Disgorgement of infringer's profits in Apple v. Samsung and Oracle v. Google: apportionment is key

At times I wish I knew everything about the cases I follow that the litigators working on them know, but it's possible that at times they wish they had the liberty to be as consistent in their positions on policy as an independent blogger--more independent than ever since I started the blog--can afford to be.

There's an interesting parallel between Apple v. Samsung (meaning their first case, with respect to which the Supreme Court has granted certiorari) and the Oracle v. Google Android-Java copyright litigation: in both cases, most of the damages at issue are based on the theory of a disgorgement of infringer's profits, and at first sight, the amounts claimed by the right holders appear very high. There are even more similarities. For example, in both cases, the defendants are key Android players. But there are also some important factual differences, not limited to the fact that design patents and copyright are different types of intellectual property.

The Supreme Court will take a look (at a hearing most likely to take place in the fourth quarter) at the question of whether an unapportioned disgorgement of infringer's profits is justified when a highly multifunctional product potentially embodies a number of design patents and a far greater number of technological inventions, as well as innovative elements protected by copyright and trade secrets. As for Oracle v. Google it has now become known that Oracle's damages expert from the well-known IP valuation firm of Ocean Tomo has arrived at a total damages claim of $9.3 billion, consisting of actual damages (in terms of lost Java licensing revenues) of roughly half a billion dollars and $8.8 billion in "profits apportionted to infringed Java copyrights." James Niccolai of the IDG News Service uploaded to Scribd both the relevant excerpt from Oracle's damages report and a Google motion portraying Oracle's damages claim as (in different words) the craziest thing anybody ever asked for in a U.S. court.

The notion of a disgorgement of profits is inherently somewhat Draconian. It has a strong punitive element, besides being meant to serve as a major deterrent. But even legal systems in which there is no such thing as punitive damages, such as the German case law on patent damages, enable right holders to base claims on this concept.

In U.S. copyright law there appears to be no dispute that the infringer's profits to be disgorged cannot be unapportioned, while statutory law on U.S. design patents has been interpreted in different ways. In Apple v. Samsung, both the trial court and the appeals court said the law of the land was that there should be no apportionment, but I still have hopes that the Supreme Court will thread the needle and let reasonableness prevail over utter irrationality. Just for the sake of the argument, let's assume now that apportionment is warranted in both cases, and take things from there.

On the same basis, let's assume that the asserted intellectual property rights are valid and enforceable. In Oracle v. Google, there is no more doubt about it: the appeals court decided so, and the Supreme Court denied cert. In Apple v. Samsung, this assumption is actually exceedingly Apple-friendly given the state of affairs of the D'677 iPhone design patent.

A reasonable apportionment of infringer's profits relating to the visual appearance of a smartphone and the layout of one of numerous screens can't result in a huge amount of money. I have tremendous respect for great designers, but to put this into perspective, a tech product is still predominantly a tech product. In the fashion or furniture industries, I'm sure many companies have been acquired at high prices because the acquirer wanted to own their unique designs (and the brands those designs are associated with). But in this industry, I'm not aware of any case where a software company was bought because it has a nice screen layout or where a phone maker was acquired at a high price because it had great designs. Instead, Google bought Motorola Mobility a few years ago at a price of $12.5 billion to get control of its utility patent portfolio, including its standard-essential patents. Not because of its designs.

In the Android-Java case, the ultimate result must also be a reasonable apportionment, and at first sight, the $8.8 billion figure (just the disgorgement part, not the lost licensing revenues) is staggering. It exceeds what Oracle paid six years ago for Sun Microsystems ($7.4 billion, with an enterprise value component of $5.6 billion), which made Java but also owned a hardware business and MySQL, which clearly was a key part of the reason Oracle bought Sun.

But that comparison alone doesn't make the number unreasonable. It could very well be that Java's reasonable market value in 2010 (when Android already existed but wasn't the world's #1 operating system) was close to $2 billion but market developments have since made it several times more valuable. I'm not arguing that this is the case, but it's far from an illogical position to take.

It's instructive to look at the strategic situation Google faced when it developed Android. Google's management foresightfully understood that the mobile revolution was going to come and that platform owners could displace Google by creating their own search engines or doing deals with a Google rival such as Microsoft's Bing search division. In order for Android to get traction, Google knew it would need app developers (Google presumably realized this even before Steve Jobs did). Attracting app developers to a new operating system from a company that never made one before was going to be hard enough, but it was going to be downright impossible with a totally new API (application programming interface) no one would have been familiar with initially. Java was already very popular on mobile devices (a fact that Google's filings in the Oracle case generally fail to recognize). Then there were Apple, which had Objective C (Mac software developers already knew it) and wouldn't have considered for a tenth of a second to license it to Google (though Google is now free to adopt Swift on open-source terms), and Microsoft, which certainly wouldn't have been interested in strengthening a new platform at the expense of Windows (which, like Java, also existed on mobile devices before the iPhone and Android).

Java was the obvious choice for Google at the time. It was not just an obvious choice: there really was no viable alternative.

Instead of letting Oracle buy Sun, Google would have had every opportunity to outbid the Ellison company. Everybody in Silicon Vally knew about Sun's dire straits, and maybe Sun's executives or investment bankers even contacted Google when shopping Sun around. Sure, Sun was about more than Java. I actually would have liked Google to own MySQL and think it could have proved reasonably valuable to Google. Google wouldn't have liked the excess baggage of Sun's hardware business, but it could have just divested that part to someone else or even just closed it down. Excess baggage didn't prevent Google from doing the Motorola deal, and that kind of excess baggage even created potential conflicts with its device maker partners. So, in retrospective, Google should have bought Sun to keep Java and MySQL, should have somehow gotten rid of the hardware part, and then this whole Oracle v. Google litigation would never have happened. With the benefit of being wise after the fact, the Sun deal would also have made it unnecessary for Google to buy Motorola Mobility later: Sun had lots of patents that Google could have used to countersue the likes of Apple and Microsoft.

Google didn't do what it could have done, and now the price may be a lot higher. That's the way things work.

How high the price should be is, of course, another question. I'm not saying that a disgorgement of $8.8 billion is the right number: this is just the position Oracle's expert takes. What I do wholeheartedly believe is that this is by far and away the economically biggest copyright infringement case in the history of the world, and that even a $1 billion award would be far too small when considering the value Google has extracted from Java. From a perspective of market capitalization, it's possible that Alphabet (Google's corporate parent) would be worth less than half of what it is worth without Android (because its core business might have lost a lot of ground). Google pays Apple $1 billion a year for having its search engine on Apple's devices, and that price would be far higher if Apple were the only game in town (or the only one besides Windows).

Oracle's claim is very, very high, but it's not nearly as absurd as Google's lawyers' argument that the infringed program code amounts to a fraction of a percent of the entire Android code base. In the potato business, that kind of ratio would probably be meaningful. Here, it's more like arguing that the human heart only has a mass of 250 to 350 grams and then argue that its value is roughly that of 250 to 350 grams of sand or water.

Google took the essence of Java, built Android on that basis, and yes, a multi-billion dollar disgorgement would appear perfectly reasonable to me.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Follow @FOSSpatents

Share with other professionals via LinkedIn:

Share|

Supreme Court grants Samsung's petition to review Apple's smartphone design patents case

The Supreme Court of the United States has just published a decision it had already made on Friday (March 18): Samsung's December 2015 petition for writ of certiorari (request for Supreme Court review) in Apple's design patents case has been GRANTED with respect to question 2 (damages). As a result, the Apple v. Samsung damages re-retrial scheduled to begin later this month in the Northern District of California is almost certainly going to be postponed indefinitely, as Apple is seeking unapportioned infringer's profits on all five products still at issue and won't be entitled to that if Samsung prevails in the top U.S. court.

A decision to hear the case is not a decision in any party's favor, but it is substantial headway for Samsung and comes less than a month after the Federal Circuit threw out Apple's entire second California case against Samsung, nixing a $120 million jury award and rendering an injunction decision irrelevant. Samsung's outside lawyers in those cases, from Quinn Emanuel, must be very happy.

Cert petitions are usually long shots. But in this case, I was optimistic from the get-go, and I actually prepared this post here before the scheduled publication of the decision because I believed strongly it was going to play out just this way. I was in great company with my bullish perspective on the petition, as two bloggers who are IP lawyers agreed.

It's not surprising that the damages question, which also ignited far more interest among "friends of the court," fared better than the claim construction question, though the latter one was interesting as well.

Samsung received unusually broadbased support for its petition, which definitely buttressed the electronics giant's claims that the issues in the case--damages (disgorgement of unapportioned infringer's profits) and claim construction (functional elements not to be considered in infringement and validity analysis)--are of concern to the high-tech industry and other parts of the economy, and not just to Samsung only because Apple has already collected half a billion dollars in damages on a questionable basis.

Last month, Samsung reinforced its petition with a reply brief that argued the law of the smartphone should not follow reflexively from the law of the spoon. The Supreme Court may or may not agree that Apple was entitled to unapportioned infringer's profits, and it won't evaluate whether Judge Koh should have instructed the jury on the exclusion of functional elements from its analysis of Apple's infringement and Samsung's invalidity claims. Previously, both Judge Koh and the Federal Circuit had agreed with Apple that the law was, in their opinion, so crystal clear on unapportioned disgorgement that there was no room for any other interpretation. Judge Koh and the Federal Circuit also agreed that there was no requirement to instruct the jury on claim construction the way Samsung proposed. Now, the highest court has agreed with Samsung that there is a need for clarification of how to apply a 19th-century law to 21st-century, multifunctional, high-technology products. That is already, in and of itself, a disagreement with the way Judge Koh and the Federal Circuit had dismissed Samsung's arguments.

Whether this will result in the decision Samsung is fighting for remains to be seen. Without a doubt, the justices will understand the absurdity of unapportioned disgorgement, let alone the theoretical possibility of multiple disgorgements if multiple patent holders each win an unapportioned disgorgement. (In a more conservative theory, the second one might no longer receive an unapportioned disgorgement, but every patent holder would get something and one or more might get an unapportioned disgorgement, which also means that more than a company's entire profits from a product would be wiped out.) Then it depends on statutory interpretation. There are ways such as a reasonable definition of "article of manufacture," in which Samsung can prevail. Apple will have to argue that there is no room for interpretation outside of its own position. Sometimes there are situations in which judges see that a law needs a revision to reflect technological (or, in other fields, societal) change, but believe only Congress has the authority to do something about it. That's the conclusion Apple wants the Supreme Court to reach here.

I'll be following the proceedings in detail, and I'll be talking about statutory interpretation as well as policy considerations in the months ahead. For now, I just want to highlight a very few aspects:

• One reason Apple wanted to avoid this is because one of its iPhone design patents at issue in the case, the D'677 patent, has been held invalid by the Central Reexamination Division of the United States Patent and Trademark Office in an ongoing reexamination. Should this decision to be affirmed, then it will be harder and harder for Apple to collect the amount of damages originally awarded. It will take years until there is a final, non-appealable decision (presumably, Apple will exhaust all appeals unless it prevails before), but significant interim steps can also have an effect on the infringement proceedings.

• There was no amicus curiae (friend of the court) who filed a letter oin support of Apple's position. Apple received limited support for its position on damages--nowhere near the level of Samsung's support, but some support--in 2014 before the Federal Circuit. Those amici presumably didn't file a letter this time around because it would have been counterproductive: it would only have shown that there is strong interest in this. Now, at the merits stage, they will become active again.

• I'm sure Samsung can count on at least the support it received for its petition, and that was already very impressive. But it's possible that now, with the Supreme Court having decided to look at this, even more companies will openly take Samsung's side.

I'm very happy that the Supreme Court will now take a look at an interpretation of the law that would theoretically threaten even a company like Facebook (or little guys--for example, "indie" app developers) with the prospect of losing their entire profits over a single design patent infringement. I'm hopeful that something good will come out of this. And it wouldn't even bad for Apple. Once the shoe is on the other foot, Apple, the most profitable company in the history of this industry, will fight the notion of an unapportioned disgorgement as well. It's just hoping to somehow get leverage over Samsung with its design patents, now that its utility (technical) patents have practically failed to have any non-negligible effect.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Follow @FOSSpatents

Share with other professionals via LinkedIn:

Share|

Supreme Court petition 15-777 (Samsung v. Apple) closely watched by IP lawyers, relisted for this Friday

Earlier this month (on Friday, March 4), the Supreme Court of the United States already had Samsung's December 2015 petition for writ of certiorari (request for Supreme Court review) in Apple's design patents case on its agenda. It's nothing unusual for a case to be relisted, and it happened in this case. There was no weekly conference last Friday, so this cert petition will be discussed this week, and we'll know the decision (unless there's another relisting) on Monday morning.

Samsung received unusually broadbased support for its petition, which definitely buttressed the electronics giant's claims that the issues in the case--damages (disgorgement of unapportioned infringer's profits) and claim construction (functional elements not to be considered in infringement and validity analysis)--are of concern to the high-tech industry and other parts of the economy, and not just to Samsung (Apple has already collected half a billion dollars in damages on a questionable basis).

Last month, Samsung reinforced its petition with a reply brief that argued the law of the smartphone should not follow reflexively from the law of the spoon.

It's always been clear that this petition raises some extremely important issues. Apple's lwayers obviously had to try to downplay its certworthiness, but independent observers who have commented on the petition have all deemed it interesting (at least the part on disgorgement of an infringer's entire, unapportioned profits).

The fact that Samsung's petition is certworthy has been confirmed by two recent posts on key IP blogs:

• The SCOTUSblog's Relist Watch:

  "The big new relist this week is Samsung Electronics Co. v. Apple, 15-777, which we're guessing is being closely watched by the IP crowd."

  That's a verys safe guess. Not sure this can even be described as a guess.

• Wegner's Writings on the Los Angeles Intellectual Property Law Association's (LAIPLA) blog:

  "The petition has a higher than usual chance for success."

In other Apple-Samsung news, patent analytics firm Lex Machina has published a new report that once again confirms Apple and Samsung are the top targets of patent troll lawsuits. Finally, I agree in principle with Vivek Wadhwa's recent opinion posted on the Crunch Network (Techcrunch). He believes Apple and Samsung should end their dispute, and notes that "patent litigation, such as what Apple resorted to, rarely does the world any good."

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Follow @FOSSpatents

Share with other professionals via LinkedIn:

Share|