Wednesday, January 17, 2018

Petitions for Certiorari Relating to Patent Damages, Part 2

As I mentioned last week, the U.S. Supreme Court has granted cert in WesternGeco LLC v. ION Geophysical Corp., No. 16-1011, in which the question presented is "Whether the U.S. Court of Appeals for the Federal Circuit erred in holding that lost profits arising from prohibited combinations occurring outside of the United States are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. § 271(f)."  Here is a link to the Scotus Blog's webpage for the case.  I'm guessing there will be a fair number of amicus briefs filed in this one, on both sides.  Meanwhile, Dan McDonald has published an interesting essay on the case in Law360, and Tim Holbrook has posted a thoughtful analysis on Patently-O, both of which I commend to readers' attention.

In addition, as I noted last month, there is also a petition for certiorari pending in EVE-USA, Inc. v. Mentor Graphics Corp., No. 17-804, petition filed Nov. 30, 3017, in which the two questions presented are "(1) Whether, and under what circumstances, assignors and their privies are free to contest a patent's validity; and (2) whether the U.S. Court of Appeals for the Federal Circuit erred in holding that proof of but-for causation, without more, satisfies the requirement that damages be apportioned between patented and un-patented features."  The briefs filed thus far--in addition to the petitioner's brief, there are four amicus briefs--are available for download from Scotus Blog hereI joined the brief on the assignor estoppel issue, but definitely not on the damages issue.  (For my views on the latter, see here and here).

Monday, January 15, 2018

Drafting Around the Entire Market Value, Part 2?

Nearly three years ago I published a post titled Drafting Around the Entire Market Value Rule?, in which I wrote:
Over at the Patent Damages blog, Chris Marchese published an interesting post a few weeks back titled Damages base--is the name of the game the claim? . . .
. . . suppose an inventor invents component ABC, and that ABC serves as a small component in a larger, multicomponent product such as a smartphone.  Would the inventor be well-advised to include at least one dependent claim comprising "ABC incorporated into a smartphone"?  In a case in which a defendant infringes by incorporating ABC into a smartphone, could the inventor then assert that, with respect to the infringement of the dependent claim, the "smallest salable patent-practicing unit" is ABC plus smartphone?  Sure, the inventor would have to apportion the value of the patented feature further, under VirnetX.  But now the jury has heard the entire market value of the end product, which is what the EMVR is supposed to prevent.
According to Mr. Marchese, the case law thus far is not very clear on this issue.  But perhaps it wouldn't be surprising if patent owners started to include claims like the hypothetical dependent claim above, just in case it could come in handy later on in the event of litigation.  Indeed, in Ericsson the Federal Circuit was willing to allow the jury to hear about comparable licenses that use the EMVR as the royalty base as long as the court, on request, gives an appropriate cautionary instruction.
Well, we now have a Federal Circuit opinion in which (although it wasn't a dependent claim that was at issue) the court to some degree vindicates Mr. Marchese's speculation.  The case is Exmark Mfg. Co. v. Briggs & Stratton Power, decided last Friday (opinion by Judge Stoll, joined by Judges Wallach and Chen) and involving a patent "directed to a lawn mower having improved flow control baffles."  The district court "entered summary judgment that claim 1 . . . was not invalid because the claim survived multiple reexaminations involving the same prior art," and also denied summary judgment of indefiniteness.  The matter proceeded to trial on infringement and damages, and the jury awarded $24 million in compensatory damages, which the judge doubled following a jury determination of willfulness.  On appeal, the court vacates and remands for further consideration the summary judgment of invalidity based on prior art, and affirms the judgment as to definiteness.  On damages, which is what I will focus on, the court vacates and remands.

The first, and to my mind most important, damages issue relates to the royalty base, and the court's resolution of this issue arguably pulls back a bit from cases like LaserDynamics and VirnetX (as well as last week's opinion in Finjan, see discussion here).  Here are the most relevant portions of the court's discussion:
Briggs first argues that the district court erred by allowing Exmark to compute a royalty rate without properly identifying a royalty base to apportion the value of the patentee’s invention in comparison to the value of the whole lawn mower. The parties do not dispute that apportionment is required in this case. Although claim 1 of the ’863 patent is broadly directed to “a multiblade lawn mower,” our law recognizes that a reasonable royalty award “must be based on the incremental value that the patented invention adds to the end product.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014). Here, the patent makes clear that the patented improvement relates to the mower’s flow control baffle, which through its structure and orientation within the mower deck purportedly efficiently directs grass clippings toward a side discharge and thereby improves the quality of grass cut in a manner that distinguishes it from prior art. See, e.g., ’863 patent col. 1 l. 30–col. 2 l. 9. The remaining limitations of claim 1 recite conventional features of a lawn mower, including a mower deck, a side discharge opening, and a power means for operating the mower. In these circumstances, the patent owner must apportion or separate the damages between the patented improvement and the conventional components of the multicomponent product. . . .
On appeal, Briggs argues that Exmark’s expert should have apportioned or separated the value of the baffle from the other features of the mower through the royalty base rather than the royalty rate. We disagree. We have held that apportionment can be addressed in a variety of ways, including “by careful selection of the royalty base to reflect the value added by the patented feature [or] . . . by adjustment of the royalty rate so as to discount the value of a product’s non-patented features; or by a combination thereof.” Ericsson, 773 F.3d at 1226. So long as Exmark adequately and reliably apportions between the improved and conventional features of the accused mower, using the accused mower as a royalty base and apportioning through the royalty rate is an acceptable methodology. Id. (citing Garretson, 111 U.S. at 121). “The essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.” Id.
Using the accused lawn mower sales as the royalty base is particularly appropriate in this case because the asserted claim is, in fact, directed to the lawn mower as a whole. The preamble of claim 1 recites a “multiblade lawn mower.” ’863 patent col. 5 l. 60. It is not the baffle that infringes the claim, but rather the entire accused mower. Thus, claim 1 covers the infringing product as whole, not a single component of a multi-component product. There is no unpatented or non-infringing feature of the product. Nonetheless, “[w]hen a patent covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements, the court must determine how to account for the relative value of the patentee’s invention in comparison to the value of the conventional elements recited in the claim, standing alone.” AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1338 (Fed. Cir. 2015) (citing Ericsson, 773 F.3d at 1233). We hold that such apportionment can be done in this case through a thorough and reliable analysis to apportion the royalty rate. We have recognized that one possible way to do this is through a proper analysis of the Georgia-Pacific factors. . . .
Finally, we note that Exmark’s use of the accused lawn mower sales as the royalty base is consistent with the realities of a hypothetical negotiation and accurately reflects the real-world bargaining that occurs, particularly in licensing. As we stated in Lucent Technologies, Inc. v. Gateway, Inc., “[t]he hypothetical negotiation tries, as best as possible, to recreate the ex ante licensing negotiation scenario and to describe the resulting agreement.” 580 F.3d 1301, 1325 (Fed. Cir. 2009). “[S]ophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price,” and thus “[t]here is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.” Id. at 1339. This is consistent with the settlement agreement relied on by Exmark’s damages expert, which the parties agree provided an effective royalty of 3.64% of the sales of the accused mowers (pp. 21-24).
Second, however--and I don't think I need to go into as much detail on this issue--the court agrees with the defendant that 5% royalty rate proposed by the plaintiff's expert was not sufficiently tied to the facts, stating that her report did not "tie the relevant Georgia-Pacific factors to the 5% royalty rate or explain how she calculated the . . . rate using these factors" (p.24).  In addition, the court holds that the district court erred by excluding evidence relating to certain prior art, which went to the question of whether the patent in suit was a major or minor advance over the state of the art (pp. 28-30).  

Moving on to willfulness:
Before trial, the district court found that Briggs’ litigation defenses were unreasonable. Based on that finding, the district court precluded Briggs from presenting any evidence regarding the validity of claim 1 or how closely the prior art tracks claim 1. Briggs argues that it should have been allowed to present such evidence to mitigate any finding that it acted with an objectively high risk of infringement. Briggs further argues that the district court’s exclusion of this evidence is inconsistent with Halo, which mandates that the inquiry into the degree of risk of infringement is for the jury, not the district court, to decide. We agree with Briggs that the district court erred to the extent it excluded this evidence without also determining whether it was relevant to Briggs’ state of mind at the time of accused infringement. . .  (p.31).
Finally, the court affirms the judgment dismissing the defendant's laches defense, noting that
The Supreme Court recently held in SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, that laches is no longer a defense against damages for patent infringement that occurred within 35 U.S.C. § 286’s six-year statute of limitations period. 137 S. Ct. 954 (2017). Because Exmark only seeks damages for the six-year period prior to filing its complaint against Briggs, we agree with the district court that Briggs cannot assert laches as a defense (p.32).

Friday, January 12, 2018

U.S. Supreme Court Grants Cert in WesternGeco

The case is WesternGeco LLC v. ION Geophysical Corp., No. 16-1011, and here is the question presented:  "Whether the U.S. Court of Appeals for the Federal Circuit erred in holding that lost profits arising from prohibited combinations occurring outside of the United States are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. section 271(f)."  I've blogged about this case several times now, most recently here, and it appears this will not be the last time.  I may have more to say next week, but for now here is a link to today's Supreme Court order list, courtesy of Scotus Blog, and here is a link to a story on Law 360 that alerted me to this development.

Thursday, January 11, 2018

Losing on Summary Judgment Doesn't Make a Case "Exceptional" for Purposes of Fee Award

Dennis Crouch has already blogged about this morning's nonprecedential opinion in Honeywell Int'l Inc. v. Fujifilm Corp., and the opinion itself is only five pages long, so I won't take much space discussing it here.  Basically, Honeywell asserted a patent against Fujifilm, but the latter succeeded in proving on a motion for summary judgment that the patent was invalid under the on-sale bar (Patent Act section 102(b)).  The Federal Circuit subsequently affirmed that judgment, and the matter eventually returned to the district court on Fujifilm's motion for attorneys' fees.  The district court applied the Octane Fitness standard for determining "exceptional case" and denied the motion, engaging in what the Federal Circuit refers to as "a detailed and structured analysis."  In this appeal, Fujifilm argues that it was an abuse of discretion for the district court to deny the few award, but the Federal Circuit disagrees:
. . . we cannot say that the district court abused its discretion in denying fees. The district court applied the correct legal test under § 285 and Octane. Indeed, it examined the totality of the circumstances—including all of the circumstances raised by appellants on appeal—to determine whether this case stood out from others. . . . The district court’s analysis demonstrated the totality-of-the-circumstances approach, detailing the reasons why Honeywell’s positions on the merits and litigation tactics did not make this case, in its judgment, exceptional. The district court’s fact findings on the issue are not clearly erroneous. Further, we agree with the district court that losing a summary judgment motion should not automatically result in a finding of exceptional conduct. The district court did not abuse its discretion in denying appellants’ motions for attorneys’ fees. We affirm.

Shenzhen Court Enters Injunction Against Samsung for Infringement of Huawei SEPs

I just learned that the Intermediate People's Court in Shenzhen, China has awarded Huawei an injunction against the infringement of two Huawei SEPs.  (Hat tip to Yijun Ge.)  Here is a link to what I understand is the court's official WeChat announcement.  There is coverage so far by Jacob Schindler on IAM and by Kelvin Chan on USNews. This is the second case in which a Chinese court has awarded an injunction against infringement of a SEP, the first being last year's decision in IWNComm v. Sony (for previous coverage on this blog, (see here, here, here, here, here, here, and here).  According to the above reports, the court concluded that Huawei was a willing licensor but that Samsung was not a willing licensee, having "maliciously delayed" negotiating with Huawei.  I'm sure I will have to more to say about this matter as further information, including I would hope a translation of the opinion into English, trickles in.

Wednesday, January 10, 2018

Federal Circuit Reverses in Part Damages Verdict, for Failure to Apportion

In a precedential opinion published this morning, Finjan, Inc. v. Blue Coat Systems, Inc., the Federal Circuit affirmed in part and reversed in part a judgment in favor of the patent owner.  The author of the opinion is Judge Dyk, joined by Judges Linn and Hughes.  A jury found the four patents in suit, all of which relate to software used for detecting and protecting against malware, valid and infringed, and awarded reasonable royalties totaling $39.5 million.  On appeal, the Federal Circuit affirms on liability with regard to three of the four patents.  On damages, it affirms with regard to two of the these three and reverses as to the other one.  I'll focus on the damages issues, starting with the portion of the judgment that was reversed.  

The court begins by describing the accused product:
WebPulse, the infringing product, is a cloud-based system that associates URLs with over eighty different categories, including pornography, gambling, shopping, social networking, and “suspicious”—which is a category meant to identify potential malware. WebPulse is not sold by itself. Rather, other Blue Coat products, like Proxy SG, use WebPulse’s category information to make allowability determinations about URLs that end users are trying to access.
DRTR, which stands for “dynamic real-time rating engine,” is the part of WebPulse responsible for analyzing URLs that have not already been categorized. DRTR performs both infringing and non-infringing functions. When a user requests access to a URL that is not already in the WebPulse database—a brand new website, for instance—DRTR will analyze the content, assign a category or categories, and collect metadata about the site for further use. As part of that analysis, DRTR will examine the URL for malicious or suspicious code, create a kind of “security profile” highlighting that information, and then “attach” the security profile to the given URL. This infringes the ’844 patent. But the DRTR analysis also evaluates whether the URL fits into categories ranging from pornography to news. These additional categories are unrelated to DRTR’s malware identification function but are still valuable for companies trying to, say, prevent employees from using social media while on the job. DRTR also collects metadata about the URL for Blue Coat’s later use. In other words, all of the infringing functionality occurs in DRTR, but some DRTR functions infringe and some do not (p.18).
The court then discusses what it views as wrong with Finjan's damages methodology:
At trial, Finjan attempted to tie the royalty base to the incremental value of the infringement by multiplying WebPulse’s total number of users by the percentage of component that performs the infringing method. DRTR processes roughly 4% of WebPulse’s total web requests, so Finjan established a royalty base by multiplying the 75 million worldwide WebPulse users by 4%. Although DRTR also performs the non-infringing functions described above, Finjan did not perform any further apportionment on the royalty base.
Finjan argues that apportionment to DRTR is adequate because DRTR is the “smallest, identifiable technical component” tied to the footprint of the invention. . . . This argument, which draws from this court’s precedent regarding apportionment to the “smallest salable patent-practicing unit” of an infringing product, does not help Finjan. . . . [T]he fact that Finjan has established a royalty base based on the “smallest, identifiable technical component” does not insulate them from the “essential requirement” that the “ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.” Ericsson, 773 F.3d at 1226. As we noted in VirnetX, if the smallest salable unit—or smallest identifiable technical component—contains non-infringing features, additional apportionment is still required. . . .
Because DRTR is itself a multi-component software engine that includes non-infringing features, the percentage of web traffic handled by DRTR is not a proxy for the incremental value of the patented technology to WebPulse as a whole. Further apportionment was required to reflect the value of the patented technology compared to the value of the unpatented elements (19-20).
As I have noted before (see, e.g., here), I have mixed feelings about the Federal Circuit's SSPPU rule as embodied in Laser Dynamics and VirnetX, since (among other things) a large base multiplied by a correspondingly small rate would give you the same number as a small base multiplied by a correspondingly larger rate.  Be that as it may, the court further concludes that the rate wasn't supported by the evidence either:
To arrive at a lump sum reasonable royalty payment for infringement of the ’844 patent, Finjan simply multiplied the royalty base by an $8-per-user royalty rate. Blue Coat contends that there is no basis for the $8-per-user rate.
We agree with Blue Coat that the $8-per-user royalty rate employed in Finjan’s analysis was unsupported by substantial evidence. There is no evidence that Finjan ever actually used or proposed an $8-per-user fee in any comparable license or negotiation. Rather, the $8-per-user fee is based on testimony from Finjan’s Vice President of IP Licensing, Ivan Chaperot, that the current “starting point” in licensing negotiations is an “8 to 16 percent royalty rate or something that is consistent with that . . . like $8 per user fee.” . . . Mr. Chaperot further testified that the 8–16% figure was based on a 2008 verdict obtained by Finjan against Secure Computing. On this basis, Finjan’s counsel urged the jury to use an $8-per-user royalty rate for the hypothetical negotiation because “that’s what Finjan would have asked for at the time.” . . .
. . . Mr. Chaperot’s testimony that an $8-per-user fee is “consistent with” the 8–16% royalty rate established in Secure Computing is insufficient. There is no evidence to support Mr. Chaperot’s conclusory statement that an 8–16% royalty rate would correspond to an $8-per-user fee, and Finjan fails to adequately tie the facts of Secure Computing to the facts in this case. . . . 
Secure Computing did not involve the ’844 patent, and there is no evidence showing that the patents that were at issue are economically or technologically comparable. . . . In any case, Mr. Chaperot’s testimony that an 8–16% royalty rate would be the current starting point in licensing negotiations says little about what the parties would have proposed or agreed to in a hypothetical arm’s length negotiation in 2008 (pp. 21-22).
The court leaves open the question of whether Finjan will able to rectify these problems on remand:
While it is clear that Finjan failed to present a damages case that can support the jury’s verdict, reversal of JMOL could result in a situation in which Finjan receives no compensation for Blue Coat’s infringement of the ’844 patent. Ordinarily, “the district court must award damages in an amount no less than a reasonable royalty” when infringement is found . . . , unless the patent holder has waived the right to damages based on alternate theories . . . . We therefore remand to the district court to determine whether Finjan has waived the right to establish reasonable royalty damages under a new theory and whether to order a new trial on damages (p.22).
As for the other two patents, the court concludes that Finjan's expert's apportionment of the revenue comprising the royalty base between the infringing and noninfringing functionality of the accused product, Proxy SG, was supported by the evidence (pp. 23-24).  Finally, the court sees no error in the fact that the jury came back with a damages award that exceeded what Finjan requested:
. . . Finjan’s damages expert gave a range of $2,979,805 to $3,973,073 for infringement of the ’731 patent and a range of $833,350 to $1,111,133 for infringement of the ’633 patent . . . but the jury awarded $6,000,000 for the ’731 patent and $1,666,700 for the ’633 patent, J.A. 125. We agree with Blue Coat that the statute’s direction to award damages “in no event less than a reasonable royalty” does not mean that the patentee need not support the award with reliable evidence. 35 U.S.C. § 284. A jury may not award more than is supported by the record, but here the record contains evidence that the expert’s estimates were conservative and that the underlying evidence could support a higher award (p.24 n.1).

Monday, January 8, 2018

Some New Papers on FRAND

1.  Jorge Contreras has posted a paper on ssrn and on the website of Sage Publications titled Aggregated Royalties for Top-Down FRAND Determinations: Revisiting 'Joint Negotiation', 62 Antitrust Bulletin 690 (2017).  Here is the abstract:
In an environment in which widely-adopted technical standards may each be covered by large numbers of patents, there have been increasing calls for courts to determine “fair, reasonable and non-discriminatory” (FRAND) royalties payable to holders of standards-essential patents (SEPs) using “top-down” methodologies. Top-down royalty approaches begin with the aggregate royalty that should be payable with respect to all SEPs covering a particular standard, and then allocate a portion of the total to individual SEPs. Top-down approaches avoid many drawbacks associated with bottom-up approaches in which royalties for individual SEPs are assessed, often in an inconsistent and piecemeal manner, without regard for the other SEPs that cover the standard. Yet despite the potential benefits of top-down methodologies, one of the most promising means for determining aggregate royalty levels – joint agreement by the members of the relevant standards-development organization (SDO) – has gained little traction. The idea of SDO participants jointly negotiating FRAND royalties attracted the attention of commentators and antitrust agencies about a decade ago, when a handful of SDOs began to explore mandatory ex ante rate disclosure requirements. But few SDOs adopted such policies, and joint negotiations were never incorporated into the mainstream standardization process. One of the principal reason that SDOs have been hesitant to endorse joint royalty negotiations is the perceived risk of antitrust liability arising from concerted action among competitors. But as numerous commentators and antitrust officials have reiterated, this fear is largely misplaced in the context of industry standard-setting. Thus, SDOs should follow the lead of patent pools and begin more actively to determine aggregate patent royalty burdens for standards that they develop. In addition, antitrust and competition authorities should assure the market that collective agreement on aggregate royalty rates alone should not give rise to antitrust liability. 
2.  Jinyul Ju has posted a paper on ssrn titled Recent Developments in Korean Antirust Cases Concerning FRAND-Encumbered Standard-Essential Patents, 8 Jindal Global Law Review 221 (2017).  Here is a link to the paper, and here is the abstract:
In Korea, there have been four antitrust cases concerning the “fair, reasonable, and non-discriminatory” (FRAND) related standard-essential patents (SEPs) in the last six years: (1) Seoul Central District Court’s decision in Samsung v. Apple (August 2012); (2) Korean Fair Trade Commission (KFTC)’s consent decision on Microsoft’s acquisition of Nokia (August 2015); (3) Seoul High Court’s decision in Qualcomm v. KFTC (August 2012) pending in the Supreme Court; and (4) KFTC’s decision against Qualcomm (January 2017) pending in the Seoul High Court.
3.  A. Douglas Melamed and Carl Shapiro have posted a paper on ssrn titled How Antitrust Law Can Make FRAND Commitments More EffectiveHere is a link to the paper, and here is the abstract:  
In this article, we argue that the antitrust laws have an important role to play in ensuring that the rules established by standard-setting organizations are effective in preventing the owners of standard-essential patents from engaging in patent holdup after the standard is established and becomes commercially successful. These organizations and their members can violate Section 1 of the Sherman Act if the rules adopted are ineffective in preventing the owners of standard-essential patents from exploiting the ex post monopoly power they gain because of the standard.