Supreme Court Clarifies “Article of Manufacture” In Design Patent Cases, And Reverses $400,000,000 Jury Award To Apple

On Tuesday December 6, 2016, in Samsung Electronics Co. v. Apple Inc., 580 U.S. ___ (2016), the Supreme Court unanimously rejected the Federal Circuit’s “narrow reading” of “article of manufacture” for purposes of damages for infringement of a design patent, and reversed the Federal Circuit’s affirmance of a $400,000,000 damages award to Apple.  The Court’s decision is an important step toward limiting what many have viewed as an outdated damages regime for design patent infringement.

The Patent Act prohibits the unlicensed use of a patented design “or any colorable imitation thereof, to any article of manufacture for the purpose of sale” as well as the unlicensed sale or exposure to sale of “any article of manufacture to which [a patented] design or colorable imitation has been applied.”  35 U.S.C. § 289.  A successful design patent plaintiff is entitled to recover from an infringer the “total profit” from the unauthorized use of “the patented design” on the “article of manufacture.”  Id.

Apple sued Samsung in 2011, alleging that various Samsung smartphones infringed three design patents.  Slip Op. at 3-4.  The design patents covered “a black rectangular front face with rounded corners,” “a rectangular front face with rounded corners and a raised rim,” and “a grid of 16 colorful icons on a black screen.”  Id. at 3.  In 2012, a jury found that some of Samsung’s smartphones infringed the design patents and awarded Apple $399,000,000 in damages.  Id. at 4.  This amount was based on the “total profit” Samsung made from its sales of the infringing smartphones.  Id.; 35 U.S.C. § 289. 

On appeal to the Federal Circuit, Samsung argued that the damages award was improperly calculated because it was based on profits derived from the entirety of each infringing smartphone, rather than the components of the phones found to infringe the Apple design patent (i.e., the camera shell or body).  Id.; see 786 F.3d at 1002.  According to Samsung, because each Samsung smartphone was comprised of numerous components, the damages should have been limited to profits attributable to the components that incorporated the patented designs.  Id.  The Federal Circuit disagreed, finding that the components of each smartphone were not sold separately from the smartphone as a whole, and therefore did not qualify as “distinct articles of manufacture to ordinary purchasers.”  Id.  In the Federal Circuit’s view, only the smartphone in its entirety qualified as an “article of manufacture” within the meaning of section 289.  Id

The Supreme Court reversed.  The Court framed the issue of assigning design patent damages as a two-step inquiry:  first, identification of the “article of manufacture” to which the infringing design has been applied; second, to calculate the infringer’s profit made on the article of manufacture.  Samsung required the Court to consider the Federal Circuit’s evaluation of the first step.  Samsung, 580 U.S. at ___ (slip op., at 5).

The Supreme Court explained that “[t]he text [of §289] resolves this case.”  Id. at 6.  The Court held the Federal Circuit’s restriction of “article of manufacture” to only a final product sold to a consumer was a “narrow” reading of section 289 that “cannot be squared with the text.”  Id. at 7-8.  “The term ‘article of manufacture,’ as used in §289, encompasses both a product sold to a consumer and a component of that product.” Samsung, 580 U.S. at ___ (slip op., at 6).  Relying on dictionary definitions to support its conclusion that “an article of manufacture . . . is simply a thing made by hand or machine,” the Court held that the statutory language is broad enough to encompass the individual components of a multicomponent device.  Id.  The Court further noted that its interpretation of “article of manufacture” was consistent with the term’s use in 35 U.S.C. §171, the provision governing what subject matter can qualify for a design patent, and 35 U.S.C. §101, the provision governing what subject matter can qualify for a utility patent.  Id. at 6-7.

The Court declined, however, to decide whether “for each of the design patents at issue here, the relevant article of manufacture is the smartphone, or a particular smartphone component.”  Id. at 8.  The Court explained that such a determination would require it to develop a test for identifying relevant articles of manufacture.  Id.  While the United States as amicus curiae had proposed a test,[1] neither Samsung nor Apple had briefed the issue.  The Court declined to articulate a test, instead leaving it to the lower courts to fashion a methodology for identifying the “article of manufacture” to which liability for design patent infringement may attach.

Various implications of Samsung seem likely.  While clarification of the “article of manufacture” is important to the ongoing development of patent damages law, it may not prove the most challenging aspect of the inquiry.  In many cases, identification of the article of manufacture is more straightforward that ascertaining the “total profits” derived from the sale of the article.  The latter issue will almost certainly require new expert and trial approaches to establishing, or refuting, damages associated with infringement of a design patent.  Also, the Court’s decision almost certainly will mean that many design patents will be viewed as not carrying the same value they did prior to Samsung.  Nevertheless, the additional clarity that will result from Samsung, and the lower courts’ application of it, will help parties better evaluate their rights and exposure in the marketplace and litigation.  It will also help to sharpen the focus on valuation of design patent assets, and portfolios in which they exist.

-- By Jason S. Angell and Josh Young

[1] The Government proposed a case-specific “article of manufacture” test that called for the fact finder to consider the scope of the design claimed in the plaintiff’s patent, the relative prominence of the design within the product as a whole, whether the design is conceptually distinct from the product as a whole, and the physical relationship between the patented design and the rest of the product.  Brief for United States as Amicus Curiae 27–29. 

Supreme Court Relaxes Standard for Proving Willful Infringement

In Halo Electronics, Inc. v. Pulse Electronics, Inc., et al., No. 14-1513, a unanimous opinion by Chief Justice John Roberts, the Supreme Court today overturned the two-part test for willful infringement that the Federal Circuit established in 2007 in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc).  The Supreme Court held that the lower court’s test was too rigid and unfairly protected infringers that had willfully infringed the patent rights of others.  Importantly, today’s holding establishes that district courts have broad discretion to evaluate whether a party has willfully infringed a patent such that it should be liable for enhanced damages under the Patent Act.

Upon a finding of infringement, a district court “shall” award a successful plaintiff in an action for patent infringement “damages adequate to compensate for the infringement.”  35 U.S.C. § 284.  In addition, the district court “may increase the damages up to three times the amount found or assessed.”  Case law interpreting § 284 has long held that enhanced damages may be available in cases of “willful” infringement.

The law of enhanced damages under § 284 has been the subject of some controversy over the years.  Soon after it was established, the Federal Circuit established an “affirmative duty of due care” that effectively required accused infringers to present an opinion of counsel in order to successfully defeat a willfulness claim.  See Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F. 2d 1380 (1983).  The “affirmative duty of due care” foreseeably created tension with respect to the attorney-client privilege.  Twenty years later, the Federal Circuit changed the law in ways that represented a significant pendulum swing in the opposite direction. 

In 2007, abandoning the “affirmative duty of due care” standard, the Federal Circuit established a two-part test to be used to determine when it would be appropriate to enhance damages under § 284 for willful infringement.  See In re Seagate, supra.  The first step of the willfulness inquiry required the plaintiff to prove by clear and convincing evidence that “the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.”  The second step required the plaintiff to demonstrate by clear and convincing evidence that the “objectively-defined risk . . . was either known or so obvious that it should have been known to the accused infringer.”  In practice, an infringer that made a showing that a “reasonable” defense existed (or, in other words, raised a “substantial question” as to validity or noninfringement) could defeat a willfulness claim at step one, and few cases proceeded to step two. 

Today’s Supreme Court opinion held that the Seagate test was not consistent with § 284.  The Supreme Court reviewed two willfulness decisions from the Federal Circuit.  In the first case, Halo Electronics had sued Pulse Electronics for patent infringement.  A jury found Pulse liable for infringement, and that there was a high probability Pulse had done so willfully.  However, the district court declined to award enhanced damages under § 284 because it determined Halo could not show objective recklessness under the first step of Seagate.  The basis for the court’s finding was that Pulse had presented at trial a defense that “was not objectively baseless, or a ‘sham.’”  The Federal Circuit affirmed. 

In the second case, a jury found that Zimmer had willfully infringed Stryker’s patents.  The district court awarded treble damages under § 284, noting the enhancement was appropriate “[g]iven the one-sidedness of the case and the flagrancy and scope of Zimmer’s infringement.”  The Federal Circuit vacated the award of treble damages, concluding that enhanced damages were unavailable because Zimmer had asserted “reasonable defenses” at trial.

The Supreme Court vacated the judgments of these two Federal Circuit cases and remanded them for further proceedings.  The Supreme Court came to three important conclusions.  First, the Supreme Court rejected the idea that an independent showing of “objective recklessness” should be a prerequisite to enhanced damages.  The opinion held that an infringer’s subjective willfulness may warrant enhanced damages without regard to whether its infringement was objectively reckless.  Culpability is generally measured against an actor’s knowledge at the time of the challenged conduct.  The Federal Circuit’s Seagate framework erroneously made dispositive the ability of the infringer to muster a reasonable defense at trial, even if it did not act on the basis of that defense, or was even aware of it. 

Second, the Supreme Court rejected the Federal Circuit’s requirement that recklessness be proved by clear and convincing evidence, and held § 284 is governed by the preponderance of the evidence standard.  The Supreme Court noted that Congress erected a higher standard of proof elsewhere in the Patent Act, but not in § 284. 

Third, the Supreme Court held that the district court’s determination on whether enhanced damages are appropriate is to be reviewed on appeal for abuse of discretion.  In doing so, the Supreme Court rejected the Federal Circuit’s tripartite appellate review framework, which required reviewing the first step – objective recklessness – de novo, the second step – subjective knowledge – for substantial evidence, and the ultimate decision – whether to award enhanced damages – for abuse of discretion.

Today’s decision reflects the continuing trend of the Supreme Court’s correction of the Federal Circuit’s interpretation of the Patent Act.  It will also be considered a win for patent owners, many of whom view recent decisions from the Supreme Court and the Federal Circuit as tipping the balance against patent holders.  Nevertheless, the Supreme Court emphasized that enhanced damages remain reserved for egregious cases typified by willful misconduct.  Elimination of the Federal Circuit’s Seagate test reestablishes that it is the “over nearly two centuries of application and interpretation of the Patent Act” that again guides district courts in applying § 284.

TC Heartland: No Tightening Of Plaintiffs’ Ability To Choose A Friendly Patent Venue

By: Jason S. Angell

A frequent complaint from accused patent infringers is that they often are sued in far-flung jurisdictions that are considered “plaintiff-friendly,” such as the Eastern District of Texas, Delaware, or, more recently, the Middle District of Florida.  Defendants complain that requiring them to defend a patent case in a jurisdiction in which they have no operations or personnel is inappropriate and unfair.  However, the Federal Circuit has long held that venue is proper in jurisdictions where defendant’s goods are sold, and thus infringing acts have occurred in the jurisdiction.  The Federal Circuit reaffirmed that rule in its rejection of a closely-watched mandamus proceeding initiated by TC Heartland LLC (“TC Heartland”). In re: TC Heartland LLC, Case No. 16-105 (Fed. Cir. April 29, 2016).