Dennis Crouch's Patently-O: 2 new topics, including “Federal Circuit Affirms 10% Royalty on “Pure Profit” Infringement by US Government”

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• Federal Circuit Affirms 10% Royalty on “Pure Profit” Infringement by US Government
• Patent Reform: Innovation Act of 2015
• Patent Reform 2015

Federal Circuit Affirms 10% Royalty on “Pure Profit” Infringement by US Government Posted: 05 Feb 2015 08:27 PM PST Gaylord v. US (Fed. Cir. 2015) In this case’s third-trip to the Court of Appeals, the Federal Circuit has again sided with Sculptor Frank Gaylord — This time affirming the lower court’s award of $5.4 million in US Postal Service revenue as a reasonable royalty for its unauthorized use of Gaylord’s copyrighted work on a postage stamp. Gaylord was commissioned by the U.S. government to design what turned out to b “The Column” as part of the Korean War Memorial in DC.  Gaylord, however, retained copyright to the work and, when the the Postal Service released a stamp depicting the work Gaylord sued.  Because this case is against the U.S. government, the lawsuit was brought in the Court of Federal Claims (CFC) and appeals from the CFC are heard by the Federal Circuit (CAFC).  In the first appeal, the Federal Circuit held that the government’s use was not a “fair use” but rather copyright infringement. In round-two, the Federal Circuit rejected the CFC’s award of $5,000 as a reasonable-royalty for the use.  Rather, the Federal Circuit held that the lower court must award “the fair market value of a license for Mr. Gaylord's work based on a hypothetical negotiation with the government.” The stamp business is interesting.  Most postage stamps are purchased and then used to mail letters with very little profit margin.  For those, the appropriate royalty rate is quite low and Gaylord agreed that he would not seek any royalty for used-stamps.  However, there are also a large number of stamp collectors and the USPS profit on those stamps is well over 90%. And, the popularity of collectible stamps tends to directly correlate with the quality and popularity of the work depicted on the stamp.  For this second category, the Court of Federal Claims determined that an appropriate royalty was 10% of revenues for the unused stamps.  On appeal, the Federal Circuit affirmed: The basic premise of the hypothetical negotiation in this case would have been the opportunity for making substantial profits if the two sides were willing to join forces, which we must [hypothetically] assume they were. The Court of Federal Claims in this case determined that the negotiators, presented such an opportunity and acting under assumptions designed to identify market value, would have agreed to a 90/10 split of the revenue from retained stamps, which, here, is in substance a 90/10 split of profits, because the revenue for the unused stamps is almost pure profit to the Postal Service. The question for us is whether that result—giving the Postal Service 90% of the profits and Mr. Gaylord 10%—is within the range of reasonable findings from the evidence. In reviewing that award, the Federal Circuit first confirmed that a royalty-approach was appropriate even though the USPS has never paid a royalty – its practice has always been to pay an up-front award of $5,000 or less. The familiar advantages of a per-unit royalty can readily be found present here. A per-unit royalty is a logical way to tie the amount paid for the asset to the marketplace success it helps produce, which fits the objective of measuring market value. Regarding the 10% split, Gaylord was able to show that he had previously obtained a 10% rate for other uses of the image and the 90% remaining leaves USPS with significant profit.  Those reasons sat well with the appellate court as well. Thus, Gaylord gets $570,000 in royalties.

Patent Reform: Innovation Act of 2015 Posted: 05 Feb 2015 10:21 AM PST by Dennis Crouch On February 5, 2015, Rep. Goodlatte reintroduced his patent reform bill: the Innovation Act.  Co-sponsors already include the bipartisan group of Reps. Defazio, Issa, Nadler, Smith, Lofgren, Chabot, Eschoo, Forbees, Pierlusi, Chaffetz, Jeffries, Marino, Farenthold, Holding, Johnson, Huffman, Honda, and Larsen. Read the Bill: Innovation Act 2015 The bill as introduced includes the following provisions: Heightened Pleading Requirements: Significant raising of the pleading requirement for patent cases.  A patent holder filing an infringement lawsuit – at the time of filing – would need to include a set of infringement charts showing how each limitation of each asserted claim in each asserted patent is found within each accused product or instrumentality.  However, the plaintiff would not be required to complete the entire chart if the infringement is not readily available after a reasonable amount of pre-filing due diligence.  Form 18 would also be eliminated.  Pharmaceutical companies filing infringement actions under 271(e)(2) wouldn’t need to comply.  The approach here raises some separation of powers concerns (ordering the Judicial Conference to act). The Judicial Conference has also already moved to eliminate Form 18 in a way that would implicitly increase pleading requirements. Those changes are expected to take-effect December 2015.  However, the Judicial Conference changes do not go nearly as far as the legislative proposal here. Presumption of Attorney Fees:  Under the new law, a court would be required to award attorney fees and “other expenses” to the prevailing party unless a judge “finds that the position and conduct of the nonprevailing [was] reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.  This flips the current rule where attorney fees are only available in “exceptional cases” and instead replaces it with a roughshod version of the “English Rule.”  In cases where the patentee is undercapitalized, the law would allow the court to pierce the corporate veil and make investors and other ‘interested parties’ pay the attorney fee award.  Unlike the English system, the proposal here does not place any limits on the potential fee award other than it be “reasonable.”  In my view, an improvement upon this would be to set reasonableness early-on based upon an estimation of the case value. IPR Claim Construction: Rejecting the Federal Circuit’s recent Couzzo decision, the Bill would require the USPTO to construe claims in post-issuance reviews (IPR/PGR/CBM) in the same manner as would be done by a district court and “in accordance with the ordinary and customary meaning of such claim as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent.”  And, if a court has already construed the claim then the PTO must “consider such claim construction.”  This particular change is one that favors patentees. Discovery Limits:  The bill would limit discovery in litigation until after a claim construction ruling (if one is necessary for the case).  For cases where claim construction is dispositive, this ruling has the potential of reducing costs. It also will create further pressure on courts to conduct early claim construction decisions.   At the same time, the approach seams to increase the likelihood that a court will separate the claim construction decision from its summary judgment decision (which would likely require further discovery) except, perhaps in cases involving definiteness under Section 112(b).  Additionally, discovery of non “core” documents would also be severely limited, and anyone asking for discovery would need to first either (a) post a bond sufficient to cover the expected costs of additional discovery or (b) be a large enough company. Willful Infringement:  Willful infringement can lead to treble damages, but the Bill would limit the applicability of pre-suit demand letters for proving willfulness unless  the demand letter identifies: (1) the patent in question; (2) the ultimate parent entity that owns the patent; (3) the accused products; and (4) how the product infringes at least one claim of the patent. Transparency of Ownership: In any lawsuit, the patent owner must disclose “the ultimate parent entity” of any assignee of the patent. Further, the patentee will be under an ongoing duty to update the USPTO of any change in ownership, including ultimate parent entity within 90-days of any change. Failure to keep-up the information results in no enhanced damages or attorney fees for the patentee in litigation and an award of attorney fees to the defendant who spent money researching the actual ownership information. Stay of Customer Suits: In limited cases, the courts will stay customer lawsuits when the manufacturer of the accused product steps up to challenge the patent. Foreign Bankruptcy: The bill would stop the practice of a bankruptcy executor canceling US IP licenses in foreign bankruptcies.  This is already barred for U.S. bankruptcies under 365(n) of the Bankruptcy code. Codifying Double Patenting: The bill would codify a double patenting regime that would seemingly replace the obvousness-type double patenting system developed by the courts. The proposal would particularly allow prior filings by overlapping inventors to count as prior art unless a terminal disclaimer is filed.

Patent Reform 2015 Posted: 05 Feb 2015 07:16 AM PST Representative Goodlatte has re-introduced the Innovation Act that easily passed the House in the last congressional term.  Senate leaders have offered bipartisan support for a reform bill as has President Obama. The push for reform is primarily focusing on bad actors asserting bad patents.  Primary elements of the bill would create a presumption of awarding attorney fees to the prevailing party and ensuring that those financing litigation can be held liable if the assertion entity is undercapitalized; requiring higher pleading standards for patent cases; and limiting discovery until after claim construction. Of course, the actual impact will very much depend upon the details of what passes. Goodlatte is the chairman of the House Judiciary Committee.  Rep. Issa is also in supporting the legislation in his role as chair of the IP Subcommittee.

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