Patent infringement: The profit motive

Focusing on the “headline-grabbing tactics” of non-practising entities (NPEs) misses the big picture, says Richard Vary, director of litigation at Nokia, in this issue’s cover story. He claims that, in fact, it is becoming increasingly difficult for patent owners to collect fair royalties by licensing or through the courts.

This assertion prompted WIPR to do some digging. Although some lawyers we spoke to said they don’t necessarily agree, others said they have noticed this problem. Ulrich Blumenröder, attorney at patent and trademark attorney firm Grünecker in Munich, says that obtaining fair royalties is increasingly tough and that damages payments are decreasing, although he admits that explaining why is more difficult.

“In Germany, damages computed on the basis of an infringer’s profit are difficult to prove. It involves a lot of guessing by the court, such as about which part of the profit has been made due to the patent infringement.”

Over in the UK, however, things seem to be more promising.

UK trials dealing with intellectual property infringement are split. First, a trial on infringement is heard, with a separate trial to decide “quantum” (an enquiry concerning damages) following it. In the vast majority of cases, says Alexandra Pygall, partner at law firm Stephenson Harwood in London, parties manage to settle the issue of quantum between themselves once there has been a finding of infringement. She says it is very unusual for there to be a trial on quantum, so the collection of damages in English courts is a fairly unusual experience.

“What is interesting, though, is that the 2012 UK Court of Appeal case of Hollister meant that an account of profit is now a genuine alternative to general damages as a method of calculating compensation for infringement,” she says.

Before Hollister (which was brought by medical device maker Hollister), she adds, it was much more likely for the claimant to elect for damages rather than an account of profit.

“This is because it was very unclear what overheads could be deducted from revenue in order to calculate profit. Defendants would deduct lots of different things (with the help of clever accountants) so that the profit was very small indeed,” she says.

The decision, Pygall explains, has been welcomed by right owners as it means that an account of profits—which may well be a more favourable calculation for the claimant than general damages—is likely to be a higher award than it would have been before Hollister.

“We have already seen a few elections for an account of profit in the Intellectual Property Enterprise Court since Hollister, and I wonder whether we will see more of this in the future,” she says.

Smaller awards in the US

‘Positive’ may describe the situation for patent owners in the UK, but ‘parsimonious’ seems to more appropriately explain the level of damages US patentees can expect to retrieve for infringement. According to Michael McManus, partner at law firm Duane Morris in Washington, DC, there is a noticeable national trend towards smaller patent damages awards.

“This has been driven by recent decisions from the US Court of Appeals for the Federal Circuit. In cases such as VirnetX and Science Applications v Cisco Systems and Apple (2014), the Federal Circuit has insisted on a tight linkage between the patented invention and the damages award.

“We are at a point where public policy analysts and all branches of government have largely decided that patent rights should be restricted."

“For example, the VirnetX case concerned patents that covered the FaceTime feature found in iPhones and iPads. The Federal Circuit held that the damages calculation must be based only on the value of the accused functionality, not the cost of the iPhone or iPad. As a consequence, the appellate court rejected the jury’s $368 million damage award and sent the case back to the trial court.”

McManus believes that a “certain scepticism” of the traditional patent litigation is visible in all branches of government. For one, he says, the US Supreme Court has issued a series of opinions that tend to restrict patent rights.

“These cases concern topics such as when software can be patented, fee-shifting in patent cases, the definiteness requirement for patent claims and obviousness in light of prior art.”

In one of those cases, Alice Corporation v CLS Bank, the US Supreme Court ruled in June 2014 that computer-implemented inventions are not patentable.

McManus also points to procedures for challenging patents post-issue, such as the inter partes review, which he says have been described by former chief judge of the Federal Circuit Randall Rader as a “death squad” for patents.

Innovation Act

He also refers to a bill pending in the House of Representatives called the Innovation Act, which provides for, among other things, automatic fee-shifting in patent infringement cases. This would create a presumption that the loser pays the winner reasonable fees and other expenses.

In a post on the Patently O blog, Ted Sichelman, a law professor at the University of San Diego, argues that while the bill includes a seemingly neutral fee-shifting provision, affiliated provisions would significantly skew the effects of fee-shifting against patent owners.

“Take, for instance, the provision for ‘interested’ third-party liability. It essentially makes those with a ‘direct financial interest in the patent ... damages [award] or ... licensing revenue’ liable in the event a losing patent holder cannot pay a fee award (subject to certain exclusions),” he explains.

The upshot of some of these provisions is to “massively skew fee-shifting against the interests of patent holders”, Sichelman argues, leading to an asymmetric risk that would “very likely cause risk-averse inventors and assignees to avoid directly enforcing their patents, sometimes even strong ones”.

Given their lopsided effect, he continues, the fee-shifting provisions would probably increase NPE activity, as these companies can “more easily absorb the risk of bringing suit in the face of potential fee-shifting than start-ups and individuals”.

This would have the opposite effect of one of the bill’s aims: to combat NPEs.

While the bill sits in Congress, debate about its potential effects will no doubt continue. For now, says McManus, “we are at a point where public policy analysts and all branches of government have largely decided that patent rights should be restricted”.

“Given this consensus and the relative lack of proponents for the patent system, there is a danger that judicial, administrative and legislative reform efforts may limit patent rights to the point that US inventors have limited ability to protect their ideas and are disincentivised from further innovation,” he adds.

The US is not just an interesting jurisdiction for lawyers based there, of course, and Pygall explains that she is monitoring whether the concept of patent misuse in the US will be overturned.

“The case of Brulotte (from 1964), put very simplistically, held that the obligation to pay royalties under a patent licence has to expire at the same time that the patent expires.

“In the UK we see that there are good economic reasons why royalties might continue to be paid after expiry of the licensed patent.

“However, in the US, this constitutes patent misuse per se and can put in jeopardy enforceability of the patent in question. Kimble v Marvel Enterprises is scheduled to be heard by the Supreme Court at the end of March 2015 and has the potential to reverse this decision. Most licensing lawyers agree that it would be a good thing if Brulotte were overturned, but there is obviously no guarantee,” Pygall says.

The Kimble case, which featured in WIPR’s top ten IP developments to watch out for in 2015 (published in January), pits inventor Stephen Kimble against Marvel, the licence holder for comics and films related to several superheroes including Spider-Man. They are battling over royalty payments from sales of a Spider-Man themed toy Kimble patented in 1990.

It seems many eyes are on the US patent system at the moment, although pending changes to the European patent landscape should not be forgotten. The Unified Patent Court, likely to launch in 2017, could provide a “fresh start” on the issue of damages awards, says Blumenröder. Until then, Vary may have to wait before seeing an upturn in patent owners’ fortunes.