On December 6, 2016, the U.S. Supreme Court issued a long awaited decision in Samsung Electronics v. Apple addressing the scope of damages available when a U.S. design patent is infringed. Reversing a damage award to Apple of $399 million, the Court modified the “total profit” damages standard which had applied to design patents for more than a century. While the Court left the measure of design patent damages unchanged — total profit for sale of the ‘article of manufacture’ to which the design was applied – it unanimously held that the article of manufacture did not need to be the end product as sold to a consumer but might instead be a sub-component of that product even if the sub-component is not sold separately. This decision is particularly significant for valuation and enforcement of design patents that apply to only part of a multi-part product, such as the housing for an electronic or mechanical device.
Under U.S. patent law, the minimum damages that can be awarded to an infringer is a reasonable royalty for the use made of the invention by the infringer. An additional remedy is available for design patents. As set forth in the Patent Act, “[w]hoever … (1) applies the patented design…to any article of manufacture for the purpose of sale, or (2) sells … 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). Since ‘total profit’ will usually exceed a reasonable royalty, and is also comparatively easier to prove than a patent owner’s lost profits due to the infringement, total profit tends to be the remedy selected by design patent owners. (In a litigation, a design patent plaintiff can explore each of the various types of damages but in the end they need to pick one to apply.)
Historically, the ‘total profit’ rule has been measured against the profit of the complete product as sold to the customer. As in the Samsung v. Apple case, this raised significant issues when the patented design applied to only a small part of a multi-component product that is sold as a unit to the customer. For example, the design patents asserted by Apple were directed to the basic shape of the front of the iPhone and the arrangement of icons on the display:
At trial, Samsung was found to infringe the patents and the jury awarded Apple damages equal to Samsung’s total profit on the infringing cell phones — $399 million. Samsung argued before the district court and on appeal that the damages should be measured against profit attributable to the screen portion of the phone, not the entire device. The Federal Circuit has repeatedly rejected this argument in cases where a multi-component article is sold as an integrated unit, and it did so here, upholding the enormous damages award. (In a recent but less financially extreme example, the Federal Circuit held that damages for infringement of a design patent on a hinge assembly used in a truck loading dock leveler was the total profit on the entire dock leveling assembly because the dock was sold as a unit with the hinge welded to it. (Nordock v. Systems Inc (PowerAmp) (Fed. Cir. 2015)).
The Federal Circuit’s position in this and other cases has been based on its view that the Patent Act explicitly authorized the award of total profit from the article of manufacture bearing the patented design. Further supporting its position was that when Congress first enacted the long-standing total profit rule for design patent damages in 1887 it did so to override an 1886 Supreme Court decision allowing design patent damages to be apportioned based on the amount of profit for the product that can be attributed to the patented design.
The present Supreme Court was fully aware of this statutory background when it made its ruling. However, it side-stepped the apportionment issue and instead focused on defining what an “article of manufacture” was. The Court unanimously held that an “article of manufacture” was simply something that was made by hand or by machine, and that this encompassed both products sold to consumers and the various components in of products sold to consumers even if the components were not sold separately. This lawyerly argument preserves the statutory interpretation while effectively opening the door for an apportionment-like argument in the case of multi-component products.
The Supreme Court declined to establish any sort of test for determining whether a relevant article of manufacture for design patent infringement damages is the product as a whole or a sub-component of it. Instead, it remanded to the Federal Circuit to do this both generally and, for this specific case, to determine whether the relevant article of manufacture for Apple’s design patents is the smartphone as a whole or just the screen display and housing components. (In a follow-up, the Supreme Court also remanded the Nordock case the Federal Circuit to reconsider damages there in view of the new standard.)
It will take some time for a clear rule or set of factors to be defined and for the burdens of proof to be established. Some of the open questions that litigants and the courts will need to address include:
- What factors will be considered when determining the article of manufacture to which a design patent applies when dealing with a multi-component product?
- What will the default rule be? Profit on the product as a whole or on the sub-component bearing the design? Will an accused infringer need to prove that damages should be measured against the sub-component or will a patent owner need to justify seeking damages on the product as a whole when their patent only covers a small part?
- If damages are based only on a sub-component, how is profit on that component to be measured? Simple apportionment of total profit vs. cost of each component? Should the importance given to the feature by customers be considered?
The changed rule also makes it more important to consider reasonable royalty damages in a design patent infringement case. If the patented design is for a small sub-component that is nevertheless a major driver of customer demand, a reasonable royalty applied to the complete product could exceed the total profits assessed for the sub-component. This issue might not be resolved until late in the case requiring both alternatives to be addressed.
At a minimum, the Supreme Court’s decision will increase the complexity of damage analyses for design patents by creating more issues to be addressed in discovery, argued by lawyers and experts on both sides, and decided by the Court.