"PREVIEW of United States Supreme Court Cases," ABA Preview

September 28, 2016

Where a Design Patent Is Applied to Only a Component of a Product, Should an Award of Infringer’s Profits Be Limited to Those Profits Attributable to the Component?

Case at a Glance
In this case, the U.S. Supreme Court will consider whether the § 289 of the Patent Act requires the award to a design patent holder of the entire profits on a product bearing a patented design, irrespective of the relative scope of the component to which the design patent is applied and its contribution to the product’s overall value. Petitioner Samsung appeals the Federal Circuit’s reading of 35 U.S.C. § 289, under which design-patent infringers, unlike infringers of copyrights, trademarks, or utility patents on technical inventions, are liable for their entire profits from an infringing product, even if the patented design is only a minor feature of that product.

Samsung Electronics Co., Ltd., et al. v. Apple, Inc.
Docket No. 15-777

Argument Date: October 11, 2016
From: The Federal Circuit

Issue
Does 35 U.S.C. § 289, if elected as a remedy, automatically entitle a design-patent holder to recover all of an infringer’s profits made from sales of any product found to bear a patented design, without regard to the design’s contribution to that product’s value or sales, or should an award of infringer’s profits be limited to profits attributable to that component?

Facts
Respondent introduced the iPhone in 2007 and owns three design patents that protect various aspects of the iPhone’s design: U.S. Design Patent No. 618,677 (herein, the D’677 patent); U.S. Design Patent No. 593,087 (herein, the D’087 patent); and U.S. Design Patent No. 604,305 (herein, the D’305 patent). The D’677 patent is directed to the iPhone’s front face design and claims a black, rectangular front screen face with rounded corners but specifically disclaims the surrounding rim or “bezel,” the circular home button on the front, and the sides, top, bottom, and back of the device (i.e., the rest of the phone):

The D’087 patent is directed to the iPhone’s overall appearance and claims a rectangular front face with rounded corners, minus the black shading and with the addition of a bezel. The D’087 patent specifically disclaims the sides, back, top, and bottom of the device (i.e., the rest of the phone), as well as features on the front, such as the circular home button:

The D’305 patent is directed to the interface for displaying information and claims a specific grid of colorful icons that may appear on one of the many graphical user interface screens a phone may display; the patent specifically disclaims every attribute of a smartphone except that specific display:

In 2011, respondent Apple filed an action in the U.S. District Court for the Northern District of California, alleging that 19 Samsung smartphones infringed the D’677, D’087 and/or D’305 patents. After a jury trial and a partial retrial on damages, the juries awarded petitioners’ entire profits on 11 smartphones to respondent for design-patent infringement. Of those 11 phones, 6 were found to infringe only the D’305 patent and 4 were found to infringe only the D’677 patent. 

The district court rejected petitioners’ attempts to limit any profits awarded under § 289 to total profit attributable to infringement of respondent’s claimed designs and ultimately awarded respondent with a $399 million profits award for the design-patent infringement. The district court excluded petitioners’ evidence calculating the portion of petitioners’ profits attributable to design and to the patented features, ruling that any “apportionment of damages [is] in clear contravention of 35 U.S.C. § 289.” The district court further rejected petitioners’ proposed jury instructions limiting any total profit award to the amount attributable to infringement of a patented design and the article of manufacture to which the design is applied, and instructed the jury that, “[i]f you find infringement by any petitioner defendant …, you may award respondent that petitioner Defendant’s total profit attributable to the infringing products.” The district court’s instruction then stated that the “total profit” of any petitioner defendant “means the entire profit on” the phone and “not just the portion of profit attributable to the design or ornamental aspects covered by the design.” Finally, the district court ruled, on post trial motions, that the jury had properly awarded all of petitioners’ profits on the design-patent-infringing products, finding any lesser amount “clearly foreclosed by Federal Circuit precedent.”

On appeal, the Federal Circuit affirmed the design-patent-infringement judgment as well as the $399 million profits award for that infringement. The Federal Circuit rejected petitioners’ argument that any profits award should be limited to profits from the portion of the product as sold that incorporates or embodies the subject matter of the patent. Rather, the Federal Circuit held that § 289’s “clear statutory language prevents us from adopting a ‘causation’ rule,” even if that “makes no sense in the modern world.” The Federal Circuit read its own prior decision in Nike Inc. v. Wal-Mart Stores, Inc., 138 F.3d 1437 (Fed. Cir. 1998), as precluding any ruling that infringer’s profits under § 289 should be “limited to the profit attributable to the infringement.” The Federal Circuit denied rehearing en banc.

Case Analysis
In this case, the Court must determine whether 35 U.S.C. § 289, if elected as a remedy, automatically entitles a design-patent holder to recover all of an infringer’s profits made from sales of any product found to bear a patented design, without regard to the design’s contribution to that product’s value or sales, or whether an award of infringer’s profits should be limited to profits attributable to that component.

On the issue of whether 35 U.S.C. § 289 requires an award of an infringer’s total profit, petitioners and respondent frame the issue before the Court in different ways. Petitioners frame the issue as “[w]here a patented design is applied only to a component of a product, should an award of infringer’s profits be limited to profits attributable to that component?” Contrarily, respondent suggests that the question be framed as “[w]hether 35 U.S.C. § 289, which provides that a party that infringes a design patent may be held ‘liable … to the extent of his total profit,’ permitted the jury to award damages equal to petitioners’ total profit from its devices that infringed Apple’s design patents?” Petitioners and respondent disagree fundamentally over whether § 289 requires a finding that a design-patent infringer is liable to the extent of his total profit or merely liable for the recoverable total profit that is attributable to the article of manufacture to which an infringing design is applied.

Section 289 provides that one who “(1) applies the patented design … to any article of manufacture …, or (2) sells or exposes for sale any article of manufacture to which such design … has been applied shall be liable to … the extent of his total profit, but not less than $250.” It further provides that a design-patent holder remains free to pursue other remedies available under the Patent Act, “but he shall not twice recover the profit made from the infringement.”

Petitioners suggest that the entire-profits rule conflicts with the text, history, and purpose of § 289 and argues that the recoverable “total profit” must be limited to total profit attributable to infringement of the patented design because the text of the statute refers to the “article of manufacture” to which an infringing design is “applied”; the recoverable total profit must be that “made from the infringement”; and the Patent Act is presumptively read in light of background principles of causation and equity. Petitioners note that the term “article of manufacture” should be read to mean an entire product only where the design is “applied” to the entire product and not where the design is “applied” only to a component of the product. Further, petitioners urge that the phrase “made from the infringement” should be read to limit recoverable profits to those attributable to infringement of the patented design.

Petitioners submit that because neither an “article” nor a “manufacture” need be the entirety of a device or product as ultimately sold, the same is true when the terms are taken in combination. Petitioners noted that, in Ex Parte Wiessner, 1898 Dec. Comm’r Pat. 236, the Commissioner of Patents explained that a patent applicant may claim “the entire design” for a product but may also claim, under separate design patents, designs for that product’s components, which themselves may constitute “separate articles of manufacture.” Petitioners further suggests that, prior to the decision in the instant case, the relevant judicial decisions interpreting § 289 held that the infringer’s profits for design patents are limited to those from the article of manufacture to which the patented design was applied. Thus, petitioners argue that § 289 does not authorize disgorgement of infringer’s profits earned on sales of an entire product unless that entire product is the “article of manufacture” to which the patented design is “applied.” Petitioners further suggest that, where the “article of manufacture” to which the design is “applied” instead is merely a component of that product, profits under § 289 are textually limited to total profit from the component.

Petitioners argue the respondent made no effort in the district court proceedings to prove that petitioners’ entire profits on the accused phones resulted from the narrow design features claimed in its three design patents. Petitioners also argue that respondent never disputed that smartphones derive their value principally from functionality, noting that respondent stated, in patent license discussions preceding this lawsuit, that “[s]oftware creates the largest share of product value” and that the “[o]perating system, applications, user interface, and services are the key to a differentiated customer experience.” Petitioners further argue that the evidence in the record shows that consumers purchased petitioners and other Android phones overwhelmingly because of their functional, nondesign features.

Petitioners submit that the record contains no proof that all of the profits on petitioners’ accused phones are attributable to the specific “articles of manufacture” to which respondent’s patented designs were “applied”—namely, a phone’s front face, front face with bezel, and single icon grid display. To the contrary, petitioners argue that the evidence shows that consumers value far more highly such non-design features as apps, battery life, screen size and turn-by-turn navigation.

Petitioners suggest that any doubt that the textual provisions “article of manufacture” and “applied” limit the profits available under § 289 is resolved by the presumption that Congress intends to follow background principles of causation and equity absent a clear statement to the contrary, noting that, in enacting § 289 and its predecessors, Congress made no such clear statement.

Petitioners submit that the legislative history confirms that Congress intended no radical departure from background principles of causation and equity in enacting § 289 and suggests that, in enacting the predecessor statute in 1887, Congress sought to ensure that holders of design patents would receive more than nominal damages from counterfeiters who infringed their patented designs. Petitioners further suggest that Congress assumed that “designs are the principal feature” of such articles and that, as to a decorative carpet or wallpaper, “it is the design that sells the article.” Petitioners argue that Congress never suggested that the same assumption would hold for complex products such as smartphones, which embody hundreds of thousands of functional features having nothing to do with any patented design.

Petitioners submit that where a claimed design covers only a component of a product as sold (such as a phone’s front face), the relevant “article of manufacture” is the component (the phone’s front face), and not the entire product (the phone), and the relevant “total profit” is that attributable to the component. Petitioners further note that the ordinary meaning of the terms “article,” “manufacture,” and “applied” at the time of the enactment of the predecessor statute in 1887 supports this interpretation. The petitioners suggest that, when § 289 was originally enacted, the terms “article” and “manufacture” could be less than an entire product as sold and that pre–Federal Circuit precedent recognized that individual components of a building, such as “doors, windows, floors, supporting columns, wall construction, and other parts,” are each a “manufacture,” no less than the building as a whole is a  “manufacture.”

Petitioners further submit public policy arguments suggesting that the automatic entire-profits rule would have disastrous practical consequences that Congress cannot have intended and would invite wildly disproportionate results, which could discourage innovation and competition, encourage companies to divert resources from new and useful technologies to ornamental designs, and pose the threat of crippling liability to businesses, especially small businesses, found to infringe even a single design patent.

As amicus in support of neither party, the United States government suggests that § 289 unambiguously permits a patent holder to recover the infringer’s entire profits from the “article of manufacture” to which the design was applied, regardless of the extent to which those profits are attributable to the infringing design. The U.S. government notes that while § 289 allows the design-patent holder to recover the infringer’s “total profit” on the “article of manufacture” to which the design was applied, that “article of manufacture” will not always be the finished product that is sold in commerce and, if the relevant article is a component of the ultimate item for sale, that the patentee is only able to receive the infringer’s total profit for that component, not its total profit for the finished item.

The U.S. government suggests that the Federal Circuit’s approach, under which the relevant “article of manufacture” is invariably the entire product as sold, would result in grossly excessive and essentially arbitrary awards. The U.S. government submits that, while the plaintiff bears the ultimate burden of establishing the infringer’s total profit, the defendant, as the manufacturer or seller of the product in question, should bear the burden of identifying any component that it views as the relevant article of manufacture. The U.S. government’s position adopts the following four factors to determine the totality of the circumstances: (1) the scope of the design claimed in the plaintiff’s patent including the drawings and written description; (2) the relative prominence of the design within the product as a whole; (3) whether the design is conceptually distinct from the product as a whole; and (4) the physical relationship between the patented design and the rest of the product. Nordock, as amicus in support of respondent, supports the U.S. government’s arguments.

In response, respondent notes that § 289 provides that a design-patent infringer is “liable … to the extent of his total profit” on the “article of manufacture” to which the patented design has been applied and cited the congressional record to assert that Congress enacted this total profit remedy because it recognized that “it is the design that sells the article” and, because profits attributable to design are often “not apportionable,” “[i]t is expedient that the infringer’s entire profit on the article should be recoverable, as otherwise none of his profit can be recovered.” Respondent emphasized that nothing in the statute’s text suggests that the provision was limited to certain types of articles; quite the contrary, respondent argues that the statute made it “unlawful” for “any person other than the” patent owner to apply a patented design “to any article of manufacture.” Respondent further argues that, because of the importance of design and Congress’s determination that apportionment is difficult and impractical in the design patent context, the 1887 Act “remove[d] … the need to apportion the infringer’s profits between the patented design and the article bearing the design.” Thus, respondent asserts that petitioners’ effort to read an apportionment requirement into § 289 is at odds not only with the statute’s plain language, but also with Congress’s contemporaneous explanation identification of the relevant “article of manufacture” on which § 289 allows an award of total profit.

Respondent further agreed with petitioners’ position that the infringing article of manufacture for which total profits may be awarded “could be something less than an entire product as sold.” Respondent, citing to case law, suggests that the statutory scheme does not create any per se rule that infringement of a design patent that covers only a portion of a device always entitles the plaintiff to an award of total profit on the entire device. Respondent argues that the broad definition given to “article of manufacture,” that it may include a complete final product or a component thereof, flows naturally from the definition given to “article of manufacture” and “manufacture” in other provisions of the Patent Act. However, respondent further argues that Congress reaffirmed the total profit remedy in 1952 and chose this particular remedy for any article of manufacture, whether simple or complex, to which a patented design was applied. Respondent also argues that the mere fact that the relevant article of manufacture “could be” less than an entire product does not mean that it must be. Rather, respondent suggests that, in concurrence with the U.S. government’s amicus brief,  “[w]ith respect to some multicomponent products, the finished product as sold in commerce is most naturally viewed as the article to which the patented design is ‘applied.’”

Respondent further argues that there is no reason to remand this case because the petitioners failed to introduce any evidence that the relevant articles of manufacture were anything other than the whole smartphones and never offered any calculation of § 289 damages based on anything other than the entire phones.

Respondent suggests that petitioners’ policy arguments are speculative and do not justify upending the settled interpretation of a statutory remedy first adopted in 1887, readopted in 1952, and left unchanged since then. Respondent argues that it is not for the Supreme Court to decide whether to alter the statutory balance that Congress has chosen and left undisturbed for decades. Respondent suggests that petitioners’ invocation of “background principles” cannot overcome Congress’s evident intent, expressed in the clear text and legislative history to adopt a total profit rule rather than an apportionment rule that Congress plainly rejected.

In reply, petitioners suggest that the parties and the U.S. government, in its amicus brief, have reached consensus that § 289 permits an award of infringer’s profits from a component of a product rather than the entire product and that the Patent Office and the lower courts have “construed the term ‘article of manufacture[]’ ... to include components of larger products.” Petitioners further argue, citing to respondent’s brief and the U.S. government’s amicus brief, that the parties and the government also agree that, where the relevant article of manufacture is a component of a product, it follows that total profit is limited to that attributable to the component, not the entire product citing. Petitioners argue that the Federal Circuit held categorically that no component may constitute an “article of manufacture” under § 289 unless it is “sold separately” to consumers. Petitioners also adopt the U.S. government position that the Federal Circuit held that “the relevant ‘article of manufacture’ is invariably the entire product as sold.”

Petitioners argue that the Federal Circuit’s “total profits” holding is contrary to the statutory text of § 289 and urge the Court to confirm that § 289 permits an award of infringer’s profits based on only a component of an entire product. Petitioners, supported by 50 Intellectual Property Professors, also suggest that basic principles of remedies law require a plaintiff to show some connection between the damages and the infringement, and that any other interpretation of § 289 would permit windfalls that are untethered from the infringement.

Petitioners further suggest that § 289 contains language expressly invoking causation principles, arguing that the only plain language in § 289 touching on causation indicates that the answer is “profit made from the infringement,” a standard “requirement of but-for causation.”

Petitioners note that respondent did not dispute the harms the Federal Circuit’s rule would cause to innovation and competition except to suggest that they are speculative. Petitioners point to the Computer and Communications Industry Association (CCIA) and Public Knowledge amici briefs supporting petitioners to explain that this Court’s affirmance of the Federal Circuit’s rule would transform a design patent into a sort of super-utility patent, allowing a design patentee to control an industry in a way that would be nearly impossible with utility patents. Petitioners further argue, supported by amici the Engine Advocacy and Shapeways, the Hispanic Leadership Fund, and the Internet Association, that this Court’s affirmance of the Federal Circuit’s rule would open up new frontiers of litigation that would stifle the very innovation that the patent system seeks to encourage, leaving “legally unsophisticated entrepreneurs,” and “small companies lacking diverse product lines” especially vulnerable.

Petitioners suggest that respondent’s protests that, if such consequences were likely, they already would have come about, are premature because the Federal Circuit had never before announced a rule that a design patent for a component of a complex product such as a smartphone could be used to obtain total profit on the entire phone. Petitioners argue, again supported by amici the Engine Advocacy and Shapeways, the Public Knowledge, and the CCIA, that affirmance of the total profit rule, as held by the Federal Circuit, would create new and “outsized incentives” for design-patent applications and lawsuits, inspire a new “cottage industry of opportunistic litigation,” and embolden patent trolls to use design patents as their new weapon of choice.

Petitioners further argue that respondent errors in suggesting that petitioners assented to the district court’s instructions to award all of petitioners’ profits on the products it sold by “equat[ing] the relevant ‘article of manufacture’ with the accused phones as a whole.” Petitioners note that respondent “buries in a footnote” its admission that petitioners’ operative proposed jury instructions referred to profits on “articles,” and not profits on “products” and that petitioners plainly objected to the district court’s instruction. Petitioners argue that there was ample evidence in the record to support the proposed petitioners’ jury instructions.

Petitioners argue that the Federal Circuit did not suggest that the district court’s instructions had allowed the jury to decide as a factual matter what the relevant articles of manufacture were, or to determine profits accordingly. Petitioners suggest that respondent acknowledges that the scope of the infringer’s profits remedy should be tied to the scope of infringement but argue that infringement inquiry compares a claimed design with the corresponding portion of the accused product, not with other unaccused portions of the product or the product as a whole. Petitioners suggest that the “article of manufacture” used to determine infringer’s profits should likewise correspond to the patent claim and the portion of the product accused of infringing it, in keeping with traditional principles of causation. Thus, petitioners argue that where a patent holder asserts only a partial claim against only discrete portions of a product, the corresponding article of manufacture cannot be the entire product.

Petitioners argue that if they are not entitled to judgment as a matter of law, then at minimum a new trial on design-patent damages is warranted because the district court failed to properly instruct the jury. Petitioners further argue that application of the U.S. government’s four considerations supports instructing the jury that the relevant articles of manufacture could be something less than petitioners’ entire phones. Utilizing these four considerations, petitioners argue that the jury heard: evidence that “the scope of the design[s] claimed in the plaintiff’s patent[s]” was limited to discrete portions of the products; evidence concerning “the relative prominence of the design[s] within the product[s] as a whole” and whether there were “other components unaffected by the design[s]”; evidence that the patented designs were “conceptually distinct from the product[s] as a whole”; and that each “design pertains to a component that a user or seller can physically separate from the product” or “is embodied in a component that is manufactured separately from the rest of the product.”

Petitioners’ position is supported by Public Knowledge that argues that there are at least three reasons why the Court should reject the Federal Circuit’s “total profits” construction and adopt a different one. First, Public Knowledge asserts that the Federal Circuit’s construction will undermine the patent system because many design patents are directed to only minor parts of products and awarding the total profits on such products will greatly overvalue the patents and undervalue the numerous other features in those products. Secondly, Public Knowledge suggests that the Federal Circuit’s interpretation will create an abusive industry of design-patent litigation at the expense of the public. Finally, Public Knowledge notes that the Federal Circuit’s reading of § 289 can result in excessively high damages awards, disproportionate to the magnitude of the actual offense, which can run afoul of the Due Process Clauses of the Fifth and Fourteenth Amendments, in the contexts of both punitive damages and statutory awards.

Hispanic Leadership Fund et al., as amicus in support of petitioners, argues that the Federal Circuit’s interpretation of § 289 of the Patent Act permits design-patent holders to recover all of the profits earned on infringing products, even for designs that cover only a small part of a product, or contribute little to the product’s overall value. This will result in awards that drastically overcompensate design-patent holders for the inventive contribution embodied in a design patent, and for this reason alone, this Court’s review is warranted.

Similarly, Dell et al., also in support of petitioners, argues that the Federal Circuit’s decision is flawed and, if allowed to stand, leads to absurd results and would have a devastating impact on companies, including amici, that spend billions of dollars annually on research and development for complex technological products and their components. Dell suggests that the Federal Circuit’s decision cannot be reconciled with the text, history, or purpose of § 289 or with prior decisions from other courts of appeals and that it is problematic because it ignores the reality of modern, multicomponent technological products. Dell suggests that, consistent with the text, history, and purpose of § 289, the better interpretation of “article of manufacture” is one that recognizes that complex, multicomponent technological products typically embody far more than one “article of manufacture” for purposes of the “total profit” rule. Thus, to the extent that total profit may ever be awarded from the proceeds of such products, patentees must demonstrate that the design of the infringing article drives nearly all of a consumer’s demand for the product; otherwise, damages should be limited to the profit attributable to the component to which design has been applied. The concerns raised by Dell are echoed by the CCIA and the Systems, Inc., all in support of petitioners.

In contrast, ACT, as amicus in support of respondent, notes that the recovery mechanisms that Congress provided to design-patent owners in 35 U.S.C. § 289 were enacted in response to the specific problem of apportioning the value of a product derived from a protected design, noting that Congress recognized that requiring design-patent holders to attribute damages precisely and specifically to the patented design would leave them “without a remedy” in the vast majority of cases of infringement. ACT argues that since the creation of design patents, courts have long upheld the clear intent of Congress in § 289 to permit the trier of fact to award the owner of an infringed design patent the infringer’s entire profits from the article of manufacture to which the design was applied.

113 Distinguished Industrial Design Professionals and Educators joined together in support of the respondent and suggest that a product’s visual design becomes the product itself in the minds of consumers, and design patents thus protect from misappropriation not only the overall visual design of the product, but the underlying attributes attached to the design of the product in the eye and mind of the consumer. Because of the overall design misappropriation, the Distinguished Industrial amici argue that the disgorgement of total profits is the only appropriate remedy for design-patent infringement.

Similarly, American Intellectual Property Law Association (AIPLA), as amicus in support of the respondent, argues that the legislative history of § 289 supports the plain meaning of the statutory language and demonstrates the policy decision Congress made in providing this remedy to design-patent owners. The AIPLA suggests that the statutory language constitutes a congressional rejection of a causation consideration, i.e., an apportionment requirement, and authorizes recovery of the infringer’s total profit from the article of manufacture bearing the patented design. Finally, Tiffany, Boston Patent Law Association, Intellectual Property Professors, Bison Designs, and Roger Cleveland, all in support of the respondent, agree that the text, legislative history, and judicial application of § 289 are clear and that an infringer of a design patent is liable to the patent owner for the infringer’s total profit.

Significance
On the issue of whether 35 U.S.C. § 289, if elected as a remedy, automatically entitles a design-patent holder to recover all of an infringer’s profits from sales of any product found to bear a patented design, a decision affirming the use of the “total profits” rule without regard to the design’s contribution to that product’s value or sales would clarify the damages that could be obtained by the patentee in design-patent litigation. Under this precedent, there would not be any possible apportionment of damages as a result of the design’s contribution to that product’s value or sales, and there would be no limitation to the award of infringer’s profits that would be limited to profits attributable to that component. The adoption of the Federal Circuit’s “total profit” holding could strengthen the disincentive to violate design patents by supporting established precedent with respect to potential liabilities of potential patent infringers.

Should the Court reverse the use of the total profits rule as held by the Federal Circuit and hold that an award of infringer’s profits be limited to profits attributable to that component if a patented design is applied only to a component of a product, the availability of proportionate profits from accused infringers of design patents could increase innovation and investment. Such an interpretation would limit a patentee’s award under § 289 to the amount of profit generated by the infringing component. If proportionate damages were allowed instead of total profits, design patentees would not be able to leverage the “total profit” as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the design patent, which could serve the public interest.

Reprinted with permission from ABA Preview. All rights reserved.

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