What does reputational harm mean? Lessons from Apple v. Samsung

Apple, Inc. v. Samsung Electronics Co., No. 12-CV-00630 (N.D. Cal. Aug. 27, 2014)

Others will doubtless have much to say about the patent-specific aspects of this case, but I want to talk about what the court said about the relationship between alleged injury to reputation from (patent) infringement and irreparable harm.  Apple won some patent infringement claims against Samsung and sought a permanent injunction, which requires a showing of irreparable harm with a “sufficiently strong causal nexus” to the infringement.  Without the causal nexus, the patentee will suffer the same harm with or without an injunction.

Apple argued that Samsung’s infringement would cause it irreparable damage to its reputation as an innovator, similar to the harm suffered by the patentee in Douglas Dynamics, LLC v. Buyers Products Co., 717 F.3d 1336 (Fed. Cir. 2013). Apple also argued that it would suffer irreparable harm from sales-based losses.

The court first brushed aside Apple’s contention that its allegations of reputation-based harm ought to excuse it from showing a causal nexus with the infringement, since irreparable harm to the patentee’s reputation “necessarily” flows from infringement. The Federal Circuit has made clear that a causal nexus is always required, since it’s actually part of establishing irreparable harm.  We want to distinguish irreparable harm caused by infringement from irreparable harm caused by “otherwise lawful competition,” with reputational harm as well as other types of harm.  “For example, it is possible that Apple’s reputation as an ‘innovator’ could be harmed if Samsung’s noninfringing features are perceived as innovative, but that would not justify an injunction.”

So, Apple argued that an injunction was necessary to avoid irreparable harm to its “reputation and brand.” Samsung’s infringement allegedly harmed Apple’s reputation “by tainting Apple’s reputation as an innovator, by leading customers and competitors to believe that Apple is not entitled to enforce its patent rights (even when it prevails on its infringement claims), and by disrupting Apple’s attempts to maintain exclusivity over its patented inventions.”  While the court found that Apple established that it had a reputation for innovation among consumers that could be the subject of damage, that wasn’t enough. 

Apple argued that the appearance of its patented innovations in “competing and allegedly inferior products” showed harm, along with its reputation for enforcing its IP rights and its general refusal to license its patents.  Douglas Dynamics involved similar factors, and the Federal Circuit found irreparable harm, but that case didn’t require a finding of irreparable harm whenever those factors were present.  Rather, Douglas Dynamics rejected a district court’s refusal to find irreparable harm where there was no consumer confusion between the patentee and the infringer.  The Federal Circuit concluded that harm to a company’s reputation can occur “even absent consumer confusion.”  But it didn’t create a per se rule in cases where the patentee is an innovative company (which would be at odds with eBay/Winter).

As to the presence of patented features in competing products, Apple argued that its reputation for innovation was damaged when “customers [find] the same ‘innovations’ appearing in competitors’ [products],” including products considered less prestigious and innovative, and that the harm was particularly acute for the two patents Apple practices.  Anyway, even for the unpracticed patents, Apple continued to sell products that competed with infringing Samsung products.  But Apple didn’t show irreparable reputational harm due to Samsung’s infringement.  There was “limited” evidence of actual injury. While the evidence showed Apple’s reputation for innovation and its fierce competition with “follower” Samsung, that evidence didn’t show Apple’s reputation suffered.  There was no evidence that consumers have begun to question Apple’s role as an innovator or have difficulty differentiating Samsung and Apple products due to the infringing features.  

Indeed, Samsung persuasively argued that Apple’s reputation was extremely robust (as that of many famous brands is), making it unlikely that Apple would suffer irreparable harm due to infringement of only three patents.  Other evidence indicated that Apple’s reputation derived from products and features other than the three patents at issue. In fact, “Apple executives testified that highly publicized problems with its hardware and software have had little or no effect on Apple’s reputation.”  That demonstrably robust reputation made irreparable harm less likely.  Further, Apple didn’t show harm stemming from consumer association of Apple’s patented innovations with Samsung’s allegedly “less prestigious” products. The record indicated that Samsung’s products were also reputable, in contrast to the the infringing products in Douglas Dynamics, which were of substantially inferior quality to those sold by the patentee. (I’m still confused about this patent dilution theory, by the way.) 

In addition, Apple did license [redacted] to competing smartphone companies, while the patentee in Douglas Dynamics had never licensed the infringed patents, “so it was reasonable to conclude that an injunction would prevent those features from appearing in competitors’ products and eroding the patentee’s reputation for innovation.” By contrast, Apple’s claim to harm to its reputation as an innovator would be undermined by the presence of the patented features in licensed non-Apple products even with an injunction.  These licenses were the result of litigation settlements/patent pools etc., unlike the Samsung infringements here, but “[c]onsumers are unlikely to understand that certain features appear in competing products due to licenses as opposed to unauthorized infringement.” The licensing made any consumer perception of exclusivity unlikely, regardless of its reasons.

Nor did Apple show a causal nexis between the specific patents at issue and the alleged harm.  The patents at issue covered three features in complex phones containing many different inventions.  A causal nexus requirement may more easily be satisfied with relatively simple products, but here the products were “extraordinarily complex and multi-featured.”  There was not much to show that Apple’s reputation as an innovator was related to the patented/infringing features; Apple didn’t even practice one of the patents.

Apple also argued that, without an injunction, it could lose its reputation for enforcing its IP rights.  “Apple provides no evidence that smartphone consumers make purchasing decisions based on Apple’s reputation for enforcing its intellectual property rights.”  Further, Apple is a vigorous IP enforcer across the country, and it didn’t show a causal nexus between these three patents and any perception of slack IP enforcement.  (Rather the contrary, I’d imagine.)

The court then found that lost market share and downstream sales didn’t entitle Apple to an injunction. The parties’ competition affects downstream sales because of “ecosystem” effects, where one company’s customers will continue to buy that company’s products and recommend them to others.  Being forced to compete against infringing products can be irreparable harm, so the parties’ direct competition weighed in favor of finding irreparable harm. But Apple still needed to show a causal nexus between harm and infringement.  Samsung heavily criticized Apple’s conjoint analysis purporting to show consumer demand for the patented features (e.g., its implausible conclusion that the patented word correction feature was worth $102 for a $149 phone), and pointed out that none of the patented technologies appeared in an independent review of online smartphone advertising.  So Apple didn’t meet its burden of showing a causal nexus. 

The court also addressed an issue that comes up in Lanham Act cases: if a jury ultimately awards damages, does that mean that no injunctive relief is allowed because the harm is demonstrably reparable with money damages?  No, the jury’s ability to put a number on the harm Apple suffered doesn’t necessarily mean that number captured the full extent of Apple’s harm, including irreparable harm stemming from sources other than lost sales (e.g., market share).  There is, however, an inherent tension between showing the likelihood of market harm and its incalulability.  Comment: While one approach would be to resolve that tension by finding that market harm isn’t irreparable, courts haven’t been willing to say that outright even if some cases achieve that practical result. 

Ultimately, Apple failed to prove that the infringing features drive consumer demand for the accused products. 

Query: How would this analysis work in a design patent case, where damages are assessed based on the entire product?  If a patentee is entitled to the profits from the entire article, is it also entitled to measure irreparable harm by the sales potential of the entire article?  If not, why not?

Turning to the other injunctive relief factors, the court considered whether Apple’s alleged harms can be quantified.  Other cases have found damages inadequate for lost reputation, but they all involved evidence.  Here, Apple didn’t offer evidence that its reputational harm couldn’t be remedied.  (I haven’t reviewed the records of the cited cases, but I wonder how truly evidentiary that evidence was.)  However, Apple did offer evidence that it couldn’t completely quantify the ecosystem effects of purchases of infringing phones. Thus, lost sales would be hard to quantify and remedy with damages. But that still didn’t show a causal nexus between infringement and harm. Irreparable harm remains an independent requirement for an injunction; thus, to award an injunction here would “ignore the Federal Circuit’s warning that a patentee may not ‘leverage its patent for competitive gain beyond that which the inventive contribution and value of the patent warrant.’”

The ease of designing around/removing the infringing features showed that the balance of hardships favored Apple. The public interest favors the enforcement of patent rights, but also product choice.  The narrowness of Apple’s proposed injunction here meant less threat to product choice, and Samsung’s design-around remedy might spur innovative alternatives to the patented features.  Thus, the public interest favored Apple.

Weighing all the factors, a permanent injunction was inappropriate.