Word came recently that Samsung is going to pay Apple approximately $546 million in damages as part of the ongoing patent infringement dispute between the two technology giants. So, one might assume that it is time for Apple to celebrate. But as Lee Corso might say, “Not so fast my friend.” Apple’s victory over Samsung rests on a jury’s conclusion that Samsung infringed three design patents. The victory, if it stands, will encourage more design patent infringement claims, and Apple will likely find itself defending against similar suits in the not so distant future. On December 14, Samsung filed a petition asking the Supreme Court to hear an appeal in the case. Given the economics of future litigation, Apple might quietly hope that the Court takes the opportunity to articulate the appropriate standard for awarding total profit damages for infringement.
When a company gets sued for patent infringement, it must decide whether to litigate or settle. An informed choice requires an assessment of the risks of being held liable for damages. The greater the risk of being found to infringe, the greater the settlement value. Similarly, the greater the likely damages, the higher the settlement value. The liability risks for design patent infringement are, in many respects, higher than the risks for more common claims of utility patent infringement due to opaque infringement standards and an unpredictable damages remedy that allows for the award of astronomical monetary damages for patents covering features of relatively marginal value, at least in terms of influence over consumers’ purchasing decisions.
In cases of alleged design patent infringement, the risk of costly liability is high. The bar for what patents will be granted, however, is low. The Patent and Trademark Office (PTO) grants a significantly larger percentage of design patents than utility patents. Though an alleged infringer can ask the PTO to review a questionable patent, patents are assumed valid during the review process. In the meantime, companies and individuals are at risk of infringement claims, regardless of how weak a patent might be. Apple’s own success against Samsung highlights this risk, as the PTO has invalidated one of the three design patents on which Apple based its claims. That is, Apple will receive hundreds of millions of dollars based in part on a patent that the PTO never should have granted.
The lack of clarity and standards for design patent infringement can confuse more than just the parties to a case of alleged infringement. In fact, in commenting on Samsung’s Supreme Court appeal, David Kappos, the former head of the PTO, stated that “usability comes down to design.” But usability is really about function, which is relevant to utility patents, not design patents. If the former head of the PTO confuses design and utility patent standards, of course, then a company facing a design patent infringement action has to assume that the risk of a judge or jury will confuse the two is high.
An earlier piece that appeared in Wired titled, “American Doesn’t do Enough to Protect its Innovative Designs,” which was authored by the former PTO director, cites Apple’s iPhone as an iconic example of an American innovation. Interestingly the article leads off with an image of a U.S. patent for four of Singer’s round bobbin sewing machines. The problem? It was a utility patent in the image, not a design patent.
Then there is the risk of damages. When someone infringes a utility patent, the patentee can seek damages to cover lost profits or, more commonly, the amount that he would have been paid to license the patent. In multi-feature products like smartphones, the determination of that reasonable royalty generally focuses on the smallest component of the product that practices the invention and could be sold as a stand-alone product. In addition, even for the smallest salable unit, the parties must look at how much of the product’s value derives from that specific patented technology or feature. Damages for design patents are different. Under 35 U.S.C. § 289, one who infringes a design patent can be held accountable for total profits from the infringing product. In the Apple/Samsung litigation, the Federal Circuit’s ruling ignores all of the value from all of the other technologies within these smartphones. Rather than determining how much a design patent contributed to the value of a product, the only question will be how much profit the infringer received from the product, regardless of whether the infringed design played a meaningful role in generating those profits.
This difference in damages means that the risk of any particular case is much higher than it would be for a utility patent case. This should cause serious concern for any company that brings products to the market, including Apple. Under the current interpretation, if Apple faces a design patent infringement action, it faces the possibility that all of its profits for iPhones, iPads, or other popular products would be at risk. Any one of these cases could have a significant impact on Apple’s finances, let alone what will happen if a jury finds against Apple in one or more cases.
For Apple, iPhone sales comprise about two-thirds of the company’s revenue. While revenue and profit are not necessarily the same, iPhones obviously also account for an enormous share of the profits for the most profitable company in the world. Recently, Apple has shown signs of slowing iPhone sales. While those sales might diminish revenue, they do not diminish the jeopardy that Apple faces from a potential design patent infringement action. If anything, the diminishing sales exacerbate that jeopardy because, while Apple’s exposure is tied to past profits, its ability to satisfy a judgment is tied to future profits. Apple therefore finds itself in treacherous territory – to some extent of its own making.
The Supreme Court can limit this risk, but only if it grants Samsung’s certiorari petition and agrees to hear the Apple/Samsung case. The Court can use the case to restore some common sense limits to Section 289, rather than elevating form over function by letting the ruling stand. While it won’t admit it, Apple might well hope the Court does just that and saves Apple from itself.