Thursday, October 13, 2016

Apple v. Samsung: stark contrast between Supreme Court and Federal Circuit

Within a few days of each other, the Supreme Court of the United States and the United States Court of Appeals for the Federal Circuit had Apple v. Samsung on their agenda. One week ago, the Federal Circuit issued a ruling that was more than surprising: a majority of the full court overruled the three panel judges, including the Chief Judge, with respect to the second California Apple v. Samsung case to reinstate a $119 million verdict for Apple. On Tuesday, the Supreme Court held its hearing on the question of design patent damages (transcript).

Was it just a coincidence that the Federal Circuit made a decision on an Apple petition for a rehearing about eight months after the original decision and just days before the design patents hearing in the top U.S. court? It may very well have been. But when there are already other oddities (such as the decision not to invite further briefing from the parties and hold a rehearing), it's not impossible that there is a hidden message or agenda.

The Federal Circuit decision certainly gives Apple leverage. Limited leverage, though: the relatively most valuable one of the three patents on which Apple had prevailed at the spring 2014 trial has expired and the most iconic one, slide-to-unlock, is about as valuable in the age of Touch ID and comparable technologies as an ISDN or floppy disk patent.

The Supreme Court hearing, by contrast, went fairly well for Samsung--to the extent that one can say at this procedural stage. While the Federal Circuit had said in May 2015 that Samsung was liable to the extent of its total profit on any phones deemed to infringe any Apple design patent(s) and that arguments against that holding would have to be directed to Congress, Apple itself softened its stance after the U.S. federal government had warned against absurd results: Apple told the Supreme Court that the "article of manufacture" with respect to which an unapportioned disgorgement of profits was warranted might be less than an entire smartphone.

At the Tuesday hearing, there really was no indication that the Supreme Court would agree with the lower courts. The focus was completely on what the right test for the relevant article of manufacture should be--a test that the Federal Circuit (and Judge Koh before it) hadn't even considered necessary. Despite the parties' agreement at this stage and the U.S. goverment's position, the Supreme Court could have said the same as the Federal Circuit: talk to Congress. It didn't. The justices appear convinced that a solution can be worked out without changing the statute, just by interpreting it reasonably. A couple of examples:

Chief Justice Roberts: "It seems to me that the design is applied to the exterior case of the phone. It's not applied to the --all the chips and wires, so why [...] So there should - there shouldn't be profits awarded based on the entire price of the phone."

Justice Breyer (sympathetically paraphrasing an Internet Association brief): "you know, wallpaper, you get the whole thing. A Rolls Royce thing on the hood? No, no, no. You don't get all the profit from the car."

In light of those statements, I would not advise patent trolls to acquire broad and trivial design patents at high prices right now. The Federal Circuit opinion on disgorgement may have encouraged some organizations to do that, but the Supreme Court decision will almost certainly be a lot more balanced.

The big question mark at the hearing was how to solve the problem (of totally unreasonable design patent damages due to the application of the law of the spoon to modern-day smartphones or entire cars or airplanes). What rule would work?

Justice Kennedy, whose concurring opinion in the eBay case on patent injunctions has been cited over and over, said something I agree with and that even the parties to this case here might agree with philosophically:

"My preference, if --if I were just making another sensible rule, is we'd have market studies to see how the --the extent to which the design affected the consumer, and then the jury would have something to do that. But that's apportionment, which runs headlong into the statute."

In the case of a design patent-infringing cupholder in a car, the impact on purchase decisions would be zero, or at least negligible. In the case of a rug or a wallpaper, design would be a huge part of the value. And when it comes to a smartphone, it's somewhere in between (not in the middle, but somewhere in between).

That kind of standard, however, would either require new legislation or an interpretation of § 289 under which the phrase "profit made from the infringement" would result in a causal-nexus requirement, which in effect would lead to apportionment despite the statute containing the world "total."

Samsung's counsel proposed focusing on "article of manufacture," which is also what certain amici had advocated in their briefs, and the patent specifications ("the article of manufacture to which a design has been applied is the part or portion of the product as sold that incorporates or embodies the subject matter of the patent"). Justice Kennedy said that as juror he wouldn't know what to do with an instruction like that, but there's lots of things that are hard for juries to resolve, such as highly technical infringement questions.

It's hard to make a prediction here but I think it's a relatively likely outcome that the Supreme Court will ultimately support Samsung's proposed approach of looking at the cost of the different components. It would be the lesser one of two "evils" the statute could lead to. The position of the courts below, which was an "entire product" or "largest saleable unit" kind of rule, could drive companies into bankruptcy. The net effect of basing damages for a design of the casing of a smartphone on the cost of the exterior parts covered by the design patent could be that design patent holders feel they are undercompensated. The result could be substantially below what Justice Breyer would like to be the test if he could make new law; but the Supreme Court has to interpret the existing statute.

Unless someone comes up with a creative new idea or the Supreme Court somewhat surprisingly goes down the "causal nexus" avenue, it will be a situation of "tertium non datur." It will be a choice between the devastating and absurd "entire product" approach or Samsung's (and also Google's, Facebook's etc.) "smallest saleable unit" rule. The latter would not drive companies out of business, which is a strong argument in its favor, and not the only one.

The reason why I would be less concerned about some potential undercompensation than about totally outrageous and absurd overcompensation is that design patent law is not the only kind of legal protection for design-oriented companies like Apple. Certain designs are protected by copyright. And designs that drive demand are protectable under trademark law including "trade dress," a type of intellectual property right Apple also asserted in this case (but on that one the Federal Circuit disagreed with it).

Apple still hopes--though probably much less now than it did before the Supreme Court hearing--to get the original verdict(s) affirmed because, according to Apple's lawyers, Samsung failed to present enough evidence that the smartphone as a whole was not the correct article of manufacture for determining design patent damages in this case. Based on how the hearing went, it's highly unlikely that the Supreme Court (except maybe one or two dissenters) would affirm the Federal Circuit decision on that basis. Apple's counsel was repeatedly told to focus on what the correct rule should be rather than stress the record:

Chief Justice Roberts: "Mr. Waxman, we're spending an awful lot of time on an issue about what was raised below, what wasn't raised below, what was raised below, what wasn't raised. Maybe it's a good time to turn to Justice Breyer's question."

Justice Sotomayor: "Please don't go to the --to the record."

It's impossible to form an opinion from the outside on whether the record contains enough evidence to support Samsung's position, but in this case the evidentiary body as a whole must amount to (literally) truckloads of material and Samsung's reply brief gives some examples on its pages 20-22. It's good news that the Supreme Court is inclined to focus on the rule rather than on the record. Further below, the record will play a greater role.

In the very short term, the Tuesday hearing could clearly have gone better for Apple. Over time, however, even Apple will benefit from case law that makes overcompensation less likely. Otherwise Apple itself could find itself exposed to various attempts to siphon off its profits.

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