Should Samsung have to pay Apple $399 million—its total profits on sales of certain smartphones—for infringement of three Apple design patents when the value of the Samsung phones may be attributable to many other desirable features and not just to the designs infringed? An anomalous rule in U.S. design patent law seems to suggest the answer is yes, when it should be no.
The U.S. Supreme Court heard oral arguments to determine the answer to this question last October: the Court decided the case in early December 2016, when it threw out the nearly $400 million in damages Samsung had been ordered to pay Apple by a ruling of the Court of Appeals for the Federal Circuit (CAFC) affirming an award of all of Samsung’s profits from selling the infringing phones. The exact amount of damages, to be determined by the U.S. Court of Appeals for the Federal Circuit or a trial court on remand, will likely be much less than the hundreds of millions of dollars Samsung might have paid.
Several technology companies (including Facebook, eBay, and Google) and technology industry associations filed amicus curiae (friend of the court) briefs. They warned that upholding the total profits award against Samsung would lead to a deluge of litigation and result in unjustified windfalls when design patents are infringed as to only one or a small number of components of complex multicomponent products. The Court’s decision will have huge implications for the technology industry.
After providing some background on design patents, this column discusses the arguments that the litigants and the U.S. government took on the "total profits" issue and the way the Justices reacted to those arguments.
Origins of the "Total Profits" Rule
Ornamental designs for articles of manufacture have been eligible for design patent protection in the U.S. since 1842. Their inventors must apply to the Patent and Trademark Office (PTO), satisfy novelty and nonobviousness standards, and claim the design through drawings and descriptions of the article of manufacture to which the design will be applied. (Most other countries provide legal protection original designs of article of manufacture, although not through the patent system.) Design patent protections may now last for up to 15 years.
Design patents in the 19th and early 20th centuries conventionally covered simple articles of manufacture, such as carpets and wallpaper, which were attractive to consumers because of the patented design. Design patents today are more likely to be sought for designs applied to specific components of complex products.
Infringement of a design patent occurs when an unlicensed person embodies that design in an article of manufacture and the accused product is so similar that an ordinary observer would be deceived into buying the infringer’s product thinking it was buying the patentee’s product. (Embodying the design in a different type of product generally does not infringe because consumers will not be deceived in this manner.)
When design patents have been infringed, courts may order defendants to pay the patentee a reasonable royalty for use of the patented design in infringing products. Alternatively, design patentees can ask for a disgorgement of the defendant’s profits as to the article of manufacture to which that design has been applied. (Courts have ruled that design patentees cannot get both disgorgement of profits and reasonable royalties, as that would produce double recovery.)
Origins of the "Total Profits" Rule
In the late 19th century, in two cases involving design patents for carpets, the U.S. Supreme Court gave a narrow interpretation to the disgorgement of profits rule. The Court denied the patentee an award of the infringers’ profits because he had not proven how much of the infringers’ profits were due to the patented design and how much was other factors (such as the quality of the wool).
In response to criticism of these decisions, the U.S. Congress in 1887 amended the design patent statute so that patentees could get the "total profits" that defendants derived from selling articles of manufacture embodying the patented designs. Congress was aware that this new "total profits" rule might overcompensate some patentees, but regarded this outcome as better than a rule that undercompensated them. There is, however, no comparable "total profits" rule in any other intellectual property law.
Apple’s Design Patents and Total Profits Award
Three design patents on the external configuration of smartphones were at issue in Samsung. One was for a black rectangular round-cornered front face for the device. A second was for a rectangular round-cornered front face with a surrounding rim or bezel. A third was for a colorful grid of 16 icons to be displayed on a screen.
In the trial Apple brought against Samsung for infringing these patents, the judge instructed the jury that it could not assess how much of Samsung’s profits from selling smartphones were attributable to the patented designs. If the jury found infringement, it was obliged to award Samsung’s total profits from sales of infringing phones. The jury agreed with Apple on the infringement claims and awarded $399 million in total profits. Samsung appealed to the CAFC.
The appellate court acknowledged it was difficult to justify this award for infringement of the three Apple design patents as a matter of equity. However, the CAFC decided the statute required it to affirm the total profits award because it regarded Samsung’s smartphones as the relevant "article of manufacture" to which the patented designs had been applied.
Samsung persuaded the Supreme Court to review the CAFC ruling.
Solicitor General Weighs In
The U.S. government rarely files briefs with Supreme Court cases or joins in oral argument when disputes are between private litigants such as Apple and Samsung. The Solicitor General (SG) filed a brief in Samsung to challenge the CAFC’s ruling, saying it would result in "grossly excessive and essentially arbitrary awards" for design patent infringement in cases in which the patented design was applied to one component of a multicomponent product (such as a latch for a refrigerator door). The SG also participated in the oral argument to represent the government’s interest in sound interpretations of U.S. design patent law.
The SG argued that the proper inquiry in cases involving multicomponent products was, first, to identify the relevant "article of manufacture" to which the patented design(s) had been applied, and second, to assess what portion of the defendant’s profits were attributable to the infringing article. In respect of multicomponent products, the relevant article of manufacture may be one component, rather than the product as a whole, even though there may be no separate market for that component.
The SG’s brief identified several factors that juries should take into account in deciding what the relevant article of manufacture was: the scope of the patented design; the extent to which the patented design was responsible for the appeal of the product; the existence of other conceptually distinct and unrelated components of the product; and how various components of the product were manufactured.
The SG recognized that it would sometimes be difficult for the jury to determine what "total profits" were attributable to the infringing components, but regarded the design patent statute as requiring this determination. The SG also recognized that when components embodying patented designs were not sold separately, the total profits inquiry would be "functionally similar" to the conventional profits-attributable-to-infringement analysis used in other types of IP cases. However, the SG stated that "a significant conceptual and practical difference [exists] between the profit attributable to the infringing article and the profit attributable to the infringement" (emphasis in the original).
The Justices did not discuss Apple’s patents at all or the allocation of profits to the smartphones at issue.
Profits attributable to the infringing article will generally be higher than profits attributable to infringement, especially when the relevant article of manufacture is valuable for more than the design. (Samsung’s lawyer suggested, for instance, that the design-patented rectangular round-edge design for smartphones might be valuable to consumers because it makes the face less likely to fracture in addition to making the phone look "cool.") Total profits on the round-edge component may overcompensate Apple, but this must be what Congress intended when it amended the law in 1887.
The SG recommended sending the Samsung case back to the lower courts to determine the relevant article of manufacture and profits attributable to that article under this standard.
The Supreme Court Argument
Before the Court, nobody defended the CAFC’s ruling that juries must award total profits on the sale of products embodying patented designs. Samsung pointed to hundreds of thousands of component parts in smartphones and argued that the three patented designs were only small components of the smartphones at issue. In a new trial on damages, Samsung argued that the jury should first study the patent to examine the design and the article to which the design was applied. The jury should then make a judgment about the profits attributable to the components embodying the infringing designs. Consumer surveys and expert witnesses might help the jury to decide these issues.
Although not defending the CAFC ruling, Apple asked the Supreme Court to affirm the total profits award against Samsung. It argued that its patented designs made its smartphones "peculiar and distinctive in appearance," as patented designs often do. (Judges sometimes decide that lower courts erred in their interpretation of a legal rule, but find the error to be too insubstantial to justify a new trial.)
Most of the Justices’ questions focused on the difficulties that juries would have in deciding what the relevant article of manufacture was and how much of the profits from the overall product should be attributable to the component in which the infringing design had been embodied.
Not all cases would be difficult, however. Total profits on products such as wallpaper and carpets should be easy insofar as the patented designs drove consumer demand for the product. Also relatively easy would be cases in which the patents were for small components of complex multicomponent products (for example, designs for car cup holders, windshields for boats, or hood ornaments for cars).
The Justices did not discuss Apple’s patents at all or the allocation of profits to the smartphones at issue. But they speculated about what juries might do in allocating profits for infringement of a hypothetical design patent covering the overall shape of a car such as the Volkswagen Beetle. Some Justices seemed to think that consumer demand for cars embodying this design would be near the total profits for the car as a whole, while other Justices thought that much of the value of such a car would lie in the mechanical and other functional design elements not covered by that design patent.
Conclusion
Although the Supreme Court oral argument in Samsung largely focused on non-technology design patent examples, the Justices were very aware of the concerns raised by many technology companies and industry associations about the deleterious effects of excessive awards in design patent litigation posed by the CAFC’s total-profits-on-products ruling.
The Court provided very little guidance in its Samsung decision about how fact-finders should assess the relevant article of manufacture to which patented designs have been applied and the profits attributable to that article in its Samsung ruling. We can all breathe a sigh of relief that the worst outcome of the case has been averted by the Court’s willingness to correct yet another erroneous ruling by the CAFC.
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