Patent Watch: Power Integrations, Inc. v. Fairchild Semiconductor Int'l, Inc.

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[A] price erosion analysis relating to damages arising from post-notice infringement must measure price changes against infringement-free market conditions, and thus the proper starting point of such a price erosion analysis is the date of first infringement.

On March 26, 2013, in Power Integrations, Inc. v. Fairchild Semiconductor Int'l, Inc., the U.S. Court of Appeals for the Federal Circuit (Lourie, O'Malley, Reyna*) affirmed-in-part, reversed-in-part, vacated-in-part and remanded the district court's judgment that Fairchild willfully infringed U.S. Patents No. 6,249,876, No. 6,107,851, No. 6,229,366, and No. 4,811,075, which related to power supplies in electric chargers for mobile phones, and the award of $13 million in compensatory and enhanced damages (remitted from the jury award of $34 million in compensatory damages). The Federal Circuit stated:

In reaching its determination of damages, the district court made two threshold decisions. First, the district court found that the jury's total damages award of over 33 million dollars was contrary to law. Second, the district court granted Fairchild's motion for remittitur and reduced the worldwide damages award by 82% based on a theory of induced infringement. . . .

Power Integrations' argument that the broad principles of "full compensation," extend to cover Fairchild's worldwide sales is not persuasive. It is axiomatic that U.S. patent law does not operate extraterritorially to prohibit infringement abroad. Even indirect infringement, which can encompass conduct occurring elsewhere requires underlying direct infringement in the United States. Our patent laws allow specifically "damages adequate to compensate for the infringement." They do not thereby provide compensation for a defendant's foreign exploitation of a patented invention, which is not infringement at all. Power Integrations' "foreseeability" theory of worldwide damages sets the presumption against extraterritoriality in interesting juxtaposition with the principle of full compensation. Nevertheless, Power Integrations' argument is not novel, and in the end, it is not persuasive. Regardless of how the argument is framed under the facts of this case, the underlying question here remains whether Power Integrations is entitled to compensatory damages for injury caused by infringing activity that occurred outside the territory of the United States. The answer is no.

Power Integrations is incorrect that, having established one or more acts of direct infringement in the United States, it may recover damages for Fairchild's worldwide sales of the patented invention because those foreign sales were the direct, foreseeable result of Fairchild's domestic infringement. Power Integrations has not cited any case law that supports an award of damages for sales consummated in foreign markets, regardless of any connection to infringing activity in the United States. To the contrary, the entirely extraterritorial production, use, or sale of an invention patented in the United States is an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement. . . . We thus reject Power Integrations' argument that there exists a legal basis sufficient to uphold the jury's original damages award, which was based on worldwide sales and hold that the district court correctly decided that the jury's original damages award was contrary to law. . . .

Before the trial on infringement and damages, Fair child moved the district court for partial summary judgment on the issue of pre-suit damages. In its motion, Fairchild asserted that Power Integrations had failed to mark its patented products in accordance with 35 U.S.C. § 287, the patent marking statute. Therefore, Fairchild argued, the marking statute precluded Power Integrations from relying on any "economic or market data prior to the date" Fairchild was notified of its infringement. The district court granted Fairchild's motion for par¬tial summary judgment. . . . By its ruling, the court prohibited Power Integrations from introducing evidence that Fairchild's pre-notice infringing sales had depressed the market price of the patented products, thus reducing Power Integrations' profits on sales after the notice date.

Lost revenue caused by a reduction in the market price of a patented good due to infringement is a legitimate element of compensatory damages. Indeed, an "infringer's activities do more than divert sales to the infringer. They also depress the price [of the patented product]. Competition drives price toward marginal cost." Because the patentee is entitled to what she would have made "had the Infringer not infringed," damages for infringement may account for both lost sales and reduction of prices due to infringing competition. We thus recognize the economic principle of "price erosion" in calculating compensatory damages for patent infringement.

The patent marking statute limits recoverable damages where a patentee fails to mark her patented products. Where a patentee does not appropriately mark her products, she may not recover damages for infringement occurring before notice to the infringer. The marking statute provides a temporal limitation on damages for infringement. It does not define -- nor does it redefine -- acts of infringement. That task is left to 35 U.S.C. § 271(a), which provides that "whoever without authority makes, uses, offers to sell, or sells any patented invention . . . infringes the patent." While the marking statute limits recovery of damages for infringement occurring before the "infringer was notified of the infringement," the statute refers to the pre-notice infringing activity as "infringement." Indeed, pre-notice infringement is still infringement. What differs is that a patentee may not recover damages for such pre-notice infringement.

Even the infringer's pre-notice infringing activity is part of her whole infringement, and it is the whole of her infringement which we must consider in calculating damages for legally compensable post-notice infringement. To the extent an infringer's pre-notice infringement erodes the market price of a patented product, that price erosion is relevant in determining for each post-notice act of infringement what the patentee would have made but for the infringement. Accordingly, we hold that a price erosion analysis relating to damages arising from post-notice infringement must measure price changes against infringement-free market conditions, and thus the proper starting point of such a price erosion analysis is the date of first infringement. The district court's decision to exclude Power Integrations' evidence of pre-notice price erosion was incorrect as a matter of law. We thus reverse the district court's grant of partial summary judgment for Fairchild. In the new trial on damages for direct infringement, the district court shall admit Power Integrations' evidence of pre-notice price erosion that is relevant in calculating damages for Fairchild's post-notice direct infringement.