Tuesday, December 6, 2016

Supreme Court agrees with Samsung: Federal Circuit got design patent damages ($399 million for Apple) wrong

It has taken the Supreme Court of the United States less than two months since a mid-October hearing and less than ten pages (counting only the opinion per se, not the two-page syllabus) to determine and explain that the United States Court of Appeals for the Federal Circuit got the law on design patent damages fundamentally wrong. A unanimous Supreme Court has overruled a unanimous Federal Circuit panel and whoever hadn't requested a vote on, or voted for, Samsung's June 2015 request for a rehearing.

The top U.S. Court disagrees with the Federal Circuit's interpretation of the term "article of manufacture," which is central to a disgorgement of a design patent infringer's entire profits under 35 U.S.C. § 289. Apple used to argue--in district court and on appeal--that it was entitled to a disgorgement of Samsung's total profits on any smartphones held to infringe any of Apple's three design patents-in-suit (which a jury had held infringed back in August 2012). Samsung asked the Federal Circuit to find that Judge Lucy Koh (United States District Court for the Northern District of California) had erred in how she instructed the jury: Samsung said the article of manufacture could also be a component, such as a smartphone case, as opposed to an entire multifunctional smartphone. The Federal Circuit nevertheless affirmed the related §399 million part of the damages award in the first California Apple v. Samsung case because it argued that consumers buy smartphones, not components.

Today's Supreme Court opinion says the following:

"The Federal Circuit's narrower reading of 'article of manufacture' cannot be squared with the text of §289. The Federal Circuit found that components of the infringing smartphones could not be the relevant article of manufacture because consumers could not purchase those components separately from the smartphones. [...] But, for the reasons given above, the term 'article of manufacture' is broad enough to embrace both a product sold to a consumer and a component of that product, whether sold separately or not. Thus, reading 'article of manufacture' in §289 to cover only an end product sold to a consumer gives too narrow a meaning to the phrase."

That is absolutely wonderful! Large parts of the (U.S. and global) tech industry will breathe a sigh of relief now. As I said at different points in time, I believe the Federal Circuit's extreme position wouldn't have been good for Apple either--thinking of longer-term implications, not just this one Apple v. Samsung case.

Samsung and its lawyers--Samsung's lead counsel before the Supreme Court was Quinn Emanuel Urqhart & Sullivan name partner Kathleen M. Sullivan--can be proud of what they have achieved here for themselves and for the economy at large. Had they accepted the Federal Circuit opinion as the final word on this issue (considering that cert petitions rarely persuade the Supreme Court to look at a case), numerous companies would have overcompensated design patent holders through settlements and district courts across the United States would have instructed juries the way Judge Koh did, resulting in who-knows-how-many exorbitant damages awards. Sooner or later, someone would have tried to appeal this to the Supreme Court, but who knows whether someone else would have done such a great job (in briefing the court but also in mobilizing industry support) and, therefore, how long it would have taken before the huge mistake at the heart of the Federal Circuit decision would have been corrected.


...it's not really over yet.

The Supreme Court's ruling was so quick and short because it's strictly focused on the key question of statutory interpretation presented. Toward the end of the decision, the Supreme Court says it wasn't possible to determine, in addition to the question that has been resolved, what the right "article of manufacture" should be in this dispute.

At the mid-October hearing, the justices asked the parties questions about what the proper test should be. The parties had not specifically proposed a test (though they both made various points that relate to what the test should be) in their filings. So the Supreme Court "decline[d] to lay out a test for the first step [this means the identification of the relevant "article of manufacture"] of the §289 damages inquiry in the absence of adequate briefing by the parties."

I'm slightly disappointed that no justice filed a concurring or dissenting opinion to express views and outline ideas for the "article of manufacture" test. That could have been so helpful.

Now the case goes back to the Federal Circuit. On remand, the Federal Circuit might develop a test, and if it does so, it hopefully won't reflect the same kind of extreme pro-patentee bias as its interpretation of $nbsp;289 showed. Theoretically, whatever test the Federal Circuit comes up with could be reviewed again by the Supreme Court. But that's purely hypothetical.

I guess Apple will try hard to avoid this, and even Samsung would probably prefer to win rather than get a test. At the Supreme Court hearing, Apple stressed the record, claiming that Samsung hadn't presented any evidence for anything other than a smartphone being the relevant article of manufacture. Samsung argued that Apple had the burden of proof and failed to prove that the relevant article should be an entire smartphone. Obviously, the parties also disagree on the burden of proof...

It's very hard for outsiders like me to form an opinion on a record we don't have access to. The party's filings contained some claims and citations but simply not enough to come down on one side or the other, except that I deem it unlikely (based on what I know now) that a huge record doesn't contain anything about it. Maybe it isn't perfectly specific, but there's probably something. On remand, the parties will address this question and then we'll all be a lot wiser, too.

Absent a miracle (i.e., a near-term settlement), Apple v. Samsung will go into 2017, and possibly way beyond. In connection with their second California case, the Federal Circuit has issued a mandate based on its recent surprise decision (its potentially most controversial one ever according to Donald Chisum of "Chisum on Patents", a treatise that today's Supreme Court opinion cites to), but there would still be time for a petition for writ of certiorari in that context, too.

A lesson for Europe

This is only the latest of many patent cases in connection with which the Supreme Court has restored sanity after an extremist ruling by the Federal Circuit. Knowing that many industry players read this blog, I want to make an urgent call for action here:

Let us try to prevent Europe from putting the Unified Patent Court (UPC) in place in the form in which it was originally envisioned! Otherwise, judges that will be handpicked by the same people who are in charge of the European Patent Office are going to make decisions that will be worse than anything you've ever seen from the Federal Circuit and there normally won't be any chance of petitioning a court with a broader and more balanced perspective.

It's disappointing that the UK plans to ratify the UPC agreement despite this year's Brexit vote. With more political action in the UK, it may be possible to prevent this from happening. I always got along very well with the UK Independence Party, whether it was about software patents or soccer broadcasting rights and sports governance. In the latter context, I had a great conversation with a young assistant to an MEP. His name was Paul Nuttall. He's now the party chairman. Those are the kinds of people that industry players concerned about Federal Circuit-style pro-patentee bias should talk to. I can't help on that front as I must stay in Munich and finish my app (at long last). But please, if you don't want Europe to become a patent troll's paradise, take action now!

Share with other professionals via LinkedIn: