Recalibrating the Disgorgement Remedy in Intellectual Property Cases

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Recalibrating the Disgorgement Remedy in Intellectual Property Cases ARTICLES RECALIBRATING THE DISGORGEMENT REMEDY IN INTELLECTUAL PROPERTY CASES PAMELA SAMUELSON, JOHN M. GOLDEN & MARK P. GERGEN ABSTRACT The five major U.S. intellectual property (“IP”) regimes—trademark, trade secrecy, copyright, design patent, and utility patent (“patent”) laws—have quite different rules about the availability of disgorgement of infringer profits as a remedy. Traditional principles of restitution and unjust enrichment support awards of disgorgement of profits insofar as they are (1) levied against conscious wrongdoers, (2) attributable to the wrongful conduct, and (3) subject to equitable discretion. Unlike awards of actual damages, which aim primarily to compensate plaintiffs for harms suffered because of a defendant’s wrongdoing, disgorgement awards primarily seek to deter wrongdoing by ensuring that wrongdoers do not profit thereby. This Article presents a formal model that supports our judgment that these principles are consistent with the goal of optimal deterrence of IP infringement. This Article presents a close study of the doctrinal structure of the five IP regimes’ approach to disgorgement. We find that trademark law is the most consistent of the five regimes with traditional restitutionary principles and the goal of optimal deterrence. Trade secrecy law, like trademark law, is substantially consistent. Design patent, copyright, and patent laws deviate in more significant ways. Disgorgement awards are always available to owners of copyrights or design patents, even against innocent infringers. Moreover, design patent law even deviates from traditional approaches to restricting awards to amounts attributable to infringement. Instead, design patent law requires awards of total profits on the manufacture or sale of whatever “article of Richard M. Sherman Distinguished Professor of Law, Berkeley Law School. Edward S. Knight Chair in Law, Entrepreneurialism and Innovation, University of Texas at Austin School of Law. Robert and Joann Burch D.P. Professor of Tax Law and Policy, Berkeley Law School. We wish to thank Roger Huddle for his valuable research assistance about disgorgement rules in various IP regimes; Kathryn Hashimoto for her most helpful research and editorial work on this Article; and Sarah Burstein, Tom Cotter, Tomás Gómez-Arostegui, Andrew Kull, Mark Lemley, Mark McKenna, Caprice Roberts, Henry Smith, and Ben Zipursky, as well as attendees of Fordham and NYU faculty workshops for feedback on earlier drafts. 1999 2000 BOSTON UNIVERSITY LAW REVIEW [Vol. 100:1999 manufacture” to which an infringing design has been applied. Further, courts have rarely recognized that disgorgement awards should be subject to equitable adjustments in copyright and design patent cases, although this may change after the Supreme Court’s characterization of disgorgement as an equitable remedy for copyright infringement. Patent law deviates from traditional restitutionary principles in a very different way: courts have ruled that Congress repealed disgorgement as a general remedy for patent infringement in 1946, but patent law’s reasonable royalty awards can, in effect, result in a partial disgorgement of infringer profits. This Article concludes by making recommendations about how courts can, within the statutory bounds of each IP regime, render disgorgement awards that are more consistent with traditional restitutionary principles in a manner that will promote the overall goals of the IP laws. 2020] RECALIBRATING THE DISGORGEMENT REMEDY 2001 CONTENTS INTRODUCTION ............................................................................................. 2002 I. TRADITIONAL PRINCIPLES OF DISGORGEMENT AS EXEMPLIFIED IN TRADEMARK LAW ......................................................................... 2008 A. The Total Profit Rule and the Substantial Factor Requirement ............................................................................... 2009 B. The Conscious Wrongdoer Requirement ................................... 2014 C. Equitable Remedy with Safety Valves ........................................ 2020 II. A MODEL OF HOW TRADITIONAL PRINCIPLES OF DISGORGEMENT PROMOTE PROPORTIONAL DETERRENCE ................ 2023 III. THE DISGORGEMENT REMEDY IN OTHER IP REGIMES ...................... 2040 A. Trade Secret Law ....................................................................... 2041 1. A Menu of Options for Measuring Disgorgement ............... 2042 2. Trade Secrecy’s Knowledge Requirement .......................... 2046 3. Equitable Remedy with Safety Valves ................................ 2047 B. Copyright Law ........................................................................... 2049 1. Apportioning Infringer Profits ............................................. 2050 2. Strict Liability ...................................................................... 2054 3. Restoring Copyright’s Disgorgement Remedy to Its Equitable Origins ................................................................. 2055 C. Design Patent Law .................................................................... 2057 1. Total Profit from an “Article of Manufacture” as the Measure of Disgorgement ............................................. 2059 2. Strict Liability ...................................................................... 2064 3. Disgorgement Shorn from Its Equitable Roots .................... 2065 D. Utility Patent Law ...................................................................... 2067 1. From Disgorgement to Reasonable Royalty Awards .......... 2068 a. Disgorgement Prior to 1946 ......................................... 2068 b. The 1946 Act and the Reasonable Royalty Alternative .................................................................... 2070 c. The Role of Profits in Reasonable Royalty Calculations .................................................................. 2072 2. Strict Liability ...................................................................... 2074 3. Equitable Considerations ..................................................... 2075 IV. REFLECTIONS ON THE DISGORGEMENT REMEDY ACROSS IP REGIMES........................................................................................ 2076 A. Conscious Wrongdoing ............................................................. 2077 B. Measures for Disgorgement ...................................................... 2078 C. Equitable Discretion and Safety Valves .................................... 2081 CONCLUSION ................................................................................................. 2082 2002 BOSTON UNIVERSITY LAW REVIEW [Vol. 100:1999 INTRODUCTION Controversies have been cropping up lately on appellate court dockets about the disgorgement of infringer profits remedy in intellectual property (“IP”) cases. In 2016, the Supreme Court addressed an apportionment issue in Samsung Electronics Co. v. Apple Inc.,1 in which a jury awarded all of Samsung’s profits from sales of smartphones that infringed Apple’s design patents.2 The Court ruled that the “total profit” that Samsung made from infringing Apple’s design patents did not have to be the total profit from sales of end products (that is, smartphones), as the Court of Appeals for the Federal Circuit (“CAFC”) held,3 but could instead be the total profit attributable to a feature of that product (such as an opening display of a smartphone featuring sixteen colorful icons).4 During its 2019-2020 term, the Supreme Court addressed whether disgorgement awards in trademark cases are available only against willful infringers, as the CAFC had held in Romag Fasteners, Inc. v. Fossil, Inc.5 The Court rejected the lower court’s “categorical rule” that willfulness is a precondition to an award of infringer profits in trademark infringement cases.6 In Romag, the Court also seemed to suggest that IP disgorgement is an equitable remedy that only judges can render,7 as two recent appellate courts have held and as another of the Court’s recent precedents has indicated.8 1 137 S. Ct. 429 (2016). 2 Id. at 433 (discussing $399 million awarded to Apple as result of trial). See infra Section III.C for a discussion of design patent’s disgorgement remedy and the Samsung decision. Two of us have criticized the Court for failing to invoke and discuss normative principles of restitution and unjust enrichment in design patent disgorgement cases. See Pamela Samuelson & Mark Gergen, The Disgorgement Remedy of Design Patent Law, 108 CALIF. L. REV. 183, 185-87 (2020). 3 Apple Inc. v. Samsung Elecs. Co., 786 F.3d 983, 1001-02 (Fed. Cir. 2015) (rejecting Samsung’s argument for determining damages by apportionment), rev’d, 137 S. Ct. 429 (2016). 4 Samsung, 137 S. Ct. at 433-34; see also U.S. Patent No. D604,305 (filed June 23, 2007). 5 140 S. Ct. 1492, 1497 (2020) (holding that showing of willful trademark infringement is not necessary to qualify for disgorgement of profits award), vacating and remanding No. 18- 02417, 2019 WL 2677388 (Fed. Cir. Feb. 5, 2019) (per curiam). However, the Court observed that an infringer’s mental state was “an important consideration” in decisions about awarding infringer profits. Id. at 1497. The Court had earlier vacated a CAFC decision in this case on other grounds. See Romag Fasteners, Inc. v. Fossil, Inc., 817 F.3d 782 (Fed. Cir. 2016), vacated on other grounds, 137 S. Ct. 1373 (2017) (mem.). For discussion of Romag, see infra text accompanying notes 85-88, 140-148. 6 Romag, 140 S. Ct. at 1494, 1497. 7 See id. at 1496-97 (discussing transsubstantive
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