Global-Tech v. SEB -- I see, said the willfully blind man

It's not that often when the Supreme Court takes a patent case -- and it's almost always when it thinks the Federal Circuit, who is supposed to take care of such matters, gets something seriously wrong.

Thus, the Supreme Court's decision today in the Global-Tech Appliances v. SEB, S.A. case, which at least appears to have tightened up the law on the mental state required to show infringement by inducement. However, the facts of this case show enough bad conduct that the Supreme Court may have felt the need to do something to the defendant, which may have resulted in a ruling which is confusing to say the least and may be almost impossible to apply in the real world.

SEB had invented an innovative deep fryer and obtained a U.S. patent. Sunbeam, its competitor, who was rapidly losing market share, asked its Hong Kong supplier Pentalpha, to provide a deep fryer which could compete with SEB's. Instead of doing the right thing, Pentapha simply bought an SEB fryer overseas (lacking, of course, any U.S. patent markings) and just copied it. It retained an attorney to do a patent search omitting, unsurprisingly, the fact that it had directly copied the SEB product. This attorney, for some reason could not find the SEB patent which covered the very same fryer that Pentapha had copied and issued an opinion letter saying there were no patent problems. Sunbeam started selling the Pentapha fryers under its own brand at a price that undercut SEB's.

SEB sued, and then settled, with Sunbeam. It then sued Pentapha, who had gone on to sell the fryers to other retailers who sold them under their respective trademarks, under a theory of induced infringement. Pentapha's defense was that it did not know about the SEB patent under Sunbeam's notification to Pentapha that it had been sued.

The question for the Supreme Court was the level of "knowledge" necessary to support a clain for induced infringement. The existing Federal Circuit law held that it was sufficient for a plaintiff to show that the accused inducer "deliberately disregarded a known risk" that its customer would be infringing. Pentapha argued, however, that actual knowledge of the patent was required, which it, of course, argued that it did not have.

Going back to the opinions of William Howard Taft, the Court ended up splitting the difference between those 19th century and early 20th century cases which basically imposed no "knowledge of infringement" standard and more recent law on the subject of contributory infringement which held that actual knowledge of the patent was required.

Now comes the headfake.

Pentapha's conduct was too egregious to let go unpunished, so the Supreme Court fashioned yet another rule to handle persons who are not aware of the patent but who still engage in bad behavior -- the "willfully blind" standard, imported from criminal law. Under this standard, even an accused inducer who does not know about the patent can be liable if it deliberately "shielded" itself from "clear evidence of critical facts." Specifically, the doctrine applies if (1) the defendant subjectively believes that there s a high probability that a fact exists and (2) takes deliberate action to avoid learning of that fact.

Pentapha's decision not to inform the attorney it hired to write the opinion letter that it was making a deliberate knockoff of the SEB fryer was, according to the Court, sufficient to satisfy the "willful blindness: test.

Justice Kennedy, alone in dissent, was confused at this results-oriented decision. He noted that the path the Court took to get to the "willful blindness" standard was nothing if not tortured. He also noted that the Supreme Court appeared to have endorsed the "willful blindness" standard for all criminal cases involving knowledge -- a massive change in jurisprudence be inappropriate for decision in a patent case.

So what does all this mean?

It means that, as far as the standard for knowledge in cases of induced infringement, basically nothing has changed. As a practical matter, "deliberate disregard" will now become "willful blindness." No one will really know the standard for knowledge in inducement cases. Bad conduct will continue to be punished.

But we have, however, been saved from the plague of knockoff deep fryers. And that's something.

Skyworks Dodges Patent Spat With Linear Technology

Woburn-based Skyworks acquired Advanced Analogic this week for the eye-popping amount of $262 million. But what wasn't as well known was the fact that Advanced Analogic had been sued in the International Trade Commission for importing voltage regulator chips that Linear Technology claimed infringed its "sleep mode" patent. This wasn't Linear's first trip to the ITC against Advanced Analogic, as Linear had already obtained an exclusion order against the company, which it had claimed Advanced Analogic was violating.

However, a month before Skyworks' acquisition, Advanced Analogic settled its patent differences with Linear, thus clearing the way for the Skyworks' acquisition. Although, with a spate of "investigations" by law firms looking to bring a securities lawsuit attacking the merger, this transaction may not be out of the woods yet.

Why Samsung Gets a Look at the iPad3 and You Don't

Well, first, they haven't actually gotten to look at it yet -- that's in the hands of Judge Koh of the Northern District of California. And, second, Samsung had to get sued by Apple for trademark and trade dress infringement to even get to ask for the right to see it, so unless you really want to get sued by Apple, you might want to just be patient.

This all came about because of Apple's lawsuit against Samsung's Galaxy line of smartphones and tablets. Apple claims that these products look too much like the iPhone and iPad and violate Apple's registered trademarks and trade dress. Samsung, of course, says that they have been using these designs for years and that Apple's trademarks are invalid, besides.

What this particular fight is about is that Apple asked for what is called "expedited discovery" (i.e. much faster than normal) against Samsung, asking for the designs of as-yet-unreleased Galaxy products to support a planned preliminary injunction motion.

Samsung fired back, asking for expedited discovery of Apple's unreleased iPhone and iPad designs so that it could defend itself by showing that there was no likelihood of confusion. Samsung argued that under the famous "goose/gander" rule, Judge Koh had already advised Apple firmly that any discovery in the case would be reciprocal.

This motion, just filed last Friday, has yet to be decided, but I don't think Judge Koh is going to make Samsung's attorneys line up outside the Apple store to get the discovery they need

Mirror World v. Apple -- The Entire Market Value Rule Strikes Again

For damages purposes, this case is actually known for an apparent mixup, where the jury awarded damages per patent for essentially the same conduct -- a verdict that the plaintiff did not ask for, but later had to defend. However, the more interesting aspect of this decision [at least to me] is a fairly standard application of the entire market value rule.

The patents in this case related generally to the stacking and streaming of data. Virtually all of Apple's various products were accused (at least at first), though for the purposes of this analysis, the important accusation was that of the Mac OS X operating system -- particularly the functions Spotlight, Cover Flow and Time Machine, which the plaintiff claimed used the patented features.

Plaintiff's damages expert used as his royalty base not only the price of the software upgrade (to Mac OS X), but also the price of the hardware running that operating system (totaling $72 billion). He applied a royalty rate of 8.8% for the software upgrade and .81% for the hardware sales.

In analyzing whether the jury had properly considered the totality of Apple's hardware sales to calculate the reasonable royalty, the court examined whether the plaintiff's expert had employed the correct royalty base -- the revenue from the accused products. The court found that, although the plaintiff claimed not to have used the entire market value rule to construct its royalty base, the court found that it had, in fact, done so. Thus, the court had to determine whether this rule had been properly applied.

The plaintiff, in order to show consumer demand for the accused features of the Mac OS X, had commissioned a survey tracking consumer demand for various features of the Tiger-to-Snow Leopard upgrade. However, that survey did not cover two of the accused features -- Cover Flow and Time Machine.

Moreover, the surveys did not show that the patented features drove consumer demand for either the operating system or for the hardware -- thus making the plaintiff's use of the entire revenues for either the software or the hardware inappropriate under the entire market value rule.

Accordingly, the court found, the plaintiff "was obligated to properly apportion the royalty base to address the accused features, which it did not do." The court also found that it was inappropriate for the plaintiff to make such an apportionment simply by lowering the royalty rate (giving the rate a "haircut"), while applying that lowered rate to the revenues for the overall product -- the court thus threw out the damages award in its entirety.

On this last point, I personally disagree with the Mirror World court. I believe, as the Lucent v. Gateway court noted, that a royalty base based on the revenues for the "entire" product may be the only reliable royalty base, as "allocated" revenues are more likely to be speculative and inaccurate. I also do not believe, as the Mirror World court held, that Uniloc compels this result -- the Uniloc court's ruling in that regard, in my opinion, was case specific.

ePlus v. Lawson Software -- ResQNet Doesn't Let You Pick and Choose

As the ResQNet decision continues to roll on through the world of patent damages, the scope of how and when to use settlement agreements to calculate a reasonable royalty is becoming, if anything, even more confusing.

In January, Judge Payne of the Eastern District of Virginia was presented with a plaintiff's expert who picked just the settlement licenses he liked as part of his reasonable royalty analysis -- and was confronted with a Daubert motion to exclude all of his testimony.

In this case, the plaintiff's expert had five settlement agreements that had previously been entered into by the plaintiff as part of the data he could use to make a determination under Georgia-Pacific factor 1 -- whether there was an established royalty.

Three of those agreements, with Verian, SciQuest and Perfect Commerce, were entered into shortly after the patent litigation began and were for relatively low amounts. The plaintiff's expert chose not to rely on them.

Instead, the plaintiff's expert relied on two other agreements, one of which (Ariba) was entered into after a jury returned a verdict of infringement and the other (SAP) was reached after a hung jury mistrial. Both of these settlements were for substantial amounts (10-20 times the amount of the other settlements). These were the settlements the plaintiff's expert chose to use, converting these two lump sum amounts to a running royalty.

On the Daubert challenge, the court hammered the plaintiff's expert.

First, the court condemned the plaintiff's choosing only to rely on the high value settlements, while ignoring the low ones -- no reason, the court noted, was given for this picking and choosing of data.

The court also criticized the expert's using the later (post-verdict) settlements at all, since they were entered into well after the date of the hypothetical negotiation. The court also noted that these licensing agreements contained extensive cross-licensing provisions which made them quite different than the hypothetical license being constructed for the litigation.

Finally, the court criticized the use of lump-sum licenses as a basis for determining a "running" reasonable royalty -- especially without a rigorous economic analysis as to how to convert one to the other (which the court found lacking here).

Finding that the plaintiff's damages expert's opinion was without sufficient economic basis, the court excluded it.

Note -- at trial, ePlus later got a verdict of infringement, but -- because its damages expert's testimony had been excluded -- no damages.

Sanofi-Aventis v. Glenmark -- After Uniloc, Where Does an Expert Start the Reasonable Royalty Analysis?

In Uniloc, the Federal Circuit struck down the disfavored 25% "rule of thumb" (which held that, as a "starting place" an expert could start his or her reasonable royalty analysis by presuming that the plaintiff would take 25% of the infringer's profits on the infringing product). This rule had been kicking around for years, surviving almost universal condemnation from the academic community, by sheer inertia, until the Federal Circuit finally put it out of its misery, holding that using it would get a quick Daubert exclusion.

But where is an expert to start the Georgia-Pacific analysis (i.e. a staring point from which the factors could be applied, plus and minus) without walking into the same trap?

In Sanofi, the expert presumed that the parties would have split the profits 50-50 and was met with an objection that this analysis was just as arbitrary as the "25% rule" struck down in Uniloc. The Court noted the problems the Federal Circuit had with the 25% rule: 1) "it fails to account for the unique relationship between the patent and the accused product," 2) "it fails to account for the unique relationship between the parties," and 3) "the rule is essentially arbitrary and does not fit within the model of the hypothetical negotiation within which it is based."

In this case, however, the court noted that the expert had relied on game theory to come up with his 50-50 split and that he had considered "the facts of the case, specifically the relationship between the parties and their relative bargaining power, the relationship between the patent and the accused product, the standard profit margins in the industry, and the presumed validity of the patent."

Thus, even after Uniloc, an expert can pick a "starting point" for his or her reasonable royalty analysis, but must be careful to have a rational, economically sound, basis for it.

LaserDynamics v. Quanta -- Limits to Grain Processing's Non-Infringing Alternative

In this case, LaserDynamics sued Quanta for infringing a patent for automatically determining the type os disk being used in a optical disk drive.

In the first trial, LaserDynamics received a verdict of $52 million, but could not hold on to it. Quanta filed and won a remittitur motion after which the court gave LaserDynamics a choice -- take $6.2 million or a new damages trial. LaserDynamics took the new trial.

In the new trial, Quanta's damages expert argued that the reasonable royalty would be relatively modest because Quanta had available to it an "acceptable non-infringing alternative," which would consequently have lowered the amount it would have licensed the patent for. The issue for the Court was whether the alternative was "available" to Quanta at the time of infringement under the Federal Circuit's decision in Grain Processing [which, although originally only applicable to lost profits analyses, has been used as part of a reasonable royalty analysis]

The LaserDynamics Court applied the Grain Processing test -- (1) could the defendant have readily obtained all of the material needed to implement the non-infringing alternative; (2) was the non-infringing alternative well known in the field at the time of infringement; and (3) did the defendant had all of the necessary equipment, know-how, and experience to use the non-infringing alternative.

The Court found that Quanta's expert had not shown that (1) the purported alternative was even on the market; or (2) even if it was on the Market, Quanta could have used it. The Court therefore excluded all of Quanta's damages expert's opinions to the extent they relied on an "acceptable non-infinging alternative" analysis.

Lear Automotive v. Johnson Controls -- Live or Die by the Survey?

Although the Federal Circuit has stated repeatedly that surveys -- when done properly -- can provide valuable evidence for patent damages analysis, litigants must be careful of how they use them, lest their opponents turn the tables on them.

In Lear Automotive v. Johnson Controls, the patent involved garage door openers and the programming of such units -- the issue being whether users programmed one or two buttons (the latter infringing, while the former did not).

Johnson Controls' damages expert relied on a survey provided him by the company which polled customers as to how they used the allegedly infringing units. He opined, based on that survey, that the infringing use was not very popular with consumers and that, in the hypothetical negotiation, JCI would have only agreed to a "modest" royalty rate.

Lear, however, had a quite different problem. To show direct infringement (which would support its claim for inducement against JCI) it had to show that at least one consumer used the allegedly infringing item in an infringing manner -- programming more than one button. however, it had no direct evidence than any consumer had done so. Thus, it turned to JCI's survey, arguing that this survey, which showed that a modest percentage of users programmed more than one button, nevertheless satisfied its burden, at least circumstantially, that one user employed this feature.

JCI was put in the position of arguing that the very evident it had submitted and on which its expert relied was inadmissible hearsay and was too unreliable to support Lear's claim of infringement. The court disagreed, finding that the survey data was admissible under the "adoption by use" doctrine and allowed Lear to use the survey to prove infringement.

So, although surveys can be useful for a defendant trying to show that a patent is not valuable, that defendant needs to look over his shoulder to make sure it can't be turned against him.

The Continuing Saga of ResQNet -- How Discoverable are Patent Settlement Negotiations?

Since the Federal Circuit's decision in ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), holding that "litigation based" settlement agreements were at least potentially relevant to the determination of a reasonable royalty, there has been a substantial amount of controversy in the district courts as to how to apply it, or whether the issue could even be ignored altogether.

Since ResQNet represented a stark reversal of decades of authority holding that licenses entered into as settlement of actual or threatened litigation were somehow so "tainted" that they could not be used in any way in determining a reasonable royalty, there has been an understandable resistance to suddenly allowing parties to use these agreements at trial -- especially where sensitive settlement negotiations may be revealed. Indeed, defendants have started asking for -- any in some cases receiving -- discovery of settlement negotiations between plaintiffs in their own cases involving the very patents they were sued on.

This issue arose recently in two decisions by Magistrate Ashman of the Northern District of Illinois in MSTG, INC. v. AT&T Mobility LLC.

MSTG is what could broadly be described as a "patent troll" in the sense that it makes no products and its income is derived solely from licensing its patents (which are products of the research arm of the South Korean government). In discovery, it produced licenses for three of the patents-in-suit. AT&T, however, requested that it also produce documents relating to the settlement negotiations for those licenses. Judge Ashman held, however, that although ReQNet made the license agreements themselves relevant, AT&T had failed to show that ResQNet required the disclosure.

Now here's where it gets interesting.

Not to be dissuaded, AT&T moved for reconsideration -- and won.

AT&T's argument was that, because MSTG's expert stated that the prior license agreements should not be used as part of the hypothetical negotiation analysis because the rate was too heavily discounted, the actual settlement negotiations which led up to that agreement were relevant because they might show why the parties agreed on that rate. The court agreed.

This decision makes it clear that any settlement negotiations may be subject to discovery and that and plaintiffs in multi-defendant cases need to be extremely careful that their negotiations do not come back to bite them later, since they may not be able to hide behind carefully crafted agreements.

MasterObjects sues Google and Amazon on Instant Search Patent -- If It's Instant, What Took You So Long?

This week, a Netherlands company called MasterObjects (not a troll -- they actually appear to have a product) finally got around to suing Amazon.com and Google for infringing their patent on "instant search" -- the function which annoyingly "guesses" what your search is going to be while you are still typing it in.

It's no big surprise that companies go after Google and Amazon for patent infringement -- they're big targets that can well afford to pay for that license you wanted. What's surprising is that they didn't choose to go after Apple and eBay, who also employ the same function (as the Techcrunch article on teh subject pointed out). They also waited almost nine months since their patent issued to bring suit. And, when they did sue, they filed in the Northern District of California -- instead of the fashionable Eastern District of Texas.

I'm sure that this delay is mostly explained by (finally) busted license negotiations, but you wouldn't think it would take almost a year to figure out that Amazon and Google aren't handing out bags of gold and they aren't very afraid of your threats of injunction.

Or maybe the Dutch are just too polite to play smashmouth patent litigation with the rest of us. Join the party, boys -- dutch treat!

Why Is the WSJ Being So Fair to Patent Marking Bounty Hunters? And How Did They Know What Qui Tam Means?

I'll answer the second question first -- the WSJ Law Blog author, Ashby Jones, is a fellow University of Michigan law grad and therefore is awesomely smart and knows his latin.

The first question is more interesting. Plaintiffs have increasingly taken advantage of the Federal Circuit's 2009 decision in Forest Group v. Bon Tool, which changed the law to make the $500 penalty for false patent marking apply to each falsely marked product sold (a recovery which is split 50/50 with the government). As the WSJ notes, such suits have, in fact, "picked up steam." And such suits would, in fact, be a big threat to the banking industry if the case referenced in the article actually gets anywhere.

However, I thought, given the danger to the WSJ's prime readership, there would have been more coverage of the efforts to cut these cases down to size. In addition to the legislative effort he mentions, the present Congress' attempt to pass "patent reform" (a bipartisan effort that has, nonetheless failed in the last three Congresses) would give standing to bring a false marking case only to those who have suffered a "competitive injury" by the false marking -- i.e., nobody.

Given there is really no special interest other than a few law firms interested in the viability of false marking cases, I think this provision would have a more than decent shot at passage. So Ashby, throw us a line over here!

Kodak Loses its ITC Action Against Apple and RIM -- Having a Bad "Kodak Moment"

Kodak, who has been surviving on its IP portfolio since the film business crashed and burned (Paul Simon, where are your product placement songs now?) suffered a big loss today as an administrative law judge at the International Trade Commission held that the patent it had asserted against Apple and RIM -- for previewing a low-resolution image -- was held invalid and not infringed. Although the same patent had been upheld by a different ALJ in Kodak's previous ITC action against LG and Samsung, enabling Kodak to reach agreements totaling $864 million, the market certainly recognized, driving Kodak stock down almost 9% that, even when you've got 1000 digital camera patents, that IP litigation for profit is a risky business.