Thursday, February 22, 2018

Cotter, Hovenkamp, and Siebrasse on Holdup

Erik Hovenkamp, Norman Siebrasse, and I have posted a paper on ssrn titled Switching Costs, Path Dependence, and Patent HoldupHere is a link to the paper, and here is the abstract:
Patent holdup occurs when a patent holder extracts higher royalties ex post (after the payor has committed to use of the patented technology) than it could have negotiated ex ante, where the difference is not explained by an increase in the technology’s value. To date, the literature principally has focused on—indeed, sometimes conflated—two potential sources of holdup: the sunk costs the user has incurred ex ante to adopt the technology, and the “switching costs” of adopting an alternative ex post. We demonstrate, however, that this literature tends either to over- or underestimate holdup risk, because holdup may arise even when sunk costs are zero, or be absent despite high ex post switching costs. More generally, we show that patent holdup is best understood as an opportunistic exploitation of path dependence, arising when prior commitment to a technology creates some dynamic distortion in the technology’s incremental value over alternatives.

Wednesday, February 21, 2018

Some New Papers on the Appropriate Royalty Base for FRAND-Committed Patents

1. Fredrick Nilsson has published a paper titled Appropriate Base to Determine a Fair Return on Investment:  A Legal and Economic Perspective on FRAND, in the December 2017 issue of GRUR Int. (pp. 1017-1023).  Here is the abstract:
This paper aims at contributing to the discussion regarding Fair, Reasonable and Non-Discriminatory (FRAND) licenses in the telecom industry.  Although there are many topics to debate this paper focuses solely on the royalty base.  As of today, there are two royalty bases favored by industry players:  the Entire Market Value Rule (EMVR) and the Smallest Salable Patent Practicing Unit (SSPPU).  By exemplifying with a case study on the Intellectual Property Right (IPR) Policy governing the Wi-Fi standardization process this article analyses which model is more likely to have a positive impact on technology creation and diffusion in the telecom industry when used as royalty base by the patent holder and implementer in their bilateral FRAND negotiations.
2.  Taking a somewhat different view of the matter is a paper by law student Zachary Coots titled Standardizing the Smallest-Functional Unit: A Tier-Stacking Approach to Frand Royalty RatesHere is  a link to the paper, and here is the abstract:
Apple's recent fight with Qualcomm, alleging that Qualcomm is overcharging apple to license Qualcomm's FRAND-encumbered standard essential patents (SEPs), raises an interesting issue regarding patent hold-up: whether a FRAND royalty rate should limit an SEP holder’s ability to extract larger royalties from end-product manufacturers — resulting from that manufacturer's increased sales prices due to unrelated, end-product advancements. This Paper advocates that uniformly assessing all FRAND-encumbered licenses against the smallest-functional unit would ameliorate this concern, and it further provides two methods for achieving this end while also avoiding issues of excessive royalty stacking.
3.  In this vein, I should also mention that Richard Stern has published a very interesting paper titled  Who Should Own the Benefits of Standardization and the Value It Creates?, 19 Minnesota Journal of Law, Science & Technology 107 (2018).  The paper discusses the appropriate royalty base, among several other topics relevant to calculating FRAND royalties; and though Mr. Stern and I may have to agree to disagree on certain issues (see, e.g., pp. 223 et seq.), the paper certainly merits the attention of readers interested in these issues.   Here is a link (I'm not finding an abstract).

Monday, February 19, 2018

Bharadwaj on Injunctions and the Public Interest in India

Ashish Bharadwaj has published an article titled Patent Injunction and the Public Interest in India, 40 EIPR 55-58 (2018).  Here is the abstract:
In Bayer Intellectual Property GmbH v Ajanta Pharma Ltd, the Delhi High Court weighs public interest with an injunction in an infringement suit pertaining to a drug patent on new grounds. The decision is functionally a compulsory licensing arrangement, although it is characterised as voluntary licensing. Moreover, the decision represents a dramatic expansion in the scope of patents that fall under the public interest exception to the grant of patents under the Indian patent law. The decisive ruling has implications for future cases in India, where courts could now refuse to grant injunctions for patent infringement based on a very broad economic rationale.
As the abstract suggests, the author argues that the case departs from Indian precedent in effectively permitting a court to issue a compulsory license in the public interest, even though the drug is not a life-saving medicine (it's an erectile dysfunction drug), based on "economic factors such as employment or tax revenues for the state."  (Ajanta was making the patented drug in India, without Bayer's permission, for export to other countries. Bayer itself was not working the drug in India.)   Several posts about the Bayer/Ajanta case also have appeared over the past few months on the SpicyIP Blog, as I noted here.  In addition, here is a link to a post on Mondaq from March 2017 by Dinesh Kumar Sharma, titled Patent Infringement in India and Interim Injunctions: Jurisprudence on "Public Interest" Continues to Evolve, which discusses Bayer/Ajanta among others.  Finally, I should note that in September Pankhuri Agarwal and Shamnad Basheer published two posts on Spicy IP titled Towards More Intelligible "Open Access" at the India Patent Office:  A Study of Compulsory Licensing Cases (see here and here), which discusses the difficulty one of the authors encountered in trying to obtain online access to compulsory licensing decisions of the India Patent Office, and provides their recommendations for improving online access.

Friday, February 16, 2018

Lex Machina 2017 Patent Litigation Year in Review

Lex Machina's Patent Litigation Year in Review 2017, authored by Brian Howard, is now available.  As in previous years, the report presents a wealth of data on U.S. patent litigation.  This year's report includes an extensive discussion of the effect of the TC Heartland case on patent venue (which, as many readers are probably aware, is now to some degree shifting away from the Eastern District of Texas to the District of Delaware), as well as a brief section on design patent litigation.  (For brief discussion of TC Heartland on this blog, see here.)  Page 28 includes some data on injunctions, which Lex Machina classifies by default/consent and merit-based decisions, as well as by permanent injunctions, preliminary injunctions, and TROs.  I was somewhat surprised to see that, among the merit-based decisions (80 cases in 2017), motions for permanent injunctions were granted in 31 cases and denied in only 2 cases.  (Is that because litigants can now predict most of the time whether a permanent injunction is likely or not, and thus either are (1) agreeing to the entry of a permanent injunction when it's likely one will be granted, and (2) not bothering to request a permanent injunction when it isn't?)  The grant rate for merit-based preliminary injunctions is 19% (8 out of 42), which seems about right to me, and for TROs 38% (but based on only a handful of cases, 3 grants out of 8 motions).  There are also data on damages, showing for example that in 2017 courts awarded $763 million in reasonable royalties and $284 million in lost profits, "with only a few outliers driving the high totals.  Among all damages awarded in cases filed since the year 2000, 90% of the reasonable royalty awards in cases have been less than $46.5m, 75% less than $15.2m, and half less than approximately $4.4m; the amounts for lost profits are lower" (p.30).  Finally, there is also a chart on ITC investigations, which indicates that 60 were filed in 2017 (p.39).

Thursday, February 15, 2018

Minor Changes to TCL v. Ericsson Opinion

David Long reports on the Essential Patents Blog that Judge Selna has issued an order making a few minor corrections to his December 2017 FRAND opinion in TCL v. Ericsson (previously discussed on this blog here).  Rather than repeating Mr. Long's analysis, I will simply direct readers to his post, here.  Basically, the court appears to have rebuffed most of Ericsson's arguments for amending the findings of fact found in the December opinion.

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Just a reminder--Jorge Contreras, Christopher Thomas, and I will be participating in an IP Chat Channel webinar on TCL v. Ericsson on February 28.  More details soon.

Wednesday, February 14, 2018

Liability for Willful Infringement Without Knowledge of the Patent Prior to Suit?

On occasion I have posed the question whether, in the wake of the U.S. Supreme Court's decision in Halo, the trier of fact may find that the defendant willfully infringed if the defendant (1) lacked actual knowledge of the patent at the time the infringement began, but (2) continued to infringe after acquiring such knowledge, such as where the defendant continues to infringe after the patent owner sends a cease-and-desist letter or files suit.  (See, e.g., here, discussing an article by Feldman and Lemley.) On the one hand, the Court in Halo states that "culpability is generally measured against the knowledge of the actor at the time of the challenged conduct,” but does that necessarily mean that a defendant who continues to infringe once the lawsuit has been filed is potentially a willful infringer from that point forward?  Of course, the defendant may have a good faith basis for believing the patent is invalid or not infringed, in which case it probably isn't a willful infringer; so does the issue turn on the defendant's subjective state of mind once the suit is filed (or the cease-and-desist letter is received)?  Or might there be other considerations (such as the difficulty of designing around immediately) that should affect the analysis of willfulness?

Judge Lucy Koh effectively answered the question stated in the first sentence of the preceding paragraph in the affirmative in Apple Inc. v. Samsung Elecs. Corp., Case No. 12-CV-00630-LHK (N.D. Cal .June 23, 2017) (see previous discussion here); and now it appears that another court may have done so too, in Microsoft Corp. v. Corel Corp., Case No. 5:15-cv-05836-EJD (N.D. Cal. Feb. 9, 2018).  The jury verdict finds that Microsoft did not notify Corel of three of the design patents at issue prior to suit, but that Corel nonetheless willfully infringed those three design patents (as well as one other design patent and two utility patents).  (Here is a copy of the verdict.  Here is a link to a story about the case on Law360, and here is a link to one on IP Watchdog.) The jury awarded actual damages of $278,000, and I assume that it remains to be seen whether the judge will award an enhancement.  (I also infer from the Law360 article that the question of whether Microsoft notified Corel may have been relevant to the date on which actual damages began to accrue, under U.S. Patent Act section 287.  I gather that Microsoft was hoping for a larger damages award, based on the theory that damages started accruing several years prior to the initiation of litigation.  For discussion of section 287, see, e.g., here.)  Without knowing anything more about the case, I also can't say whether there was evidence that Corel had actual knowledge (as opposed to actual notice from Microsoft) of any of the patents pre-suit; and actual knowledge is irrelevant under section 287.  But if the case does stand for the proposition that willfulness can be based on a continuation of infringement post-filing, despite the defendant's lack of knowledge prior to that point, this could be an important precedent, assuming it withstands appellate review. 

Monday, February 12, 2018

Damages and Profits?

David Brodsky has posted an article on ssrn titled General Damages and an Account of Profits ‒ An Irish Innovation?, JIPLP (forthcoming 2018).  Here is a link, and here is the article:
This article considers the ‘orthodox’ rule requiring an election between damages or an account of profits in light of a recent Irish court decision that would appear to open the door for the granting of both remedies.
Following a brief review of the background and historical development of the ‘orthodox’ view, the specific judicial arguments underlying the decision are presented. The crux of the judge's reasoning centred on the distinction between special and general damages. Interpreting these terms in the manner set forth by the Irish Supreme Court for trade mark/passing off cases, the judge concluded that the ‘rule’ requiring a plaintiff to make an election between the two remedies refers to an election between special damages and an account of profits, so that nothing precludes a plaintiff from making a claim for general damages and an account of profits.
The article shows that the legal and economic logic underlying the judgment is not easily refuted. Moreover, at least in certain situations the ‘orthodox’ position can be seen to send a clear, albeit unintended, signal to potential infringers that they need not worry unduly about the quality of their workmanship, or tarnishing the victim's trade mark or reputation.  
The basic idea is that an award of the infringer's profit substitutes for "special" damages (lost profits, that is, profits actually lost on sales that would have been made but for the infringement) but not for "general" damages (injury to goodwill or reputation, which the author views as, in economic terms, encompassing more of a future harm yet to be suffered), and thus that there is no discrepancy between granting an award of infringer's profits and an award of general damages.  The author notes, however, that the infringer's profits could be greater or less than the plaintiff's lost profits, and that the plaintiff typically will seek whichever form of relief offers a higher payout.  So I would be concerned that an award of infringer's profits coupled with general damages for harm to reputation would result in overcompensation and, potentially, overdeterrence.  Of course, if there is reason to think that compensatory damages won't provide sufficient deterrence in a given type of case, there may be good economic reasons to award enhanced damages or, if that option isn't available in a particular country, an award of the infringer's profits instead.  But I'd still be wary about adding general damages on top of that; I don't see why an award of infringer's profits should be viewed as compensatory damages at all, though I recognize that courts in some countries (e.g., Japan) do continue to invoke that premise.

To be sure, the situation the author describes may not come up much in patent, as opposed to trademark, cases.  (He notes as well that in the case he's discussing, the judgment was later reversed on liability, so Justice Cregan's statements about damages are dicta.  Here's a link to Justice Cragen's opinion, by the way, in case you're interested.)  But there may be cases in which patent owners can make a reasonable case that the infringement has injured their reputation or caused some other less tangible harm.  See, e.g., Ronen Avraham's recent article arguing for pain-and-suffering damages in patent cases (a view I don't particularly share, however), which I mentioned here , and some of my previous posts on damages for "moral prejudice" in patent law (see, e.g., here and here).  So the issue Mr. Brodsky discusses could in theory come up in a patent case too, and if so it will be interesting to see if other courts find the Irish judge's reasoning persuasive.

For a discussion of a recent Canadian case holding (not surprisingly) that the defendant cannot elect between damages and an accounting of profits, see Norman Siebrasse's Friday post on Sufficient Description.