Author Archives: Thomas F. Cotter
Federal Circuit Partially Vacates Judge Koh’s Order Denying Apple’s Motion for a Permanent Injunction Against Samsung
[Cross-posted at Comparative Patent Remedies]
In an appeal arising from Judge Koh’s December 2012 order denying Apple’s request for a permanent injunction against Samsung, following the high-profile August 2012 jury verdict in Apple’s favor, Judge Prost writing for the panel (1) affirms Judge Koh’s ruling denying a permanent injunction with respect to Samsung’s infringement of three design patents and its dilution of Apple’s trade dress; and (2) vacates the portion of the ruling denying a permanent injunction with respect to the three utility patents. The opinion can be downloaded from here. My previous write-up on the case following oral argument in August 2013 is here.
First, the district court appears to have required Apple to show that one of the patented features is the sole reason consumers purchased Samsung’s products. . . .
It is true that Apple must “show that the infringing feature drives consumer demand for the accused product.” Apple II, 695 F.3d at 1375. It is also true that this inquiry should focus on the importance of the claimed invention in the context of the accused product, and not just the importance, in general, of features of the same type as the claimed invention. . . . However, these principles do not mean Apple must show that a patented feature is the one and only reason for consumer demand. Consumer preferences are too complex—and the principles of equity are too flexible—for that to be the correct standard. Indeed, such a rigid standard could, in practice, amount to a categorical rule barring injunctive relief in most cases involving multi-function products, in contravention of eBay.
Thus, rather than show that a patented feature is the exclusive reason for consumer demand, Apple must show some connection between the patented feature and demand for Samsung’s products. There might be a variety of ways to make this required showing, for example, with evidence that a patented feature is one of several features that cause consumers to make their purchasing decisions. It might also be shown with evidence that the inclusion of a patented feature makes a product significantly more desirable. Conversely, it might be shown with evidence that the absence of a patented feature would make a product significantly less desirable. . . .
The second principle on which we disagree with the district court is its wholesale rejection of Apple’s attempt to aggregate patents for purposes of analyzing irreparable harm.
While it is true that this court analyzed causal nexus on a patent-by-patent basis in Apple I, we did not mean to foreclose viewing patents in the aggregate. Rather, we believe there may be circumstances where it is logical and equitable to view patents in the aggregate. For example, it may make sense to view patents in the aggregate where they all relate to the same technology or where they combine to make a product significantly more valuable. To hold otherwise could lead to perverse situations such as a patentee being unable to obtain an injunction against the infringement of multiple patents covering different—but when combined, all—aspects of the same technology, even though the technology as a whole drives demand for the infringing product.
The U.S. Supreme Court’s decision yesterday in FTC v. Actavis, Inc. brings some resolution to the decade-long dispute over the level of antitrust scrutiny that is appropriate for evaluating the legality of “reverse-payment” or “pay-for-delay” agreements settling pharmaceutical patent infringement litigation between brand-name and generic drug companies. Writing for a 5-3 majority in Actavis, Justice Breyer rejected both the scope-of-the-patent test and the presumptive illegality approach, and held instead that courts should review reverse-payment settlements under the rule of reason. Or say the opinion states. In reality, the Court appears to have all but in name adopted the presumptive illegality approach it purported to reject. One might speculate about the political or prudential considerations that went into the majority’s characterization of what it was actually doing, but as I read the opinion reverse-payment settlements of the type at issue in Actavis are now subject to a de facto regime of presumptive illegality. I have completed a brief essay on the case, which interested readers can access here; see if you agree or disagree with my analysis.
As reported yesterday on the Essential Patents Blog and the Wall Street Journal, the ITC has ruled in Investigation No. 337-TA-794 to issue a limited exclusion order prohibiting Apple from importing certain models of its iPhone and iPad (though not the latest-generation products) into the United States. Here’s a copy of the four-page Notice of Final Determination. (It doesn’t appear that there is a publicly available opinion yet.) The interesting part, from the standpoint of patent remedies, is this:
The Commission has determined that the appropriate remedy is a limited exclusion order and a cease and desist order prohibiting Apple from importing into the United States or selling or distributing within the United States wireless communication devices, portable music and data processing devices, and tablet computers that infringe claims 75-76 and 82-84 of the ’348 patent. The Commission has determined that the public in terest factors enumerated in section 337(d)(1) and (f)(1) do not preclude issuance of the limited exclusion order and cease and desist order. The Commission has determined that Samsung’s FRAND declarations do not preclude that remedy.
Finally, the Commission has determined that a bond in the amount of zero percent of the entered value is required to permit temporary importation during the period of Presidential review (19 U.S.C. § 1337(j)) of wireless communication devices, portable music and data processing devices, and tablet computers that are subject to the order. The Commission’s order and opinion were delivered to the President and to the United States Trade Representative on the day of their issuance.
Commissioner Pinkert dissents on public interest grounds from the determination to issue an exclusion order and cease and desist order.
As I have discussed elsewhere, I think that a FRAND declaration generally should preclude entry of an exclusion order. I’ll be interested to read the Commission’s opinion and Commissioner Pinkert’s dissenting opinion when public versions become available.
Further to the above. The president has the authority to veto a Commission’s exclusion order. As others have pointed out, this hasn’t actually happened since the 1980s. But yesterday President Obama issued a series of executive orders and recommendations to Congress on patent litigation, see coverage in WSJ here and the White House’s fact sheet here. One of the recommendations is that Congress should “Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.” At the same time, though one of the executive orders is:
Strengthen Enforcement Process of Exclusion Orders. Once the U.S. International Trade Commission (ITC) finds a violation of Section 337 and issues an exclusion order barring the importation of infringing goods, Customs and Border Protection (CBP) and the ITC are responsible for determining whether imported articles fall within the scope of the exclusion order. Implementing these orders present unique challenges given these shared responsibilities and the complexity of making this determination, particularly in cases in which a technologically sophisticated product such as a smartphone has been successfully redesigned to not fall within the scope of the exclusion order. To address this concern, the U.S. Intellectual Property Enforcement Coordinator will launch an interagency review of existing procedures that CBP and the ITC use to evaluate the scope of exclusion orders and work to ensure the process and standards utilized during exclusion order enforcement activities are transparent, effective, and efficient.
We are living in interesting times . . .
Most countries routinely award permanent injunctions to the prevailing patentee. In the U.S., since the Supreme Court’s 2006 decision in eBay v. MercExchange, courts consider four equitable factors of irreparable injury, adequacy of the remedy at law, the balance of hardships, and the public interest. As a result, U.S. courts now award permanent injunctions to prevailing patentees about 75% of the time; in the remaining quarter of cases, they award an ongoing royalty.
Over the past year the U.S. Court of Appeals for the Federal Circuit has given mixed signals as to how often courts should award patentees permanent injunctions. I’ll have more to say about some of these opinions in future posts, but for today I’d like to focus on one case in particular, Edwards Lifesciences AG v. CoreValve, LLC, 699 F.3d 1305 (Fed. Cir. 2012), pet’n for cert. filed, __ U.S.L.W. __ (May 6, 2013) (No. 12-1325). The patent in suit is for a medical device known as a transcatheter heart valve. In 2011, a jury found the patent valid and infringed, and awarded Edwards lost profits of $72,645,555, along with $1,284,861 as a reasonable royalty. If I understand the facts correctly, the device has been approved for marketing, and is not patented, outside the United States; as of the date of trial, however, the device was still awaiting FDA approval for marketing within the United States. Thus all of the sales that Edwards allegedly lost to CoreValve occurred outside the United States. The district judge denied a permanent injunction, however, based on, among other things, CoreValve’s representation “that it was immediately moving [its] manufacturing operation to Mexico, and thus that infringement would terminate.”
Several issues were raised on appeal, but for present purposes I’ll focus exclusively on remedies. First, on the issue of lost profits, the majority (in an opinion authored by Judge Newman) stated:
CoreValve argues “that the criteria for award of lost profits were not met, stating that it “could have manufactured its device overseas by March 2007,” CoreValve Br. 3, and thus would have avoided all liability for infringement, by avoiding infringement. CoreValve argues that this eliminates liability for damages based on its manufacture in the United States, or that at most it should be liable for only a modest royalty. Neither the jury nor the district court was persuaded by this argument. Nor are we. Whether or not CoreValve could have avoided infringement, it did not do so, although it was notified as early as 2005 of Edwards’ position, and the record showed CoreValve’s familiarity with the patents and the inventors.
Second, the court reversed the denial of the injunction and remanded for further proceedings, stating:
A patentee’s right to exclude is a fundamental tenet of patent law. Richardson v. Suzuki Motor Co., Ltd., 868 F.2d 1226, 1247 (Fed. Cir. 1989) (“The right to exclude recognized in a patent is but the essence of the concept of property.”) (quoting Connell v. Sears, Roebuck & Co., 722 F.2d 1542, 1548 (Fed. Cir. 1983)). The innovation incentive of the patent is grounded on the market exclusivity whereby the inventor profits from his invention. Absent adverse equitable considerations, the winner of a judgment of validity and infringement may normally expect to regain the exclusivity that was lost with the infringement. Edwards argues that the Court’s ruling in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 126 S. Ct. 1837, 164 L. Ed. 2d 641 (2006) supports its position, for the willfulness of the infringement and other equitable aspects weigh in favor of restoration of the exclusive patent right.
The Court in eBay did not hold that there is a presumption against exclusivity on successful infringement litigation. The Court did not cancel 35 U.S.C. § 154, which states that “Every patent shall contain … a grant … of the right to exclude others from making, using, offering for sale, or selling the invention,” nor did the Court overrule Article I section 8 of the Constitution, which grants Congress the power to “secur[e] for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” The Court held that equitable aspects should always be considered, stating: “We hold only that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.” eBay, 547 U.S. at 394, 126 S.Ct. 1837. Statutory and historical as well as commercial considerations impinge on every equitable determination.
Precedent illustrates the variety of equitable considerations, and responsive equitable remedy in patent cases; for example, the grant of a royalty-bearing license instead of imposing an injunction in situations where the patentee would experience no competitive injury, as in ActiveVideo Networks, Inc. v. Verizon Communications, Inc., 694 F.3d 1312, 1339–40 (Fed. Cir. 2012); or where there is an overriding public interest in continued provision of the infringing product, as in Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., No. 03–CV–0597 (D. Ariz. July 21, 2010), where the Gore vascular graft materials were not available from the successful patentee Bard. Another form of equitable response is illustrated in Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683, 704 (Fed.Cir.2008), where the court postponed the effective date of an injunction for twenty months, to relieve hardship on the infringer.
In Advanced Cardiovascular Sys. v. Medtronic Vascular, Inc., 579 F.Supp.2d 554 (D. Del. 2008), the court observed that: “Courts awarding permanent injunctions typically do so under circumstances where plaintiff practices its invention and is a direct market competitor.” Id. at 558. Edwards argues that these conditions here prevail. However, the district court declined to impose the requested injunction. First, the district court responded to Edwards’ argument that without exclusivity it would lose first-mover advantage and market share and reputation, by stating that these had already been lost—although Edwards states that this is incorrect, for sales in the United States had not yet been authorized by the FDA, as to either the Edwards or the CoreValve/Medtronic product. The district court also stated that Edwards had given up exclusivity by licensing the ′552 patent to another competitor. CoreValve does not dispute that the district court erred in its view of that transaction, and that no such license exists.
The district court’s explanation of why it was withholding an injunction placed significant weight on CoreValve’s statements that it was immediately moving this manufacturing operation to Mexico, and thus that infringement would terminate. Edwards at *16, 2011 U.S. Dist. LEXIS 12022, at *29 (“The remaining two eBay factors do not alter the court’s analysis, since the only practical effect of a permanent injunction would be that CoreValve would be forced to move its United States manufacturing operations for the accused product to Mexico.”). The district court stated that if CoreValve should renew its infringing manufacture in the United States, then “[a]s it did in this case, Edwards can bring suit against CoreValve and seek damages if CoreValve continues its infringing manufacturing operations in spite of the judgment of infringement.” Id. at *15, 2011 U.S. Dist. LEXIS 12022, at *28. Edwards states on this appeal, and CoreValve does not deny, that CoreValve never stopped its infringing manufacture in California. Whether or not that representation was known to be false when made, the situation before us reflects, at least, changed circumstances.
In TiVo Inc. v. EchoStar Corp., 646 F.3d 869, 890 n. 9 (Fed. Cir. 2011) this court en banc noted that “district courts are in the best position to fashion an injunction tailored to prevent or remedy infringement.” Recognizing that the circumstances have not been fully explored in the record before us, we vacate the denial of the injunction, and remand to the district court for consideration in light of ensuing events and any other relevant factors.
Judge Prost, concurring in the judgment, wrote that she joined the majority opinion
in all respects except one—the majority’s discussion of the permanent injunction standard. The majority opines that “[a]bsent adverse equitable considerations, the winner of a judgment of validity and infringement may normally expect to regain the exclusivity that was lost with the infringement.” Majority Op. 1314. To the extent that one reads this statement as creating the presumption of an injunction once the plaintiff prevails, which must be rebutted by the defendant, that is not the law.
Nor do the selected portions of eBay cited by the majority provide support for its position. First, while I agree with the majority that in eBay the Supreme Court did not cancel 35 U.S.C. § 154, the majority overlooks the Court’s explanation that “the creation of a right is distinct from the provision of remedies for violations of that right,” such that “injunctive relief ‘may’ issue only ‘in accordance with the principles of equity.’” eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 392, 126 S.Ct. 1837, 164 L.Ed.2d 641 (2006) (quoting 35 U.S.C. § 283). Second, the majority excludes from its analysis the four-factor equitable standard, the preamble of which states that “the plaintiff must demonstrate” these factors. Indeed, the majority’s analysis might be read to suggest that the defendant, not the plaintiff, bears the burden of establishing the equitable factors.
Some complain of areas of patent law in which our guidance is mixed or muddled. This is not—or should not be—one of those areas after the Supreme Court’s clear pronouncement in eBay. eBay made clear that there is no general rule that a successful plaintiff is entitled to an injunction; rather, the plaintiff bears the burden of establishing the four equitable factors that weigh in its favor in order to obtain a permanent injunction. We should take care to avoid possible misinterpretation of an otherwise clear Supreme Court standard. Because the majority’s statements appear to me to deviate from the standard articulated by the Supreme Court and our court, I respectfully concur. See Robert Bosch LLC v. Pylon Mfg. Corp., 659 F.3d 1142, 1149 (Fed. Cir. 2011) (recognizing that “ eBay abolishes our general rule that an injunction normally will issue when a patent is found to have been valid and infringed”).
In its May 6 cert. petition, CoreValve raises two questions, one relating to enablement and the other to injunctive relief, specifically “Whether the Federal Circuit’s holding that an injunction is presumptively warranted after a verdict of infringement conflicts with this Court’s decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).”
Whether the Supreme Court decides to take the case or not, I find a couple of things notable about the majority opinion. First, contrary to Judge Newman, I don’t see any reason in principle why a product lawfully manufactured and sold abroad cannot be a noninfringing alternative to which the defendant could have resorted in order to avoid infringement; under appropriate circumstances, the existence of such an alternative could demonstrate that the patentee suffered no lost profits. If taken seriously, Judge Newman’s statements that we must focus on what the patentee actually did, not what it could have done, would overturn long-settled case law in the United States that the existence of noninfringing alternatives can reduce or eliminate a patentee’s entitlement to lost profits; indeed, Judge Newman’s language sounds a lot like the “reasoning” employed in the U.K. to deny the relevance of noninfringing alternatives to awards of lost profits (see my book, pp. 187-89). The district judge’s actual reasons for entering the jury’s lost profits awards, however, seem more sound; in relevant part, Judge Sleet stated that “the jury also properly rejected CoreValve’s noninfringing alternative of moving abroad because Edwards demonstrated that CoreValve had limited capital and could not design a marketable product abroad.” See 2011 WL 446203, at *16 (D. Del. Feb. 7, 2011). If moving abroad wasn’t an available alternative during the period for which the lost profits award was calculated, then it was correct to award lost profits.
I don’t claim to be familiar enough with the facts of Edwards to offer an opinion whether an injunction would be warranted or not. As a general matter, however, my own view is that a presumption in favor of permanent injunctive relief wouldn’t be such a bad idea, as long as the presumption is a rebuttable one—though I recognize that this is not what the Supreme Court held in eBay. More generally, I have argued that, as a theoretical matter, injunctive relief is often the better option because (1) if the patentee is the more efficient user of the patented invention, injunctive relief preserves the patent incentive by enabling the patentee to exclude others during the patent term; and (2) if the infringer is the more efficient user, the parties themselves can bargain toward an appropriate license—and should have better information than a court would have as to the value of such a license. When there is a risk of patent holdup, however—in particular, where the patent reads on only one feature of a complex device, the infringement is inadvertent, and the value of a license ex post would be substantially greater than the value ex ante—courts should deny permanent injunctions and enter ongoing damages instead. See my book, pp. 53-62, 105-07.
Readers may agree or disagree with my analysis, but I think it would be a brighter day if courts would focus on the underlying policies served by injunctions and damages rather than on formalistic legal doctrine.
A third possibility that I’ve been mulling over recently is whether it can ever be a violation of U.S. antitrust law for the owner of an SEP who has made a RAND commitment to attempt to obtain injunctive relief against an allegedly unauthorized user of the SEP. (For violations of U.S. antitrust law, the available remedies include injunctive relief and treble damages.) The FTC’s consent order relating to Google’s acquisition of Motorola Mobility included provisions prohibiting Google and Motorola from seeking injunctive relief against the infringement of SEPs (subject to exceptions), but that case was atypical because it involved an acquisition that was potentially anticompetitive and thus subject to review under section 7 of the Clayton Act. In a case not involving such facts, I think the likelihood that a U.S. court would impose antitrust liability are low. See, e.g., In re Indep. Serv. Orgs. Antitrust Litig., 203 F.3d 1322, 1325-28 (Fed. Cir. 2000) (holding that unilateral refusals to license patents are actionable only under extremely narrow circumstances); Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1356-62 (Fed. Cir. 1999) (narrowly construing the essential facilities doctrine); Image Technical Servs. v. Eastman Kodak Co., 125 F.3d 1195, 1218-20 (9th Cir. 1997); Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1187 & n.64 (1st Cir. 1994). See also Rambus, Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008) (casting doubt on the use of antitrust law as a vehicle for redressing a lawful monopolist’s use of deception to extract higher royalties). It’s also possible that the Noerr-Pennington doctrine would preclude such an antitrust claim, an issue discussed in this paper by Thomas Dillickrath and David Emanuelson–though I tend to think not, since the limitation on the patentee’s right to petition would only be a limitation as to one type of remedy, injunctive relief, and not as to damages. But I need to think about the issue some more. I will be addressing some of these antitrust issues in a forthcoming paper and may blog about them further.
The remedy of lost profits has always seemed to me to be, conceptually, the simplest of the various damages remedies. You calculate how many infringing sales the infringer made; estimate how many of these infringing sales the patentee would have made, but for the infringement (a number which could range from “zero” to “all”); and you calculate the profit the patentee would have earned on those lost sales. To be sure, there are both underlying policy issues and difficult practical issues surrounding this simple concept. From a policy perspective, a recovery of lost profits (coupled with a reasonable royalty on infringing sales the patentee would not have made, but for the infringement) is intended to render the patentee no worse off as a result of the infringement, and therefore to preserve the patent incentive. I generally think this is a sound policy, though reasonable minds may differ–for example, see Ted Sichelman’s interesting paper in a forthcoming issue of the Texas Law Review (to which I will be contributing a response in the review’s online supplement), or Norman Siebrasse’s thoughtful argument that deterrence sometimes should play a greater, or at least somewhat different, role than my work advocates (a point to which I hope to respond in a forthcoming post). And there certainly are a number of practical difficulties, as there are with any damages remedy; there are inevitably tradeoffs between accuracy and administrative efficiency. One of these difficulties involves the accurate calculation of the number of sales the patentee would have made, but for the infringement. This requires one to determine, among other things, what the infringer would have done if it had not infringed. Resolving this issue, in turn, requires an inquiry into the next-best noninfringing alternative. Suppose, for example, that the infringer made 100 sales with the use of patented invention A; and that it could have substituted nonpatented invention B for patented invention A, but in doing so would have lost 10 sales to the patentee. In other words, 90 consumers were indifferent between A and B, but the 10 who preferred A to B would have purchased from the patentee, but for the infringement. The patentee should recover its lost sales on the 10 and a reasonable royalty on the other 90.
This is hardly cutting-edge economic reasoning, and it’s been part of U.S. law for a long time. One can also find application of this reasoning in French case law and, more recently, in cases from Canada. As I discuss in my book, however, the U.K. still follows an outdated nineteenth century precedent holding that courts may not take noninfringing alternatives into account in calculating lost profits (or in awarding defendant’s profits). And Japanese courts have denied the patentee the opportunity to recover both lost profits on sales it lost to the infringer and a reasonable royalty on infringing sales it would not have made. Under these precedents, the patentee must choose one remedy over the other, even though this necessarily renders the patentee worse off than it would have been, but for the infringement.
Two recent U.S. opinions (from the Federal Circuit), both authored by Chief Judge Rader, on the topic of lost profits also raise some questions, at least in my mind. The first, Presidio Components, Inc. v. American Tech. Ceramics Corp., 702 F.3d 1351 (Fed. Cir. 2012), was a case in which the patentee apparently thought it was selling a product that embodied its patent, but (as it turned out) it wasn’t: it was selling a product that was not covered by the patent in suit. The defendant’s infringing product competed with the patentee’s unpatented product, and the defendant’s infringing sales caused the patentee to lose sales on its unpatented product. The court affirmed an award of lost profits on those lost sales. The principle that the patentee can recover lost profits on sales of unpatented goods that compete with infringing goods was established in Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir. 1995) (en banc). As I discuss in my book, I think the principle is probably correct, if the goal is to restore the patentee to the position it would have occupied, but for the infringement. In Rite-Hite, however, there was (according to the majority) evidence that the “unpatented” Rite-Hite products actually were covered by other patents not in suit, and thus were not noninfringing alternatives available to Kelly. In Presidio, there is nothing in the Federal Circuit opinion that indicates whether Presidio’s unpatented products were covered by some other patents or other IP rights. If not, then it seems to me that those products themselves may have incorporated noninfringing alternative technology that the defendant could have used, and thus that a lost profits recovery may not have been appropriate. Perhaps there was good reason not to consider the unpatented products as an adequate substitute technology, but I think the court should have said something about this issue.
The other, more recent opinion, is Versata Software, Inc. v. SAP America, Inc., Nos. 2012-1029, -1049 (Fed. Cir. May 1, 2013). The court wound up affirming a lost profits award of $260 million (and a reasonable royalty award of $85 million). For all I know, these numbers may be the right ones, but there are two aspects of the opinion that I find perplexing. First, the court says (slip op. pp. 14-15) that it won’t consider defendant SAP’s arguments relating to the expert’s methodology because those arguments should be resolved under Daubert (U.S. case law relating to the conditions for the the admissibility of expert testimony), and SAP didn’t appeal the Daubert ruling. But SAP did appeal from the final judgment, which should have preserved SAP’s objection to the expert’s testimony. So does the court mean to say that SAP didn’t object to the expert’s methodology at trial and therefore is precluded from raising this argument on appeal, or is there some fine point of civil procedure that I am missing here? Second, the court affirms a reasonable royalty award, even though “the district court precluded Versata’s expert from presenting a reasonable royalty analysis, and the only evidence for a royalty award came from SAP’s expert.” But Versata, the plaintiff, had the burden of proof, so why is there any reasonable royalty award at all if it failed to carry its burden? At least, I think Judge Posner would wonder about that, as evidenced by his opinion last June in Apple v. Motorola . . .
[Note: The following post can also be found on my new blog, “Comparative Patent Remedies”, at comparativepatentremedies.blogspot.com. I intend to continue blogging on IntellectualIP on other IP-related topics, and to cross-post on IntellectualIP material from Comparative Patent Remedies that I think would be of interest to IntellectualIP’s readership.]
Professor Daniel Sokol’s Antitrust and Competition Policy Blog is hosting an online symposium on my book Comparative Patent Remedies: A Legal and Economic Analysis (Oxford University Press 2013), with commentary by Professors Norman Siebrasse, Marketa Trimble, and Peter Yu. Links to the reviews are here:
Many thanks to Professor Sokol for putting this together!
Late last week Judge James Robart issued his long-awaiting findings and fact and conclusions of law on the issue of RAND royalties in Microsoft Corp. v. Motorola, Inc. For those of you who haven’t had time to plow through the 207-page opinion, there are good summaries available by Professor Jorge Contreras at Patently-o (http://www.patentlyo.com/patent/2013/04/so-thats-what-rand-means-a-brief-report-on-the-findings-of-fact-and-conclusions-of-law-in-microsoft-v-motorola.html); by Florian Mueller at Foss Patents (http://www.fosspatents.com/2013/04/a-closer-look-at-207-page-landmark.html); and by Jay Jurata, Matthew Poppe, and David Smith at http://reaction.orrick.com/rs/vm.ashx?ct=24F76C1AD3E60AEDC1D180A9D329951CD4BE7BB3D38714DD4CF371647BF8D90DDD78038. Rather than repeat what can be found elsewhere, this essay sets forth a few initial reactions I had as I read the opinion, and that I have not yet seen discussed anywhere else.
By way of background, many standard setting organizations (SSOs) require their members to license their standard-essential patents (SEPs) on “reasonable and nondiscriminatory” (RAND) terms. (The alternative term “FRAND,” meaning “fair, reasonable, and nondiscriminatory,” is synonymous with RAND.) SSOs rarely if ever define the term RAND in advance, however; rather, the RAND commitment serves as a backdrop against which SEP owners and potential licensees negotiate. Of course, when negotiation fails, either party or both parties may resort to litigation. Many of the civil actions in the “Smart Phone Wars” that have been raging across the globe for the last two or three years have involved SEPs; most of these cases are patent infringement actions filed by SEP owners. One issue that can arise in such cases is whether an SEP owner that prevails at an infringement trial should be able to obtain a permanent injunction (or, in the ITC, an exclusion order). Until Judge Robart’s opinion, however, no reported decision had addressed the difficult issue of to calculate a RAND royalty.
Given this backdrop, Microsoft v. Motorola is in some ways a bit of an oddity in that it is not a patent infringement action, but rather an action for breach of contract. In 2010, Motorola offered to license two portfolios of purportedly standard-essential patents to Microsoft. Believing that the asking price of 2.25% per unit was too high, Microsoft filed suit, requesting among other things a declaratory judgment (1) that Microsoft was a third-beneficiary of Motorola’s RAND commitment to the IEEE and ETSI, and (2) that Motorola had breached that contract. Last year, Judge Robart held that Microsoft was indeed a third-party beneficiary of an enforceable contract. The opinion from last week sets forth the judge’s views as to what a RAND royalty for the patents at issue would be, as well as the possible range of what a RAND royalty could be (which may be relevant to determining whether Motorola’s offer was in good faith). Later this year, a jury will determine whether Motorola breached the contract and, if so, whether Microsoft is entitled to damages for any collateral harms it has suffered.
Briefly, Judge Robart concluded that the amount of a RAND royalty should be determined through application of a modified version of the Georgia-Pacific factors that are used to determine reasonable royalties in patent infringement litigation. Among the notable features of his opinion are: (1) the conclusion, correct as an economic matter, that a patent royalty should reflect the value of the patented invention only, and not the “hold-up” value that may result from trying to extract a better deal after a standard incorporating the patent has been chosen; (2) that in industries in which many patents are likely incorporated into a device, courts should avoid “royalty stacking” that would result in aggregate royalties exceeding the value of the device; (3) the recognition that incremental value, i.e., the value of the patented invention over the next-best alternative, is the theoretically correct measure of patent value, though one that may be difficult to estimate in practice; (4) the importance of carefully considering which purportedly comparable licenses are, in fact, comparable to the hypothetical license between the patent owner and the user; and (5) the importance of considering how important (or unimportant) the patent is to the user. Although I cannot comment intelligently on the factual evidence before the judge, his legal and economic analysis is, for the most part, sound. Without repeating what others have already said about the opinion, I’d like to note the following matters that struck me as I read the opinion and that I haven’t seen any discussion of anywhere else.
First, there is a sense in which Judge Robart actually made an additional, and appropriate, modification to Georgia-Pacific that he didn’t explicitly call attention to. Specifically, Georgia-Pacific factor fifteen recites the overarching “willing licensor-willing licensee” framework:
The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee–who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention–would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.
Judge Robart’s analysis arguably departs from a literal application of this factor to the extent he is trying to reconstruct the hypothetical deal the parties would have negotiated before the standard was adopted, rather than at the time Microsoft may have begun using the patents in suit—though he alludes to this matter most clearly in connection with factor 9, “the utility and advantages of the patent property over old modes or devices” (p.38), and he elsewhere states that “RAND licenses can be negotiated after an SSO adopts a standard” (p.29; see also p.159). I have argued elsewhere that such a modification of the relevant time frame is necessary, in the context of SEPs subject to RAND commitments and even in actions alleging patent infringement as opposed to breach of contract, because if the focus is instead on the time (post-standard adoption) that the alleged infringement began, the royalty to be calculated may reflect the patent’s holdup value rather than its incremental contribution to the art. See Thomas F. Cotter, Reining in Patent Remedies: Three (Increasingly Immodest) Proposals, 29 Santa Clara Comp. & High Tech. L.J. __, __ n.43 (forthcoming 2013), available at http://ssrn.com/abstract=2235769.
Second, under the willing licensor-willing licensee analysis that applies in patent infringement actions, the premise is that the licensor and licensee both knew that the patent was valid and infringed. See, e.g., Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009). Though counterintuitive, this assumption makes economic sense in the context of an infringement trial. To illustrate, suppose that (at the time infringement began) the user would have agreed to pay the patentee $1 million, discounted by an 80% probability of infringement and an independent 70% probability of invalidity; the royalty would have been $560,000 (i.e., $1 million x 0.7 x. 0.8). If the patentee could recover only $560,000 in damages if the case went to trial, however, her expected recovery prior to filing the complaint would be only $560,000 x 0.7 x 0.8 = $313,000. The unrealistic-sounding assumption that the parties would have negotiated on the understanding that the patent was valid and infringed means that the patentee should recover $1 million if she prevails at trial (something she has a 56% chance of doing), and thus avoids the double discounting problem. See Stephen Kalos & Jonathan D. Putnam, On the Incomparability of “Comparable”: An Economic Interpretation of “Infringer’s Royalties,” 9 J. Proprietary Rts. 2, 4-5 (1997). In a breach of contract action such as Microsoft, however, there has been no determination that any of the patents at issue are valid or infringed. Using the preceding example, the uncertainty over the patent’s validity and infringement means that the appropriate royalty would be $560,000, not $1 million. Thus in Microsoft, Judge Robart correctly took into account the possibility that Microsoft was not using some of the Motorola patents at all. See, e.g., pp. 92, 93, 105-06, 121. Notice, however, that this means that a RAND royalty calculated in a breach of contract action ought to be lower than a RAND royalty awarded for the very same patent or patents at the conclusion of an infringement action—a counterintuitive, but I think economically correct, result.
Third, in some instances Judge Robart was convinced by neither side’s conclusions regarding valuation and simply proceeded on his own. See, e.g., pp. 112, 116. Contrast this approach with that of Judge Posner last year in Apple v. Motorola, who when convinced that neither side’s damages experts had tendered admissible opinions dismissed the action altogether, on the ground that there is no right to proceed to trial for a judgment of nominal damages. In such cases, should the trier of fact attempt to reach a reasonable result notwithstanding flaws in the evidence—and if so, on what basis—or is dismissal the proper option? Should it matter whether the relevant portion of the trial is to a jury or to a judge? Should it matter whether the party with the burden of proof is the patentee (as in Apple) or the user (as was the case, presumably, in Microsoft)?
Fourth, while I find most of Judge Robart’s analysis persuasive (subject to the caveat that I have not reviewed the underlying evidence), I think the judge made some math errors in his lengthy footnote at page 171 (specifically, paragraph 526 n.23), where he tries to derive the lower end of the RAND range by means of a comparison with the royalty that Motorola firm would have earned from its patents had it been a member of the relevant patent pool for the technology in question. Specifically, Judge Robart presented an algebraic analysis of how the value of a patent pool royalty would relate to the value of a royalty calculated outside the pool. Judge Robart proposes that the value to a firm of participating in a pool could be described as
VP = P+ + IP + E – P– – OC,
where P+ is the licensing revenue the firm earns from being in the pool; IP is the value to the firm of having access to the pooled patents; E is the “external value the company derived from adding its patents to the pool, such as promoting participation in the pool and thereby encouraging widespread adoption of the standard”; P– is the licensing revenue the firm pays to the pool; and OC is the opportunity cost of joining the pool. (Judge Robart actually says that OC is “the opportunity cost of using the patents in a different way, such as abstaining from the patent pool and licensing patents outside the pool,” but I think he means “the opportunity cost of not using the patents in a different way . . . .” More on this below.). Similarly, the value to the firm of abstaining from the pool is
VA = A+ + IP – A– – OC,
where A+ is the revenue the firm would derive from licensing its patents outside the pool (the RAND royalty); A– is the revenue the firm would pay to obtain access to others’ patents; and OC is “the opportunity cost of not joining the pool.” (Apparently the assumption is that, except for the firm that is deciding whether to join the pool, all other firms with relevant patents are in the pool; otherwise there should be a A– term, though perhaps of lesser magnitude, in the first equation, shouldn’t there?) Comparing the two, Judge Robart concluded that, because Motorola’s patents contributed relatively little to the standards at issue, it was fair to assume that VP = VA (and hence that the opportunity costs “cancel out,” as does the IP term if we assume both firms benefit equally from having access to the other relevant SEPs). Moreover, he assumed that P+ = E, based on the inference that “the external value of joining the pool is equivalent to the royalty deficit Microsoft incurs through pool membership”; that 2P+ = P–, based on evidence that Microsoft paid twice as much in royalties to the pool as it received in licensing revenue from the pool (and the assumption that Motorola would have fared no better); and that A– = 1.5P– = 3P+, on the assumption that non-pool royalties would be about 1 ½ times greater than pool royalties (“higher than the pool rate, but not twice as high because some, if not all, of the companies holding SEPs would be subject to the RAND commitment”). Substituting values, we get A+ = 3P+, meaning that the RAND royalty is three times the pool royalty.
I think there are some errors here. First, it seems to me that the opportunity cost of not joining the pool is VP, and that the opportunity cost of joining is VA (right?), though ultimately this factor does not wind up mattering to the judge’s analysis and (I think) shouldn’t matter in terms of comparing the value of joining the firm versus the value of abstaining. Second, and more significantly, I’m not sure why we should assume that VA = VP, even if there is reason to think that Motorola’s patents are relatively low in value. Motorola itself apparently though that VA ≥ VP or it would have joined the pool (though to be fair, the judge is using this analysis to calculate the low end of the range). Third, I think that the judge errs when he states that E “is equivalent to the royalty deficit Microsoft incurs through pool membership,” that is that E = P+. He’s conflating E with IP + E. From his earlier analysis, all we can say is that, for VP to be positive, P+ + IP + E > P–. Thus, at best, even if the assumption that A– = 3P+ is correct, I think all we can infer is that A+ ≥ 2P+ + E. So the RAND royalty is at least twice what the pool royalty would be, plus some increment for the intangible value of being a pool member. It seems to me that the low end of the RAND range therefore would be just twice the RAND rate, not three times; in theory, E could be as low as zero. If anything, though, the error works in favor of Motorola, but I don’t think Microsoft will make much of it since the overall thrust of the opinion strongly favors Microsoft’s position. (And, to reiterate, my analysis is preliminary and it’s possible that I have overlooked something important; a 207 page opinion is a lot to digest, even over the course of a week).
 For a contrary view, however, see Dennis Carlton & Allan L. Shampine, An Economic Interpretation of FRAND, at p.13, available at http://ssrn.com/abstract=2256007 (arguing that, in the context of FRAND royalties, a firm that succeeds in proving infringement of its SEP should not be able to recover more than the pre-litigation FRAND rate).
Editor’s note: This is part 4 of a 4-part series on FTC v. Actavis: How Should the Supreme Court Rule on the Legality of Pay-for-Delay Settlements of Patent Disputes Litigated in the Shadow of the Hatch-Waxman Act? This series is adapted from a document that Professor Cotter coauthored while serving on ABA-Intellectual Property Law Section Task Force last fall. See http://www.americanbar.org/content/dam/aba/administrative/intellectual_property_law/leadership/agendabook_nov2012.authcheckdam.pdf, pages 39-55. The views expressed, however, are his own, and do not represent the views of the ABA or the Task Force.
In my view, the approach embodied in K-Dur strikes the right balance in terms of preserving patent incentives, on the one hand, and fulfilling the legislative mandate of the Hatch-Waxman Act and the antitrust goal of promoting competition, on the other. A rebuttable presumption of illegality rightly places the burden on the settling parties to present evidence that the settlement promotes competition. Allocating the burden of coming forward with such evidence to the settling parties makes sense, since they are likely to be better situated than anyone else to provide and substantiate such information if it exists. At the same time, a rebuttable presumption of illegality avoids the risks inherent to a per se rule, which might condemn some reverse payment agreements that threaten little or no anticompetitive harm—for example when the amount of the payment is consistent with the patent owner’s desire to avoid litigation expenses or, as suggested in K-Dur, when the payment enables a cash-starved generic firm to remain in business.
Among the factors that should be relevant to the question of whether the settling parties have rebutted the presumption of illegality, the most important is the amount of consideration flowing from the brand-name to the generic firm. Where that amount is less than the amount of the patent owner’s expected litigation costs, this fact alone may be sufficient to rebut the presumption, and thus shift to the antitrust plaintiff the burden of proving that the anticompetitive harm outweighs the procompetitive benefit of the settlement. Under these circumstances, the payment may represent nothing more than a good-faith effort to avoid litigation costs; and the fact that payment flows from plaintiff to defendant may be attributable only to the unusual procedural posture of the Hatch-Waxman Act, which as noted permits patentees to file suit in advance of the defendant’s having marketed any product. See Hovenkamp et al., supra, § 15.3a1(C), at 15-47 to -49. Other relevant evidence may include the presence of other agreements between the settling parties (for example, authorizing the defendant to market an authorized generic drug, or licensing the defendant other intellectual property rights), which should be taken into account for the limited purpose of accurately estimating the value of the consideration flowing from plaintiff to defendant; whether the generic is “cash-strapped,” and therefore willing to accept a later entry date to remain in business; whether the patent owner sought, and succeeded in obtaining, a preliminary injunction against the generic manufacturer; whether the generic manufacturer agrees to waive its 180-day exclusivity, thus removing the risk of a bottleneck potentially blocking other ANDA applicants; and whether the patent in suit has withstood other validity challenges arising after the filing of the settled action. See, e.g., Carrier, supra, at 378-82; Thomas F. Cotter, Refining the “Presumptive Illegality” Approach to Settlements of Patent Disputes Involving Reverse Payments: A Commentary on Hovenkamp, Janis & Lemley, 87 Minnesota L. Rev. 1789, 1812-15 (2003). On the other hand, where the amount of consideration flowing from patent owner to generic manufacturer exceeds the generic firm’s expected profit from the sale of the generic drug in question, the inference that the patent owner is simply paying a potential competitor to exit the market is much stronger, and the presumption of illegality should be very difficult to rebut. Moreover, although it probably would not be advisable to require the factfinder to estimate the ex ante probability that the patent would have been found valid and infringed had the infringement action not been settled—a matter that courts in some of the reverse payment cases understandably have been reluctant to undertake—all that the proposed approach requires is for courts to draw appropriate inferences from the amount of the settlement in comparison to other expected costs and benefits, along with any other relevant facts and circumstances.
By contrast, the “scope of the patent” test embraced by the Second, Eleventh, and Federal Circuits appears to make it virtually impossible to condemn reverse payment settlements resulting in generic exclusion unless the parties overreach by agreeing to restraints on the sales of collateral products. The amount of the reverse payments in cases such as Valley Drug ($123 million), Tamoxifen ($66.4 million), Ciprofloxacin and Arkansas Carpenters ($398 million), and Watson Pharmaceuticals (over $200 million) surely exceeded the patent owners’ avoided litigation costs many times over, see Elhauge & Krueger, supra, at 306-07, and thus should have raised serious questions concerning the settlements’ anticompetitive potential. Indeed, the payments in Tamoxifen and Ciprofloxacin were each alleged to exceed the profit the generic manufacturers themselves expected to earn from sales of the generic drugs at issue over the relevant time period. See Herbert Hovenkamp, Mark D. Janis, Mark A. Lemley & Christopher R. Leslie, IP and Antitrust, § 15.3a(B), at 15-37 n.133, 15-41 (2d ed. 2010). In any other context, such agreements among competitors likely would be viewed as naked restraints of trade. The fact that these cases involve patents does not change that fundamental conclusion: as § 211 of the Patent Act itself expressly states, “Nothing in this chapter shall be deemed to convey to any person immunity from civil or criminal liability, or to create any defense to actions, under any antitrust law.”
Arguments that sometimes have convinced courts to apply the more lenient “scope of the patent” test are not persuasive. First, although settlement generally is viewed as a positive good, antitrust law is replete with examples of patent settlements that were, rightly, understood as nothing more than disguised restraints on trade. See Hovenkamp et al., supra, § 7.1a, at 7-3 (noting that “much of our legal doctrine concerning the permissible scope of licensing agreements was developed in cases in which the arrangements were undertaken in settlement of an IP dispute”). Moreover, as the FTC Reports make clear, reverse payments are not necessary to induce settlement. Most settlement agreements of pharmaceutical patent litigation do not contain reverse payment terms—although those that do contain such terms generate losses to consumers measured in the billions of dollars and therefore are a legitimate focus of antitrust scrutiny. Second, any perceived administrative ease of applying a vague “scope of the patent” standard does not outweigh the courts’ responsibility to enforce the antitrust laws. Third, while it may be possible to imagine situations in which risk aversion or asymmetric information could lead to substantial reverse payments notwithstanding an objectively high likelihood that the patent infringement action would have succeeded on the merits, scholars have doubted whether these considerations are likely to be common enough in reality to justify the countervailing anticompetitive risk. See Jeremy Bulow, The Gaming of Pharmaceutical Patents, in 4 Innovation Policy and the Economy 145, 167-68 (Adam B. Jaffe et al. eds. 2004); Elhauge & Krueger, supra. Fourth, a rebuttable presumption of invalidity does not undermine the statutory presumption of patent validity which, as the Third Circuit noted, only goes to the question of the infringement defendant’s burden of proof on the defense of validity. As noted in the Introduction, between 40 and 50% of all litigated patents are invalidated, see John R. Allison & Mark A. Lemley, Empirical Evidence on the Validity of Litigated Patents, 26 AIPLA Q.J. 185, 205-07 (1998); Elhauge & Krueger, supra, notwithstanding the statutory presumption of validity; and in any event that presumption has nothing to do with the separate question of infringement, the burden of proving which always rests with the patent owner. Finally, the effects on innovation of a rebuttable presumption of illegality are not likely to be substantial. Plaintiffs with strong patents can still exclude competition during the statutory patent term—though to the extent there is a potential conflict between innovation and competition, Hatch-Waxman clearly reflects a legislative judgment to favor generic competition. See K-Dur, 686 F.3d at 217-18; Hemphill, supra, at 1612-16. The lenient approach to reverse payments evidenced in some of the cases tends to undermine that legislative judgment. See Thomas Brom, Full Disclosure: Dealing for Dollars, California Lawyer, Oct. 2012, at 18, 19 (quoting Senator Orrin Hatch as stating “As a coauthor, I can tell you that I find these type of reverse payment collusive arrangements appalling . . . . We did not wish to encourage situations where payments were made to generic firms not to sell generic drugs and not to allow multisource generic competition.”); Sheryl Gay Stolberg & Jeff Gerth, Keeping Down the Competition: How Companies Stall Generics and Keep Themselves Healthy, N.Y. Times, July 23, 2000 (quoting Congressman Henry Waxman as stating that “The law has been turned on its head”), available at http://www.nytimes.com/2000/07/23/us/keeping-down-competition-companies-stall-generics-keep-themselves-healthy.html.
In summary, in my view a rebuttable presumption of illegality makes the most sense for evaluating reverse payment settlements of patent infringement litigation conducted in the shadow of Hatch-Waxman. The approach proposed above retains the ability to settle such litigation on other terms, and would enable courts in reverse-payment cases to consider potentially mitigating factors in evaluating the legality of specific agreements.