08/10/16

The Problem of Mop Heads in the Era of Apps: Toward More Rigorous Standards of Value Apportionment in Contemporary Patent Law

The Problem of Mop Heads in the Era of Apps: Toward More Rigorous Standards of Value Apportionment in Contemporary Patent Law

David Franklyn & Adam Kuhn

In 1884, the U.S. Supreme Court rejected a damage claim on a patented mop head improvement for failure to apportion profits attributable to the patented feature against the entire mop. 130 years later, jurists deal with the same core challenge of damage apportionment except with much more complicated products. Given the fact that as many as 250,000 patents impact the average consumer smart phone, can anyone say confidently that any single one of these patents drives consumer demand for the whole product or even for any particular feature of the product? And if not, how much worth does any one patent have in relation to the value of the entire product? For example, what portion of the sales price of an iPhone is attributable to a particular individual feature of that phone, such as the ability to use FaceTime?

There is no more important set of issues in this era of high tech patent wars, where billions turn on the value of specific infringing features, than apportionment of damages. The paramount issues are three-fold: (1) Patent law requires a calculation of profits attributable to infringement; (2) conventional doctrine holds that it is de rigueur to do this via consumer damage surveys (absent directly relevant and compelling comparables); and (3) controversy continues to swirl regarding what constitutes a valid consumer demand survey.

This article addresses this critical question of consumer demand surveys. The article argues that the law should always require rigorous apportionment of value based on scientifically-accepted standards of consumer demand measurement. Further, the article discusses how best to achieve this policy goal and how courts have approached it to date. This article then walks through the pertinent case law on apportionment, the role and defensibility of survey evidence, and offers guidance on proper survey design.

Patent courts have cut back on previously favored general rules, preferring to resolve these damage issues through apportionment—a process of isolating and valuing individual patented features of a multi-feature product, which may include other patented and non-patented components. To conduct the value apportionment analysis, courts increasingly rely on quantitative data from consumer surveys that attempt to measure consumer demand and hence relative economic value for the patented features at issue.

Designing a scientifically reliable survey to measure consumer demand for patented product features has become a challenging undertaking. And rarely is it clear if the patent has any validity or fair use protection, especially with the growing legal cloud on the appropriate analysis for determining the validity of software patents. In the past decade, courts have limited the applicability of general rules for the value apportionment analysis, turning instead to bespoke, case-by-case analysis and demanding defensible, quantitative data. In this context, more litigants use consumer demand surveys to support their damages arguments and in some instances to help bolster validity arguments. This article explores the role of consumer surveys in patent litigation and the heightened expectations of surveys in an era of an increasingly tech-savvy judiciary.

In a field of law where damage claims can swing wildly throughout the trial and appeal, establishing a reasonable royalty can be a daunting task. The reality is that in many patent cases, particularly software patents, no “off the shelf” price exists that can be readily used. And courts are moving away from hard-and-fast rules that expedite the analysis, preferring the admission of consumer demand surveys and other forms of economic analysis. In the era of big data, courts expect a higher level of proof.

Consumer demand surveys—when properly designed, administered, and admitted—can play a pivotal role in the outcome of a case. In several cases, discussed infra, courts specifically pointed to surveys, or the lack thereof, as a substantial factor in their decision. And where one side successfully admits a survey, it can often force the other side to develop their own survey to balance the weight of evidence. Indeed, such survey use is already extensively relied upon in trademark law and tends to have substantial weight.

The challenge lies in developing a defensible consumer survey in a patent case, given the more technical subject matter. A survey that is shot down or otherwise successfully opposed has a tendency to negatively impact the outcome.

Novel issues are coalescing as parties are forced to justify their patent royalty rates with hard data. Is the patented feature even used? If so, how much value do consumers attribute to it? Do consumers even think about product features in this way? Is there a way to accurately determine whether, for example, consumers would they pay 7% less for a product without that feature? What about 5% or even 0.5%? When patents are valued in the billions, a half percent is monolithic. And getting to that data presents another challenge in and of itself.

This article will discuss the history and use of consumer surveys in patent litigation, frame the current state of the law in context of recent Supreme Court patent decisions, examine the leading survey cases, and the tactical considerations in designing and using surveys in patent law. The first part of this article sets the stage by analyzing the legal and economic theoretical foundations of patent surveys and why they have proven so useful in contemporary patent law. Next, this article provides an extended study of recent cases that highlight the challenges of software patents in particular before diving into survey precedent. The article concludes with recommendations on how to use the right survey tools to establish the right royalty values.

98 J. PAT. & TRADEMARK OFF. SOC’Y 182 (2016)

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