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Home/Magazine Archive/November 2017 (Vol. 60, No. 11)/Disgorging Profits in Design Patent Cases/Full Text
Legally speaking
Disgorging Profits in Design Patent Cases
Credit: Alicia Kubista / Andrij Borys Associates
As reported in my March 2017 column, the U.S. Supreme Court struck down a $399 million award against Samsung for infringing three Apple design patents. Samsung's win concerned an important but narrow issue. The Court ruled that Apple is entitled to be awarded Samsung's profits from sale of the article(s) of manufacture to which the protected designs were applied. However, lower courts erred in ruling that the relevant article of manufacture was necessarily the whole smartphone; it could instead be one or more components of the smartphones.
The Apple v. Samsung case has been sent back to the trial court to determine, first, to what relevant article(s) of manufacture were the patented designs applied, and second, what part of the $399 million total profits Samsung made from sales of the infringing smartphones is attributable to the relevant article(s) of manufacture. The Court offered no guidance about how lower courts should make either assessment.
On remand, Apple is still insisting that the relevant article is the whole smartphone. (For the sake of brevity, I will use the term "article" instead of repeating "article of manufacture" or adopting AOM as an acronym.) Samsung, however, contends the relevant articles are the relatively small components that embody the three designs at issue (that is, a rectangular flat face with rounded corners, a rectangular flat face with bezel, and a colorful screen with 16 icons). Apple will be entitled to a much more modest award than $399 million if Samsung prevails on this issue.
Samsung was not the only technology company relieved by the Supreme Court's ruling. Facebook, Google, eBay, Hewlett-Packard, and Dell, along with several high-technology industry associations, filed amicus curiae briefs in support of Samsung's appeal. The briefs argued that when design patent infringement occurs as to only one or a small number of components, it would be improper to disgorge total profits from the sale of multicomponent devices.
Samsung's victory notwithstanding, it is premature to assume the risk of excessive awards in design patent cases has subsided. The Supreme Court did not rule that the relevant article would necessarily and always be an individual component of a multicomponent device, only that it might be a component. How the relevant article and profits-from-that-article issues are resolved in Apple v. Samsung will have significant implications for future design patent cases involving multicomponent devices.
Recap on Design Patent Disgorgement
Disgorgement of infringer profits as a remedy in design patent cases came about because Congress got upset about a set of cases decided the 1880s. It reacted to Supreme Court rulings that the owner of a patent for a carpet design was entitled to only nominal damages (at the time, six cents, now worth about $1.50) against two infringers. The Court rejected a plea for disgorgement, saying that the patentee had failed to prove what portion of the profits were attributable to the infringing designs.
Soon thereafter, Congress effectively overturned the Court's ruling by creating a new remedy for design patent infringement. Under it, design patentees could elect, as an alternative to an award of actual damages (for example, lost profits or a reasonable royalty), a disgorgement of the defendant's "total profits" on the sale of any articles of manufacture embodying the protected design, or at least $250 (approximately equivalent to $6,100 today).
The legislative history made clear that courts should not try to determine how much of the defendant's profits were attributable to the infringing design, as opposed to the non-aesthetic attributes of the article. Instead, they should award total profits from the sale of the article of manufacture embodying the design. Congress recognized that this might overcompensate some design patentees, but that was better than under-compensating them. Moreover, the potential availability of a total profits award would also deter design patent infringement more than an apportionment remedy would.
What's the Relevant Article?
In many, and perhaps most, design patent cases, the article embodying a patented design will be the product as a whole. The design of a carpet, wallpaper, or chair, for instance, will often be the main selling point for the product, even though the quality of the materials used in the manufacturing process, the skill of the craftsmen, and other characteristics of the product or producer may contribute to the value of the product. If, however, the design is what actually drives demand for the product, it seems fair that infringers should have to disgorge all profits.
A patented design may, of course, also be embodied in a component of a multicomponent product. Profits disgorgement should be relatively straightforward when there is a separate market for the component. Consider, for instance, a patented design for an interior light that turns on when a refrigerator door opens. Consumers are unlikely to buy refrigerators because they like the design of its interior light. However, if the light and switch mechanism is sold as a component to be incorporated into other refrigerator models or other products with doors, it should be possible to estimate what profits to disgorge against an infringer of this design. It would be patently unfair, though, to disgorge profits from infringer's sales of refrigerators when only the interior light embodies the patented design.
Identifying the relevant article for disgorgement purposes is more difficult, however, in cases involving complex multicomponent products, such as smartphones, when there is no separate market for components that may embody a patented design. What evidence or factors should a judge or jury consider in determining the relevant article in such cases?
The place to start a relevant article inquiry should be looking at the design patent, which is supposed to identify the article intended to embody the design. The patent must include a drawing of the patented design as it would appear in the article. The patent may also have a textual description of the intended article. In addition, one should examine the patentee's and alleged infringer's products to discern how the patented design was embodied in the litigants' products. These types of evidence may sometimes suffice to identify the relevant article as to which disgorgement should occur.
In her argument before the Supreme Court, Samsung's lawyer recommended these steps for the relevant article inquiry. She also suggested that market studies might be useful to understand what consumers perceive the article embodying the design to be. Another indicator might be the costs incurred in developing the component embodying the design.
The Solicitor General of the United States, in a brief supporting Samsung's appeal and during oral argument, proposed consideration of four factors in making the relevant article determination: first, the scope of the patented design; second, the prominence of the design in the challenged product; third, whether the design is conceptually distinct from the product as a whole; and fourth, the physical relationship between the patented design and the rest of the product. The Supreme Court did not endorse use of these factors.
One might consider how much total profit Samsung would have made from sales of smartphones if it had not infringed Apple's design.
In support of its claim that the smartphone as a whole should still be considered the relevant article, Apple can be expected to argue that the patented designs are inseparable from the products embodying them, and that consumer demand for Apple products is due to its well-integrated designs. Would Samsung have sold so many millions of smartphones if it had not misappropriated the cool look of Apple designs? Apple thinks not.
Samsung will argue that the flat face of the smartphone and the flat face with bezel are two minor components of the exterior design of its smartphones. The colorful 16-icon design is similarly one small component of the screen displays of which smartphones are capable. These should be the three "articles" to which the Apple designs have been applied. Samsung will point to the very large number of components in smartphones to put the infringing components into proper perspective. Samsung could also point to consumer reports about Apple smartphones, which typically discuss features that consumers find most desirable.
What Profits to Disgorge?
Once the relevant article inquiry is resolved, the next question is what "total profits" did the infringer make from sale of that article. With a multicomponent product whose components are sold only as a package, "total profits" on one or more component-article(s) will almost certainly be some percentage of the profits made from sales of the infringing products. In Apple v. Samsung, $399 million was determined as the total profit Samsung made selling the infringing smartphones. So if the relevant article is not the smartphone as a whole, how should one decide what portion of those profits are attributable to the components held to be the relevant article(s)?
Expert witnesses are likely to play a significant role in assessing a total-profits-attributable-to-the-relevant-article award in design patent cases. Experts hired by the patentee and by the alleged infringer are, of course, unlikely to agree on the bottom line. However, their assessments, as set forth in reports and testimony, will generally set the bounds within which the trier of fact, whether a judge or a jury, will make the award. Juries, in particular, are likely to consider the relative culpability of the infringer in making such awards. It is consistent with principles of unjust enrichment for them to do so.
Conjoint analysis may be a useful economic technique to contribute to a design patent profits disgorgement analysis. It is often used to analyze how consumers conceive, integrate, value, and trade off different clusters of product and service features or attributes. By asking many people to express a preference between a few dozen pairs of designs that differ on features and attributes, product marketers can use clever mathematical techniques to estimate the importance of each feature in isolation. This technique has been used in some patent infringement cases, and would seem well suited for resolution of cases such as Apple v. Samsung in which design patents may cover only one or a small number of components of multicomponent products.
Alternatively, a profits disgorgement assessment might be built on a counterfactual scenario. As applied in Apple v. Samsung, one might consider how much total profit Samsung would have made from sales of smartphones if it had not infringed Apple's design patents and compare this estimate to the total profit Samsung actually made on infringing smartphones. The difference between the two profit scenarios would be the amount that Samsung should have to pay Apple under this model of the disgorgement remedy. This approach contrasts with a more compensatory approach that would focus on how much total profit Apple made from sales of its smartphones and how much profit it would have made if Samsung had not infringed. Economic experts could create models for undertaking these assessments.
Conclusion
Samsung won an important victory for itself and for other high technology companies in challenging the total profits award in the Apple case. However, uncertainty exists about how courts or juries should go about determining the relevant embodiment of a patented design to serve as the "article" on which the infringer's "total profits" should be disgorged. Because high-tech companies are utilizing design patents much more now than in the past, they have reason to worry about the legal quagmire hovering over disgorgement of profits awards in design patent cases involving multicomponent products.
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