Apple’s intellectual property has been in the news quite a bit lately. In what had to be the most publicized patent trial in at least half a decade, a California jury recently awarded the consumer electronics giant $1.05 billion in damages due to competitor Samsung’s infringement of various utility and design patents (Apple v. Samsung, 11-CV-01846-LHK (N.D. Cal., August 2012)). The decision was a tremendous victory for Apple – and to a lesser extent patent holders everywhere – while the size of the damages award has had a definite positive effect on the valuation of intellectual property that covers various communication devices and other consumer products.
On the other hand, Apple v. Samsung is not the only patent litigation that has attempted to value damages caused by the infringement of Apple’s IP. In Apple v. Motorola (1:11-cv-08540 (N.D. Ill., June 2012)), the lauded Court of Appeals Judge Richard Posner sat as a district court judge in the dispute between the handset makers regarding claims and counterclaims of patent infringement. However, unlike the Apple v. Samsung case, Judge Posner took an extraordinary step by ruling that much of the expert testimony relating to damages was inadmissible under the Daubert standard. Essentially, Posner excluded the testimony as unreliable mainly due to a lack of evidence in the record with regards to consumer preferences for the phone functionality that was covered by the patents-in-suit. Posner then doubled down on this ruling, dismissing the case with prejudice on the grounds that neither party would be able to prove the existence of damages at trial due to a lack of evidence in the record.
So who is right, here? Does Samsung’s infringement of Apple’s patents related to ‘pinching to zoom’ and ‘double tapping to enlarge’ cause $1 billion in damages while Motorola’s alleged infringement of patents for ‘real-time processing of a number of independent client applications’ and ‘an unblockable taskbar’ cause no damage at all? Well as a preliminary note, the damages award for patent infringement is typically determined to be one of 1) the profits lost by the plaintiff due to the infringement, 2) an established royalty, or 3) a reasonable royalty in cases were no previous royalty has been established. Since the trial court often has quite a bit of discretion in evaluating damage awards, numerous accounting methods have been developed for what is considered a “reasonable royalty.”
Posner took that discretion to an extreme. In essence, Judge Posner decided that in order to show damages due to patent infringement, the plaintiff must demonstrate that the product’s consumer would place a specific monetary value on the functionality that is covered by the patent. For example, if Patent A covered App A, then under Posner’s theory the plaintiff would need to show what monetary value consumers associated with App A relative to the rest of the device. Without showing the consumer value, reasoned Posner, a patent owner could not show actual damages.
Nonetheless, the logic underlying Posner’s ruling quickly breaks down when you consider patented technology that is not readily visible to the end consumer. For example, numerous patents cover the chipsets, radio transceivers, and LCD displays of typical smartphones. However, for the vast majority of these patents, consumers are unaware of the functionality and do not appreciate how the patented invention makes the user experience possible. For example, without patents related to high-speed wireless data transfer, smart phones would be nothing more than a Zack Morris phone with a larger display. Most – if not all – apps would be obsolete.
For this reason, Courts have often looked to factors such as “the utility and advantages of the patent property over any old modes or devices that had been used” and “the opinion testimony of qualified experts” when determining how much money damages should be awarded to a plaintiff (See Georgia-Pacific Corp. v. United States Plywood Corp., 318 FSupp 1116 (SD NY 1970)). This is exactly what Apple did. Their expert testified that in his expert report that it would cost Motorola $29 to $31 million to add a chip to each of its smartphones that would replace the function performed by the invention that was the subject of the ‘263 patent, which was one of the four patents Apple was asserting. Hence an expert gave his opinion regarding utility (e.g., lower cost) associated with the patented technology as compared to another non-infringing, method for performing the desired functionality.
However, Posner did not allow this expert testimony because Apple’s expert had “obtained the essential information, namely the identity of the chip that would avoid infringement, from an agent of the party” rather than from a disinterested source. Typically, an expert obtaining information from an interested party is hardly grounds for total disqualification of his testimony. Instead, the other side would inform the jury about the potential bias, and the jury could consider the reliability of the testimony as it would any other type of evidence.
The more likely rationale for Posner’s determination that the expert was unreliable was that Posner himself disagreed with the conclusions of Apple’s expert. Despite the testimony that designing around the ‘263 patent would cost tens of millions of dollars, “Posner the Engineer” knew better stating that “[a]s far as the ‘263 patent (realtime) is concerned, there is no evidence of the cost of inventing around the surviving claims in it, and for all the records shows the cost may be slight.” So although an smartphone industry expert had a legitimate viewpoint with regards to the utility of the patented invention – albeit he obtained some of that evidence from other Apple experts – that evidence was never presented to the jury.
Overall, what Posner’s ruling did was to take the issue of damages away from the jury and substitute in his own convoluted rationale as the only basis for proving damages. Limiting the techniques an expert may use to show damages is the opposite methodology of the flexible approach sanctioned by the Federal Circuit, which often relies on diverse types of evidence (such as the various Georgia-Pacific factors) when evaluating the relief that should be paid to patent owners due to a competitor’s infringement. Damages are like any other factual inquiry, and hence are best left to the jury to decide. By taking the finder-of-fact out of the equation, Judge Posner exercised tremendous judicial activism simply because he wanted to dictate his desired outcome. A better solution would be to allow the jury to weigh the evidence before tem (including allegations of bias), so that they can select from competing viewpoints, be it $1billion, nothing, or somewhere in between.