Today the Supreme Court found an ambiguity in the Patent Act, reversing Apple’s $399 million infringement award against Samsung.

In the ongoing international litigation war between Apple and Samsung,  Apple prevailed at the trial court level on a design patent infringement case regarding Apple’s rounded corners and user interfaces. Apple was awarded $399 million, representing Samsung’s total profits from sales of the infringing smartphones. Samsung appealed that Apple was only entitled to the profits based on the infringing aspects (the corners and interfaces) not the profits from the entire phone. The Federal Circuit disagreed, affirming the Apple award. In its appeal to the Supreme Court, Samsung ridiculed the lower court’s ruling, arguing that under the Federal Circuit’s logic “profits on an entire car – or even an eighteen-wheel tractor trailer – must be awarded based on an undetachable infringing cup-holder.”

The Supreme Court Decision

Justice Sotomayor, writing for a unanimous court, agreed with Samsung, finding that “the term ‘article of manufacture’ [in Section 289 of the Patent Act] is broad enough to embrace both a product sold to a consumer and a component of that product.” The Court acknowledged that the parties asked “us go further and resolve whether, for each of the design patents at issue here, the relevant article of manufacture is the smartphone, or a particular smartphone component.” But the Court punted: “Doing so would require us to set out a test for identifying the relevant article of manufacture at the first step of the §289 damages inquiry and to parse the record to apply the test in this case.” Instead, the Court remanded the case back to the Federal Circuit.

What’s Next?

So the Federal Circuit is tasked with determining (A) the proper test for whether, with regards to Samsung’s smartphones, the “article of manufacture” are the infringing components or the entire smartphone, and then (B) to calculate the proper amount of damages associated with the article of manufacture.

Patent Infringement Litigants (Their Attorneys and Damages Experts) Must Hold Their Breath

Like gamblers on a sporting event over which they have no control, parties litigating patent infringement actions can only hold their collective breath and wait to see which test the Federal Circuit devises and whether the test is pro-plaintiff or defendant. Undoubtedly, the losing party (Apple or Samsung) will argue the Federal Circuit got it wrong, and ask the Supreme Court for a do-over.

In a decision issued June 22, 2015 — Kimble v. Marvel Entertainment, LLC — the United States Supreme Court reaffirmed and declined to overrule long-standing precedent holding that a patent holder cannot charge royalties for the use of an invention after its patent term has expired.

The invention: a Spider-Man type web-blaster!

Not all patent cases feature inventions that are easy to understand.  Take, for example, patent cases in the mid/late 2000s featuring orthogonal frequency-division multiplexing (a method of encoding digital data on multiple carrier frequencies).

This case, in contrast, features an invention to which almost all of us can relate.  In 1990, inventor Stephen Kimble obtained a patent on a toy that allowed children to role-play as a “spider person” by shooting “webs” (pressurized foam string) from the palm of their hand.  Kimble met with Marvel Entertainment, the manufacturer of various Spider-Man products, seeking to sell or license his patent.

Marvel apparently liked Kimble’s invention.  Sometime after their meeting, Marvel began marketing a “Web Blaster” — a toy mimicking Kimble’s invention, using a polyester glove and a canister of foam.  But Marvel did not sign any agreement with Kimble, and made no payments to him.

The patent infringement case and settlement

Kimble sued Marvel for patent infringement in 1997.  That case settled, and the settlement agreement provided that Marvel would purchase Kimble’s patent in exchange for a lump sum of approximately $500,000 and a 3% royalty on Marvel’s future sales of the Web Blaster and similar products.  The settlement agreement set no end date for the royalty payments.

In negotiating the settlement, neither party appeared to be aware of a 1967 decision by the United States Supreme Court — Brulotte v. Thys Co. — holding that a patent holder cannot receive royalties for sales made after the patent’s expiration.

The sequel lawsuit

When Marvel finally “stumbled across” (the Court’s words) the Brulotte decision, it filed a new lawsuit for declaratory relief confirming that Marvel could cease paying royalties under the settlement in 2010 — 20 years after the patent issued, which is the duration for most patents.

The District Court sided with Marvel, and the Ninth Circuit affirmed.  The Supreme Court granted certiorari “to decide whether, as some courts and commentators have suggested, we should overrule Brulotte.”

The Supreme Court’s holding

In a 6-3 decision, the Supreme Court affirmed, holding that Brulotte remains good law unless and until Congress  determines otherwise.

The Court observed that in crafting patent laws, Congress struck a balance between fostering innovation and ensuring public access to discoveries.  Patents, the Court held, “endow their holders with certain superpowers, but only for a limited time.”  During the patent’s lifespan, the holder has exclusive rights to the invention, and may sell or license those rights.  But upon expiration, the rights to the invention pass to the public.

The Court rejected Kimble’s invitation to overrule Brulotte and replace it with a “flexible, case-by-case analysis” of post-expiration royalty clauses, noting: “Overruling precedent is never a small matter.”  Brulotte’s “statutory and doctrinal underpinnings,” the Court held, “have not eroded over time.”  Kimble also argued that Brulotte suppressed technological innovation and was based on a mistaken view of the competitive effects of post-expiration royalties.  But the Court essentially told Kimble, and others critical of the Brulotte decision, to direct their concerns to Congress.

Perhaps most noteworthy was the Court’s explanation that parties “can often find ways around Brulotte” in permissible ways, given some creativity in transaction structuring.  For example:

• a licensee can defer payments for pre-expiration use of a patent into the post-expiration period
• licensing agreements covering multiple patents can provide for royalties “until the latest-running patent covered in the parties’ agreement expires”
• licensing agreements covering both patents and closely related non-patent rights (like trade secrets) can provide for continuing royalties after patent expiration as long as the royalties are tied to the non-patent right
• parties may structure their relationship as a joint venture in which the parties share risks and rewards of commercializing inventions but without a royalty component

Takeaway

After a patent expires, patent holders can’t continue charging royalties for use of the invention.  To secure post-expiration revenue streams, patent holders must look to other transaction structures.

The Supreme Court’s recent decision in Octane Fitness v. ICON has been hailed by patent reform advocates and some commentators as a death blow to so-called “patent trolls,” patent owners who enforce patent rights despite not actually using or licensing the patents in question.  In Octane Fitness, the Court relaxed the standard for awarding attorney’s fees in patent cases.  Many believe that patent trolls, as bad actors, will now run for the hills in fear of paying successful defendants’ fees.  The reality, however, is far more nuanced.  Indeed, patent trolls’ prevalence in United States courts could actually prevent any bright line application of the Octane Fitness rule to patent trolls.

The Octane Fitness Case

At issue in Octane Fitness was the application of a federal statute allowing district courts to award “reasonable attorney fees to the prevailing party” in “exceptional cases.”  The Federal Circuit Court of Appeals had previously interpreted the provision to require findings of “material inappropriate conduct” or that the losing party’s case was both “objectively baseless” and “brought in subjective bad faith.”  Justice Sotomayor, writing for a unanimous Court, found that test too narrow, noting that the attorney’s fees statute “imposes one and only one constraint on district courts’ discretion to award attorney’s fees in patent litigation: The power is reserved for ‘exceptional’ cases.’”  The Court held the statute applied more broadly:

“an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.”

The Court also overturned the high “clear and convincing evidence” threshold, which the Federal Circuit had previously required litigants to satisfy to recover fees, finding that fees should be awarded if a party proves by a preponderance of the evidence that the case is “exceptional.”

Octane Fitness’ Impact

So, how severe a blow is this holding to the average patent troll?  The likelihood is:  Not as fatal as advertised.  Although a defendant that prevails in litigation against a patent troll will now have an easier time establishing that its case is “exceptional,” nothing in the decision suggests that cases brought by patent trolls, (patent owners who don’t use their patents) will automatically be more susceptible to a fee award than any other patent infringement litigant.  To the contrary, Octane Fitness, expressly states that “there is no precise rule or formula for making these determinations.”  Neither party in the Octane Fitness case was a patent troll, nor does the case discuss patent trolls even once.

Patent Trolls Are Not Automatically “Exceptional”

Those suggesting that Octane Fitness will dramatically alter the landscape of patent troll lawsuits, therefore, appear to be assuming that patent trolls, en masse, will fear the prospect of paying the defendants’ legal fees and opt against filing infringement suits.  But Octane Fitness provides patent trolls with plenty of room to maneuver.  The Court notes that “exceptional” means “uncommon, rare, or not ordinary.”  Patent trolls and their counsel, however, can point to substantial data refuting the proposition that their infringement suits are particularly “exceptional.”  A 2013 White House report states that 62% of all infringement suits are brought by patent trolls, who threatened more than 100,000 companies in the year prior to that report.  If such suits make up more than half of the patent suits in the federal courts, can they be said to be, by definition “uncommon, rare, or not ordinary”?

Some Patent Trolls May Be “Exceptional”

This is not to say that patent trolls will be immune from the attorney’s fees provision in question.  Far from it.  The point is simply that the strength of their cases, and the legitimacy of their litigation conduct will more likely be judged on a case-by-case basis.  The same White House report referenced above finds that many patent trolls engage in conduct that most district courts may find exceptional, including:  “focus[ing] on aggressive litigation, using such tactics as: threatening to sue thousands of companies at once, without specific evidence of infringement against any of them; creating shell companies that make it difficult for defendants to know who is suing them; and asserting that their patents cover inventions not imagined at the time they were granted.”

Nonetheless, couldn’t such conduct easily be described as “materially inappropriate” and the cases in question “objectively baseless” and “brought in subjective bad faith”?  If so, do patent trolls truly face an increased risk of paying defendants’ attorney’s fees?  Arguably not, and the prior standard clearly did little to dissuade patent troll infringement suits.

Additionally, defendants, and not only patent trolls, face a less exacting standard for having fees awarded against them.  If the troll has a valid patent and a strong case of infringement, therefore, Octane Fitness could make it twice as expensive for a defendant to fight, as the court could force the defendant to pay the troll’s fees.

In sum, the impact that Octane Fitness will have on patent troll lawsuits is far from clear.  Despite the public policy implications of such suits, they have become so ubiquitous that courts may not be able to deem them per se “exceptional.”  To the extent that the decision in Octane Fitness does result in fewer suits by patent trolls, arguably, the relaxed burden of proof (from clear and convincing to preponderance of the evidence) will have been  more significant than the Court’s revised definition of “exceptional.”  In any event, it is likely that infringement suits brought by patent trolls will continue to be decided on the merits of the particular case and the deftness of the attorneys on either side.