Posner ruling makes smartphone patent war economically irrational

June 26, 2012

There is no federal judge more economically outspoken than Richard Posner of the 7th Circuit Court of Appeals, who in his scant spare time co-authors a provocative blog with the Nobel Prize-winning University of Chicago economist Gary Becker. With a high-pitched querulous voice and no tolerance for obfuscation, Posner can demolish lawyers he considers economics slackers. If you’ve got a dubious theory of damages, you’d better hope you don’t end up arguing it before him.

But I’d bet neither Apple nor Motorola thought their damages theories were particularly unusual in the patent infringement cases Posner tossed Friday, sitting by designation in federal district court in Chicago. The lawyers on both sides (who didn’t return my calls seeking their comments) are, after all, veterans of the smartphone patent wars: Quinn Emanuel Urquhart & Sullivan for Motorola; Covington & BurlingWeil, Gotshal & Manges and Tensegrity Law Group (Matt Powers‘s new shop) for Apple. Motorola made basically the same damages argument against Apple that it has asserted in litigation with Microsoft in federal court in Seattle, claiming that it’s due more than 1 percent of iPhone sales for Apple’s infringement of a standard-essential Motorola patent on communications between cellphones and cellular towers. Apple, meanwhile, offered an economic consultant’s analysis of what it might have cost Motorola to license or work around its patents for digital signal processing and recognition of embedded phone numbers and Web addresses.

Nevertheless, according to Posner’s 38-page opinion, neither side made a legally sufficient case for damages. That, in turn, doomed both sides’ requests for injunctions. With neither an injunction nor money damages an option for Apple or Motorola, Posner said any judgment on the validity or infringement of the patents at issue “would have no practical effect” and dismissed both suits with prejudice.

The ruling sets the bar for establishing a damages case so high that it’s going to be very tough for smartphone litigators to reach it if they’re before a judge who follows Posner’s reasoning. The judge cited the laundry list of considerations for a reasonable royalty that the 2nd Circuit set forth in Georgia-Pacific v. United States Plywood but found that Apple hadn’t “presented admissible evidence that the Georgia-Pacific factors support its damages claim.” That’s despite Apple offering evidence that to work around its digital signaling patent, Motorola could have purchased a set of chips that cost $14.05. Posner said it’s not enough to establish what an alternative might have cost Motorola but said Apple had to “show that the chip that it suggested that Motorola could have purchased was a commercially reasonable design-around.” Apple’s proposed expert, a computer scientist Apple wanted to swap in for its already barred economist, merely offered what Posner derided as “guesswork” when he suggested what the work-around might have cost Motorola. “That won’t do,” the judge said.

Apple attempted to offer some real-world evidence for damages on its second allegedly infringed patent, which has already been deemed valid and infringed in Apple’s case against HTC at the U.S. International Trade Commission. Apple’s lawyers pointed to HTC’s design-around as an example of what Motorola’s costs might be. Posner deemed that insufficient proof because he issued a different claims construction on the patent than the ITC judge. “So while at the June 7 hearing Apple’s counsel was literally correct in saying that HTC was ‘faced with the exact same patent,’ the statement was misleading because as construed the claims were different and that means that the cost of designing around may have been different, an issue that responsible expert testimony would have to address but that [the Apple expert’s] report ignores.”

So it’s not good enough, in Posner’s view, for Apple to suggest what a viable work-around could have cost Motorola or what a work-around has actually cost HTC. To satisfy Posner, Apple would have had to present evidence of the most cost-efficient work-around its bitter rival could have come up with. Posner said that’s a calculable number but that Apple didn’t present it.

Nor did Motorola offer an acceptable calculation of the damages it suffered as a result of Apple’s alleged infringement of its standard-essential patent. Motorola’s expert, who fared no better with Posner than Apple’s, suggested that even though Motorola had accused Apple of misappropriating only one of 100 patents in a standard-essential portfolio, it was entitled to damages of up to 40 percent of the licensing fee it might have obtained on the entire portfolio. (That figure, according to Motorola, is a whopping 2.25 percent of iPhone sales.) Posner found Motorola’s expert estimate to be maddeningly unspecific. Motorola might reasonably have asked for damages proportionate with the patent – 1 percent of the licensing fee to match the percentage of the portfolio the asserted patent represents – but instead “went for broke,” Posner wrote. “Motorola has provided no evidence for calculating a reasonable royalty that would be consistent with this point,” he said.

Posner didn’t stop there, though. He opined that Motorola should never be entitled to an injunction based on a standard-essential patent. Motorola had argued that it needed the club of an injunction to obtain reasonable and non-discriminatory licensing fees for standard-essential patents. Posner said tough luck: If a recalcitrant licensee chooses to face litigation instead of negotiating with Motorola, he wrote, Motorola should blame the American legal system for forcing litigation winners to pay their own costs.

As for Apple’s injunction motion, Posner said he had to deny it because without any reasonable idea of Apple’s damages, he couldn’t balance the equities, particularly because the allegedly infringed patents involve relatively insignificant features. “Because of the potential costs to Motorola and the federal judiciary I could not responsibly order injunctive relief in favor of Apple without knowing whether the lower cost of a compulsory license at a reasonable royalty would produce a better balance of hardships,” he wrote. “Not only is there no evidence of gain to Motorola or loss to Apple even though if there were gain or loss Apple should have been able to quantify it, but in addition an injunction could force Motorola to remove lucrative products from the market for as long as it took to remove the infringing features – minor features in complex devices most features of which are not alleged to infringe.”

Let’s recap: Posner demanded a damages estimate that, at least for Apple, seems impossible to calculate, then said that without the estimate Apple can’t get an injunction. Motorola received a formula for estimating damages, though at nowhere near the level it would like, but was informed that it can’t obtain an injunction on any standard-essential patent anyway. Case closed.

Would any rational economic actor engage in litigation under those terms, spending millions on an apparently impossible quest? Like U.S. District Judge James Robart, Posner seems to be sending a message that the courts will not be pawns in the war for smartphone dominance. This kind of business dispute, the judges say, should be resolved by the principals, not by their lawyers.

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