Takeaway: Here's a note from Paul Glenchur -- one of Hedgeye/Potomac's Washington experts on a rare legal issue with implications for luxury/high end retail. In short, the Supreme Court review of the Apple-Samsung patent fight could impact tech device and fashion and luxury goods industries.
Next Tuesday (October 11), the Supreme Court will hear arguments in Samsung's challenge to a jury award of $399 million to Apple for design infringement. In this case, the fight is over two of the patents protecting the iPhone's look and appearance -- the rounded corners of its rectangular screen and the icon grid of the iPhone's initial display.
The damages award itself is not the issue of primary importance. The bigger issue for the tech industry is whether Apple and other tech innovators can protect the design features of their products when such products involve multiple components. Allowing "total profits" on the finished device deters the release of copycat products while encouraging innovative designs with mass customer appeal. Perhaps more significantly, major players in the fashion industry have been active in this case, concerned that a cut in the available damages remedy for design infringement could strike at the heart of their true product appeal. Nike (NKE), Tiffany (TIF), Adidas (ADDYY), Crocs (CROX) and others have submitted briefs urging the Supreme Court to affirm the lower court ruling.
The case focuses on the remedies allowed for the infringement of design patents. The relevant statute authorizes damages encompassing the "total profits" on "the article of manufacture" to which the infringement was applied. The jury awarded damages to Apple representing total profits on the sale of 11 different Samsung smartphone models. Samsung complains that the award is grossly exaggerated because total profits on the sale of smartphones would over-compensate Apple for the relevant designs affecting form factor and icon displays. The real value in the iPhone is functional, Samsung says, and the damages award should be limited to the value of the component, in this case the screen's shape and contour, not the entire smartphone.
Facebook (FB), Google (GOOGL), eBay (EBAY) and other tech industry entities have filed in support of Samsung, seeking to limit the remedy Apple won in this case. In their view, the governing statute setting forth remedies for design patent infringement must be interpreted to curtail the scope of damages in multi-component devices, discovering the portion of profits attributable to the relevant design feature. As they contend, smartphone users purchase the phone for its communications or camera functionality, or because it synchonizes with the Apple ecosystem, and allowing damages on "total profits" from infringing smartphones -- as finished devices sold to consumers -- confers a disproportionate remedy that will encourage patent trolls to acquire frivolous design patents for the litigation lottery.
We suspect these tech industry players make a persuasive point or at least one that will provoke some sympathetic response from the Supreme Court's current eight members. The original design patent damages statute was passed by Congress more than a hundred years ago because carpet designers were under-compensated when copycats manufactured infringing carpets displaying similar decorative patterns. The genesis for the damages remedy, Samsung claims, simply fails to address the unique features of high tech devices (smartphones, laptops, etc.) as such devices include thousands of patents involving utility, functionality and design. Apple and its fashion industry supporters contend that Congress, not the courts, should address any policy shortcomings of the applicable law.
We'll see how the Court responds to the various arguments next week. But we believe the Government, which also plans to participate in Tuesday's proceeding, could offer a compromise interpretation of the statute that would allow a trial court to characterize a design patent's value as either a component of limited value within a complex device or so integral to the finished product as to justify the forfeiture of total profits on product sales. For fashion industry participants, the latter option has a lot of appeal but they worry that the Court could create new litigation uncertainties if they are forced to defend the value of their designs as perceived by their target retail audience.
The case could be decided by the end of the year or very early next year.
