strategic patent licensing and litigation presentation at kaist october 2010 bruce d. sunstein...
TRANSCRIPT
Strategic Patent Licensing and Litigation
Presentation at KAIST October 2010
Bruce D. SunsteinSunstein Kann Murphy & Timbers LLP
Boston
www.sunsteinlaw.com©2010 Sunstein Kann Murphy & Timbers LLP
A US Supreme Court case has changed the way licensing is done in the US
MedImmune v. Genentech, 549 U.S. 118, 127 S.Ct. 764 (2007) makes it easier for a party in licensing negotiations with a patent owner to initiate a lawsuit for declaratory judgment attacking validity of the patent MedImmune held a patent license from Genentech
and was living up to terms of the license MedImmune nevertheless disagreed with
Genentech whether MedImmune must pay royalties under the license for a new drug MedImmune was launching
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MedImmune v. Genentech (cont’d)
MedImmune sues Genentech for a declaration that MedImmune has no obligation under the royalty agreement for the new drugThe Federal Circuit says that MedImmune cannot sue now because MedImmune is a licensee in good standingThe Supreme Court reverses: “we do not require a plaintiff to expose himself to liability before bringing suit to challenge the basis for the threat.” 127 S.Ct. 764 at 772
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In the wake of MedImmune
SanDisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007) involved communications to SanDisk by STMicroelectronics (STM), which expressly told SanDisk that STM had no plan to sue SanDisk for patent infringement but did show SanDisk how SanDisk infringed STM patents and that STM should take a patent licenseHeld: STM’s actions give SanDisk grounds to sue for a declaration of non-infringement and patent invalidity
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The implications of SanDisk Corp. v. STMicroelectronics, Inc.
There appears to be no safe way to offer a license to a patent without running a risk of being sued for a declaration of non-infringement and patent invalidity!In Hewlett Packard Co. v. Acceleron LLC, 587 F.3d 1358 (Fed. Cir. 2009), Acceleron informed Hewlett Packard of patent rights, but did not threaten to sue for infringement or demand a license Nevertheless, it was held that Hewlett Packard had the right to bring a declaratory action for non-infringement
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What is the rule about when the patent owner creates a risk of being sued for a declaration of non-infringement?
“Thus, a communication from a patent owner to another party, merely identifying its patent and the other party's product line, without more, cannot establish adverse legal interests between the parties, let alone the existence of a ‘definite and concrete’ dispute.” Hewlett Packard Co. v. Acceleron LLC, 587 F.3d at 1364. There must be some “affirmative act” by the patent holder. Id.
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So how do I offer someone a patent license?
Be prepared to run the risk of being sued just for having made the offer, orSue for infringement first, and then offer the licenseA concurring opinion in SanDisk Corp. v. STMicroelectronics, Inc. suggests that a confidentiality agreement might forestall an action for declaratory relief, 480 F.3d at 1386, note 1, but Hewlett Packard Co. v. Acceleron shows that it takes very little to create the risk
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The Supreme Court has recently weighed in on how patent litigation is conducted
Injunctions: eBay v. MercExchange, 547 U.S. 388 (2006) rejecting the Federal Circuit’s “general rule” that a
permanent injunction will issue once infringement and validity have been adjudged in patent disputes; now a matter of equity as in other areas of the law
Obviousness: KSR v. Teleflex, 550 U.S. 398 (2007) making it easier to attack patents on obviousness
grounds (and harder to overcome obviousness rejections by the Patent and Trademark Office on pending applications)
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Anatomy of a patent litigation: Comair Rotron v. Matsushita (1985-1994)
The technology in the litigation: brushless dc motor, used for things including a cooling fan in power supplies for personal computersThe brushless dc motor uses a permanent magnet (called the rotor) that turns within an electro-magnet (called the stator):
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DC brushless motor
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stator
rotor
The rotor is a magnet
The magnetic pattern on the rotor affects how the motor operatesIn the simplest of these motors, the magnetic pattern on the rotor needs a special configuration to make sure that the motor starts up each time the motor is turned onRotron obtained a patent for such a pattern in 1985
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The Rotron patent 4,494,028 to Fred Brown
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The Rotron rotor’s magnetic pattern
Overcame the problem (called “cogging”) in simple dc brushless motors that prevented their starting sometimes when powered onThe Rotron pattern involved making some regions of the rotor non-magnetized—called “nulls”
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The Rotron rotor pattern (Figs. 2A, 2B, 2C of Rotron patent 4,494,028 )
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magnetizedregions
non-magnetizedregions (nulls)
Getting the nulls on the rotor was not easy
It required a special electromagnet fixture to magnetize the rotorThe person making the fixture for Rotron did not think it would work
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The fixture looked like this (Fig. 4B of patent):
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Competition—Papst
Rotron was first to get true nulls on its rotor, but it was not first to make a rotor with similar performancePapst had an earlier patent that simulated the effect of nulls by putting opposite magnetic poles right next to each other A pattern of N and S close together worked like a
null It was thought hard or impossible to get a true null
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Papst patent 4,322,666 to Rolf Müller
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The Papst rotor pattern (Fig. 10)
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Placing a small N next to a small S simulatesa null
Competition—Matsushita
Matsushita entered the market for dc brushless motors using a rotor that copied the pattern used by PapstPapst started litigation against Matsushita in the US in the International Trade Commission (ITC) for patent infringement and also in a US federal court in New Jersey(The ITC is useful because its proceedings are very fast, and it can order that infringing products are not permitted to be imported into the US, although ITC cannot award damages)
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Matsushita settled with Papst by agreeing to using a magnetic pattern that did not infringe the Papst patent
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The new pattern that Matushita had agreed to use is specified in the agreement
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Nulls
Does this pattern look familiar?
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The Rotron rotor pattern (Figs. 2A, 2B, 2C of Rotron patent 4,494,028 )
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magnetizedregions
non-magnetizedregions (nulls)
In the same year as the Rotron patent issued, Rotron sued Matsushita for patent infringement in the ITC and in federal court in New Jersey
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The parties stipulated that information learned from each other in the ITC (a government agency) could also be used in a trial in federal court
The gathering of information from an opponent for use in litigation in the US is called “discovery”The rules for discovery in the ITC and in federal court permit obtaining large amounts of information, and parties are largely required to be quite cooperative in providing discoveryThe US is probably unique in the amount of information that can be obtained in discovery
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What happened in the ITC
After the discovery period in the ITC, there was an evidentiary hearing in the ITC in front of an administrative law judgeThe administrative law judge found that the Rotron patent was infringed but that the claims of the Rotron patent were invalid in view primarily of a published Japanese patent application
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The published Japanese patent application
Shows exactly the same magnetic pattern on the rotor as claimed and described in the Rotron patentSeems to describe nulls
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The published Japanese patent application (the “Japanese ‘066 application”)
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The published Japanese patent application (translation)
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The published Japanese patent application
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Nulls
Expert testimony for Matsushita
Although the published Japanese application does not describe a fixture to magnetize the rotor, the expert for Matsushita, Dr. Alexander Kusko (SM, ScD from MIT in EE), testified that it would be routine to modify the fixture of another prior art reference to make a suitable fixture
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Secondary considerations
As a result of the decisional law of the United States, when obviousness of claimed subject matter is at issue, the patent owner (or inventor if in the USPTO) can introduce evidence of non-obviousness. Graham v. John Deere Co., 383 U.S. 1, 17-18 (1966).This evidence (of so-called “secondary considerations”) can be related to “commercial success, long felt but unsolved needs, failure of others”, 383 U.S. at 17.
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What the administrative law judge said about secondary considerations
He found that that the Rotron invention produced cost savings but did not consider that fact as evidence of non-obviousnessHe said that that there were other ways of getting cost savings as well, for example, from the Papst patent and from the Japanese published application, and, anyway, the real cost savings came from using a one-piece rotor magnet, not from the Rotron invention
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Rotron appealed the administrative law judge’s determination
The appeal went to the full International Trade CommissionThe International Trade Commission affirmed the determination of the administrative law judge
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What should Rotron do?
Its patent had been invalidated by the full International Trade CommissionIt could appeal to the Federal Circuit, but on what grounds? The decision of the administrative law judge was
well “papered”—there seemed to be a strong basis for all of his determinations
Moreover, even if there were some grounds for an appeal, most appeals are unsuccessful
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Decision time for Rotron
Rotron spins off its commercial division, including the patent asserted, to a new company, Comair RotronNew management of Comair Rotron engages our firm to evaluate the case, which had been handled by other lawyers up to nowWhat do we recommend? We studied the record: the patent asserted, all the prior art, deposition testimony, transcripts of the administrative hearing, the administrative law judge’s decision
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Grounds for appeal?
After reviewing the record many, many hours, we develop the following line of argument: (1) the published Japanese reference is not
“enabling” (that is, a person of ordinary skill in the art would not know how to make a rotor with true nulls)
(2) the administrative law judge improperly failed to consider evidence (the “secondary considerations”) of non-obviousness
Even though any appeal is an uphill battle, because it seeks to change the status quo, we were given the go-ahead
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Behind the analysis—I
Our arguments as to secondary considerations applied only to obviousness, and therefore such arguments would not help to overcome invalidation based on anticipation by the published Japanese application; we decided to focus only on claims invalidated for obviousness But these claims still covered the Matsushita
product, so we felt this focused argument was worth it and had better prospects for success
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Behind the analysis—II
It would not be persuasive simply to argue that the administrative law judge failed properly to weigh the evidence of non-obviousnessWe felt it much stronger to argue that the judge failed to consider the evidence at all; we had authority that such evidence must be considered. Custom Accessories, Inc. v. Jeffrey-Allen Indus., Inc., 807 F.2d 955, 960, (Fed.Cir. 1986)
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Behind the analysis—III
We grew to like the argument that the published Japanese application was not enabling The published Japanese application failed to
disclose a fixture showing how to magnetize the rotor
When we read this reference closely we figured out that the reference failed even to disclose that the nulls were actually not magnetized: the reference said that they were “effectively non-magnetized” not that they were true nulls
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The appeal brief
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The arguments in the appeal brief
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Key arguments in the brief:
The '066 Japanese application (the published Japanese application) is not enabling and was improperly relied upon by the ITC in determining that claims 3 and 9-12 were invalid for obviousnessSecondary factors bearing on nonobviousness were erroneously ignored and trivialized by the ITC; properly considered, these secondary factors mandate a finding of nonobviousness
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Appeal schedule:
Appeal brief filed December 1986Reply brief filed April 1987Appeal argued June 1987
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Decision on appeal by Federal Circuit Court of Appeals, February, 1988
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Decision on appeal by Federal Circuit Court of Appeals, February, 1988
Reversed, for the two reasons argued. Unpublished opinion, written by Judge Newman. 845 F.2d 1034, 1988 WL 12108 (Fed. Cir. 1988).
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Reversal did not end the litigation, but merely restarted it:
We obtained reopening of the litigation, in federal court in New Jersey, which had been stayed during the ITC proceeding Our discovery stipulation allowed us to use evidence
obtained during the ITC proceeding, but in federal court, we still had to prove (i) that Matsushita should be found liable for infringement and (ii) the amount of damages to which Comair Rotron was entitled
In the ITC, we would later successfully seek an exclusion order to keep the infringing fans of Matsushita from being imported into the US
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Back in federal court, to prove liability and damages
We hire, as a technical expert, MIT Professor James Kirtley (MIT SB, SM. PhD in EE)We conduct discovery proceedings
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What discovery proceedings are
Written interrogatories (questions) to Matsushita that must be answered in writing and the answers can be used in court
Requests for production of documents, which require Matsushita to provide documents in its possession or under its control relating to the case, and the documents can be evidence in court
Depositions of Matsushita witnesses—procedures wherein the witness must answer (under oath, when the witness promises to answer correctly) questions posed by us and the answers are transcribed by a stenographer in a booklet that can be used as evidence in court
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The Rotron patent claims at issue in federal court
We appealed the ITC invalidity finding only with respect to claims 3 and 9-12 of the Rotron patent and so the invalidity holding of the ITC still applied to the other claimsBut the federal court proceeding in New Jersey was not bound by the ITC invalidity determination, because the ITC is an administrative agency, not a courtAnd the Federal Circuit’s rationale for reversing (that the Japanese reference is not enabling), applies to all the claimsSo we asserted infringement of most of the patent claims, including claim 1
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The federal court “bifurcates” the issues of liability and damages
The court will first consider liability of Matsushita Only if Matsushita is found liable for infringement, will the court take up the issue of damagesSo first the parties conduct discovery on the question of liability, and only if we prove Matsushita liable for infringement do we obtain discovery on the question of damages
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A strategy note about bifurcation
Having separate trials for liability and damages helps the trial court, because if no liability is found there does not need to be a trial on damagesBut separating the trials on liability and damages is not as good for the patent owner, particularly if the case is decided by a jury In a bifurcated case, a first jury decides liability and a
second jury later decides damages The second jury lacks some information that the first
jury would have, so there may be lower damages than with a single jury deciding everything
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Matsushita’s “two-piece” rotor
In the ITC, to avoid entry of a temporary exclusion order, Matsushita developed a “two-piece” rotor and promised to import only fans using this designNot understanding exactly how the “two-piece” rotor was made, Rotron said that was OK
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We discover how the “two-piece” rotor was made
Formerly, Matsushita placed a ring of magnetizable material into the cup in which it is mounted, and then used a fixture to magnetize the ringTo make its “two-piece” rotor, Matsushita cut the ring into two pieces, then glued the two pieces back together, then placed the glued-together pieces in the cup (just as before), and then magnetized them (just as if they were a single piece)
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Matsushita’s two-piece defense
Matsushita imported fans with its “two piece” rotor ever since the ITC proceedingMatsushita argued that its “two-piece” rotor did not infringe the Rotron patent, because the Rotron patent requires an “integral” rotor magnetWe argued that it did infringe the patent: Once the two pieces were glued together, there
was an integral piece of magnetizable material, on which the entire infringing magnetic pattern was impressed by the fixture just as before
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After completing discovery on liability, we file a motion for summary judgment
We ask the court to rule, without a trial, that the Rotron patent is infringed by MatsushitaUnder the law, a motion for summary judgment will be granted only if a court determines that there are no important facts in disputeMotions by the patent owner for summary judgment are seldom granted, so as to make sure that the defendant has an opportunity to defend at trial
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Matsushita defended on the grounds of non-infringement and invalidity
Matsushita identified additional prior art that it asserted would invalidate the Rotron patentMatsushita argued that its “two-piece” rotor did not infringeMatushita further argued that even if its “two-piece” rotor infringes the patent, it relied on Rotron’s position, taken in the ITC, that it was OK to make the “two-piece” rotor, and therefore Comair Rotron is “estopped” from arguing otherwise
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We obtain favorable summary judgment on almost all the issues
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Judge Lechner, in May 1990, holds
The Rotron patent is not invalidThe fans made by Matsushita are covered by claims of the Rotron patentThere needs to be a trial on Matsushita’s defense of estoppel as to reliance on Rotron’s statements about the “two-piece” rotor, but fans made before Matsushita switched to the “two-piece” design infringe the patent
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So as of May, 1990, Matsushita is liable for patent infringement
There remains the question of how much Matsushita owes Comair RotronIf Matsushita’s defense of estoppel succeeds, it will owe Comair Rotron only for fans shipped to the US before Matsushita changed to the “two-piece” design
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Experts on damages
We engaged a former McKinsey consultant, Robert K. Abernethy (an industrial engineer and an expert in evaluating manufacturing processes) as an expert on the cost savings realized by Rotron’s patented inventionWe engaged Paul M. Enlow, a former general counsel who was responsible for patent licensing negotiations at major corporations, as an expert on a reasonable royalty
We engaged Wayne Hoeberlein, a CPA at Arthur Anderson, as a further expert to assess production quantities of fans, and provide other data relevant to damages
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Damages theories—lost profits
A patent owner can recover lost profits only if it can show “(1) demand for the patented product, (2) absence of acceptable noninfringing substitutes, (3) manufacturing and marketing capability to exploit the demand, and (4) the amount of the profit he would have made.” Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir.) (Markey, by designation).
Otherwise, the recovery is a reasonable royalty
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Damages theories—reasonable royalty
35 U.S.C. § 284 (“Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty…”) and the Georgia-Pacific factors, Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp 1116, 1120 (S.D.N.Y. 1970)(listing 15 factors affecting determination of the reasonable royalty)
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We conduct discovery on damagesThe amount of Comair Rotron’s recovery will depend on how many infringing brushless dc motors are imported into the USWe use Matsushita’s documents and testimony to determine Matsushita’s cost savings by using Rotron’s patented rotor and how many fans and other products with the infringing motors are imported into the US directly by MatsushitaWe learn that Matsushita also sold motors to a Hong Kong company, Astec, using them in power supplies, and the power supplies are thereafter imported into the US for use by IBM and Apple; these count if we can show that Matsushita knew that they would be imported into the US
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Third party discovery
We go through Matsushita documents (with the aid of a translator) relating to its fan sales, including to AstecWe take depositions relating to Astec’s power supply business, including even a depostion of an Apple executive
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Damages trial
May 12, 1992 through June 10, 1992 in front of former federal judge Frederick B. Lacey, acting as a special master by consent of the parties.(Judge Lacey had first acted as a mediator, but his mediation did not result in a settlement.)
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Judge Lacey’s decision rendered on August 24, 1992
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Judge Lacey’s decision
Matsushita’s defense of estoppel with respect to the “two-piece” design is denied because Matsushita was more to blame than Rotron in creating the misunderstanding Rotron had of how Matsushita made its “two-piece” rotor. Consequently Matsushita owes damages for all fans having a rotor covered by the Rotron patent that enter the US with knowledge of Matsushita
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Judge Lacey’s decision
Comair Rotron has not established its claim for lost profits, because it could not prove that it would have sold fans to many of Matsushita’s customers if Matsushita had not been in the market, so Comair Rotron is entitled only to a reasonable royaltyA reasonable royalty should be calculated based on the cost savings enjoyed by Matsushita, namely at 30% of its cost savings, which he determined at $2.07 per fan
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Judge Lacey’s decision (cont’d)
Panasonic knew it was selling fans to Astec bound for use in the US by IBM and Apple, so those fans count in the calculationThe total fans imported into the US was 9,232,855, so damages are $5,724,370; Comair Rotron also gets pre-judgment interest on this amountMoreover, the infringement was wilful, and so the award will be multiplied by three. Matsushita was also required to pay attorneys’ fees of Comair RotronThe total award was $21,629,706.
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Why the infringement was found to be willful
Matsushita was found not to be forthright in presenting its change to the “two-piece” rotorThis behavior, in the judge’s view, indicated that Matsushita knew it was running a serious risk of infringing the Rotron patent, and Matsushita kept on using the same design even after Judge Lechner said that this design infringed
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Matsushita appealed the result to the Federal Circuit
Matsushita argued that the patent was improperly found to be valid and that the damages determination was flawedThe Federal Circuit, in an unpublished decision by the legendary Judge Giles Rich, affirmed the determination of the trial court on July 19, 1994
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