December 2016

Apple v. Samsung – Supreme Court Limits Design Patent Damages

Takeaway: On December 6, 2016, the U.S. Supreme Court issued a ruling on the design patent damages question in the ongoing Apple v. Samsung smartphone war.  Essentially, the Supreme Court stated that damages for design patent infringement under 35 U.S.C. § 289 may be limited to the profits gained from the component to which the patented design (or colorable imitation thereof) was applied, as opposed to the entire article of manufacture (in this case, the entire smartphone). 

The ruling is yet another in a series of anti-patent owner rulings from the U.S. Supreme Court in the last 15 years.  At present, this looks like a victory for Samsung, which was subject to approximately $400 million in damages from Apple’s design patent infringement victories in the lower courts, but the case was remanded to the United States Court of Appeals for the Federal Circuit for further proceedings to determine if the pertinent “article of manufacture” in the design patents Apple asserted against Samsung is the entire phone, or a component thereof.

Title 35 U.S.C. § 289 states:

Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250 … .

35 U.S.C. § 289.
The Supreme Court framed the issue and the consequences of deciding it one way or the other, as follows:

This case requires us to address a threshold matter: the scope of the term “article of manufacture.”  The only question we resolve today is whether, in the case of a multicomponent product, the relevant “article of manufacture” must always be the end product sold to the consumer or whether it can also be a component of that product.  Under the former interpretation, a patent holder will always be entitled to the infringer’s total profit from the end product.  Under the latter interpretation, a patent holder will sometimes be entitled to the infringer’s total profit from a component of the end product.

Samsung Electronics Co., Ltd. et al. v. Apple, Inc., Slip Op. at 5.

The Supreme Court concluded that the text of 35 U.S.C. § 289 resolved the issue:

The text resolves this case. The term “article of manufacture,” as used in § 289, encompasses both a product sold to a consumer and a component of that product.
* * *
[T]he term “article of manufacture” is broad enough to encompass both a product sold to a consumer as well as a component of that product.

Id. at 8.
The case was remanded to the Federal Circuit for a determination of whether, for each of the design patents infringed, the “article of manufacture” is the entire smartphone, or a component of the smartphone.

The impact of this ruling may be significant in several respects:

1) It will likely weaken design patents to the extent that, as a general matter, the damages recoverable under 35 U.S.C. § 289 for design patent infringement will decrease.

(2) It will likely increase litigation costs not only in fighting about what constitutes the pertinent “article of manufacture,” but also will likely increase expert witness costs in connection with the now more difficult task of ascertaining the amount of profits garnered from a particular component of a larger apparatus or product.

(3) It may also make it more difficult to recover damages for design patent infringement under 35 U.S.C. § 289 in light of recent guidance from the Federal Circuit requiring district courts to be more stringent in connection with damages calculations in patent cases.  In other words, because it will be more difficult to calculate damages for a given component in a larger product, the courts may simply find that the damages calculations are too speculative to be admissible.  At least that is what we would expect to see in the near term.

This opinion is just another in a long line of U.S. Supreme Court opinions that serve to weaken U.S. patent rights (see e.g., Festo, eBay, KSR, Bilski, Mayo, Alice).  In this case, however, the ruling, though not beneficial to design patent owners, would seem to make the determination of design patent damages under 35 U.S.C. § 289 more specific and rigorous, which is not necessarily a bad thing from an infringer’s standpoint.

 

Supreme Court to Review Scope of Venue for Patent Infringement

Takeaway: Supreme Court will decide whether the patent venue statute, 28 U.S.C. § 1400(b), which states that patent infringement cases are to be brought in the judicial district where the defendant “resides,” is supplemented by the general venue statute, 28 U.S.C. §1391, which deems that a corporate entity may reside in multiple judicial districts.

On December 14, 2016, the Supreme Court agreed to review the Federal Circuit decision,In re TC Heartland, LLC, Fed. Cir. No. 2016-105, 4/29/2016.  The Federal Circuit decision came as a mandamus petition to overcome a district court denial for change of venue based on a previous Federal Circuit decision, VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990).

28 U.S.C. § 1400(b) has long stood for the proposition that patent infringement may be brought in the judicial district “where the defendant resides” or where it has committed acts of infringement, or has a regular place of business.  The Supreme Court held inFourco Glass Co. v. Transmirra Prods., 353 U.S. 222 (1957), that Section 1400(b) is not supplemented by the general venue provision at 1391(c), which defines “resides” for venue determinations for corporate defendants as any place a court has personal jurisdiction over the corporate defendant.

The Federal Circuit distinguished VE Holdings from Fourco.  28 U.S.C. § 1391(c) states that: “For purposes of venue under this chapter, a defendant that is a corporation shall be deemed to reside in any judicial district in which it is subject to personal jurisdiction.” By the plain language of the statute, a corporation that makes any sales in East Texas is then deemed to reside there, which was the basic analysis of VE Holdings.  This holding has allowed patent trolls to easily establish venue in the Eastern District of Texas.

However, typically, when the Supreme Court agrees to hear a patent case, it is very likely that it is because the Supreme Court disagrees with the Federal Circuit, meaning that once the Supreme Court decides on In re TC Heartland, it is highly possible that the Eastern District of Texas will no longer be the patent troll mecca.

Supreme Court Heard Oral Argument For Case Regarding Whether Designs On Cheerleading Uniforms are Copyrightable

Takeaway: In oral argument for Star Athletica, LLC v. Varsity Brands, Inc., the Supreme Court fails to clarify “the most vexing, unresolved question in copyright law” in reviewing whether designs on cheerleading uniforms are copyrightable.

In 2010, Varsity, the world’s largest manufacturer and distributer of cheerleading uniforms, sued Star Athletica for infringing on its uniform designs, which consisted of stripes and chevron design elements that Varsity argued were “separable” from the utility of the garment.  Star Athletica argued that because cheerleading uniform designs were “useful” by nature, they did not qualify for copyright protection.

The Sixth Circuit reversed a federal judge’s ruling in favor of Star Athletica, and Star Athletica petitioned for certiorari to the Supreme Court.  The Supreme Court granted certiorari in May, knowing that it needed to clarify the ambiguities of the Copyright Act that led to this case.   Section 113 of the Copyright Act states that if a work is of a “useful nature,” then it is not copyrightable.  In the context of fashion, if a design element of a garment is functional rather than artistic, it is not copyrightable.

In the abstract, how to separate utility from what is purely artistic seems rather straightforward, but courts have struggled in applying the standard uniformly. When it comes to fashion, prestigious labels such as Ralph Lauren and Michael Kors support Varsity’s argument that designs on uniforms are intertwined with the garment’s utility.  Star Athletica, on the other hand, represents smaller brands that aim to protect original art without necessarily undermining competition.

The Supreme Court recently heard the oral argument for the case.   Mr. Bursch, counsel for Star, spoke about the utility of the lines, chevrons, and patterns of Varsity’s copyrighted works, arguing that the uniforms’ design cannot be conceptually severed from the uniform, stating that the absence of the  designs and colors on the uniforms fails to otherwise signal the presence of a cheerleading uniform.  Mr. Jay, counsel for Varsity, eventually focused on the argument that the designs are, in fact, separable from cheerleading uniforms because they also appear on warm-ups and jackets.

The oral argument did not seem to provide much guidance as to how the Court will rule, which will greatly affect the $300 billion dollar fashion industry one way or another.  While not mentioned, perhaps copyright on the fabric comprising the uniform would offer copyright protection. Additionally, design patent protection may have been an additional, albeit, more expensive alternative.

Consumer Review Fairness Act Will Pass with President Barack Obama’s Signature

Takeaway: Now that the Senate has passed the Consumer Review Fairness Act by unanimous vote, the bill just needs President Obama’s signature before becoming law and prohibiting companies from restricting consumers’ ability to post critiques through contractual clauses.

The bill not only prevents companies from adding non-disparagement clauses in their terms of services, but also disallows companies from asserting any copyright interests in their consumers’ reviews.  Further, both the Federal Trade Commission and state Attorney Generals are allowed to enforce the new Act, mirroring the legislation passed in California.
The bill was in response to a highly publicized suit pertaining to a couple who posted a negative review about KlearGear and received a bill from KlearGear for $3,500 for violating a non-disparagement clause in their terms of services.  In 2015, a federal court judge ordered KlearGear to pay the couple over $300,000 in damages for damaging their credit because they refused to pay the bill.

“By ending gag clauses, this legislation supports consumer rights and the integrity of critical feedback about products and services sold online,” Chairman of the Commerce Committee John Thune (R-S.D.) said in a statement after the bill’s passage.

Therefore, companies need to review their consumer contracts and remove and/or amend any non-disparagement or copyright ownership clauses regarding consumer reviews and or remarks of a company’s goods and services.

IP Professionals Polled Showing Increased Concern Over Corporate IP Cyber Theft

Takeaway: In October 2016, Deloitte Advisory Cyber Risk Services released the results of an online poll of intellectual property professionals that reflects a growing concern about the security of their companies’ intellectual property assets in the wake of an increase in cyber theft.

For many companies, intellectual property (“IP”) assets can constitute upwards of 80% of the company’s value and as one of the most valuable assets, the security set in place for protecting the IP needs to reflect that.  However, according to the poll of nearly 3,000 IP professionals, almost 50% of the respondents stated that their companies are only in the building stages of their IP security plan or do not even have one in place at all.

The respondents were IP professionals that came from a broad array of business sectors, including: banking and securities: 13.5%; technology: 8.4%; investment management: 6.1%; travel, hospitality and services: 5.4%; insurance: 5.1%; and retail, wholesale and distribution: 5.0%.

Further, across these different business sectors, the highest four sectors with over 60% of respondents anticipating an increase in cyber theft are power and utilities: 68.8%; telecom: 68.8%; industrial products and services: 64.7%; and automotive: 63.9%.

The survey also showed that 20.1% of respondents believe that IP cyber theft will come from “employees and other insiders” at their organizations, followed by competitors (16.3%), activist groups (12%), third-party vendors (11.7%) and nation states (10.1%).  Therefore, one of the suggestions for mitigating IP cyber theft from insiders is to create specific “insider threat mitigation programs” that include routine and random auditing, as well as special policies and training programs for employees.

However, one of the biggest challenges remains to be “assessing what IP had been stolen, or the impact of IP loss” and “managing investor and customer/client relationships,” with a combined 44.1% of respondents stating that as the biggest challenge to their organizations.

Hopefully, with more coverage relating to the imminent threat of cyber theft, more and more companies will reevaluate their current IP protection programs and hopefully begin to implement protocols that are more rigorous, and with more tools available to them.

Facebook v. Vachani – Violating both the Computer Fraud and Abuse Act (“CFAA”) and California Penal Code Section 502

Takeaway: In Facebook v. Vachani, the U.S. Court of Appeals for the Ninth Circuit held that Power Ventures, with CEO Steven Vachani, violated both the Computer Fraud and Abuse Act (“CFAA”) and California Penal Code Section 502 when Power Ventures continued to access Facebook’s computer system after receiving Facebook’s cease and desist letter regarding its permission to access.

CEO Steven Vachani operated a social networking site, Power.com, which acted as a social network aggregator, allowing users to see all of their social network contacts on one platform.

In order to attract new visitors, Power put a message stating “First 100 people who bring 100 new friends to Power.com win $100,” with a button titled “Yes, I do!” When a user clicks the button, Power would, in many cases, transmit a message to the user’s Facebook friends, stating that the message was from “The Facebook Team.”  Facebook requires that third-party users enroll in the Facebook Connect program in order to contact its users and agree to an additional Developer Terms of Use of Agreement.

Facebook sent a cease and desist letter once it found out about Power’s campaign and in response, Power refused to sign the Developer’s Terms of Use Agreement and enroll in Facebook Connect. Consequently, Facebook blocked Power’s IP addresses. Power then changed its IP addresses and continued its activities. Facebook filed an action in Federal Court and on review, the Ninth Circuit reviewed three separate actions.

1.   Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (“CAN-SPAM”)

CAN-SPAM prohibits messages that are “materially false” or “materially misleading.”  15 U.S.C. § 7706(a)(1).  The Ninth Circuit found that identifying the messages as from “The Facebook Team” did not amount to being “materially misleading” as defined under CAN-SPAM because Facebook was one of the initiating parties, meaning that users of a system can having the service provider become an initiating sender of messages under CAN-SPAM.

2.   Computer Fraud and Abuse Act of 1986 (“CFAA”)

The CFAA “provides for two ways of committing the crime of improperly accessing a protected computer: (1) obtaining access without authorization; and (2) obtaining access with authorization but then using that access improperly.” In order to prove a private right of action, corporations must show that they have “suffer[ed] damage or loss by reason of a violation of this section.”  Facebook was able to show that employees spent $5,000 worth of hours in responding to Power’s activities and the Ninth Circuit found that Power did indeed violate the CFAA when it accessed Facebook’s computer systems after receiving the cease and desist letter.

3.   California Penal Code Section 502

Section 502 provides for liability where a person ““[k]nowingly accesses and without permission takes, copies, or makes use of any data from a computer, computer system, or computer network, or takes or copies any supporting documentation, whether existing or residing internal or external to a computer, computer system, or computer network.” § 502(c)(2).  The Ninth Circuit held that Mr. Vachani was personally liable for Power’s offending actions, and, therefore, senior corporate decision makers may be personally liable under Section 502.

Federal Agencies Working with United States Patent and Trademark Office To Fight Fraudulent Trademark Solicitations

Takeaway: Two California men pled guilty in a mass-mailing scam targeted at U.S. trademark applicants. The United States Patent and Trademark Office (“USPTO”) warns applicants to be extra cautious when responding to alleged correspondence from the USPTO.

The United States Patent and Trademark Office (“USPTO”) works closely with federal agencies, including the Department of Justice, the Federal Trade Commission, and the United States Postal Inspection Service to combat the similar problem of fraudulent trademark solicitations.  The Department of Justice recently announced that two California men who pled guilty in a mass-mailing scam targeted at U.S. trademark applicants admitted to stealing approximately $1.66 million from registrants and applicants using companies called Trademark Compliance Center (TCC) and Trademark Compliance Office (TCO).

The USPTO issues warnings and a link to the USPTO’s Non-USPTO Solicitations page in each office action, which reminds customers to carefully review all correspondence regarding their application to ensure they are responding to official documents from the USPTO.

In addition, the USPTO provides online resources including a frequently updated list of fraudulent entities the USPTO has already identified. If one receives an invoice from a company not appearing on this list, the USPTO requests a copy of the notice and the envelope it came in be sent to [email protected].