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On October 11, 2016, the U.S. Supreme Court will hear its first design patent case in over a century, and it’s a whopper. The significance of the Supreme Court’s ultimate decision on Apple Inc. v. Samsung Electronics Co. Ltd. (Supreme Court Case No. 15-777) stems not just from the huge damage award at issue in the case but rather from the potentially devastating impact on business and innovation resulting from the lower courts’ interpretation of a statute drafted many decades before the advent of complicated devices such as today’s smartphones that encompass hundreds or even thousands of individually-patented features and components.
On October 11, 2016, the Supreme Court will hear Samsung’s appeal of the Federal Circuit’s affirmation of the jury’s damage award to Apple of Samsung’s “total profits” on sales of the infringing smartphones even though it had only infringed Apple’s design of the iPhone’s outer shell. In upholding the “total profits” award, the Federal Circuit determined that it was bound to uphold the jury’s award by the “explicit” and “clear” statutory language relating to design patent infringement damages.
In 2011, Apple sued Samsung claiming that its Galaxy smartphone infringed on Apple’s proprietary rights in the design of the outer shell of the iPhone. A jury found that Samsung infringed Apple’s patents rights and diluted Apple’s trade dress and awarded Apple approximately $1 billion in damages. Samsung appealed to the Federal Circuit. The Federal Circuit reversed the jury’s findings as to Apple’s trade dress claims but kept intact the bulk of the damage award which represented a disgorgement of Samsung’s entire profits on the infringing smartphones. The total profit award was based on the statutory remedies in 35 U.S.C. § 289 available against an infringer of design patents.
Samsung appealed to the Supreme Court, arguing that damages for design patent infringement should be limited to that portion of Samsung’s profits that was attributable to the smartphone outer shell, rather than to the entire phone itself (i.e. “apportionment”). The Federal Circuit rejected Samsung’s apportionment argument citing the clear language of § 289 authorizing an award of the infringer’s “total profit” on “any article of manufacture to which such design or colorable imitation has been applied.” In essence, the Federal Circuit said its hands were tied because of the clear statutory language and because apportionment is a “policy argument” that should be directed to Congress adding, “We are bound by what the statute says, irrespective of policy arguments that may be made against it.”
Given the current statutory language, the Supreme Court might very well agree with the Federal Circuit and find that it is bound to uphold the jury’s total profit award. However, an award of “total profits” rather than apportionment can lead to the absurd situation where a company that infringes an insignificant design element nonetheless covered by a design patent would have to disgorge all profits on the entire device to the plaintiff. What if another feature of that same device is later found to infringe a different design patent owned by a different entity?
The importance of the Supreme Court’s ultimate ruling here is underscored by the numerous amicus curiae briefs filed (27 at last count). With over 205 billion in cash reserves at last count, Apple certainly doesn’t “need” the full nine-figure damage award. And, given the far reaching implications of this case, Apple may live to regret its aggressive pursuit of “total profits” for design patent infringement by finding itself battling design patent holders seeking to recover Apple’s total device profits for infringement of even a minor design feature. Apple will also be an even richer target for the new breed of design patent trolls already surfacing based, at least in part, on Apple’s success in this case. Clearly it is time for Congress to step in and amend Section 289 to add apportionment language.
UPDATED: Tuesday, August 16, 2016 at 8:56pm
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Join the Discussion
28 comments so far.
JD
August 19, 2016 04:16 amRP,
If this case hinged on policy alone, Samsung would have a very compelling case. But there is a statute which is clear on its face. And there is legislative history, which further clarifies the statute.
It’s not for the court to say that a clear statute should be ignored because the court disagrees with Congress’s policy justifications. Capitol Hill is just a short drive away.
Samsung is basically arguing that the law isn’t fair. Lots of laws aren’t fair. You violate the antitrust laws, you may have to pay treble damages. You’re a willful patent infringer, you may have to pay treble damages. You violate RICO, you may have to pay treble damages. The list goes on and on. In all these cases, you’re paying more than the harm done to you. But there is a reason for that: Congress sought to punish and deter the specific conduct proscribed.
Patent remedies in the Federal Circuit
Anon
August 18, 2016 07:44 pmRP,
The moment you dive into “a part of” – you risk losing the meaning of “total.”
No matter what “parade of horribles” that you pull from utility patent cases, you STILL need to be able to understand that design patent cases ARE different because of that word.
If you want something else, the path to what you want cannot go through the courts.
Thomas
August 18, 2016 05:55 pmMaybe then Apple can start paying it’s fair share of US corporation tax
RP
August 18, 2016 03:49 pm@JD , The jury should have been instructed that the “article of manufacture” in this case cannot be the entire product because the infringement was only as to part of a modern multi-component product. The Amici Curiae brief of 50 IP Professors put it succinctly:
“Further, awarding the defendant’s entire profit based on a plaintiff’s small contribution to a product’s value would cause significant mischief, as this Court noted in Seymour v. McCormick, 57 U.S. 480 (1853) (If the measure of damages be the same whether a patent be for an entire machine or
for some improvement in some part of it, then it follows that each one who has patented an improvement in any portion of a steam engine or other complex machines may recover the whole profits arising from the skill, labor, material,
and capital employed in making the whole machine, and the unfortunate mechanic may be compelled to pay treble his whole profits to each
of a dozen or more several inventors of some small improvement in the engine he has built. By this doctrine even the smallest part is made
equal to the whole, and ‘actual damages’ to the plaintiff may be converted into an unlimited series of penalties on the defendant. We think, therefore, that it is a very grave error to instruct a jury ‘that as to the measure of damages the same rule is to govern, whether the patent covers an entire machine or an
improvement on a machine.’) Id. at 490-91.
The result of applying that rule is that a design patent on a small component of a product gives the patentee “undue leverage” over the unpatented components. eBay, Inc. v. MercExchange LLC, 547 U.S. 388, 396 (2006) (Kennedy, J., concurring).
Nor does all, or even most, of the value of a product
normally come from patented designs. People don’t buy
iPhones for their appearance alone; they buy them for their
functions. Those functions contribute substantially to the phone’s value and they are covered by many utility patents.
Indeed, by one estimate, there are 250,000 patents that arguably cover various aspects of a smartphone. To conclude that one design patent drives the purchase of the product, and therefore that the defendant’s entire profit is attributable to infringing that patent, is to say that none of those functional features contribute anything to the value of the phone – a ludicrous proposition.”
Prizzi’s Glory
August 18, 2016 09:42 amFor everyone’s interest, here is an article that describes the cell phone tech of the 80s.
http://mashable.com/2014/03/13/first-cellphone-on-sale
JD
August 18, 2016 02:03 amYou’re oversimplifying Apple’s argument (summarized here).
Apple’s argument is multi-pronged:
1) Section 289 entitles a patent holder to the infringer’s total profit from the article of manufacture bearing the patented design
2) This article of manufacture may be a portion of the product sold, ie, it doesn’t have to be the entire product sold
3) Samsung did not provide evidence showing that the relevant article is less than the entire smartphone. Apple provided sufficient evidence for the jury to find that the relevant article is the entire smartphone. Thus, sufficient evidence supports the jury finding, and the Federal Circuit should be affirmed.
The second and third prong will prevent patent trolls from terrorizing patent holders. If a troll holds a design patent to a small component of Apple’s product, Apple will simply argue that the relevant article of manufacture under 289 is the component and not the entire product. Disaster averted.
Insight on remedies in the Federal Circuit
Anon
August 17, 2016 10:28 pmPrizzi’s Glory,
I fully agree with your last statement.
And yet, it is quite evident that we live in a time of “efficient infringement.”
(I think that “treble” will at times simply NOT be enough)
Prizzi’s Glory
August 17, 2016 10:00 pm@Anon#17, Isn’t trebling under 35 USC § 284 still available if the infringement is sufficiently reckless and intentional? Or does 35 USC § 284 only apply to utility patents?
In any case, levying the total profit from infringing under the standard definitions is quite punitive even without 35 USC § 284 because according to the usual definitions total profit from infringing is not normally reduced by COGS, development costs, or operating costs associated with the infringing product.
The infringer is forced to absorb a tremendous amount of expense with no way to offset it.
In other words, if the patent system operated properly, it should be very stupid to infringe.
Anon
August 17, 2016 07:49 pmPrizzi Glory – are you discounting all punitive effects? Why?
Why should “total” be so limited?
Prizzi’s Glory
August 17, 2016 06:30 pm@Paul F. Morgan#16, Whoever wrote the statute knew just enough accounting lingo to be dangerous. He used the terminology of gain calculation (somewhat imprecisely) as I discuss in @Prizzi’s Glory#4 and in Prizzi’s Glory#14.
The gain here is the total (illicit) profit from infringing. That is the total profit to which the infringee is entitled. The infringee is not entitled to the total profit from product sales or any of the numerous other total profits that are defined. I find the interpretation of the District Court and CAFC to be ignorant and baffling.
RP
August 17, 2016 05:10 pm@patentyoda#3 as an example, check out the first demand letter posted on trollingeffects.org
Anon
August 17, 2016 05:00 pmMr. Morgan,
I did provide an answer. The answer was non-evasive. As I recall, you merely did not like the answer that I provided.
Paul F. Morgan
August 17, 2016 04:39 pmI’m still waiting for a good non-evasive answer to a question I posed some time ago on this same statutory construction issue:
If one can prove the infringement of one’s design patent on an automobile hood ornament by a car company using a sufficiently similar hood ornament integrally welded to its car hoods, can one collect all the profits on all the sales of all the cars?
Prizzi’s Glory
August 17, 2016 03:44 pmOf course, the Talmud would not have used the potato for the vegetable whose weight was exaggerated.
Prizzi’s Glory
August 17, 2016 01:16 pm@Anon#13, I had already explained a sensible understanding of meaning of total for 35 U.S.C. § 289 in @Prizzi’s Glory#4.
I could have explained more clearly. I should have written the following:
instead of
Now before you cry “Fowl” for my advocating an implicit reading, keep in mind that the District Court and the CAFC are implicitly reading “total profit” as “total profit [from the sales of the infringing product]“.
My implicit reading is simpler, makes more sense form the legal and accounting standpoints, and follows hundreds of years of usage in dealing with cheating in sales transactions.
I don’t remember for sure, but I think I took my example of cheating in weight from ??? ??? (Baba Kama — the First Gate) a Talmudic treatise in the order ?????? (Nezekin — Damages) that is supposed to have been finally redacted at the beginning of the 3rd century.
Anon
August 17, 2016 12:43 pmAnd yet, your answer of apportionment is clearly not the same as ANY meaning of “total,” now is it?
A rose by any other name…
Prizzi’s Glory
August 17, 2016 10:51 am“Total” is a highly nonspecific term without further elaboration.
Is total profits from the product meant? Is total profits from the product line meant? Is total corporate profit meant? How about profit from drag? The infringer might sell a lot of product not incorporating the infringing design merely because it sells a product that incorporates the infringing design.
Should it be calculated in terms of ROI? In that case, there might never be any profit.
The author of the statute irrelevantly used terminology usually associated with gain calculations and created a mess from the standpoint of normal accounting terminology that defines total profit.
The counsel’s brief goes into the issue of unclear meaning of total profit in more detail.
The meeting of accounting and legal terminologies has a lot of the issues faced in mixing legal terminology with those of engineering or of science.
Anon
August 17, 2016 10:11 amWhat part of “total” is so unclear Prizzi’s Glory?
Your post above, as detailed as it is, is certainly not “total” but is instead a formula for apportionment.
If Congress had wanted “apportionment” they were free to use that word or otherwise indicate so.
The plain fact of the matter is that they did not.
Prizzi’s Glory
August 17, 2016 10:00 amHere is counsel’s brief for the petitioners: http://www.scotusblog.com/wp-content/uploads/2016/06/15-777-ts.pdf .
The terminology of 35 U.S.C. § 289 is far from clear as I point out above and as counsel expatiated in far greater detail.
Concerned
August 17, 2016 09:11 amBenny @7, I agree with you 100 percent and my words are meant to describe what you are saying, i.e., the industrial design drives the internal mechanical and electrical design, as well as some of the software (e.g. user interface) and is therefor integral to the overall design. I too did product development for 25 years and you are likely to have used one of the products I helped develop, and likely liked it.
Benny
August 17, 2016 08:50 amConcerned,
You say, “The outer shell design is integral to such other form, fit and functions such as the touch screen, the integrated antennae, the design and layout of the internal circuit boards, etc”.
Product development and design is part of my job. That’s not how it works. Industrial design dictates the size and shape of the box according to what they imagine tickles the consumer’s fancy, and we have to to stuff our tricks inside any which way we can. If it worked the other way round, the form would be functional and therefore eligible for a utility patent rather than a design patent.
Prizzi’s Glory
August 17, 2016 08:16 am@concerned#5, to determine the total profit associated with the design-patent-infringing component:
1) identify the parts associated with the infringing design,
2) calculate the total parts cost for these components,
3) calculate the sale price to total parts cost (of the entire device) multiplier,
4) apply the multiplier from (3) to the value identified in (2),
5) subtract from value in (4) the value identified in (2),
6) multiply the value in (5) by the number of infringing units sold.
———–
Now the court has a starting point to levy an amount from the infringer to transfer to the design patent owner.
Concerned
August 17, 2016 07:28 amI have to say, with all due respect, I strongly disagree with your position on “total profits”. Furthermore, your only support for your position is a “what if” scenario. Here’s your statement,
“Apple may live to regret its aggressive pursuit of “total profits” for design patent infringement by finding itself battling design patent holders seeking to recover Apple’s total device profits for infringement of even a minor design feature.”
I wonder why you didn’t provide an example of a “minor design feature” and how it could be exploited. And now that the question is posed, please do provide a few examples of a minor design feature where the feature is integral to the finished product such that disgorgement of “total profits” would apply. The shape of a screw head used in a mobile phone doesn’t count.
I don’t think any industrial designer would consider the finished design of a mobile phone, a computer, a watch, or just about anything else I can imagine would be considered a minor design feature. I view the design of a mobile phone as deeply intertwined with much of the rest of the system. The outer shell design is integral to such other form, fit and functions such as the touch screen, the integrated antennae, the design and layout of the internal circuit boards, etc. IMHO there is no fair way to separate the value of the design from the rest of the system.
Finally, some may say if a design patent owner wants to sell their property rights to a manufacturer, a PAE, or to anyone else, then they are entitled to do so. Let the buyer determine the value of the patent, and the potential validity issues. In your blog post, you suggest Congress act to amend Section 289. Do we really want Congress to meddle in a nonexistent problem of a “new breed of design patent trolls”? To be sure there’s one potential case pending in China related to a mobile phone design patent, but let’s wait to see the details of the case and the potential court decision.
Benny
August 17, 2016 05:42 am” What if another feature of that same device is later found to infringe a different design patent owned by a different entity?”
I’m curious to learn the answer to the question raised by Ronald.
Prizzi’s Glory
August 17, 2016 05:16 amI think whoever wrote the 35 U.S.C. § 289 was confused with respect to possible decrease in profitability on a per unit basis versus the possible increase in sales.
Altogether total profits might go up by infringing even if per unit profitability went down.
Probably the statute should have been worded as below. Without this addition the phrase “to the extent of” really makes no sense and should have been replaced with “for” if the statute is really to be interpreted as the District Court and the CAFC did.
I analogize the sale of an infringing device to the sale of potatoes by weight if the shopkeeper uses a scale that cheats by showing too great a weight. The shopkeeper would be liable to the customer to the extent of his total profit from cheating on weight and not for his total profit on selling the potatoes.
PatentYoda
August 16, 2016 10:34 pmYes, please provide us with a single example of a design patent troll, since they are “already surfacing.”
Anon
August 16, 2016 02:50 pmDo you have examples of these “Design Patent Tr011s” for your parade of horribles?
Roy Fiore
August 16, 2016 11:04 amWhy do you not ever mention the VirnetX vs Apple case where VirnetX won 2 jury trials, and now will enter Apple3 and Apple4 due to errors by Judge Schroeder. I really would like your take on this. What is good for the goose is good for the gander. Thank you