US Supreme Court To Examine Outsized Infringement Damages

Patent infringers are supposed to pay damages, but the award in this case struck many as ridiculous. Some Samsung smartphones contained one or two purely decorative design elements that had been patented by Apple. But instead of paying modest damages for what many see as a tiny infringement, Samsung was ordered to pay $399 million – all the profits the company had made from its infringing phones. The Federal Circuit said it had no choice but to approve those damages; it was constrained by statute. Critics, however, said that the Federal Circuit had misinterpreted the statute. They fret the court’s error will unleash a wave of design patent infringement suits that will harm innovation, stifle competition, and empower patent trolls. Which is why so many will be paying close attention on 11 October, when this dispute comes before the US Supreme Court.

The lawsuit arises from a relatively obscure type of intellectual property, design patents. These protect non-functional designs on useful objects, such as the pattern on a rug. They are thus the opposite of the most common type of patents – utility patents – which protect only inventions that are useful.

Another stark difference between utility patents and design patents: the penalty for infringing the former is typically much less than for infringing the latter. When a utility patent is infringed, the infringer must pay either a reasonable royalty or an amount equal to the patentee’s lost profits. When a design patent is infringed, the patentee can recover either of those measures of damages, or the patentee can choose to receive all the profits the infringer made from the infringing articles.

That may seem perverse. Why should a frivolous, purely aesthetic design receive a higher amount of damages than something new and useful?

Past Reasoning

History provides the answer. Design patents traditionally covered the entire design of an article. People bought these products, such as a rug or a handbag, precisely because of their designs. When an infringer copied these designs in order to sell knockoffs, all the infringing sales were made because of the designs. So it made sense for the infringer to pay, as damages, all of its the profits from the infringing products.

The need for this level of damages was highlighted by two Supreme Court decisions, the 1885 ruling in Dobson v. Hartford Carpet Co. and the 1886 ruling in Dobson v. Dornan. Both cases concerned the infringement of Dobson’s patents on rug designs. And in both cases, the court ruled that Dobson’s damages could not be calculated based on rug sales; damages had to be based on the value of the patented design. Because Dobson failed to prove the value of the design, the court awarded only nominal damages.

Congress responded swiftly. It passed the Patent Act of 1877, which mandated that, upon infringement, the owner of a design patent is entitled to recover the total profits the infringer made from sales of infringing items.

“The statute on design patents has changed little since that 1887 legislation,” said Prof. Sarah Burstein of the University of Oklahoma College of Law.

This stability in damages law has proved to be problematic. Because in the late 20th Century, one court made a major change in design patents.

The Incredible Shrinking Patent

The year was 1980. The court was the US Court of Customs and Patent Appeals – the predecessor of the Federal Circuit. It held in Application of Zahn that a design patent need not cover an article’s entire configuration. The patent could cover just part of an article’s configuration.

“That was a pretty dramatic change,” said Burstein.

As a consequence of this ruling, design patents became more common, as companies obtained design patents on smaller and smaller parts of useful items. One maker of bluetooth speakers, for instance, has obtained a design patent covering just a volume button and a mute button. The company later sued a rival that used similar buttons on its speakers.

While design patents have shrunk, the level of damages hasn’t. This has created a mismatch between what a design patent claims in a product and how much can be recovered for that infringing product.

“The claiming rule changed, and we never changed the profit rule. We need to get those into sync,” said Burstein. “If you are only claiming a little part of an infringer’s product, you should only be able to get a little part of the product’s profit. If you are claiming the whole product, then you should be able to get the entire profit.”

That, however, is not the current state of the law. In Pacific Coast Marine Windshields Ltd. v. Malibu Boats, LLC, for instance, the district court ruled that the owner of a design patent on a boat windshield was entitled to all profits from the sale of boats with the infringing windshield – even though the windshield was a tiny part of each boat’s value.

Apple screen design patent

Million Dollar Icons

A similar mismatch has occurred in the instant case. Four models of Samsung smartphones were found to infringe Apple’s design patent on the shape of a screen (The claimed design is shown in the above image). Six other types of Samsung phones infringed Apple’s design patent on a grid of colorful icons for the phone’s screen:

Apple design patent on grid of icons

One additional model of Samsung phone infringed both of these design patents.

Apple never claimed that consumers bought the infringing Samsung phones because of their screen shape or their colorful grid icons. According to surveys, consumers overwhelmingly bought the phones because of their functionality. That functionality derived from technological innovation embodied in tens of thousands of utility patents. Nevertheless, Apple was awarded all Samsung’s profits from the infringing phones, as if the phone’s technology were of no importance.

Some experts say this isn’t a problem. They claim innovative designs are extremely important, so high damage awards are needed to deter infringements.

“A company is frequently known by the look of its product, not by how it works. When you steal that look, it is like stealing somebody’s baby. You are stealing the company’s goodwill. So you have to really discourage that theft by telling an infringer, ‘It is not worthwhile to infringe because you will lose all your profits,’” said Perry J. Saidman, principal of Saidman DesignLaw Group, in Silver Spring, Maryland.

He added that those who infringe design patents are bad actors who intentionally steal others’ hard work. “There is no such thing as an accidental infringement of a design patent,” said Saidman. “If you are a good faith competitor and never copy another’s design, you’ll never infringe a design patent.”

Other experts dispute this, noting that as design patents have become smaller, accidental infringement has become a legitimate concern. “Conditions are ripe for a lot of accidental duplication to occur,” said Burstein.

Even diligent companies may have trouble avoiding infringement. “Design patents are very difficult to search,” noted Matthew A. Levy, Patent Counsel for the Computer & Communications Industry Association.

The Downside of Deterrence

Many experts question why it is more important to deter infringement for design patents than for utility patents. And they note that by allowing damage awards that far exceed a design’s value, the law gives inordinate power to owners of design patents.

The threat of losing all one’s profits from a product puts great pressure on a defendant to settle even dubious infringement claims. “If the risk of losing is just one percent, a rational defendant doing the math has a strong incentive to settle,” said Burstein. That amounts to a “tax on innovation,” she added.

But the potential harm goes further. Businesses could use frivolous assertions of design patent infringement against rivals. “You have to be concerned about the unjustified threats that people can make, which can really chill competition,” said Burstein.

Moreover, the situation creates new opportunities for patent trolls. “The situation is ripe for these people to move in,” said Burstein. She added, “There is some evidence that people are already abusing the system. At least one frequent litigant has started filing these cases.”

The Easy Way Out

There could be an easy way to fix these problems and end the mismatch between design patent claims and damages. The current damages provision, Section 289 of the Patent Act, states that when a design patent is applied to an “article of manufacture,” the maker or seller of that article “shall be liable … to the extent of his total profit” from that article. But what is the relevant “article of manufacture” when a design patent covers just a component of a larger product? Is it the component or the larger article?

The Federal Circuit ruled [pdf] in this case that “article of manufacture” refers to the entire product containing an infringing component. Thus Samsung was liable for all its profits from eleven models of smartphones.

Samsung is urging the Supreme Court to adopt a different interpretation: When a design patent covers a component of a larger product, the infringer has to pay all its profits from only the infringing component. That would greatly decrease Samsung’s damages in this case. And it would restore the correlation between design infringement and the penalty therefor.

The US Department of Justice has filed a brief [pdf] that offers significant support to Samsung’s position. The government is arguing that “article of manufacture” is a flexible concept, and that a four-factor, fact-based examination is necessary to decide, in any particular case, what is the relevant article.

The DOJ’s position is novel. “If the Supreme Court accepts this, it will be creating new law. Just deciding that ‘article of manfacture’ is a question of fact would be a totally new legal proposition,” said Saidman.

The high court, however, traditionally gives great weight to the DOJ’s opinion in cases such as this, where the government is a third-party amicus. Moreover, the DOJ’s stance could appeal to the Supreme Court, which has repeatedly struck down hard and fast rules created by the Federal Circuit.

“Historically, the Supreme Court seems to dislike bright line rules. The Justices like multi-factor tests,” said Burstein. “So I would not be surprised if the Supreme Court declared something like what the government is proposing.”

There is thus a good chance that the high court will overturn the Federal Circuit’s interpretation of the law. Said Levy, “This is one of those cases where the Justices would not have taken it if they did not want to at least modify the lower court’s ruling.”