Apple v. Samsung Before the Supreme Court: Fair Payment and Consequences to Innovation

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Imagine a tire on a fancy Tesla, a highly technical, complex car made from myriad technological contributions and likely subject to thousands of patents. Many of those patents cover the technologies that make the car run, while others, design patents, cover only the ornamental designs. Generally, a tire's tread pattern is several straight lines that cross each other - and could be covered by a design patent. The tire itself is a small part of the final car, and the role the tread plays in the car’s value is minimal.

Next, imagine that someone sues Tesla’s manufacturer for a design patent infringement because a small part of the Tesla’s tire pattern is the same as, or sufficiently similar to, his patented design. Then the court says: Tesla, you should give the plaintiff your total profits from selling the Tesla cars as long as the cars use the plaintiff’s patented design on the tires, no matter how small the percentage of the plaintiff’s patented design plays on your tire design, no matter whether you intentionally copied his design or it is just a coincidence, no matter how many other high-tech patents you also put into your fancy cars.

Is this imaginary scenario fair for Tesla? Not at all.

This week, Public Knowledge, in a brief joined by the Electronic Frontier Foundation, the R Street Institute, the American Antitrust Institute, and IP Justice, asked the Supreme Court to reverse an earlier decision by the Federal Circuit Court of Appeals. That decision held that a design patent owner is entitled to 100% of the defendant’s profits from the sale of an entire consumer product, if the product incorporates an element infringing the owner’s design patent.

Awarding one design patent owner 100% of the profits on an entire product, which generally includes a lot of technologies and designs covered by other people’s patents, and 0% to all those “other people” is simply unfair. This is especially so when the covered design is just a small part of the final product. More seriously, such overcompensation will discourage innovation by creating huge uncertainties and risks for those who are interested in making something new. This will also invite an industry of patent litigation, the business model of which contributes nothing to the society but simply relies on abusing the patent system.

The Federal Circuit’s decision upheld a jury verdict awarding Apple $399 million damages, mostly for Samsung allegedly copying three designs of the iPhone – a black rectangular front face with rounded corners, that same face with a beveled edge, and a colorful grid of 16 icons. In ruling that the law required to grant Apple the total profits Samsung earned from the sale of phones containing the infringing designs, the Federal Circuit relied upon a portion of the patent law which applies only to design patents. This portion, 35 U.S.C. §289, provides that someone who uses the same or sufficiently similar design as that covered by a design patent on any “article of manufacture” without that patent owner’s permission, and intends to sell it, or does sell it or “expose [it] for sale”, “shall be liable to the owner to the extent of his total profit, but not less than $250.”

However, the law also states that the patent owner cannot recover twice “the profit made from the infringement.” While the Federal Circuit inflexibly interpreted this clause to require an award of total profits on any consumer product that infringes a design patent, Public Knowledge told the Court that the language of the law is not quite as clear as the Federal Circuit thought. The Court should interpret the law in a way that is more consonant with the overall “object and policy” of patent law, that is, “to promote the progress of science and useful arts.”

The Federal Circuit’s decision could have significant consequences. First, the Federal Circuit’s rule would create strikingly disproportionate levels of compensation. Just like the imaginary Tesla suit at the beginning of this post, most of the time the products involved in design patent infringement cases include a lot of technologies and designs, and the design patent in dispute is often only a small component. It is simply ridiculous to give the owner of a design patent on a tire pattern 100% of the profits from the entire car, where that design patent owner contributed little to the total value of the car. This could deter others from developing new products and discourage innovation, which contradicts the primary purpose of the patent system.

If a Tesla designer independently comes up with a creative design for tire treads, which is, unfortunately, later found to be sufficiently similar to a patented design, Tesla could still lose all profits on the cars using that tire tread design to the design patent owner. This is true even if the tire designer was completely unaware of the existence of that patented design. This potential risk would be strong enough to dissuade public from embracing new ideas, especially the start-up firms, for which the complete deprivation of total profits on the whole products would be fatal because they generally could not afford to start their development processes over again. 

Second, the Federal Circuit rule’s effect would exaggerate two economic problems in patent law: patent holdup and royalty stacking. Patent holdup happens when a company or developer has already invested a substantial amount of resources in a project, but then is pushed into negotiations with a patent holder to decide among: (1) abandoning the project, (2) paying an excessively large sum (up to and potentially exceeding the project’s entire value), or (3) waiting for litigation and injunctions. Royalty stacking happens when multiple patentees are each able to extract an infringement royalty that is greater than their contribution to the infringing product. The producer of the infringing product then would have to pay a royalty amount that, in total, surpasses the total profits from sales of the final product.

In the context of royalty stacking, the Federal Circuit’s “total profits” rule means that, where more than one design patent owner can successfully sue a company for design patent infringement, that company could end up owing its total profits on one product independently to each of those design patent holders. If there are two design patent holders, that will be two times the amount of the profits. Additionally, if that product also infringes a utility patent, that company would also have to pay out a royalty to the utility patent owner.

When a company knows that it could lose its entire profits on a product line simply due to one single design, that company will be less likely to invest in developing new products and bringing them to market – meaning consumers will lose out on access to those new things. And even if some adventurous innovators dare to take such a risk, they probably would calculate this risk into their business strategies by passing the cost on to the consumers.

The Federal Circuit’s decision will also nourish a design patent litigation industry, because it would make the existing easy-money patent troll industry even easier. Under current law, it is trivially easy to obtain design patents –  in 2014 a design patent application had an 89.5% chance of being granted. And current law also makes it easy for the design patentee to adjust, develop, and expand the scope of the patent’s coverage. Thus a design patent owner already has a powerful weapon to target a large swath of competitors or other manufacturing companies, and the Federal Circuit’s “total profits” rule just provides another big motivation for abusive litigation practices. Furthermore, the rule could inspire patent trolls to develop new strategies seeking larger “profits” for their litigation business. For example, the design patentee of that Tesla tire pattern might be advised by his lawyers to wait until that tire is used on future car models which might have higher selling prices, or, when cars using those tires become more popular.

To show more respect to the policy goals of patent law, to better balance the equities among patent owners, industry, and the public, to better protect consumers’ interests, and simply, to be fair, we should grant the design patent owners only what they proportionately deserve. As Public Knowledge told the Supreme Court in our brief, the owner of a design patent on tire treads should get only the profits that flow from the tire pattern, rather than the entire profits on the whole car. 

 

Image credit: Wikimedia Commons

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