Saturday, November 16, 2013

Lost profits ineligible as damages theory for several Apple patents in Samsung retrial

Shortly after the start of the Apple v. Samsung limited damages retrial in the Northern District of California I concluded from various reports that "modesty and humility reign". The court "only" allowed Apple to present a damages claim of $380 million to the jury, slightly short of the corresponding portion of last year's award ($410 million), and Samsung is pretending contrition in an effort to propitiate the jury.

Apple's claim became publicly known only when the trial started. Before trial, it was just known that Samsung complained about Apple seeking "vastly greater" damages, allegedly "hundreds of millions" more than the year before. It was also discoverable that Samsung's pretrial motions had succeeded in part to constrain Apple's ability to seek damages. The quantitative impact was unclear, however.

Late on Friday, Judge Koh entered a motion on certain motions for judgment as a matter of law, and that order, in conjunction with a couple of previous decisions, suggests to me that the most important legal question on which Samsung prevailed (subject to an appeal) is about the underlying, hypothetical assumption of when Samsung would have begun to avoid infringement of the infringed patents: when actual infringement began or when it received notice of Apple's infringement claims. For example, the designaround period for the relevant design patents is considered to be one month. The question is when that month would begin.

The district court agreed with Samsung that Apple's claim of lost profits due to Samsung's infringement must be based on the assumption that Samsung's designaround efforts would have started when infringement began, not when Apple notified it of its infringement claims. On this basis, Apple can seek lost profits only with respect to the '915 pinch-to-zoom API patent, but not with respect to four other patents (two design patents, the rubber-banding '381 patent, and the tap-to-zoom-and-navigate '163 patent) that Samsung would have hypothetically worked around even before it had notice, i.e., before the relevant damages period.

I agree with Apple that this is not a logical choice, and it will be interesting to see what happens on appeal. Judge Koh believes that the case law is on Samsung's side, and I'll talk about the two relevant cases, Panduit and Grain Processing, in a moment. But it really is illogical. Why would someone work around a patent without actually seeing a need for it?

A real-world example shows how absurd this is. Which driver would accelerate way beyond a speed limit and then hit the brakes with full force for no reason? But if a driver is speeding and suddenly sees the flashing red light of a traffic enforcement camera (it's happened to me a few times, I admit), then the instinctive reaction is to hit the brakes, though it's too late anyway if your car (and not someone driving ahead of you) triggered it.

A 1978 Sixth Circuit case, Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., established the test for a lost profits damages model (reformatted):

  1. demand for the patented product,

  2. absence of acceptable noninfringing substitutes,

  3. [the patent holder's] manufacturing and marketing capability to exploit the demand, and

  4. the amount of the profit [the patent holder] would have made.

Panduit factor two is the issue here: the absence of workarounds/designarounds. The legal question is now how to reconcile this factor with the requirement of notice for a damages period to begin. Judge Koh's JMOL order describes the Federal Circuit's 1999 opinion in Grain Processing Corp. v. American Maize-Products Co. as "the starting point for the parties' dispute over whether a lost profits damages analysis must take into account the actions an infringer could have taken to design around the infringed patents starting at the point of first infringement (as opposed to the date of first notice, or any other date)".

Apple argues not only on the basis of logic but also interprets Grain Processing as saying that the designaround start date is a question of fact, i.e., for the jury to decide. And after the court barred Apple's damages expert from using different designaround start dates, Apple still wanted to tell the jury about its lost profits (in the form of lawyer argument, not an expert report), but the court granted an emergency motion by Samsung to preclude Apple from doing so.

There's no question that Grain Processing moved the goal posts in a way that now benefits Samsung, but the question is: to what extent? The key lesson from Grain Processing is (based not just on my reading of the opinion but also what various commentators say) that lost profits depended on a "but for inquiry" (what would the situation in the marketplace have been "but for" the infringement identified) and that this inquiry involves not only products that were actually sold at the time, but also hypothetical -- but available -- workarounds. What happened in the real world is measured against a counterfactual world.

Judge Koh says certain wordings in Grain Processing ("had [the infringer] not infringed", "absent the infringing product", or "with infringement factored out of the picture") imply that "reconstructing the hypothetical market requires one to factor out infringement entirely". This is followed by a passage on which I disagree with Judge Koh:

"In order to do this [factoring out infringement entirely] when considering whether an infringer would have been able to design around the patentee's intellectual property, one would have to start the inquiry as of the date of first infringement. While the facts of any given case might ultimately lead to the conclusion that the infringer would not have been able to begin to design around the patent starting on the date of first infringement, one would need to begin the analysis at the date of first infringement to avoid arbitrarily ignoring actions the infringer could have taken in lieu of infringing."

The problem I have with this is that the relevant wordings in Grain Processing -- as Judge Koh describes it, the need to take into account "actions the infringer could have taken in lieu of infringing" -- mean, if viewed in isolation, that an infringer chose a noninfringing alternative from the get-go. That would be even more infringer-friendly than Judge Koh's approach. I'm not saying that this is is necessarily the right conclusion. But it would be a more logical one that the assumption that someone goes ahead and infringes, only to make a U-turn during the same second that infringement begins. Why would Samsung have started to work on designarounds when actually shipping infringing products? Why not start right after releasing the infringing program code to manufacturing? To me, this is more arbitrary than it is logical.

I can see scenarios in which it makes sense not to allow for damages claims based on a lost profits model. For example, there's an infinite number of encryption algorithms out there. If a particular encryption technique is patented and infringed, but equally good or even superior alternatives were available, then I agree that the owner of the patented technique didn't really lose profits: the infringer, probably inadvertently, used the patented technique, but didn't have to. Even then I can't see why someone would implement a patented encryption algorithm, release a product, and the very moment that the product ships alter course and replace that implementation with a non-infringing one. I would like to see Apple raise this issue on appeal.

Apple complied with the pretrial orders not to present (neither through lawyer argument nor in the form of expert testimony) lost profits as a damages theory for the relevant patents (again, the key exception is the '915 patent). In yesterday's JMOL order, Judge Koh ruled that no reasonable jury can award Apple any lost profits with respect to those patents. But that decision was merely a formality. Things will really get interesting after the final judgment by the district court.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Share with other professionals via LinkedIn: