Amicus Curiae Brief — Samsung Elecs. Co. v. Apple Inc., 136 S. Ct. 1453 (2016) (No. 15-777)

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IN THE

Supreme Court of the United States

SAMSUNG ELECTRONICS Co., LTD., SAMSUNG

ELECTRONICS AMERICA, INC., AND SAMSUNG

TELECOMMUNICATIONS AMERICA, LLC,

Petitioners,

APPLE INC.,

Respondent.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

BRIEF OF PUBLIC KNOWLEDGE, THE

ELECTRONIC FRONTIER FOUNDATION, THE

R STREET INSTITUTE, THE AMERICAN

ANTITRUST INSTITUTE, AND IP JUSTICE AS

AMICI CURIAE IN SUPPORT OF PETITIONERS

VERA RANIERI CHARLES DUAN

ELECTRONIC FRONTIER Counsel of Record

FOUNDATION PUBLIC KNOWLEDGE

815 Eddy Street 1818 N Street NW, Suite 410

San Francisco, CA 94109 Washington, DC 20036

(415) 436-9333 (202) 861-0020

vera@eff.org eduan@publicknowledge.org

Counsel for amici curiae

TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTEREST OF AMICI CURIAE

SUMMARY OF ARGUMENT

ARGUMENT ...

Il.

Iil.

IV.

CONCLUSION

The Federa! Circuit’s Construction Is Not Mandated

by the Text of Section 269 .............

Section 289 Should Be Interpreted to Promote Fair-

ness and Economic Efficiency Rather Than to Over-

ea are

A. Alternate Interpretations Would Better Pro-

mote Innovation

B. Economic Concerns with Holdup and Royalty

Stacking Militate in Favor of an Alternate In-

terpretation . . oe Reebe oraen

The Federal Circuit’s Interpretation Invites an In-

dustry of Counterproductive Patent Litigation ... .

A. Design Patents Are Ripe for Abuse, Especially

with the Enticement of Total Profits .

B. Analogous Federal Circuit Rules Have Created |

Cottage Industries of Patent Litigation

Section 289 Should Be Interpreted in a Way that

Avoids Serious Constitutional Doubts. ,

A. Due Process May Disallow Certain Excessively

High Damages Awards ‘

B. A Total Profits Award, leveapective of Actual

Harm, Potentially Violates These Due Process

i+ whe owed « eA e aees

C. Alternative Interpretations of Section 289°

Avoid These Constitutional Doubts

(2)

ao wore

TABLE OF AUTHORITIES

CASES

Alice Corp. Pty. Ltd. v. CLS Bank International,

oe S| Ul Eee eee eee

Apple Inc. v. Samsung Electronics Co.,

786 F.3d 983 (Fed. Cir.2015) . . ......

Ashwander v. Tennessee Valley Authority,

a A ee a

Bilski v. Kappos,

ES 6k ip bw oe. ole 6:6 we 8

BMW of North America v. Gore,

517 US. 569 (1996). .....

Bonito Boats, Inc. v. Thunder Craft Boats, Inc.,

BP Lubricants USA Inc., In re,

637 F:3d 1307 (Fed. Cir. 2011)

Broadcom Corp. v. Qualcomm Inc.,

501 F.3d 297 (8d Cir.2007) . ......

Brooks Furniture Manufacturing, Inc.

v. Dutailier International, Inc.,

27, 29-31

.13

393 F.3d 1378 (Fed. Cir. 2005), overruled by Octane

Fitness, LLC v. Icon Health & Fitness, Inc., 134 S.

Ct. 1749 (2014)

Commil USA, LLC v. Cisco Systems, Inc.,

135 S. Ct. 1920 (2015)

Commonwealth v. O’Laughlin,

830 N.E.2d 222 (Mass. 2005)

Cooper Industries, Inc. v. Leatherman Tool Group, Inc.,

532 U.S. 424 (2001) .

(72)

. 25

. 16

27, 29

(272)

Crowell v. Benson,

285 U.S. 22 (1932) . ate : 32

Deshaney

v. Winnebago County Department of Social Services,

489 U.S. 189 (1989) __.. Pat by sae

eBay Inc. v. MercExchange, LLC,

ae Se Ee 6 4) 9-0 low ba wee » se re

Ericsson, Inc. v. D-Link Systems, Inc.,

773 F.3d 1201 (Fed. Cir. 2014) . 13

Forest Group, Inc. v. Bon Tool Co.,

590 F.3d 1295 (Fed. Cir. 2009) 3, 22-23

Garretson v. Clark,

111 U.S. 120 (1884). . ee an a . <a

Graham v. John Deere Co.,

eee eee vee “2 9

Hooper v. California,

155 U.S. 648 (1895) . oN ge se ee :

Immigration & Naturalization Service v. St. Cyr,

533 U.S. 289 (2001) 32

Impression Products, Inc.

v. Lexmark International, Inc.,

No. 15-1189 (Mar. 21, 2016) . . sao. ae 21

Integra Lifesciences I, Ltd. v. Merck KGaA,

331 F.3d 860 (2003), vacated on other grounds, 545 U.S.

193 (2005) ss he roa eS Ae ae

Kendall v. Winsor,

gts § Ft) OF ee a )

LaserDynamics, Inc. v. Quanta Computer, Inc.,

694 F.3d 1255 (Fed. Cir.2012) . . ... . 5 aa

(iv)

Lexmark International, Inc.

v. Impression Products, Inc.,

816 F.3d 721 (Fed. Cir. 2016) (en banc), petition for cert.

filed, No. 15-1189 (Mar. 21, 2016) , 57 ae

Medtronic, Inc. v. Mirowski Family Ventures, LLC,

134 S. Ct. 843 (2014) oa 20

Merck KGaA v. Integra Lifesciences I, Ltd.,

eee eee ; ~ ie

Microsoft Corp. v. Motorola, Inc.,

795 F.3d 1024 (9th Cir. 2015) ss 13-14

National Federation of Independent Business

v. Sebelius,

a ne 32

Nike Inc. v. Wal-Mart Stores, Inc.,

138 F.3d 1437 (Fed. Cir. 1998) ........... . 6,20

Nordock, Inc. v. Systems Inc.,

803 F.3d 1344(Fed.Cir.2015) . . 3 ..... . 7,29

Octane Fitness, LLC v. Icon Health & Fitness, Inc.,

CC « = gw ww ttt ee 24

Owens, In re,

710 F.3d 1362 (Fed. Cir.2013) . 18

People v. Downer,

557 P.2d 835 (Colo. 1976) Fe 16

Philip Mc~ris USA v. Williams,

EE ee 28-29

Precision Instrument Manufacturing Co.

v. Automotive Maintenance Machinery Co.,

324 U.S. 806(1945) . .... . eke eae

Reno v. Flores,

507 U.S. 292 (1993) . . oe er ietata . 26

(v)

Robinson v. Shell Oil Co.,

519 U.S. 337 (1997). .

Salmon, In re,

705 F-2d 1579 (Fed. Cir. 1983)

Seaboard Air Line Railway v. Seegers,

207 U.S. 73 (1907) ..... Ss

Sheldon v. Metro-Goldwyn Pictures Corp.,

SPU Is wc cee ce es. Keene's

Southwestern Telephone & Telegraph Co. v. Danaher,

238 U.S. 482 (1915)

State Farm Mutual Automobile Insurance Co.

v. Campbell,

538 U.S. 408 (2003)... .

State Street Bank & Trust Co.

v. Signature Financial Group, Inc.,

149 F 3d 1368 (Fed. Cir. 1998) . .......

St. Louis, Iron Mountain & Southern Railway Co.

v. Williams,

251 U.S. 63 (1919) . .

TXO Production Corp. v. Alliance Resources Corp.

509 U.S. 443 (1993)... ....

United Savings Ass'n

v. Timbers of Inwood Forest Associates,

United States v. Bajakajian,

524 U.S. 321 (1998)

United States v. Heirs of Boisdore,

49 US. (8 How.) 113 (1850) .. .

VirnetX, Inc. v. Cisco Systems, Inc.,

767 F.3d 1308 (Fed. Cir. 2014)

.19

26-27, 30

(vi)

Waters-Pierce Oil Co. v. Texas,

212 US. 86(1909) .... .. . . 26-27, 30

Welch v. Board of Professional Remensthiitie,

Co ee ee sere

Westinghouse Co. v. — edema Co.,

225 U.S. 604 (1912) . ea Togs ee ee 10

Yates v. United States,

ED 6 a ste ue 6 wr es : oe

CONSTITUTIONAL PROVISIONS

US. Const.amend.5 .. . ‘ . 4, 25-26, 28

U.S. Const. amend. 14...... eS es 4, 26-28

U.S. Const. art. I, § 8, cl. 8 ‘ 7, 9, 25

STATUTES

35 U.S.C. § 120 . ck +. be. «een be

——§285. .... ie ‘eee —.

——§2837 }3}3..... . Vite os . 20

—— § 289 ' . 3-12, 14-16, 20, 28-32

Pe RY calle Big ma aS PP 3, 22-23

Act of July 19, 1952, ch. 950,66 Stat.792 ..... ll

America Invents Act, Pub. L. No. 112-29, 125 Stat. 284

a Cede eg wh ee ek aoe »' ie

Fed. R. Evid. 404(b)(2) . 16

OTHER SOURCES

157 Cong. Rec. $5321 (daily ed. esd 6, 2011) (statement

of Sen. Kyl) . vx bp Li” lean ae 22

(vit)

John R. Allison et al., Patent Quality and Settlement

Among Repeat Patent Litigants, 99 Geo. L.J. 677 (2011) . . 24

Dieter Balkenborg et al., A Simple Economic Teaching

aan” on the Hold- - Problem, 43 J. Econ. Educ.

377 (2012) . Awe ‘ , 12

James a The Evidence Is In: Patent Trolis Do

Hurt Innovation, Harv. Bus. Rev. (July 25, 2014), https://

hbr. Spent apart saceuameiaamnnatd

innovation on : , ..1l

Roger D. Blair & Thomas F. ete Rethinking Patent

Damages, 10 Tex. Intell. Prop. L.J. 1 (2001) . ae

Sarah Burstein, — Designs, 77 Ohio St. L.J. 107

(2016) ee. eae ee a >a

Sarah Burstein, Moving Beyoud the Standard Criti-

cisms of Design Patents, 17 Stan. Tech. L. Rev. 305

Pt eikede tb éale eb ie hed ae he es 18

Colleen Chien, Startups and Patent Trolls, 17 Stan. Tech.

ee «we 06s» ‘ 1]

Colleen V. Chien & Mark A. nates Patent Holdup, t the

ITC, and the Public Interest, 98 Cornell L. Rev.1(2012) . 13

Thomas F. Cotter, Patent Holdup, Patent Remedies, and

Antitrust Responses, 34 J. Corp. L. 1151(2009) .. 13-14

Decorative Television Frame, U.S. Patent No. D755,744

(issued May 10,2016) ... ; “+ eee

Joseph Farrell et al., Standard Setting, Patents, and

Hold-Up, 74 Antitrust L.J. 608 (2007) “ae aos . 12

Fed. Trade Comm’n, To Promote Innovation: The

Proper Balance of Competition and Patent Law and

Policy (2003), aveilable at http://www.ftc.gov/sites/

default / files / documents / reports / promote - innovation -

proper-balance-competition-and- cnecee ee

innovationrpt.pdf . oe es —

(viii)

Gift Bag, U.S. Patent No. D739,765 (issued Sept. 29,

re ee btn ed ee wets

Justin E. Gray, Decrease in New False Marking Cases

Filed Post In re BP Lubricants, Gray on Claims (Mar.

31, 2011), http://www.grayonclaims.com/home/2011/3/

REED. 606s 60's 008

Justin E. Gray, False Marhing—Seitiement Update,

Gray on Claims (Aug. 9, 2011), http://www.grayonclaims.

com/home/2011/8/9/false - marking - settlement - update.

Dus Seée- eee he eke Chae ees

Benjamin Klein et al., Vertical Integration, Appropriable

Rents, and the Competitive hia sea. Process, 21 J.L.

& Econ. 297 (1978) ‘

William F. Lee & A. Douglas Melamed, Breaking the Vi-

cious Cycle of Patent eee 101 Cornell L. Rev. 385

Se a. Wave a ok deck whe ea

Mark A. Lemley, A Rational Gaston of Design Patent

Remedies, 17 Stan. Tech. L. Rev. 219(2013) ......

Mark A. Lemley & Carl Shapiro, Patent Holdup and

Royalty Stacking, 85 Tex. L. Rev. 1991 (2007)

Joseph S. Miller, Standard Setting, Patents, and Access

Lock-In: RAND Licensing and the Theory of the Firm,

40 Ind. L. Rev. 361 (2007)

Mirror, U.S. Patent No. D754,979 (issued May 3, 2016)

Michael R. O’Neill, False Marking Claims: The New

Threat to Business, Intell. Prop. & Tech. L.J., Aug. 2010,

at 22, available at http://files.mwe.com/info/pubs/False_

Patent_Marking Claims.pdf ......

Restatement (Second) of Torts (1977) .

Restatement (Third) of Restitution and Unjust Enrich-

A pcr ee eS aoe :

. 30

(iz)

Perry J. Saidman, The Crisis in the Law of Designs, 89 J.

Pat. & Trademark Off. Soc’y 301 (2007). .....

Pamela Samuelson & Tara Wheatland, Statutury Dam-

ages in Copyright Law: A Remedy in Need of Reform,

51 Wm. & Mary L. Rev. 439(2009) ...

Sheila B. Scheuerman, Due Process Forgotten: The Prob-

lem of Statutory Damages and Class Actions, 74 Mo. L.

SES Bo I ee, tree ee

David L. Schwartz, The Rise of Contingent Fee Represen-

tation in Patent Litigation, 64 Ala. L. Rev. 335 (2012) .. .

Nicholas W. Stephens, From Forest Group to the Amer-

ica Invents Act: False Marking Comes Full Circle, 97

Iowa L. Rev. 1008 (2012) .........

U.S. Dep’t of Justice & Fed. Trade Comm'n, Antitrust

Enforcement and Intellectual Property Rights: Promot-

ing Innovation and Competition (2007), available at

http://www.usdo}j.gov/atr/public/hearings/ip/222655.pdf_ .

US. Dep’t of Justice & US. Patent & Trademark

Office, Policy Statement on Remedies for Standards-

Essential Patents Subject to Voluntary F/RAND Com-

mitments (Jan. 8, 2013), http://www.justice.gov/atr/

public/guidelines/290994.pdf . rh

U.S. Patent No. D558,753 (issued Jan. 1, 2008)

US. Patent No. D741,316 (issued Oct. 20,2015) .

US. Patent & Trademark Office, Manual of Patent Ex-

amining Procedure (9th ed. Nov. 2015)

U.S. Patent & Trademark Office, Performance and Ac-

countability Report, Fiscal Year 2015 (2015), available

at http://www.uspto.gov/sites/default/files/documents/

ES Pe ee ee

Donald R. Ware, Research Tool Patents: Judicial Reme-

dies, 30 AIPLA Q.J. 267 (2002) . a

. 20

.13

. 18

.15

(x)

Brian T. Yeh, Cong. Research Serv., False Patent Mark-

ing: Litigation and Legislation (2010), available at

https://www.fas.org/sgp/crs/misce/R41418.pdf .... . 22-23

INTEREST OF AMICI CURIAE

Public Knowledge’ is a non-profit organization that

is dedicated to preserving the openness of the Internet

and the public’s access to knowledge, promoting creativ-

ity through balanced intellectual property rights, and up-

holding and protecting the rights of consumers to use in-

novative technology lawfully. Public Knowledge advo-

cates on behalf of the public interest for a balanced patent

system, particularly with respect to new and emerging

technologies.

The Electronic Frontier Foundation (“EFF”) is a non-

profit civil liberties organization that has worked for over

25 years to protect consumer interests, innovation, and

free expression in the digital world. EFF and its more

than 23,500 dues-paying members have a strong interest

in helping the courts ensure that intellectual property law

serves the public interest.

The R Street Institute is a non-profit, non-partisan

public-policy research organization. R Street’s mission

is to engage in policy research and educational outreach

that promotes free markets, as well as limited vet effec-

tive government, including properly calibrated legal and

regulatory frameworks that support Internet economic

growth and individual liberty. R Street’s particular fo-

cus on Internet law and policy is one of offering research

and analysis that show the advantages of a more market-

oriented society and of more effective, more efficient laws

'Pursuant to Supreme Court Rule 37.3(a), all parties received ap-

propriate notice of and consented to the filing of this brief. Pursuant

to Rule 37.6, no counsel for a party authored this brief in whole or

in part, and no counsel or party made a monetary contribution in-

tended to fund the preparation or submission of the brief. No person

or entity, other than amici, their members, or their counsel, made a

monetary contribution to the preparation or submission of this brief.

and regulations that protect freedom of expression and

privacy.

The American Antitrust Institute (AAI) is an inde-

pendent, nonprofit organization devoted to promoting

competition that protects consumers, businesses, and so-

ciety. It serves the public through education, research,

and advocacy on the benefits of competition and the use

of antitrust enforcement as a vital component of national

and international competition policy. The AAI has long

recognized the important role that a balanced patent sys-

tem can play in promoting competition, innovation, and

consumer welfare.

IP Justice, founded in 2002, is an international civil lib-

erties organization that promotes Internet freedom, inno-

vation policy, and balanced intellectual property rights.

Although based in San Francisco, IP Justice partici-

pates in a number of international law and Internet pol-

icy venues which impact digital rights including the In-

ternet Corporation for Assigned Names and Numbers

(ICANN), the UN World Intellectual Property Organiza-

tion (WIPO), the UN Internet Governance Forum (IGF),

and other international treaty and trade agreements ad-

dressing Internet policy and intellectual property rights.

IP Justice has held an accredited consultative status with

ECOSOC, the Economic and Social Council of the United

Nations, since 2003.

SUMMARY OF ARGUMENT

Five years ago, the United States Court of Appeals

for the Federal Circuit construed a statute in a way that

led to one of the most disastrous episodes in modern

patent law. The court thought its construction unremark-

able, based on the “plain langua~e” of the statute. But

that court’s interpretation, which authorized vast mone-

tary awards in certain patent lawsuits, had far-reaching

effects. The decision would trigger siz hundred and

seventy-five new lawsuits within a year, create a cottage

industry of litigation firms, force companies to scramble

to avoid “staggering fines,” and draw criticism as “a shift

in wealth to lawyers.”

The case thus described was Forest Group, Inc. v. Bon

Tool Co. and related to patent marking, but it could be the

present design patent damages case in five years’ time if

history is any guide. For the Federal Circuit’s decision

here, interpreting 35 U.S.C. § 289 to require an award

of total profits on any consumer product that infringes a

design patent, sets up the same precarious situation as

the widely denounced interpretation of 35 U.S.C. § 292 in

Forest Group that authorized potentially enormous false

marking awards.

This Court should reverse the Federal Circuit and con-

strue § 289 to balance the equities among patent owners,

industry, and the public. The statutory text is more open

to interpretation than the Court of Appeals assumed it to

be. Given that interpretive flexibility, there are at least

three reasons why this Court should reject the Federal

Circuit’s construction and adopt a different one.

~ 2S¢e Section 111.B()) infra p. 22.

First, the Federal Circuit’s construction will under-

mine the patent system. With many design patents be-

ing directed to only minor parts of products, awarding

the totai profits on such products will greatly overvalue

the patents and undervalue the numerous other features

in those products. This possibility will likely raise prices,

discourage new goods and services from coming to mar-

ket, and thus impede consumers’ access to new technolo-

gies contrary to the constitutional mandate that patents

promote progress. It also opens the door to the eco-

nomic inefficiencies of patent holdup and royalty stacking,

which work to disincentivize future invention and produc-

tivity.

Second, there are strong reasons to believe that the

Federal Circuit’s interpretation will create a costly and

abusive new industry of design patent assertion that will

enrich a few clever litigators at the expense of the public.

With the Federal Circuit’s decision offering the promise

of enormous damage awards, and with extant substantive

law already making it easy to obtain broad-scoped design

patents, design patent law offers the motive, means, and

opportunity for widespread and abusive litigation. In-

deed, history shows that, at least three times, the Federal

Circuit has devised rigid rules that have fostered patent-

related litigation industries, including the patent mark-

ing situation described above.

Third, affirming the Federal Circuit’s reading of § 289

may invite a serious question of the constitutionality of

that damages statute. This Court has held for a century

that excessively high damages awards, disproportionate

to the magnitude of the actual offense, can run afoul of

the Due Process Clauses of the Fifth and Fourteenth

Amendments, in the contexts of both punitive damages

and statutory awards. An award of total profits on a prod-

uct for infringement of a design patent of minor or incon-

sequential value to that product is potentially impermis-

sible under this jurisprudence, and may render § 289’s ap-

plication unconstitutional in many cases should the Fed-

eral Circuit’s interpretation stand. This Court has often

sought to construe statutes to avoid serious doubts us to

their constitutionality where such statutes permit alter-

native interpretations; it should again do so here.

Too often has the patent system been beleaguered by

unbalanced rules that favor a small class of rightsholders

at the expense of the public good and the constitutional

mandate for that system. Too rarely does this Court re-

ceive a timely case allowing it to nip that imbalance in the

bud, before the harm is done, simply by correcting a way-

ward construction of a patent statute. This is that timely

case.

To prevent such harm from occurring, to protect the

public interest, and to ensure that § 289 comports with

the objects of the patent system, this Court should re-

verse.

ARGUMENT

I. THE FEDERAL CIRCUIT'S CONSTRUCTION Is

NoT MANDATED BY THE TEXT OF SECTION 289

Contrary to the decision of the Court of Appeals, the

design patent damages statute is not so wholly inflexible

as to require an award of total profits on entire products

in all cases. The statutory language is sufficiently ambigu-

ous to permit a proper interpretation that more appropri-

ately balances the interests of the patent system.

Statutory construction requires a complete view of

the text of a statute in the context of the broader law

and policy. “In expounding a statute,” explained Justice

Taney, “we must not be guided by a single sentence or

member of a sentence, but look to the provisions of the

whole law, and to its object and policy.” United States v.

Heirs of Boisdore, 49 U.S. (8 How.) 113, 122 (1850); see

also United Sav. Ass’n v. Timbers of Inwood Forest As-

socs., 484 U.S. 365, 371 (1988) (“Statutory construction,

however, is a holistic endeavor.”); Robinson v. Shell Oil

Co., 519 U.S. 337, 341 (1997); Yates v. United States, 1358.

Ct. 1074, 1082 (2015) (Ginsburg, J., op.) (“dictionary defini-

tions .. . are not dispositive of the meaning” of a statute);

id. at 1092 (Kagan, J., dissenting) (“I agree with the plu-

rality (really, who does not?) that context matters in in-

terpreting statutes.”).

The Federal Circuit claimed to be “bound by what the

statute says” in holding that 35 U.S.C. § 289 requires®

awarding patentees the “total profit from the article of

‘Respondent faults amici for a “mistaken assumption that the

Federal Circuit’s ruling requires” a total profit award. Br. Opp’n 34—

35 n.15. But the Federal Circuit has at least twice said that § 289

“requires the disgorgement of the infringers’ profits.” Nike Inc. v.

Wal-Mart Stores, Inc., 138 F.3d 1437, 1448 (Fed. Cir. 1998) (empha-

manufacture bearing the patented design,” by which it

means the total profit on the whole product as sold to

consumers. Apple Inc. v. Samsung Elecs. Co., 786 F.3d

983, 1001-02 & n.1 (Fed. Cir. 2015). But the statutory lan-

guage is not so plain and mandatory in that respect.

The statute states, in relevant part, that an infringer

of a design patent “shall be liable to the owner to the ex-

tent of his total profit, but not less than $250.” 35 U.S.C.

§ 289 (emphasis added). Read literally, then, the statute

does not limit the award to the “total profit from the ar-

ticle of manufacture,” as the Federal Circuit held; total

profits would seem to apply to all products sold or ser-

vices rendered, infringing or not. According to the text

of § 289, Samsung would theoretically be liable to Apple

for its profits from selling washing machines.

Thus, even the Federal Circuit’s interpretation ac-

knowledges and depends on ambiguity in the statutory

text.

But there is no good reason that the Federal Circuit’s

limitation on the scope of § 289, cabining total profits at

the level of consumer articles, is the right line to draw.

Petitioners and several amici have proposed alternate in-

terpretations of § 289. See, e.g., Br. 37 Intellectual Prop-

erty Law Professors 17, Jan. 15, 2016; Br. Computer and

Communications Industry Association 9, Jan. 15, 2016.

Accordingly, the statutory language is sufficiently am-

biguous to allow interpreting § 289 in a manner consonant

with the overall “object and policy” of patent law, namely

“to promote the progress of science and useful arts.” U.S.

Const. art. I, § 8, el. 8.

sis added); Nordock, Inc. v. Sys. Inc., 803 F.3d 1344, 1354 (Fed. Cir.

2015).

Il. SECTION 289 SHOULD BE INTERPRETED TO

PROMOTE FAIRNESS AND ECONOMIC EFFI-

CIENCY RATHER THAN TO OVERCOMPENSATE

ONE PARTY

This Court should interpret § 289 in a way that ad-

vances the public purpose of the patent system, namely

to offer a fair reward to inventors without unduly bur-

dening the public interest in access to technology. The

Federal Circuit’s approach fails to strike that balance.

Many design patents are directed not to entire prod-

ucts, but rather only to small components or parts. By

contrast, the products that potentially infringe design

patents are often complex ones incorporating numerous

technologies and designs. “Modern devices may poten-

tially infringe many thousands of patents, held by nu-

merous different owners.” William F. Lee & A. Douglas

Melamed, Breaking the Vicious Cycle of Patent Dam-

ages, 101 Cornell L. Rev. 385, 407 (2016). Thus, the prof-

its on a complex product may derive from myriad techno-

logical and design innovations, any combination of which

might drive consumers’ purchasing decisions.

As a result, awarding total profits on an entire prod-

uct for a patent on only a small component gives design

patentees a windfall of profits attributable to a large num-

ber of far more significant elements, including those cov-

ered by other utility and design patents. See Mark A.

Lemley, A Rational System of Design Patent Remedies,

17 Stan. Tech. L. Rev. 219, 232-33 (2013).

Alternate interpretations of § 289 will better allocate

value between a patent owner and a product manufac-

turer. That correct allocation will have at least two bene-

fits. First, it would encourage future innovation by better

accounting for future inventors and creators. Second, it

would avoid the known economic inefficiency problems of

“patent holdup” and “royalty stacking.” Accordingly, this

Court should reject the Federal Circuit’s interpretation

of § 289 and adopt a different reading that accommodates

these important considerations.

A. ALTERNATE INTERPRETATIONS WOULD

BETTER PROMOTE INNOVATION

An alternate reading of § 289 would better serve the

basic purpose of the patent system, namely enhancing the

public interest in greater access to technology. This pur-

pose, enshrined in the Constitution and in this Court’s de-

cisions, is best served through appropriate limits on the

strength of patents, including limiting infringement dam-

ages to a proper measure of the patentee’s inventive con-

tribution. But the Federal Circuit’s total-profits interpre-

tation grants excessive damages that would break this

balance, and so it should be rejected.

1. The primary purpose of the patent system is to

encourage innovation and ultimately to benefit the public.

The Constitution authorizes Congress to create a patent

system, but only one that is directed “to promote the

progress of science and useful arts.” U.S. Const. art. I,

§ 8, cl. 8; see Bonito Boats, Inc. v. Thunder Craft Boats,

Inc., 489 U.S. 141, 146 (1989) (“the Clause contains both a

grant of power and certain limitations upon the exercise

of that power.”). The “primary object” of patents is “the

benefit to the public or community at large.” Kendall v.

Winsor, 62 U.S. (21 How.) 322, 327-28 (1859). Thus, “the

patent power may not overreach the restraints imposed

by the stated constitutional purpose.” Graham v. John

Deere Co., 383 U.S. 1, 6 (1966).

Limiting damages to the inventive contribution of the

patentee is critical to maintaining that public purpose

of patents. Garretson v. Clark affirmed that patentees

should “in every case give evidence tending to separate or

apportion the defendant’s profits and the patentee’s dam-

ages between the patented feature and the unpatented

feature.” 111 U.S. 120, 121 (1884). In particular, dam-

ages based on the whole machine are appropriate only

given evidence that the value of the whole machine could

be “properly and legally attributable to the patented fea-

ture.” Jd.; see also Westinghouse Co. v. Wagner Mfg. Co.,

225 U.S. 604, 614-15 (1912) (“[I}f plaintiff’s patent only

created a part of the profits, he is only entitled to recover

that part of the net gains.”).

Following Garretson, the recent case VirnetX, Inc. v.

Cisco Systems, Inc. held that a patentee could be

awarded “only those damages attributable to the infring-

ing features.” 767 F.3d 1308, 1326 (Fed. Cir. 2014). Such

a rule was necessary, said the Federal Circuit, to en-

sure that the award “does not overreach and encom-

pass components not covered by the patent.” /d. (citing

LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d

1255, 67-68, 70 (Fed. Cir. 2012)).

2. By requiring an award of total profits on the en-

tire consumer product, the Federal Circuit’s reading of

§ 289 breaks this balance. In most circumstances not all

of the infringer’s profits are attributable to the infringing

patent—it would be highly unbalanced, for example, to

award an owner of a patent on a tire design the total prof-

its on a vehicle. “[A]}warding the plaintiff any more than

the lost profit attributable to the component . . . would in

effect expand the scope of the plaintiff’s patent to encom-

pass the entire final product.” Roger D. Blair & Thomas

F. Cotter, Rethinking Patent Damages, 10 Tex. Intell.

Prop. L.J. 1, 14 (2001).

The Federal Circuit’s rule ignores the interests of oth-

ers whose innovations contributed to the profitability of

the same product. By allocating 100% of the profits on a

product to a design patent asserter and 0% to all other

contributors to that product, that rule strips away any in-

centives for those other contributors to innovate, directly

contravening the constitutional purpose of the patent sys-

tem. See Section II.B(2) infra p. 14 (discussing “roy-

alty stacking,” where the sum of patent royalties exceeds

100% of the value of the product).

The degree of overcompensation is most stark in the

increasingly likely scenario of “innocent” infringement,‘

that is, where the manufacturer arrived at a similar de-

sign through its own inventive efforts. Damages under

§ 289 require no showing of the infringer’s knowledge of

infringement, of the patent itself, or of other products

incorporating the design. See Br. Pet’rs 16 (citing Act

of July 19, 1952, ch. 950, § 289, 66 Stat. 792, 813-14). A

company could develop a new product coincidentally us-

ing a minor patented design and then be blindsided with

loss of all profits on that product. This possibility would

dissuade new firms from developing innovative products

and bringing them to market. Cf. Colleen Chien, Star-

tups and Patent Trolls, 17 Stan. Tech. L. Rev. 461, 477

(2014) (documenting small companies’ avoidance of tech-

nology and markets out of fear of patent assertion); James

Bessen, The Evidence Is In: Patent Trolls Do Hurt Inno-

vation, Harv. Bus. Rev. (July 25, 2014), URL supra p. vii.

‘The numerous design patents being obtained on the most basic

shapes and designs, see infra p. 18, make innocent infringement more

and more likely.

By requiring awards of total profits on whole con-

sumer products, the Federal Circuit’s interpretation of

§ 289 will increase risk for those who want to develop new

products or services, and thereby deter innovation. Ac-

cordingly, this Court should adopt an alternative inter-

pretation of § 289 crafted to promote innovation rather

than overcompensation, to favor a balance between the

public interest and patentees, and to advance the needs

of business, the economy, and the public.

B. ECONOMIC CONCERNS WITH HOLDUP AND

ROYALTY STACKING MILITATE IN FAVOR OF

AN ALTERNATE INTERPRETATION

An interpretation of § 289 different from the Federal

Circuit’s rule would avoid two problematic economic inef-

ficiencies: patent holdup and royalty stacking.

1. “Holdup” refers to the situation where one firm

sinks startup investments into a project, only to be forced

later into negotiations with an outside party having the

power to block that project. The firm is forced to choose

between abandoning the project and the sunk costs or

paying the outside party theoretically up to the entire

value of the project. See Dieter Balkenborg et al., A

Simple Economic Teaching Experiment on the Hold-Up

Problem, 43 J. Econ. Educ. 377 (2012) (describing holdup

and surveying literature); Benjamin Klein et al., Verti-

cal Integration, Appropriable Rents, and the Competi-

tive Contracting Process, 21 J.L. & Econ. 297, 298 (1978).

“It is as if the sawmill owner set its prices [for pur-

chasing logs] only after a logger transported its logs to

the sawmill, unloaded them, and sent its trucks away.”

Joseph Farrell et al., Standard Setting, Patents, and

Hold-Up, 74 Antitrust L.J. 603, 612 (2007).

Holdup creates perverse ex ante incentives and harms

static and dynamic efficiency. Any excessive payments

that the firm makes due to threat of holdup translate

to downstream costs to consumers. And the victimized

firm, anticipating the loss of the value of its startup in-

vestments as a result of holdup, may decline ex ante to

invest in future projects. See Thomas F. Cotter, Patent

Holdup, Patent Remedies, and Antitrust Responses, 34

J. Corp. L. 1151, 1169 (2009); Joseph S. Miller, Standard

Setting, Patents, and Access Lock-In: RAND Licensing

and the Theory of the Firm, 40 Ind. L. Rev. 351, 366-67

n.65 (2007). Where holdup is enabled, fewer products and

services make it to market, harming consumers’ access

to and choice of technology. Colleen V. Chien & Mark A.

Lemley, Patent Holdup, the ITC, and the Public Interest,

98 Cornell L. Rev. 1, 6 (2012).

In the patent context, the harms of holdup have been

recognized by no small number of authorities. Justice

Kennedy warned in eBay Inc. v. MercExchange, LLC

that where “the patented invention is but a small compo-

nent of the product,” an injunction could be “employed as

a bargaining tool to charge exorbitant fees to companies

that seek to buy licenses to practice the patent”—that is,

as a tool for patent holdup. 547 U.S. 388, 396 (2006) (con-

curring op.).° The Department of Justice, Federal Trade

Commission, and Patent and Trademark Office have all

recognized the risks of patent holdup.°

®See also Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024, 1031

(9th Cir. 2015); Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 310

(3d Cir. 2007); Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1209

(Fed. Cir. 2014).

®U.S. Dep't of Justice & Fed. Trade Comm'n, Antitrust Enforce-

ment and Intellectual Property Rights: Promoting Innovation and

Competition 35-37 (2007), available at URL supra p. ix; U.S. Dep’t

Here, the Federal Circuit’s interpretation of § 289

would likely lead to the same results as patent holdup.

While holdup normally involves an injunction threat, the

effect of disgorgement of all profits on a product is the

same: the nominal right to continue manufacturing is a

nullity when every cent of the value is taken away. Cf.

Cotter, supra, at 1171 (excessive damages “could cause

much the same harm to static and dynamic efficiency” as

an injunction). The mere threat of design patent litiga-

tion may be used as a club to extract excessive payments

that will be passed on to consumers. See Section III infra

p. 16. And if companies like Samsung contemplated that

their investments in phone designs would yield no profits

in view of a single infringement case, then such compa-

nies would be wary of investing in new designs, the exact

loss that holdup theory predicts.

2. “Royalty stacking” is another problem that will

likely also result from the Federal Circuit’s reading of

§ 289. Royalty stacking occurs when multiple patentees

each are able to obtain an infringement royalty that is

greater than the proportional contribution of each patent

to the infringing product. The total “stack” of royalties,

as a result, can exceed 100% of the product’s total value,

meaning that the infringing manufacturer would have

to pay more in royalties than the manufacturer actually

earns in sales. See Microsoft Corp. v. Motorola, Inc., 795

F.3d 1024, 1031 (9th Cir. 2015); Cotter, supra, at 1169.

The harms of royalty stacking are similar to those

of patent holdup: manufacturers who wish to develop

new products will likely be discouraged ex ante by the

of Justice & U.S. Patent & Trademark Office, Policy Statement

on Remedies for Standards-Essential Patents Subject to Voluntary

F/RAND Commitments 4 (Jan. 8, 2013), URL supra p. ix.

prospect of potentially having to go into debt to pay

royalties. See Mark A. Lemley & Car! Shapiro, Patent

Holdup and Royalty Stacking, 85 Tex. L. Rev. 1991, 2012

(2007). As the Federal Circuit recognized in the pharma-

ceutical development context, “(t]he cumulative effect of

such stacking royalties can be substantial.” Integra Life-

sciences I, Ltd. v. Merck KGaA, 331 F.3d 860, 871 (2003)

(citing Donald R. Ware, Research Tool Patents: Judicial

Remedies, 30 AIPLA Q.J. 267, 295 (2002)), vacated on

other grounds, 545 U.S. 193 (2005).

By authorizing total profits recovery to every design

patent owner, the Federal Circuit’s rule creates a clear

path to royalty stacking. Although § 289 does not allow

“an owner of an infringed patent” to “twice recover the

profit made from the infringement,” the statute does not

deal with a situation where patents of two different paten-

tees are involved. If two design patent owners succeed in

showing that a product infringes their respective patents,

then the product manufacturer could theoretically owe

twice its entire profits. Or if a product infringes a design

patent and a utility patent, the manufacturer could owe

total profits plus a reasonable royalty.’

Accordingly, the total profit award authorized by the

Federal Circuit potentially leads to patent holdup and

royalty stacking. These consequences suggest the error

of the Federal Circuit’s interpretation of § 289 and the su-

periority of an alternate one.

7A court might try to avoid this situation by deeming that, af-

ter the first award of total profits, there are no more profits to

be awarded such that future patent asserters would receive noth-

ing. Such a result would introduce an extremely strange path-

dependence into patent infringement, wherein the patent damages

award turns on the order in which lawsuits are filed, and it would

also induce a race to the courthouse over design patents.

Ill. THE FEDERAL CIRCUIT’S INTERPRETATION

INVITES AN INDUSTRY OF COUNTERPRODUC-

TIVE PATENT LITIGATION

The rigid “total profits” rule will almost certainly

spawn a cottage industry of opportunistic litigation, com-

pounding the harms described above. The present ease of

obtaining broad design patents on simple concepts means

that the stage is already set for opportunities for abu-

sive design patent litigation. And the situation with de-

sign patents is highly analogous to other situations where

newly-minted Federal Circuit rules triggered waves of

litigation. In other contexts this Court has sought to

avoid incubating patent litigation industries; it should

seek to avoid the same possibility here.

A. DESIGN PATENTS ARE RIPE FOR ABUSE,

ESPECIALLY WITH THE ENTICEMENT OF

TOTAL PROFITS

Means, motive, and opportunity are the elements con-

ducive to bad acts.® Current law makes it almost trivially

easy to obtain design patents—the means—that have

broad scope and that are likely to sweep in large ranges

of unintentional infringers—the opportunity. By opening

the door to potentially enormous total-profits awards, the

Federal Circuit’s interpretation of § 289 adds the final leg

of the triad—the motive—for the rise of a design patent

litigation industry.

®See, e.y., People v. Downer, 557 P.2d 835, 839 (Colo. 1976);

Welch v. Bd. of Prof'l Responsibility, 193 S.W.3d 457, 466 (2006).

These three elements alone will not support a criminal conviction,

see Commonwealth v. O’Laughlin, 830 N.E.2d 222, 231 (Mass. 2005),

but the presence of all three is certainly probative of likelihood that

the bad acts will occur. Cf. Fed. R. Evid. 404(b)(2).

FIG. 1

Gift Bag, U.S. Patent No. Mirror, U.S. Patent No.

D739,765 fig.1 (issued Sept. 29, D754,979 fig.2 (issued May 3,

2015). 2016).

(== =)

4 J

FIG. 1

Decorative Television Frame, U.S.

Patent No. D755,744 fig.1 (issued May

10, 2016).

Figure 1: Example design patents recently issued.

The Means. Design patents are routinely granted on

the most trivial aspects of consumer products. In 2014,

the Patent and Trademark Office granted 24,008 design

patents while only 2,828 applications went abandoned,

meaning that a design patent application that year had an

89.5% chance of being granted. U.S. Patent & Trademark

Office, Performance and Accountability Report, Fiscal

Year 2015, at 184 tbl.1 (2015), available at URL supra

p. ix. Compared to utility and other patents, which had a

51.5% probability of grant that year, a design application

is practically a sure bet for obtaining a patent.

Within that 89.5% cohort of granted design patents,

it is easy to find ones of dubious validity. As shown in

Figure 1 above, recently issued patents include designs

as pedestrian as a Christmas stocking, a wall mirror, and

a television screen. See also Sarah Burstein, Moving Be-

yond the Standard Criticisms of Design Patents, 17 Stan.

Tech. L. Rev. 305, 324-28 (2013) (describing Federal Cir-

cuit law that “may explain, at least in part, why the PTO

has been issuing design patents for so many apparently

obvious designs lately”).

The Opportunity. It is not just that design patents

routinely issue on commonplace designs: the law permits

issuance of very broad patents that can easily sweep in

unsuspecting companies as infringers. Current design

patent laws and regulations “allow the patentee to adjust

his patent coverage” by replacing solid lines in the figures

with dashed ones, as dashed lines are not considered part

of the design claimed by the patent. Jn re Owens, 710

F.3d 1362, 1367 (Fed. Cir. 2013); see also U.S. Patent &

Trademark Office, Manual of Patent Examining Proce-

dure § 1503.02(III) (9th ed. Nov. 2015). Furthermore, the

applicant can use continuation practice to obtain multi-

U.S. Patent No. D558,753 fig.1 U.S. Patent No. D741,316 fig.1

(issued Jan. 1, 2008). (issued Oct. 20, 2015)

(enlarged fragment).

Figure 2: Example design patent continuations.

ple patents from a single application and thus revise the

scope of patented subject matter over time. See 35 U.S.C.

§ 120; In re Salmon, 705 F:2d 1579, 1579 (Fed. Cir. 1983).

These two legal tools allow a design patent owner to

render a large swath of competitors or other manufac-

turing companies liable for infringement. For example,

Figure 2 shows figures from two Apple design patents,

the right one being a continuation of the left. While the

older patent is extremely “narrow,” claiming nearly the

whole laptop design, the newer patent replaces nearly

the entire figure with unclaimed dashed lines, claiming

only the small oblong shape of the front push latch. Thus,

a different-looking laptop using a similar-shaped latch

would infringe the newer patent, but not the older.

This practice makes it difficult to avoid infringement

through design-around. A hypothetical Apple competitor

could have tailored its activity to avoid infringing the ear-

lier patent, and yet find itself infringing the later issued

patent. See Sarah Burstein, Costly Designs, 77 Ohio St.

L.J. 107, 116-17 (2016).°

And those who unintentionally use a patented design

are in an even worse situation, having no good way to de-

termine what design patents may be implicated by their

products. The mutability of design patents through bro-

ken lines and continuations, combined with the general

difficulty of finding similar images, makes searching the

patent catalog an exercise in futility. Nor would review

of competing products on the shelves be more effective:

patent marking on products is incomplete at best.’ Prod-

uct makers and sellers have limited ability to avoid po-

tential infringement claims, meaning that design patent

owners have a wide opportunity to bring lawsuits.

The Motive. With the means and opportunity for

widespread design patent litigation established, only the

motive for bringing such suits remains. That motive is

created by the Federal Circuit’s reading of § 289 to award

total profits on consumer products, giving design patent

holders the possibility of large windfalls in damages.

*One practitioner apparently applauds this strategy, calling it

“well-accepted patent gamesmanship” and “one of the most power-

ful weapons in a design patentee’s arsenal.” See Perry J. Saidman,

The Crisis in the Law of Designs, & J. Pat. & Trademark Off. Soc’y

301, 319-24 (2007). Query whether giving a “powerful weapon” to

patentees is the right result. Cf Medtronic, Inc. v. Mirowski Fam-

ily Ventures, LLC, 1348. Ct. 843, 851 (2014) (“But the ‘public’ also has

a ‘paramount interest in seeing that patent monopolies . are kept

within their legitimate scope.’”) (quoting Precision Instrument Mfg.

Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 816 (1945)).

While marking under 35 U.S.C. § 287 is a prerequisite to design

patent damayes, see Nike Inc. v. Wal-Mart Stores, Inc., 138 F.3d 1437,

1446 (Fed. Cir. 1998), marking wil] not reveal patents issued after the

products were marked, and it will not reveal patents held by non-

manufacturing owners.

Design patentees may augment these already large

potential awards in at least two ways. First, they may opt

not to license to or sue component manufacturers, wait-

ing instead to seek a greater damages award based on

more complete, and more profitable, downstream prod-

ucts. See Lee & Melamed, supra, at 427 n.201. Second,

they may take advantage of the Federal Circuit’s ques-

tionable recent decision in Lexmark International, Inc. v.

Impression Products, Inc., 816 F.3d 721 (Fed. Cir. 2016)

(en banc), petition for cert. filed, No. 15-1189 (Mar. 21,

2016), and use the device of conditional sales to control the

secondary resale market as well as to extract the profits

of competitors."

Accordingly, the means, motive, and opportunity for

a new wave of design patent litigation are all present in

view of the Federal Circuit’s decision here. By reversing

that decision, this Court would forestall such an undesir-

able result.

B. ANALOGOUS FEDERAL CIRCUIT RULES HAVE

CREATED COTTAGE INDUSTRIES OF PATENT

LITIGATION

The likelihood that the Federal Circuit’s decision will

give rise to an industry of design patent litigation is illu-

minated by the fact that other recent Federal Circuit de-

cisions have given rise to industries of patent litigation,

ones that have harmed the patent system and the public.

'\ Lexmark held that, where a patent holder manufactures prod-

ucts and places a notice of conditions on the packaging, downstream

resellers or users who violate the conditions would be liable for

patent infringement, despite the patent exhaustion doctrine. See

id. at 773-74. Several amici filed a brief with this Court arguing that

Lexmark is incorrect and contrary to Supreme Court precedent.

1. Most analogous to the present case, the Federal

Circuit in Forest Group, Inc. v. Bon Tool Co. construed

35 U.S.C. § 292 to impose up to a $500 fine for each article

on which the manufacturer erroneously applied a patent

marking. See 590 F.3d 1295, 1384 (Fed. Cir. 2009). The

interpretation of the patent marking statute “exponen-

tially raised the potential recoveries in false marking ac-

tions,” causing a “meteoric rise in false patent marking

suits.” Brian T. Yeh, Cong. Research Serv., False Patent

Marking: Litigation and Legislation 2 (2010), available

at URL supra p. x.

Within a year of that decision, the cottage industry

of false marking litigation had been established: 675 new

lawsuits were filed, many by newly established firms fil-

ing dozens of cases. See Nicholas W. Stephens, From

Forest Group to the America Invents Act: False Mark-

ing Comes Full Circle, 97 lowa L. Rev. 1003, 1019 n.107

(2012); Justin E. Gray, False Marking—Settlement Up-

date, Gray on Claims (Aug. 9, 2011), URL supra p. viii.

One practitioner advised companies to quickly review

their product lines to avoid “staggering fines” even for

“inadvertent mismarking.” Michael R. O’Neill, False

Marking Claims: The New Threat to Business, Intell.

Prop. & Tech. L.J., Aug. 2010, at 22, 28-29, available

at URL supra p. viii. The result of Forest Group was

widely criticized; one senator called it “a shift in wealth

to lawyers that comes at the expense of manufacturing

jobs.” 157 Cong. Rec. $5321 (daily ed. Sept. 6, 2011) (state-

ment of Sen. Ky)).

The decision being reviewed here is similar to the

court’s Forest Group decision five years ago. In both

cases the Federal Circuit interpreted a statute, claiming

to be merely applying the plain language of the statute,

that opened the door to high-magnitude judicial awards.

In both cases, the right to sue was easy to obtain and the

pool of potential defendants was large. So it should be un-

surprising if the result of the Federal Circuit’s decision

here, if left unchanged, would be similar to the result of

Forest Group: an overnight industry of litigants “scour-

ing store shelves ... with hopes for a massive payday.”

Yeh, supra, at 2.”

2. The Federal Circuit’s ruling in State Street Bank

& Trust Co. v. Signature Financial Group, Inc., autho-

rizing patents on business methods, see 149 F.3d 1368,

1373 (Fed. Cir. 1998), also resulted in a flood of applica-

tions for patents on business methods and software. See

Fed. Trade Comm’n, To Promote Innovation: The Proper

Balance of Competition and Patent Law and Policy ch. 4,

at 39 (2003), available at URL supra p. vii. Patent own-

ers, armed with patents on these basic concepts, were

now in a position to sue broad swaths of businesses, and

potentially receive massive infringement payouts. This

practice went largely unchecked until this Court substan-

tially corrected the standard for patentable subject mat-

ter eligibility in Bilski v. Kappos, 561 U.S. 593 (2010), and

The courts were instrumental in repairing the damage left by

Forest Group. Several months after that decision, a different panel

of the Federal Circuit clarified the intent requirement of 35 U.S.C.

§ 292. See In re BP Lubricants USA Inc., 637 F.3d 1307, 1311 (Fed.

Cir. 2011). Congress ultimately modified the patent marking statute,

see America Invents Act, Pub. L. No. 112-29, § 16(b), 125 Stat. 284,

329 (2011), but BP Lubricants is generally credited with significantly

decreasing the onslaught of false marking cases. See Justin E. Gray,

Decrease in New False Marking Cases Filed Post In re BP Lubri-

cants, Gray on Claims (Mar. 31, 2011), URL supra p. viii. Notably,

because design patent infringement is a strict liability offense, this

avenue is not available in the present case.

Alice Corp. Pty. Ltd. v. CLS Bank International, 134 S.

Ct. 2347 (2014)

3. Similarly, the Federal Circuit established a rigid

rule restricting the ability for courts to shift attorney fees

in patent cases under 35 U.S.C. § 285. Brooks Furni-

ture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381

(Fed. Cir. 2005), overruled by Octane Fitness, LLC v. Icon

Health & Fitness, Inc., 134 S. Ct. 1749 (2014). This had

allowed patent owners to bring borderline frivolous in-

fringement actions without risk.

The combination of easily-obtained business method

patents and the lack of consequence for even highly ques-

tionable lawsuits in large part facilitated the industry of

“patent assertion entities.” Their patent infringement ac-

tions are often in fact unsuccessful, with one study finding

that high-volume patent asserters, those whose patents

were litigated eight or more times in a nine-year period,

lost almost 90% of the time when their cases were fully

litigated. See John R. Allison et al., Patent Quality and

Settlement Among Repeat Patent Litigants, 99 Geo. L.J.

677, 681 (2011).

But patent assertion entities need not rely on success

on the merits; they can leverage the cost of litigation as a

weapon to extract settlements before reaching the merits.

Wrote one commentator: “It is not uncommon for settle-

ment demands to be in the range of $100,000 or $250,000,

even though the cost of litigating the case for an accused

infringer would be close to one million dollars per year.

Sometimes the demands are as low as $5,000 or $10,000.”

David L. Schwartz, The Rise of Contingent Fee Repre-

sentation in Patent Litigation, 64 Ala. L. Rev. 335, 370

(2012). The misguided Brooks Furniture rule thus helped

to establish the dubious “industry . . . in which firms

use patents ... primarily for obtaining licensing fees.”

Commil USA, LLC v. Cisco Sys., Inc., 135 S. Ct. 1920,

1930 (2015) (quoting eBay, 547 US. at 396 (Kennedy, J.,

concurring)).

Experience with utility patent assertion should in-

form this Court’s expectations about design patent asser-

tion: where a rule of law affords an opportunity for abu-

sive litigation, there are those willing and able to avail

themselves of that rule in short order. Indeed, the pos-

sibility of disproportionately large total-profit damages

makes design patent assertion appear even more attrac-

tive than utility patent assertion, where a proportionality

requirement has long been in place.

And experience shows that time is of the essence. Or-

dinarily it might take years or decades before this Court

or Congress has an opportunity to deal with harm already

done by a misguided rule of patent law. But in this case

this Court can avoid the bulk of the harm in the first in-

stance by reversing a misguided rule ab initio.

IV. SECTION 289 SHOULD BE INTERPRETED IN A

WAY THAT AVOIDS SERIOUS CONSTITUTIONAL

DOUBTS

Besides being bad policy, the Federal Circuit’s inter-

pretation may raise constitutional doubts, specifically be-

cause an absolute “total profits” rule can result in exces-

sively high and disproportionate damages awards that

could violate the Fifth Amendment.” Correcting that

interpretation may thus avoid a potential constitutional

quagmire.

- 1The Federal Circuit’s interpretation also runs afoul of the Patent

Clause, as explained in Petitioners’ brief. See Br. Pet’rs 38-39.

A. DUE PROCESS MAY DISALLOW CERTAIN

EXCESSIVELY HIGH DAMAGES AWARDS

That the Due Process Clauses of the Fifth and Four-

teenth Amendments prohibit “excessive” and “wholly

disproportionate” damages is a longstanding principle of

this Court."*

A long arc of cases confirms that due process con-

strains damages awards to bear some relationship to the

harm caused. Waters-Pierce Oil Co. v. Texas held that

civil penalties could be unconstitutional where “the fines

imposed are so grossly excessive as to amount to a de-

privation of property without due process of law.” 212

U.S. 86, 111 (1909). Similarly, St. Louis, Iron Mountain &

Southern Railway Co. v. Williams suggested that a statu-

tory penalty could “transcend the limitation” of the Four-

teenth Amendment “where the penalty prescribed is so

severe and oppressive as to be wholly disproportioned to

the offense and obviously unreasonable.” 251 U.S. 63, 66-

67 (1919) (citing Waters-Pierce Oil, 212 U.S. at 111).

Though Waters-Pierce Oil and St. Louis ultimately

found no due process violation on their respective facts,

this Court did find such a violation in Southwestern Tele-

phone & Telegraph Co. v. Danaher. There, a state had

levied a relatively large civil penalty against a telephone

company that had disconnected one of its users for insuf-

ficient payment. See 238 U.S. 482, 485-86 (1915). Particu-

larly given its finding of “no intentional wrongdoing,” this

Court held that the penalty “was so plainly arbitrary and

‘4 Although patent law, as federal law, is governed by the Due Pro-

cess Clause of the Fifth Amendment rather than that of the Four-

teenth Amendment, the standards appear not to differ. See, e.g.,

Reno v. Flores, 507 U.S. 292, 301 (1993); Deshaney v. Winnebago

County Dep't of Soc. Servs., 489 U.S. 189, 196 (1989).

oppressive as to be nothing short of a taking of its prop-

erty without due process of law.” See id. at 491. Danaher

thus stands for the proposition that a “plainly arbitrary

and oppressive” recovery rule can violate due process.’°

See generally Sheila B. Scheuerman, Due Process Forgot-

ten: The Problem of Statutory Damages and Class Ac-

tions, 74 Mo. L. Rev. 103 (2009).

More recent cases have held that proportionality be-

tween damages and injury is required in the context

of punitive damages. In 7’XO Production Corp. v. Al-

liance Resources Corp., 509 U.S. 443 (1993), a plurality

of this Court relied on Waters-Pierce Oil, St. Louis, and

Danaher to determine that “the Due Process Clause of

the Fourteenth Amendment imposes substantive limits

‘beyond which penalties may not go.’” 7'XO, 509 U.S. at

453-54 (quoting Seaboard Air Line Ry. v. Seegers, 207

U.S. 73, 78 (1907)).

That principle was followed in BMW of North Amer-

ica v. Gore, which held that the Fourteenth Amendment

“prohibits a State from imposing a ‘grossly excessive’ pun-

ishment on a tortfeasor.” 517 U.S. 559, 562 (1996) (cita-

tions omitted); see also Cooper Indus., Inc. v. Leather-

man Tool Group, Inc., 5382 U.S. 424, 434 (2001). Thus,

“punitive damages may not be ‘grossly out of proportion

to the severity of the offense.’” 517 U.S. at 576 (quoting

TXO, 509 US. at 453, 462); see also Cooper Indus., 532

U.S. at 435; United States v. Bajakajian, 524 US. 321,

334 (1998); State Farm Mut. Auto. Ins. Co. v. Campbell,

538 U.S. 408, 1152 (2003).

‘It is noted that Danaher specifically did not declare unconsti-

tutional the overall statute disallowing discriminatory disconnec-

tion, but rather only found the statutory penalty to be insufficiently

grounded. See id. at 490.

Indeed, a rule allowing excessive damages can even

fail procedural due process. Philip Morris USA v.

Williams considered a punitive damages award that was

apparently premised largely on injury to third parties

similarly situated to the plaintiff but not parties to the

action. See 549 U.S. 346, 350-51 (2007). Noting initially

that “the Constitution imposes certain limits, in respect

both to procedures for awarding punitive damages and to

amounts forbidden as ‘grossly excessive,’” Philip Morris

held that the Fourteenth Amendment “forbids a State to

use a punitive damages award to punish a defendant for

injury that it inflicts upon nonparties.” /d. at 353. Thus,

where a damages award goes beyond compensation for

the harm to the party itself, there is a potential problem

of procedural due process.

Accordingly, damages that are excessive and dispro-

portionate in relation to a defendant’s wrongdoing or to

the amount of harm caused to the plaintiff can violate con-

stitutional due process guarantees enshrined in the Fifth

and Fourteenth Amendments.

B. A TOTAL PROFITS AWARD, IRRESPECTIVE

OF ACTUAL HARM, POTENTIALLY VIOLATES

THESE DUE PROCESS PRINCIPLES

In adopting a construction of § 289 that awards the

plaintiff all of the defendants’ profits on a product when

that product contains only a small infringing element, the

Federal Circuit has opened the door to damages awards

that may be unconstitutionally high.

1. Where the infringing element comprises a minor

contribution to an overall product and has a null or neg-

ligible effect on the product’s profits, such awards may

be “grossly out of proportion to the severity of [the de-

fendant’s] offense,” Gore, 517 U.S. at 575, and dispropor-

tionate to the harm caused by the defendant’s wrongdo-

ing, see id. at 580-81. Indeed, much like Philip Morris’s

concern with damage awards going beyond the “harm po-

tentially caused the plaintiff,” 549 U.S. at 354 (emphasis

in original), a sufficiently large gap between patented fea-

ture and total product value can cause a total profit award

to go far beyond harm to the patentee, beyond even valid

deterrent and punitive concerns, into the domain of con-

stitutional excessiveness.

The Federal Circuit’s reading of § 289 is worse from a

due process perspective than the punitive damages situ-

ations of Gore and its progeny. With punitive damages, a

judge or jury has discretion to make a reasonable award.

But under § 289, an infringer “shall be liable” for total

profits—even if a judge or jury believes a lesser amount

is warranted. See note 3 supra p. 6 (discussing Nordock,

Inc. v. Sys. Inc., 803 F.3d 1344, 1354 (Fed. Cir. 2015)).

Additionally, punitive damages require a showing of

culpability, in contrast to the Federal Circuit’s interpre-

tation of § 289. So a defendant may be liable for a dispro-

portionately large award even without the “degree of rep-

rehensibility” contemplated in Gore. See 517 U.S. at 575-

78. For example, the defendant may have independently

invented the patented design, or the defendant may rea-

sorably believe that an element is functional and there-

fore not covered by a valid design patent.

And to a certain degree, the total profits rule actually

acts punitively. Compensatory damages “are intended to

redress the concrete loss that the plaintiff has suffered by

reason of the defendant’s wrongful conduct.” Campbell,

538 U.S. at 416 (citing Cooper Indus., 5382 U.S. at 432

(citing Restatement (Second) of Torts § 903, at 453-54

(1977))). Damages consisting of a defendant’s “total prof-

its” awarded under § 289 can far exceed the amount nec-

essary for compensation of the injured plaintiff.

If a court were to “make an award of profits which

have been shown not to be due to the infringement,”

it would be “not to do equity but to inflict an unau-

thorized penalty.” Sheldon v. Metro-Goldwyn Pictures

Corp., 309 U.S. 390, 405 (1940) (emphasis added); see also

Restatement (Third) of Restitution and Unjust Enrich-

ment § 42, cmt. h (2011) (“[D]isgorgement in excess of

net gain would be punitive, as would disgorgement of

gains derived from legitimate sources.”). By construing

§ 289 to require an award based on the whole consumer

product, the Federal Circuit’s rule would award profits

“shown not to be due to the infringement” and would

thereby “inflict an unauthorized penalty” potentially con-

flicting with this Court’s jurisprudence.

Accordingly, there is good reason to believe that Gore

and its progeny would be applicable to § 289. Indeed,

commentators have observed that this Court “has ap-

plied due process excessiveness reviews to a wide vari-

ety of sanctions—not just to punitive damages, but also

to civil fines, forfeitures, criminal penalties, and other de-

privations of liberty or property.” Pamela Samuelson &

Tara Wheatland, Statutory Damages in Copyright Law:

A Remedy in Need of Reform, 51 Wm. & Mary L. Rev.

439, 492 (2009). That is because the larger principle,

which reconciles Gore, Waters-Pierce Oil, and Danaher,

is that a legal or equitable award must show at least

some reasonable relationship to the injury being reme-

died, for that award to pass muster under the Due Pro-

cess Clause. There is potentially no such reasonable re-

lationship where the actual injury relating to a small

patented design feature is minimal and yet profits on a

complete product are enormous.

2. Rejection of the Federal Circuit’s interpretation

of § 289 also comports with the underlying motivations for

the aforementioned cases. Concerns of fairness underlie

those holdings that due process disfavors grossly exces-

sive damage awards. Gore referred to “[e]lementary no-

tions of fairness” and to “fair notice . . . of the severity of

the penalty” in arriving at its rule against grossly exces-

sive punitive damages. 517 U.S. at 574-75.

The potentially excessive nature of the Federal Cir-

cuit’s interpretation of § 289 may similarly raise funda-

mentally important concerns of fairness to the defendant.

It is unfair because the entire profits of a complex de-

vice of many components, built by the hard work of nu-

merous designers, developers, and engineers, are handed

to a single design patent holder, ignoring the substantial

contributions of the defendant and many other creators.

Thus, where the disparity between the value of the de-

sign patent (and therefore, the harm to the plaintiff) and

the amount of the “total profits” is high, these awards will

serve not to compensate the plaintiff for its losses, but

rather will represent a windfall to the patent holder and

an unexpected total loss to the product manufacturer.

The Federal Circuit’s reading of § 289 thus creates a

potential and concerning conflict with the constitutional

command of due process.

C. ALTERNATIVE INTERPRETATIONS OF SECTION

289 Avorip THESE CONSTITUTIONAL DOUBTS

“{I)t is well established that if a statute has two pos-

sible meanings, one of which violates the Constitution,

courts should adopt the meaning that does not do so.”

Nat'l Fed’n of Indep. Bus. v. Sebelius (“NFIB”), 132 S. Ct.

2566, 2593 (2012). Indeed, “even if a serious doubt of con-

stitutionality [of an act of Congress] is raised, it is a cardi-

nal principle that this Court will first ascertain whether

a construction of the statute is fairly possible by which

the question may be avoided.” Crowell v. Benson, 285

U.S. 22, 30 (1932). Where an alternative construction is

available, courts “are obligated to construe the statute

to avoid such [constitutional] problems.” Immigration &

Naturalization Serv. v. St. Cyr, 533 U.S. 289, 300 (2001)

(citing Ashwander v. Tenn. Valley Auth., 297 US. 288,

341, 345-48 (1936) (Brandeis, J., concurring)). “[E]very

reasonable construction must be resorted to, in order to

save a statute from unconstitutionality.” NFIB, 132 S.

Ct. at 65 (quoting Hooper v. California, 155 U.S. 648, 657

(1895)).

As discussed previously, see Section I supra p. 6, the

text of § 289 is ambiguous and subject to multiple possi-

ble readings, all of which may be characterized as fairly

possible. The interpretation proposed by Petitioners is

supported by the statutory context, legislative history,

and policy aims of the patent system. By contrast, the

Federal Circuit’s interpretation raises serious questions

of constitutionality. In view of those serious questions,

this Court should reject the Federal Circuit’s construc-

tion pursuant to its preference for avoiding constitution-

ally problematic constructions and to avert future ques-

tions regarding the statute’s constitutionality.

CONCLUSION

For the foregoing reasons, this Court should reverse

the Court of Appeals.

Respectfully submitted,

CHARLES DUAN

Counsel of Record

PUBLIC KNOWLEDGE

1818 N Street NW, Suite 410

Washington, DC 20036

(202) 861-0020

cduan@publicknowledge.org

VERA RANIERI

ELECTRONIC FRONTIER

FOUNDATION

815 Eddy Street

San Francisco, CA 94109

(415) 436-9333

vera@eff.org

Counsel for amici curiae

June 7, 2016

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