Apple v. Samsung and awards of defendant’s profits: the potential for overcompensatory damages in design patent infringement cases

One aspect of the Apple v. Samsung litigation that has not received much coverage in the press is the basis of the jury’s $1.05 billion damages award.  According to an interview with the jury foreman, the jury award was based on the $8.16 billion in revenue Samsung earned from the sales of allegedly infringing devices, multiplied by the jury’s estimate of Samsung’s profit margin on those devices (somewhere between 12 and 13%).  See Dan Levine, Velvin Hogan, Foreman in Apple Samsung Case, Says Jury Didn’t Want $1 Billion Verdict To Be Just a Slap on the Wrist, Aug. 25, 2012.  Assuming that the numbers are supported by the evidence, this sort of award is permissible under design patent law.  (Three of the patents Samsung was found to have infringed were design patents.)  In this respect, however, U.S. design patent law is something of an oddity compared with other types of infringement cases, both in the U.S. and elsewhere.

In a case involving the infringement of a utility (invention) patent, the prevailing plaintiff has the option under section 284 of the U.S. Patent Act to recover its own lost profit resulting from the defendant’s infringing sales, or a reasonable royalty.  At one time, a third option—the recovery of the profit the infringer made from sales of infringing products, which depending on the circumstances could be higher than the plaintiff’s own lost profits or a reasonable royalty—also was available, but in 1946 Congress eliminated this option for utility patents on the ground that the calculation of the defendant’s profits was often too complex and time-consuming.  Congress did not eliminate this third option in design patent cases, however, where it remains today in section 289.  So this explains why Apple could request, and the jury could award, Samsung’s profits from sales of allegedly infringing products.

Awards of defendant’s profits are also sometimes permissible in U.S. copyright and trademark infringement cases, but design patent litigation is different from these other bodies of law in one crucial respect as well.   The issue is how to calculate the profits the defendant earned as a result of the infringement.   From an economic standpoint, the correct methodology would be to (1) calculate the profit the defendant earned from sales of infringing products; (2) estimate the profit the defendant would have earned from the sales of those products, if the defendant had avoided infringing by using the best available noninfringing alternative; and (3) subtract (2) from (1).  The remainder (3) is the profit the defendant earned from the unauthorized use of the plaintiff’s IP right.  This methodology is difficult to perform in the real world, however, and so as an alternative in copyright and trademark cases—and in patent cases litigated in other countries as well, where recovery of the infringer’s profits is an available remedy for both utility and design patent infringement—courts will instead (1) calculate the profit the defendant earned from sales of infringing products; (2a) estimate the percentage of those profits that are attributable to the unauthorized use of the plaintiff’s IP right; and (3a) multiply (1) by (2a).  This methodology recognizes that a complex end product (or work of authorship) often derives some of its value from parts that are original to the defendant.  (Of course, difficulties can arise simply in determining (1), the profit the defendant earned from sales of infringing products.  What costs should be subtracted from the defendant’s revenue—only variable costs, or some portion of allocable overhead?  For an illuminating discussion of this issue, see Stephen E. Margolis, The Profits of Infringement:  Richard Posner v. Learned Hand, 22 Berkeley Tech. L.J. 1521 (2007).)

What is odd about design patent litigation in the United States is that, arguably, courts may not engage in step (2a) above:  that is, they may not reduce the award based on some estimate of the importance (or lack thereof) of the design patent to the defendant’s profit.  Section 289 of the Patent Act states:

Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties [emphasis added].

According to the Federal Circuit, Congress included the words “total profit” when it revised the statute over one hundred years ago, expressly to overrule a Supreme Court case, Dobson v. Dornan, 118 U.S. 10 (1886), a case in which the Court had required the plaintiff to apportion the profit the defendant earned from the use of an infringing carpet design as opposed to the rest of the carpet (resulting, in that case, in only nominal damages).  See Trans-World Mfg. Corp. v. Al Nyman & Sons, Inc., 750 F.2d 1552, 1567 (Fed. Cir. 1984).

In the typical design patent case, this may not matter very much, because damages in such cases tend to be low anyway in comparison with awards in utility patent litigation.  Apple v. Samsung therefore is the unusual case in which the monetary award for infringement of a design patent are enormous, and in which the non-apportionment rule has some bite—indeed, from an economic perspective, perhaps too much bite, if the profits Samsung earned from the sales of its devices were attributable in part to other, noninfringing features of the Samsung devices.  In this regard, U.S. design patent law arguably raises a potential for substantial overcompensation and overdeterrence, even if Judge Koh decides not to award enhanced damages under section 284.  There is case law, however, holding that damages awarded under section 289 may not be trebled under section 284.  See Braun Inc. v. Dynamics Corp. of Am., 975 F.2d 815, 824 (Fed. Cir. 1992).  So will Apple argue that the jury award is really an award of lost profits or a reasonable royalty, either of which under section 284 may be trebled in cases of willful infringement, and not an award of infringer’s profits?  Note that the judge instructed the jury on lost profits and reasonable royalties for the utility patent infringement claims, and on all three methods for the design patent infringement claims.  A copy of the jury instructions can be found here.  The jury verdict itself does not explain which method the jury used, though as noted above in a post-verdict interview the foreman appears to state that the jury awarded Samsung’s profits.  (Query:  is there anything to prevent judges from submitting interrogatories designed to elicit how a jury is calculating damages in a patent case?)

For further discussion of design patent damages, see Colin B. Harris & Andrew M. Ollis, Design Patent Damages, 2 No. 5 Landslide 57 (May/June 2010).

Posted on August 29, 2012, in Damages, History, Infringement, Patent and tagged . Bookmark the permalink. Comments Off.

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