The Federal Circuit’s recent decision affirming the patent jury verdict in Funai v. Daewoo effectively increases the money damages that can be recovered by millions if not tens of millions of dollars.  (Full disclosure: I tried the case and among other things was responsible for the damages evidence introduced at trial.)

Background: The Accounting Period for Patent Damages Does Not Compensate All Economic Harm

In situations where the patent owner sells a product that practices the patented invention and a competitor sells an infringing product, an economist pegs the beginning of the economic harm resulting from infringement (lost sales, reduced prices, etc.) to the date the infringing sales began.

However, the accounting period for patent infringement damages usually begins much later – not until notice is given in compliance with the patent marking statute, see 35 U.S.C. sec. 287(a).  Any and all economic harm that predates notice is excluded from recovery under the statute. 

More Background: The Earlier the Notice, the Earlier the Accounting Period Begins, the Much Larger the Damages

The earlier the statutory notice, the further back in time you can go to collect damages on infringing sales.  We’ve previously demonstrated in The Shifting Sands of Price Erosion that even slight adjustments in how early the accounting period begins can increase by tens of millions of dollars price erosion damages alone.

Funai Relaxes the Notice Requirements and Effectively Expands The Accounting Period to Capture Infringing Sales That Are Earlier In Time

More after the jump.

There are two types of statutory notice: actual and constructive.  Actual notice is accomplished by sending a properly drafted cease and desist letter, or, in  the absence of any such letter, by the filing of the lawsuit.

In comparison, constructive notice is accomplished by marking the product or its packaging with the patent number.  Practically speaking, product marking occurs before, if not well before, service of a formal cease and desist letter or the filing of a lawsuit.   Thus, the ability to establish constructive notice means the patent damages accounting period will begin earlier and capture a larger number of infringing sales.

The test for whether marking satisfies the statutory constructive notice requirement is that the marking of the products must be "substantially consistent and continuous."  Am. Med. Sys., Inc. v. Med. Engineering Corp., 6 F.3d 1523, 1537 (Fed. Cir. 1993).

Prior to addressing the issue in Funai, the largest percentage of unmarked products allowed by the Federal Circuit was 5%.  See Maxwell, 86 F.3d 1098, 1111 (Fed. Cir. 1996) (holding that marking requirement was satisfied even though 5% of the products sold by licensees were not marked).  This spelled trouble for Funai, which sold 9-12% of its products to its OEM customers for resale who did not mark the product with Funai’s patent number.  Was the Federal Circuit willing to expand by 2X the percentage of unmarked products and still find "substantially consistent and continuous" marking?  Fortunately for our client, Funai, and for the many other technology companies that distribute patented products through OEM channels, the answer was yes.

Also prior to addressing marking issues in Funai, the Federal Circuit had applied a "rule of reason" in situations where third-party licensees as opposed to the patentee handled the manufacturing and distribution of the patented products.   See Maxwell, 86 F.3d at 1111-12 ("When the failure to mark is caused by someone other than the patentee, the court may consider whether the patentee made reasonable efforts to ensure compliance with the marking requirements.")  This again raised some questions in the context of Funai’s damage claims since Funai’s sales were to third-party OEMs as distinguished from sales by third-party licensees under a patent.  Would the Federal Circuit be willing to extend the "rule of reason" doctrine to this new group of third-party sales and affirm the district court’s admission of Funai’s testimony regarding its reasonable efforts to mark in the context of OEM sales?  Again, fortunately for Funai and the many,  similarly situated technology companies, the majority of Federal Circuit panel answered in the affirmative (over the objections raised by Judge Linn in his concurring opinion).

By allowing a greater percentage of unmarked products and expanding the application of the "rule of reason" doctrine, the Federal Circuit has effectively relaxed the requirements for accomplishing constructive notice and consequently expanded the accounting period for patent damages to include far more infringing sales.  Trial counsel should modify their pre-trial discovery, expert testimony and trial presentation strategies accordingly.