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.

I previously wrote about two wage-fixing class actions, where some of the largest high-tech and Hollywood companies conspired not to hire one another’s employees to keep wages low.  Google, Apple, Intel and Adobe attempted to settle the high-tech class action for $324 million, but the Court found the amount too low.  They ultimately settled for $415 million.

Meanwhile, the Hollywood wage-fixing case against Pixar, Dreamworks, Disney, LucasFilm and other studios continued to move towards trial when the Court denied the studios’ motion to dismiss.

Initial evidence indicated that Sony was clean; it had rebuffed the other studios’ efforts to recruit Sony into the “gentlemen’s agreement” not to hire one another’s employees. But apparently there was sufficient evidence against Sony that it decided to settle. Sony, which has given us such animated classics as the Smurf franchise, Cloudy with a Chance of Meatballs, and Hotel Transylvania, agreed to pay $13 million to settle its portion of the wage-fixing claims and further agreed to cooperate with Plaintiffs in their action against the other studios.

It will be interesting to see whether Sony’s settlement will inspire the other studio defendants to cut their losses and settle or fight on.

As discussed in my initial blog post on the topic, Google, Apple, Intel and Adobe stand accused of conspiring not to poach one another’s employees in order to keep wages down. And as discussed in my update, the Court rejected a proposed $324 million settlement as too low.

At the earlier hearing, one of the plaintiff’s objected and the Court agreed that the settlement was too low. At the most recent hearing there was no objection and the Court appeared to approve the settlement. However, there is still disagreement among the various plaintiffs and their respective counsel regarding allocation of the settlement. While it appears that the size of the pie has been decided, there question of how big the pieces will be is on the table.

The lessons for the defendants are (1) don’t conspire with your competitors not to poach one another’s employees and (2) don’t be dumb enough to refer to such conspiracies in writing.

As discussed in my prior blog post, Google, Apple, Intel and Adobe stand accused of conspiring not to poach one another’s employees in order to keep wages down. 

Attorneys representing the class-action employees agreed to settle the case for $324 million, but one of the employees objected that the settlement was too low, essentially accusing the plaintiff attorneys of selling out the class. The judge agreed and rejected the settlement.

Defendants have now increased the settlement offer to $451 million, but they will need to wait and see if any of the plaintiffs object or if the Court determines the offer is still insufficient. After all, plaintiffs claim defendants’ anti-poaching scheme cost the 64,000 class members a total of $3 billion in reduced wages, and a jury could treble that amount to $9 billion. The evidence, damning email and memos describing the anti-poaching conspiracy and a need to cover up the conspiracy, dictate that defendants must settle. The only question is how much they must pay for the court to determine the settlement is fair.

It’s a monster movie cliché – near the end, when the monster is “dead,” the dust is settling and the heroes are patting each other on the back, the monster rises from the dead and goes on one more rampage before it expires.

Monster Cable, originator of the Beats headphones, has risen from the dead and filed a lawsuit for hundreds of millions of dollars against its former “partner,” Beats Electronics, its principals and the company that acquired Beats Electronics. Monster alleges that the defendants created a $300 million sham transaction to steal Monster’s intellectual property and disenfranchise Monster before Apple purchased the company for $3.2 billion. (Monster’s Complaint)

BACKGROUND

As I discussed more fully in a prior post, Monster and Beats entered into a License Agreement in 2008. In 2011, Beats arranged to sell a controlling interest in the company to defendant HTC. As a result of the sale, Beats was able to transfer Monster’s intellectual property and ownership rights to HTC, and Beats was also able to terminate the License Agreement with Monster. In 2012, Beats repurchased the controlling interest of the company from HTC, along with the intellectual property. And in 2014, Beats sold the company to Apple for $3.2 billion. When the sale was announced, Monster’s reaction to missing the big payday was anything but monstrous. Monster’s CEO , Noel Lee said: “We’re very happy they received such a high valuation. And I’m thinking of what that means for Monster’s valuation.” But like the movie cliché, Monster has now risen from the dead and is on the rampage, suing Beats, its principals and HTC.

MONSTER ALLEGATIONS

The primary focus of Monster’s eight causes of action are that Beats and HTC conspired to create a sham sale of the company to HTC, which effectively stripped Monster of its intellectual property and ownership rights. Later, when Beats had terminated its relationship with Monster, Beats bought the company back from HTC. Monster’s complaint alleges:

The timing of the Beats/HTC transaction that triggered the “Change of Control” provision is significant: it occurred months before the Amended License Agreement was set to expire. If Beats had not exercised the “Change of Control” provision in the Amended License Agreement, the Amended License Agreement would have expired on its own terms and Beats would have lost its ability to assume complete manufacturing, promotion, distribution, and sales of the “Beats By Dr. Dre” product line. (Complaint ¶ 31.)

Monster also alleges that Beats tricked Monster’s CEO into reducing his 5% share of Beats by lying to him about the pending Apple acquisition, which deprived him of more than $100 million.

Monster’s complaint draws a colorful but unflattering picture of two of Beat’s principals:

Dre’s primary contribution was to bless Monster’s headphones when he exclaimed: “That’s the shit!”

[James] Iovine is a respected but ruthless music mogul….

Monster’s complaint does not calculate its damages, but it does allege Lee’s shares were worth more than $100 million and Apple’s purchase for $3.2 billion draws a large target. Monster also seeks punitive damages, which could potentially treble any award.

CLASH OF THE TITANS

Monster has alleged that the HTC transaction was a sham, and Monster’s various claims for fraud, breach of trust, breach of fiduciary duty, etc. all focus on the suspect timing of the controlling interest shell game. Defendants will likely respond that Monster read and signed the License Agreement, and “the deal is the deal.” Under the License Agreement’s terms, Beats was allowed to sell shares, terminate Monster and then buy back shares. This “lawful but awful” defense has a better chance before a judge than a jury, especially a jury in San Mateo, California, Monster’s home town.

As the defendants are reviewing Monster’s complaint, I’m sure they are collecting and pouring through hundreds of thousands of emails among and between Beats and HTC, praying that nobody was stupid enough to create a smoking gun. Any document created during the negotiations leading up to HTC’s purchase of the shares, that discussed Beat’s potential repurchase of the shares, could confirm Monster’s legal theory that, from the start, the HTC purchase was designed as a revolving door scam with the sole purpose of seizing Monster’s technology. As the WikiLeaks, Snowden, and most recently Sony leaks have taught us, anything you write that is incriminating or embarrassing can and will be held against you.

When you think of a monopoly you probably think of Rich Uncle Pennybags or oil tycoon John D. Rockefeller, but maybe you should think of Princess Elsa from Frozen or the iPhone 6 instead.  The largest Hollywood animation studios and leading Silicon Valley giants stand accused of wage-fixing in violation of the Sherman Antitrust Act. While nobody has proven he was the primary architect of these schemes, Steve Jobs of Pixar/Apple appears to be the common denominator between these two industries.

The Sherman Antitrust Act prohibits business activities that are deemed anti-competitive, including agreements that unreasonably restrain competition affecting interstate commerce. The prototypical case involves price fixing, where various competitors conspire not to compete so they can keep their prices high. In a 2012 case where LCD screen manufacturers conspired to fix prices world-wide, Hitachi, Sharp, Samsung, Toshiba, LG and AU Optronics collectively agreed to pay more than $1.1 billion to settle antitrust claims.

Unlike the typical restraint of trade cases, these Hollywood and Silicon Valley cases involve wage-fixing, not price-fixing. These two industries stand accused of colluding with their competitors not to hire each other’s employees, thereby driving down wages.

The Hollywood class action lawsuit, amended last week, alleges that most of the major animation studios entered secret agreements not to hire one another’s employees. The lawsuit alleges that Pixar, Lucasfilm, DreamWorks Animation, The Walt Disney Company, Sony Pictures, Blue Sky Studios [maker of Rio and Ice Age films], and ImageMovers, LLC, entered into agreements, some of which date back to the 1980’s, “not to actively recruit employees from each other…” While allegations in a complaint should generally be taken with a grain of salt, the studios’ own written documents may prove impossible to explain away. For example in 2005, Pixar’s VP of Human Resources wrote: “With regards to ILM, Sony, Blue Sky, etc., …we have a gentlemen’s agreement not to directly solicit/poach from their employee pool.” In 2007, after Disney acquired Pixar, a Pixar executive wrote a memo to his Disney colleague about “a serious problem brewing” in that Robert Zemeckis [director and creator of Back to the Future and Polar Express] “has hired several people away from Dreamworks at a substantial salary increase” and that the Northern California studios has “avoided wars” by “conscientiously avoiding raiding each other.” Steve Jobs owned the majority share of Pixar prior to the merger.

Meanwhile, in Silicon Valley there are two class actions alleging that Apple, Google, Dell, IBM, eBay, Microsoft, Comcast, Clear Channel, DreamWorks, Oracle, Sun Microsystems and others conspired not to recruit each other’s employees to keep wages down. Similar to the Hollywood case, defendants may find it difficult to overcome their own damning documents. In a Google memo titled “Special Agreement Hiring Policy,” the Google executive listed four Google competitors and explains that they will not “pursue manager level and above candidates for Product, Sales or G&A [General and Administrative] roles –even if they have applied to Google.” Steve Jobs was running Apple during the wage-fixing scheme. The parties in the larger Silicon Valley case reached a settlement of $324 million, but one of the plaintiffs objected that the amount was too low, given that the estimated lost wages was $3 billion and if defendants lose, those damages could be trebled to $9 billion. The Federal District judge agreed and rejected the settlement. The defendants asked the Ninth Circuit to reverse the judge’s decision and have her removed from the case. The parties have filed their initial briefs with the Ninth Circuit

The laws are clear: 1) you cannot conspire with a competitor to fix prices; 2) you cannot conspire with a competitor to fix wages, and 3) you cannot conspire with a competitor not to solicit/hire each other’s workers. These are obvious restraints of trade. But the shocking thing is how arrogant or just plain dumb the defendants were in memorializing their conspiracy in writing. With all the smoking guns, it’s clear the defendants failed to heed Google’s Eric Schmidt’s request that “I would prefer that [Google] do it verbally since I don’t want to create a paper trail over which we can be sued later?” These sophisticated companies committed the same sort of rookie mistake as the Billionaire Boys Club members, who mistakenly left a detailed “to do” list for committing the murder (“tape mouth, handcuff …kill dog”) at the murder site. That smoking gun helped secure their convictions. Similarly, in the wage-fixing class actions, the defendants’ smoking guns are likely to prove insurmountable. Having been caught red handed, the only likely remaining question is how much money the defendants will ultimately have to pay to their employees and the employees’ attorneys. Unfortunately for defendants, it won’t be Monopoly money.

When there’s a huge pile of money staring you in the face, it’s easy to overlook some of the potential pitfalls. But a recent $3 billion monster deal provides a cautionary tale for businesses negotiating make/break the company contracts.

Back in the 80’s, Monster Inc. was known for producing high priced (quality?) stereo cables, but as the public began shifting from stereo systems to headphones, Monster sought to expand into the new market. In 2007, Monster signed a deal with Dr. Dre’s company, Beats Electronics, which lead to the “Beats,” the ubiquitous, colorful headphones and ear buds that are today’s cool credential, like wearing Air Jordans back in the day. (I bought the hype and a shiny pair of red Beats, quick review, meh. Here’s what Consumer Reports had to say about them.

But while Monster’s owners might be audio geniuses, they deserve an F in negotiation and contract comprehension. Without a lawyer, they entered a contract whereby Monster transferred all ownership of the trademarks and technology behind the products to Beats Electronics. Monster also shouldered the obligation to manufacture and distribute the products, an expensive proposition.

INSULT-In 2011, HTC, a Taiwanese company purchased a majority stake in Beats Electronics for more than $300 million, but Monster only got a small payout and according to BusinessWeek.com, in 2012 Beats declined to renew the contract with Monster.

INJURY-Beats bought back a majority share from HTC, and in spring of this year, Apple purchased Beats for $3 billion, mostly in cash, and Monster’s share was zero.

FATAL ERROR 1: Recognize your leverage. Monster had the technology. They could have negotiated a non-exclusive license or an exclusive license with an end date, or they could have sold the technology outright at a higher price. Instead, Monster got the worst of both worlds, losing its technology without adequate compensation.

FATAL ERROR 2: Hire a professional. When you’re sick, see a doctor. When your dishwasher starts spewing water, call a plumber. When you’re negotiating the future of your company, call a business lawyer. Even when you’re “negotiating” with an 800 pound gorilla (i.e. Microsoft, Coca Cola) and you have no leverage, at least have a lawyer look at the contract and identify the potential pitfalls. Whether you’re selling your key technology, disclosing your trade secrets, or indemnifying another party, you need to do so with your eyes open.

FATAL ERROR 3: Understand your relationship. The PR regarding the Monster/Beats deal described it as a partnership, but because Beats owned the technology, Monster ended up as a service provider that merely obtained a cut of the profits. When Beats decided not to renew the contract and sold the company, Monster ended up with virtually nothing, even though it developed the key technology behind the Beats products and considered itself a partner.