US High Court Muddies Rule On Design Patent Damages

The United States Supreme Court yesterday provided a big victory for Samsung – and common sense, according to many experts. The high court ruled that Samsung need not pay $399 million in damages – all the company’s profits from 11 models of smartphones – simply because one or two tiny components of those phones infringed design patents owned by Apple. But Samsung isn’t out of the woods yet. Because despite the importance of today’s Supreme Court decision, the high court left an even more important issue unresolved.

The Supreme Court’s opinion in Samsung v. Apple [pdf] was short and to the point. It overturned the Federal Circuit’s interpretation of a section of the Patent Act that provides special damages for infringements of design patents.

Section 289 of the Patent Act, states that when a design patent is infringed by an “article of manufacture,” the infringer “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 is infringed by one component in a much larger product? If the “article” is merely the component, the infringer need pay only its profits attributable to the infringing component. If the “article” is the entire product, then the infringer’s damages can be much, much larger.

The Federal Circuit, as is its wont, interpreted the law in a manner favorable to patentees. The court held [pdf] that “article of manufacture” always refers to the entire product containing an infringing component. Consequently, Samsung was liable for all its profits from eleven models of smartphones, even though the infringed design patents covered only one or two small components of the phones. (Ten of the Samsung models infringed one design patent. Another model infringed two patents.)

The Supreme Court unanimously rejected this interpretation of the Patent Act. It held that, for a multi-component product, the relevant “article of manufacture” is not necessarily the end product that is sold to consumers, but may be simply a component of the end product.

This decision pleased most patent law experts. “The justices got it totally right,” said Prof. Sarah Burstein of the University of Oklahoma College of Law. “I’m glad they recognised that there needs to be some connection between subject matter and remedy. Since 1980, when the USPTO [US Patent and Trademark Office] began granting design patents on components, the courts have been awarding profits on entire products, when only a small component [of the products] has been infringed. That doesn’t make sense.”

The decision also is being cheered by many manufacturers, particularly those in the tech sector. “The ruling is extremely important, especially for modern devices like smartphones, which contain thousands and thousands of patented components. To award the total profits for a smartphone because its appearance infringed one or two design patents, that seems completely out of whack,” said Matthew A. Levy, patent counsel for the Computer & Communications Industry Association.

The decision is bad news for patent assertion entities (PAEs), also known as patent trolls. “It will discourage PAEs from using design patents to extract profits from operating companies. If they get very small damages for infringement, that changes the economics of PAEs bringing these suits,” said Levy.

Something Missing

The Supreme Court’s decision was, however, purely negative. The high court rejected the Federal Circuit’s rigid interpretation of Section 289 – that “article of manufacture” always means the entire product – but the justices declined to explain how the statute should be construed. Instead, the justices remanded the case to the Federal Circuit and ordered that lower court to craft a standard for determining the relevant “article of manufacture” when a design patent covers a component in a multi-component product.

The Supreme Court’s restraint was probably reasonable, since the parties had not addressed this issue until oral argument. “Compared to how we normally develop legal rules and tests, the tests offered by counsel were rushed,” said Burstein. “I’m glad the Supreme Court remanded for further briefing on this issue.”

It is unclear what the Federal Circuit will do on remand. “I hope the Federal Circuit will adopt a straightforward approach: Compare the design patent with the component in a multi-component product, and award damages based on the proportion of the cost of the component relative to the total cost of the product, awarding that proportion of the profit.,” said Levy.

But there are reasons to suspect the Federal Circuit might follow a different path and simply modify its reasoning in order to reaffirm its original damage award.

“There have been a number of recent cases where the Federal Circuit has been reversed by the Supreme Court and instead of following the Supreme Court’s lead, the Federal Circuit has rebelled,” said Burstein. “I hope, in this case, the Federal Circuit won’t issue the same ruling it did before but put it in a slightly new package. I hope the Federal Circuit will take this Supreme Court decision seriously.”

She added, “Today’s ruling is important, but not nearly as important as what the Federal Circuit does on remand. The ultimate impact of this case will depend on what the Federal Circuit chooses to do the next time around.”

 

Image Credits: Wikimedia