When A Billion Dollars Is Not Enough: Apple’s Persistence in Enjoining its Competitors

On Tuesday February 12, Apple’s “normal” appellate brief appeared on the Federal Circuit’s docket (I say “normal” because Apple took the unconventional step of originally asking for an immediate en banc review, which the Federal Circuit denied).  All that is at stake is the future of meaningful competition in the mobile communications industry.

A quick recap of the litigation is needed to provide context.  Apple sued Samsung in the Northern District of California (Apple-Samsung I) alleging that Samsung infringed on eight Apple utility patents and seven Apple design patents, and seeking both damages and a permanent injunction.  A jury returned a verdict in favor of Apple, finding infringement of Apple’s patents and dilution of trade dress, and awarded Apple damages of $1.051 Billion, one of the biggest damages awards ever in patent litigation.  However, the court did not grant a permanent injunction.  Apple filed motions seeking a permanent injunction and damages enhancement in September.  In October 2012, in a separate case involving Apple and Samsung (Apple-Samsung II), with the same district court judge and a separate appeal to the Federal Circuit, the appellate court reversed a granting of preliminary injunction against Samsung.  In so doing the court reasoned that Apple had not demonstrated a causal nexus between the patented features of Apple’s products and consumer demand, and therefore could not articulate irreparable harm.  In December 2012 Judge Koh followed the guidance of the Federal Circuit’s reversal of her own preliminary injunction grant, and denied Apple’s motions for a permanent injunction following Apple’s trial victory in Apple-Samsung I.  Judge Koh reasoned that Apple failed to demonstrate 1) irreparable harm and 2) a causal nexus between the patented features of Apple’s products and consumer demand just as it had when it sought preliminary injunction in Apple-Samsung II.

During the course of Apple and Samsung’s litigation, Samsung’s position in the market  has evolved from upstart to legitimate threat.  By the end of 2012, Samsung became the world’s leader in smartphone sales, the largest purchaser of mobile communications semiconductors, and experienced record high profits.  All of this occurred despite competition from Apple, Nokia, and HTC, and despite concerted efforts by its competitors to frustrate the company with constant litigation.

Apple’s brief seeking a permanent injunction contains two core arguments.  First, Apple argues that the four-factor eBay standard standard for a permanent injunction – 1) irreparable harm, 2) legal remedies are inadequate, 3) balance of hardships favors the plaintiff, and 4) the public interest would be served by an injunction – is satisfied.  Second, Apple argues that the District Court erred by applying the preliminary injunction requirement of a causal nexus to the question of a permanent injunction.  Apple believes that the eBay standard is and should be the only test for the issuance of a permanent injunction.

eBay Standard for Permanent Injunction

1. Irreparable Harm

Apple rests much of its argument on a series of Federal Circuit cases in which an injunction was granted “in cases of head-to-head competition involving lost market share.”  To show irreparable harm, Apple contends that it and Samsung compete for first-time buyers of smartphones, that Apple has lost market share while Samsung has seen its market share grow from “5% in June 2010 to over 30% by the second quarter of 2012,” and that Samsung’s infringement has caused Apple to lose direct sales to customers.  This alone, according to Apple, satisfied the irreparable harm prong of the eBay test.  Most prominently Apple references Robert Bosch v. Pylon, a case involving windshield wiper blades.  While it is true that this court cited “direct competition” and “loss in market share” as reasons for finding irreparable harm, Apple’s brief fails to address the third factor listed in this set: “Pylon’s lack of financial wherewithal to satisfy a judgment.”  Certainly there is no concern that Samsung could not satisfy its monetary judgment, even one in the billions of dollars.

2. Legal Remedies are Inadequate

With respect to inadequacy of damages as a remedy, Apple cites two reasons why Samsung’s money is insufficient to rectify the harm from infringement.  First, Apple contends that the Federal Circuit has ruled money damages as an adequate remedy for direct infringement by a competitor only when “the patentee—unlike Apple—failed to prove that damages would be difficult to calculate.”  Apple argues that it is nearly impossible to estimate the exact cost of damages, and cites to a 2010 Federal Circuit case in which Microsoft was found to have infringed a patent held by i4i and was enjoined from further infringement.  Apple cites this case to show that “money damages could not remedy ‘loss of market share, brand recognition, and customer goodwill’ because “[s]uch losses may frequently defy attempts at valuation,” but does not discuss the contours of the Federal Circuit’s rationale in that case:  there was evidence to show that “Microsoft’s infringement rendered i4i’s product obsolete for much of the custom XML market, causing i4i to lose market share and change its business strategy to survive.”  Under this rationale, Apple would have to show not only that it is losing market share and customers, but that it is losing so much that the company’s future is in jeopardy.  And let’s be realistic, Apple would have extreme difficulty convincing a court that Samsung is putting its future in jeopardy.

Apple also argues that the district court erred in determining that Apple’s past licensing practices demonstrates a willingness to accept monetary damages for patent infringement.  Apple asserts that it never offered a license to Samsung.  Furthermore, Apple argues that the global licensing agreement it entered into with HTC should not be used as evidence to show a willingness to license because these licenses did not include design patents.  Quizzically Apple states that “the Nokia and HTC agreements were litigation settlements, which do not imply that monetary damages would be adequate to compensate for another party’s infringement.”  It is unclear what else could be concluded from this settlement than the fact that money is a sufficient remedy for Apple.  Finally, Apple argues that the HTC license is “quite limited” and for a “limited ‘standstill’ period” despite the fact that the license is both global and for 10 years.

3. Balance of Hardships Favors the Plaintiff

In a clever play, Apple turns the causal nexus argument against the court by asserting “infringing features in Samsung’s products do not drive market demand… [T]hat argument concedes that Samsung faces a minimal burden in removing those features from its products.”  Thus, as the story goes, Apple’s harm of losing revenue and market share far outweighs Samsung’s trivial need in removing certain features.  This of course misstates the true issue at play, which is the difficulty in identifying the truly demand-inducing features of a multi-component product such as a smartphone.  While the mere inclusion of certain elements may not attract the customer (as discussed below in the causal nexus section) the absence of features may drive them away.  A person likely does not buy a car based on the radio, but the absence of a radio may make the car undesirable.  The same is true with the incremental improvement features of a smartphone.

4. Public Interest Would be Served by an Injunction

Apple’s public interest argument is a repackaging of the usual refrain in eBay cases – the public interest is served from strong patent rights because they promote innovation.  Apple is particularly aggressive towards the district court’s ruling that Apple’s request was “extremely broad” because it sought an injunction against infringing products and hypothetical future products that are not “colorably different.”  The public interest standard in the injunction context nearly always pits the need for strong patent rights against consumer access to future products (and implicitly against the court conferring exclusionary market power where it is not warranted).  This is an academic exercise that is unlikely to turn the analysis in either respect.

Causal Nexus

The causal nexus requirement as articulated by the Federal Circuit in Apple-Samsung II is a difficult nut to crack.  The Federal Circuit explains that the patentee must show both 1) irreparable harm and 2) “a sufficiently strong causal nexus relates the alleged harm to the alleged infringement” but also opines:

the causal nexus inquiry is indeed part of the irreparable harm calculus: it informs whether the patentee’s allegations of irreparable harm are pertinent to the injunctive relief analysis, or whether the patentee seeks to leverage its patent for competitive gain beyond that which the inventive contribution and value of the patent warrant. (emphasis added).

Thus any party addressing the question of the causal nexus and corresponding appropriateness of an injunction commits itself to circular reasoning at the onset.

Apple argues that a permanent injunction requires only satisfying the eBay test, and that the causal nexus standard does not and should not apply, or at the very most should be part of the test for determining irreparable harm.  According to Apple, the test would be impossible to satisfy because “the district court applied the causal nexus requirement on a ‘patent-by-patent basis, demanding proof that each patented feature individually drove demand,” despite the fact that the creation of the test implies that no such patent could singularly drive demand.  Apple reiterated its evidence to show that the design and user experience of the features covered by Apple’s patents are in fact drivers of consumer demand, despite the district court’s opinion.  In essence, following this argument, a patentee in an industry with multi-component devices would never be able to satisfy the causal nexus requirement because of the nature of the product.

There is logic to the conclusion that no patentee should be able to freeze the entire industry.  Setting aside that many (if not all) of the patents in question likely should never have been granted, they nevertheless should not be used as a tool to eliminate competition.  This does not – contrary to Apple’s arguments – victimize patentees.  This confers an automatic source of revenue for a patent holder who can demonstrate infringement, and an incentive to reinvest this revenue in further innovation.