On the morning of Tuesday, October 11th, the U.S. Supreme Court heard oral arguments by counsel representing either party in the Samsung Electronics Co. v. Apple case. Much of the court’s line of questioning at times sought answers to whether a standard could be applied in a design patent infringement case in such a way that adequately identifies the amount of profit that could be attributed to a particular aspect of a product’s design.
The case was appealed by Samsung Electronics (KRX:005930) after the U.S. Court of Appeals for the Federal Circuit (Fed. Cir.) upheld a $400 million design patent infringement award to Apple Inc. (NASDAQ:AAPL) The award was granted under U.S. Code Title 35 § 289, which gives a plaintiff the right to a defendant’s total profits on any products which are deemed to infringe upon design patents held by the plaintiff. Samsung is trying to argue that the award should be less, as the design patents only cover a few aspects of the smartphone including the rectangular, round-cornered front of a phone and the display screen upon which the graphical user interface is displayed.
The day’s arguments were begun by Kathleen M. Sullivan on behalf of Samsung. She led off succinctly stating Samsung’s case in this matter:
SULLIVAN: “A smartphone is smart because it contains hundreds of thousands of the technologies that make it work. But the Federal Circuit held that Section 289 of the Patent Act entitles the holder of a single design patent on the portion of the appearance of the phone to total profit on the entire phone.
That result makes no sense. A single design patent on the portion of the appearance of the phone should not entitle the design-patent holder to all the profit on the entire phone.”
As confirmed by the transcript of the oral argument, it appeared Sullivan was given long periods of time to respond without being interrupted compared to other counsel presenting arguments on the day. Justice Anthony Kennedy initially took up a charge against Sullivan’s argument, noting that there was no way to apportion damages for a design patent the way that the statute is currently written:
KENNEDY: “You can’t really have apportionment, so it seems to me you leave us with no — one choice is to have a de minimis exception, like the cup-holder example that’s in the car — maybe the boat windshield, which is a little more difficult — and just follow the — and just follow the words of the statute. But it seems to me neither side gives us an instruction to work with.”
Sullivan noted, however, that Samsung did not propose a test that leaves the question as to what portion of profits a patent owner is entitled to after successfully arguing design patent infringement to the jury without guidance. Samsung supported a two-pronged test for determining what constituted the article of manufacture without getting into an apportionment argument. Sullivan indicated that juries in design patent infringement cases could be guided to answer two questions. First, juries should be instructed to decide the specific article of manufacture covered by the design patent. The second step would be to determine the amount of profits specific to that article of manufacture. To determine the amount of profit in that second step, juries could look at ordinary accounting related to the cost of the goods sold in relation to revenues for the relevant component, profit margins if the company buys the component from an original equipment manufacturer or transfer pricing between corporate divisions when different divisions of a company are responsible for manufacturing different components. Were the jury so instructed, there was no way they could have found in favor of Apple, Sullivan said.
SULLIVAN: “But the reason we think it’s consistent with Congress’s purpose, Your Honor, is that what Congress was trying to do was design a rule that gives design-patent holders total profit from the article of manufacture.
That’s a little bit overinclusive, because if you get total profit on the rugs that were at issue in the Dobson cases, you’ll get a little profit from the design, and there will be a little extra you’re getting perhaps from the fiber or the weave. We think Congress was entitled to exercise its fact-finding powers to say that it is appropriate as a matter of causation to say that design causes value in a single article product like a rug.”
After Sullivan, the next oral arguments were made by Brian H. Fletcher who represented the government of the United States in support of neither party. Fletcher argued that while Fed. Cir. correctly read the Section 289 statute in deciding how to award damages in the case, it was a mistake to award total profits as damages in such cases. He noted that, for damages in both utility patent and copyright infringement cases, successful plaintiffs are not entitled to total profits as damages.
FLETCHER: “Sometimes you — you might try to build up the share of the profits from bottom up by saying, what’s the cost of each of these components, and then what share of the revenue is attributable to each of these components. And then you say this component is 10 percent of the cost and 20 percent of the revenue, and we — we do a bottom-up calculation and try to do it that way.
Courts haven’t always done that. Sometimes that won’t be feasible. Sometimes instead they’ve — they’ve done a more impressionistic approximation and said the total profits are $10 million, and we think that the component at issue here, based on expert testimony, is responsible for a quarter or 25 percent.”
Multiple justices tried to hammer down on the difficulty of determining how much profit for which a design element was responsible. Fletcher tried to explain using the example of a Volkswagon VW, a car well-known for it’s “bug”-shaped design.
FLETCHER: “So, supposing that we’ve decided that the Bug — the relevant article in the Bug is just the body of the Bug. […]
Then I think the question is the best way to determine that, at least I can think of right now, would be consumer surveys addressed to, to what extent are people who buy Bugs making their purchasing decisions based on the look of the car, and to what extent are they instead valuing other things…”
This line of reasoning did not play well with every justice on the bench, especially Justice Samuel Alito:
ALITO: “This hypothetical is not helpful to me, because I can’t get over the thought that nobody buys a car, even a Beetle, just because they like the way it looks. What if it, you know, costs, I think, $1800 when it was first sold in the United States? What if it cost $18,000? What if it got 2 miles per gallon? What if it broke down every 50 miles?
So if that is a real question, if it is a real question whether the article of manufacture there is the design or the entire car, gives me pause about the test for determining what is the article of manufacture.”
Fletcher was followed in his remarks by Seth Waxman, counsel for Apple. Despite any question Samsung could raise over the potential that a jury was improperly instructed how to determine the article of manufacture, the Court had no power to overturn the Fed. Cir.’s decision in the case.
WAXMAN: “There were two trials below. In neither trial did Samsung, either in argument, statement, or witness testimony, ever identify for the jury any article of manufacture other than the phones themselves. In both trials, Samsung’s expert witness, Mr. Wagner, calculated total profits under 289 only on the phones themselves. And thus there is no — no reasonable juror in these trials could possibly have awarded total profits on anything other than the phones…”
It should be noted that earlier, Sullivan said that Samsung did try on six occasions to get the court to identify individual components of the phone as infringing the design patents instead of the entire phone, but each of those arguments were denied because the court felt the argument was seeking apportionment which was denied under Section 289.
Compared to the other counsel making oral arguments, Waxman was not given the ability to speak much at length and received more counter-arguments from the SCOTUS bench, which is somewhat unusual. In patent matters Waxman is generally given broad latitude by the Court to make his arguments largely uninterrupted.
Chief Justice John Roberts, for one, seemed to have difficulties understanding Apple’s position in the case.
ROBERTS: “I — maybe I’m not grasping the difficulties in the case. It seems to me that the design is applied to the exterior case of the phone. It’s not applied to the — all the chips and wires, so why –”
WAXMAN: “That’s right.”
ROBERTS: “So –”
WAXMAN: “That’s absolutely right. And, you know, of course you can’t get a design patent on something that the consumer can’t see. And yet Congress –”
ROBERTS: “So there should — there shouldn’t be profits awarded based on the entire price of the phone.”
WAXMAN: “No. The profits are awarded on the manufacture to which the design is applied.”
ROBERTS: “The outside, the case is part of it.”
WAXMAN: “Well, maybe and maybe not. I think the — the difficulty here is that it’s important to understand that design is not a component and that a patented design is not the article of manufacture. The patented design is something that’s applied to an article of manufacture.”
ROBERTS: “Okay. Well, these — these little, the chips and all are articles of manufacture, right? How is the design of the case applied to those chips?”
Waxman responded to this by noting that many of the earliest design patents issued as far back as the 1840s were filed for stoves and steam engines which had other components, much like smartphones do:
WAXMAN: “There’s no doubt the steam engine had plenty of working components, but a design is not a component. A design is applied to a thing. And the jury has to decide in the case of the VW Beetle that you have either a cup-holder or a patented hubcap, or the iconic shape of the car, I think that a jury could very well conclude that because someone who sees the iconic shape of a VW Beetle buys it because they think they are buying Beetle, that is, after all the reason why the infringer copied it.”
Waxman also pointed to court documents showing that Samsung realized that it had a “crisis of design” during development of its smartphone products. But although Waxman tried to steer clear of apportionment, going so far as to call it “a really bad word,” he didn’t seem like he was able to direct every justice away from that concept. In the words of Justice Kennedy: “Once you’ve identified the relevant article, then it seems to me necessarily what you’re doing is apportioning profits. I just don’t see how we can get away from that word.”
After Waxman’s oral argument time had fully waned, Sullivan was able to return to her arguments with some of the time she had reserved after opening. Although she noted that Samsung conceded that you can’t apportion the value of the design in relation to the article, she noted that Congress did not say that a party couldn’t segregate the proper article from the other articles that make up the product.
SULLIVAN: “So you must remand and tell the nation’s economy that no one can claim a partial design patent on a portion of a front face of an electronic device and come in and get the entire profits on the phone. Juries should be instructed that the article of manufacture is either is the Beetle exterior or there might be […] still today, there might be cases of unitary articles, just like the Dobson rugs. The Gorham spoon might be a unitary article. The patents on the handle, but nobody really cares about the sipping cup of the spoon. So we say the article of manufacture is the spoon. And if you get the profits from the spoon, that’s all right.”
GINSBURG: “Who has the burden of showing what is the relevant article? I assume in a case like this, Apple will say it’s the whole phone.”
SULLIVAN: “Justice Ginsburg, if I leave you with the most important disagreement we have with the government and with Apple, the burden is on the plaintiff. The burden is on the plaintiff to show what the article of manufacture is.
Why is that? The burden is on the plaintiff to show damages. And subsidiary questions subsumed in what the damages are are also always the plaintiff’s burden, as the entire market value rule in the Federal Circuit shows. With respect, we request that you remand — vacate and remand.”
At 11:07 a.m. ET, Chief Justice Roberts declared: “The case is submitted.” Now we wait for a decision that will come sometime before the end of the Court’s term in June 2017. While it may have seemed that the oral arguments went well for Samsung, that is not always, or even usually, a good gauge of how the Court will ultimately decide. Of course, time will tell.