Apple 2.0

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Apple's $2 billion claim comes from a twist in U.S. patent law

August 1, 2012: 10:32 AM ET

An act of Congress that dates back to an 1886 Supreme Court case about carpet design

From: An Introduction to the Patent System

FORTUNE -- The 18-minute video presented to the Apple v. Samsung jury Tuesday did a good job explaining what a patent is. What it didn't explain was the difference between a design and a utility patent or, more important, the vast difference in the rewards involved if infringement of one or the other can be proved.

Enter Christopher Carani, a patent attorney at Chicago-based intellectual property law firm McAndrews, Held & Malloy, Ltd. In an e-mail sent to reporters Wednesday, he offers this helpful commentary:

One untold issue in the press: Apple is claiming $2.525bil in damages, $2.0bil of which are design patent damages.

How did we get to that number? It is because of a little chestnut in the Patent Act (35 U.S.C. 289) that provides the unique remedy of disgorgement of profits without apportionment. (Note: Utility patents have as potential remedies only reasonable royalty and patentees lost profits with apportionment.)

"Apportionment" basically means that the patentee only can recoup profits associated with the patented feature, not the entire profit from the sales of the accused product.

The no apportionment language (i.e. disgorgement of infringer's "total profits") was placed in the Patent Act in 1887 in response to a 1886 U.S. Supreme Court case regarding infringement of a design patent on a carpet design, whereby the Court said the design patentee was only entitled to 6 cents in damages – the portion of the damages attributable to the design.

In response to that holding, a holding that members of Congress felt was a miscarriage of justice, the 1887 Patent Act was enacted and provided a remedy for "total profit" without apportionment for design patent infringement.

The provision has largely been a sleeper for 125 years. Now, it has surfaced and done so in a big, big, way – to the tune of $2.0bil, which, if awarded, would represent the largest U.S. patent infringement award of all time. If Samsung loses on infringement, it can do little about appealing the large damage award – the design patent damages provision is codified in the statute. Indeed, Judge Koh has already denied such an argument in response to Samsung's pre-trial motion on the issue.

Carani goes on to suggest that an Apple (AAPL) victory in this case could trigger a renaissance in cellphone design. "Keep in mind," he writes, "that despite Samsung's cries, there are many different ways to design these devices. Young, creative and hungry industrial designers the world over will no doubt rise to the challenge of designing non-infringing devices."

"However, if Samsung prevails," he concludes, "we can expect the market (including Samsung and others) to coalesce around the minimalist design embodied in the iPhone, iPad and Galaxy devices for at least 2-3 years. In a sense, it is like Hollywood putting out sequels; in such a high stakes game, why take the risk of putting out original material when using a proven winner will reap a guaranteed (albeit perhaps less) return?"

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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