As per their usual, the folks at Brown & Michaels have provided a concise write-up to help inventors and small companies understand whether they qualify for Micro-Entity-Status and the resulting fee reduction. http://www.bpmlegal.com/howsmall.html
The basic questions are:
Does the applicant qualify as a small entity? (If no, then no micro-entity)
Has the applicant or any joint inventor filed more than four US non-provisional patent applications? (If yes, then no micro-entity, unless those applications were from a prior employment and assigned to the prior employer)
Did the applicant or any listed inventor have an income for the past year that was greater than $150,000? (If yes, then no micro-entity). This number will change annually based upon median US household income.
Have rights in the application been promised or licensed to a non-micro-entity? (If yes, then no micro-entity)
In addition to the Brown & Michaels site above, the next stop for further reading is the USPTO’s final rules published in the Federal Register at 77 Fed. Reg. 75019.
The big deal here is that micro-entities receive a 75% reduction in USPTO fees.
Fung's servers (such as torrentbox.com) help users find illicit copies of videos to download and stream. Columbia, Disney, and others sued Fung for inducing copyright infringement while Fung claimed immunity from suit under the safe-harbor provisions of the DMCA. 17 U.S.C. § 512. The district court sided with the copyright holders and the 9th Circuit has now affirmed.
Unlike prior cases such as Grokster & Napster, Fung does not actually distribute any software to support the downloading of copyrighted work. No matter, he can still be liable for inducement.
Unlike patents, copyrights protect expression, not products or devices. Inducement liability is not limited, either logically or as articulated in Grokster III, to those who distribute a "device." As a result, one can infringe a copyright through culpable actions resulting in the impermissible reproduction of copyrighted expression, whether those actions involve making available a device or product or providing some service used in accomplishing the infringement. For example, a retail copying service that accepts and copies copyrighted material for customers after broadly promoting its willingness to do so may be liable for the resulting infringement although it does not produce any copying machines or sell them; all it provides is the "service" of copying. Whether the service makes copies using machines of its own manufacture, machines it owns, or machines in someone else's shop would not matter, as copyright liability depends on one's purposeful involvement in the process of reproducing copyrighted material, not the precise nature of that involvement.
Here, the actual acts of infringement are the uploading (distribution) and downloading (reproduction) of the copyrighted works without license. About 90% of the links on Fung's site are directed to this type of material and Fung does not dispute that the site is used by those who wish to infringe a copyright. A key element of inducement under Grokster is that the acts have to have been intended to cause infringement. Here, Fung showed his intent in several ways, including posts to the ISOhunt forum encouraging folks to upload content. The appellate court also identified two ancillary acts as indicative of intent to cause infringement. First, Fung took no steps to keep folks from posting copyrighted material and did not create any filtering technology. Second, Fung made his money through advertisements. [?]
Regarding DMCA Safeharbors: The DMCA offers a safe-harbor for entities who facilitate copyright infringement with its notice-and-takedown provisions of 17 U.S.C. 512(c). The safe-harbor does not excuse intentional acts of infringemente and so you might think that a finding of inducement necessarily negates application of the safe-harbor. In an interesting twist, the Ninth Circuit held that it is possible for the safe-harbor to apply even when inducement has been proven because the knowledge requirement under the safe-harbor is stricter and requires different particularized proof than that of inducement. Here, however, the court found sufficient evidence that Fung had red-flag knowledge of particular instances of infringement.
Intellectual Ventures has received billions of dollars in investment & revenue for its patent licensing program. Almost surprisingly, the company has rarely resorted to litigation in order to enforce its rights. Rather, it seems that most would-be defendants are willing to buy a license before litigation. However, Symantec won't roll over.
Intellectual Ventures I v. Symantec (D.Del. 2013)
In a new lawsuit, Intellectual Ventures (IV) has sued Symantec for infringing three separate patents: U.S. Patent Nos. 5,537,533; 6,598,131; and 6,732,359. In an ongoing lawsuit, IV is also alleging that Symantec infringes its U.S. Patent Nos. 5,987,610; 6,073,142; 6,460,050; and 7,506,155. IV is a master at bundling patents together to cover a particular market area. Here, I looked up the ownership history of all the patents being asserted and they turn out to be a diverse group:
The '533 patent was originally assigned to the Portland-based company MiraLink. When that company went through bankruptcy (restructuring), a shell company known as "So. Pak Pte., LLC" purchased the patent and later transferred it to Intellectual Ventures. I presume that So.Pak was an intellectual ventures shell company.
The '131 patent was originally owned by the now-defunct Ondotek company. When that company closed, intellectual ventures purchased the patent through a shell company known as Oxtapro Tre ME, LLC.
The '359 patent was originally owned by BellSouth who then sold its rights to Dono Tech Services that appears to also be an ongoing intellectual ventures shell company.
The '610 patent was originally owned by Ameritech who then transferred its interests to the University of Texas who then spun-out the IP enforcer "Verve LLC" who then transferred rights to AUCTNYC8 and then to IV. My suspicion is that IV controlled the game by the time that AUCTNYC8 purchased the rights.
The '142 patent was originally owned by the Park City Group who sold the patent to sold the patent rights to the shell company known as Pait Capital Facility who then transferred rights to IV.
The '050 patent was invented by two guys running their own company who then sold their rights to intellectual ventures.
The '155 patent was originally owned by InfoBahn before being transferred to GateKeeper then GK Webb Services and finally to Intellectual Ventures.
One thing that is unclear at this point is the extent that the original sellers retain back-end compensation rights associated with these patents.
In a recent article [2], Matt Rappaport argues for the need for greater transparency in the "marketplace" for transactions involving patents. Rappaport points out several inefficiencies that may result from a lack of transparency regarding the holdings of an entity that is seeking to license one or more of its patents. These inefficiencies result from a potential licensee being unable to readily obtain information regarding the complete holdings of the licensor, and the resultant uncertainty that may introduce regarding relevant prior art, other assets of interest, preferred negotiating tactics, etc. In general, the author thinks that the lack of transparency that results from the use of "shell" companies or other methods of disguising the actual owner of an asset create difficulties for the negotiation process, cause a failure to provide "notice" of the real party in interest (which may impact negotiations and legal options, as well as prevent knowledge of the true holdings of an entity), and subjects potential licensees to a situation in which they are at a disadvantage before even beginning a licensing discussion. There has been an increasing amount of discussion and proposed actions related to making information available regarding the entire patent holdings of patent buying entities when they seek to license portions of their patent portfolios [3].
Although some may argue that a "level playing field" (or at least a more level one) is not necessarily required for every transaction and is not something that a party is entitled to in a marketplace, this article will discuss some of the reasons why it may be beneficial to introduce a more level playing field into the market for patents. Because of the strong public policies that underlie the creation and administration of the patent system, there is a related public interest in how that system is operated. As a result, this public interest may be sufficient to justify introducing a greater degree of transparency into the "market" for patents. This greater degree of transparency may be achieved via judicial decisions, but may be more effectively introduced through enforcement of competition related laws or even new regulations (in order to produce a desired degree of uniformity in how any new requirements are implemented).
Why Increased Oversight or Regulation May Be Justified
While some may argue that patent aggregators, non-practicing entities (NPEs), or patent assertion entities (PAEs) (collectively, "patent buying entities") represent a business model that is counter-productive to the goals of the patent system or to notions of fairness, such comments seem more of a visceral response or value judgment, rather than a conclusion supported by facts. Instead of arguing about whether such entities should exist, it may be more productive to address the possible consequences of their operational methods when they purchase patents or patent applications. Specifically, how a lack of transparency in their operations can create distortions in the efficient operation of a "market" for patent rights. Even if it is uncertain whether such entities are operating in a manner that is supportive of the goals of the patent system, there appear to be strong reasons for advocating greater transparency in their operation, as this would be expected to establish a more efficient and trustworthy "market" for patents. An additional benefit is that this will also enable a more accurate determination of whether the existence and operation of these entities support, inhibit, or are effectively neutral with respect to achieving the goals of the patent system.
There are strong public policies behind the creation and operation of the patent system and as a result, both the Federal government and the public have an inherent interest in that system. This clear from the concern for providing protection for inventions that is expressed in the U.S. Constitution [4] and the Federal statutes based on that expression [5]. The Federal government has an interest in seeing that the patent system operates in a way that enables the system to achieve its stated purpose(s), while observing its obligations to the public. The public has a similar interest in seeing that the patent system fulfills its stated purpose(s), since the system is operated by the Federal government as a service for the public.
Because of the strong public interest in the operation of the patent system and its impact on the public, I believe that the exchange of patent rights should not be exposed to the benefits and disadvantages of the free market system without a careful consideration of whether additional controls should be applied to ensure that the market operates efficiently and fairly for the participants, while supporting (or at least not harming) the interests of the public [6].
That a "market" is being developed for patents and the rights that they enable the owner to exercise is shown by the development of patent trading systems, the holding of patent auctions, and the general increase in attention paid to the value of patents as business assets [7]. However, the asset being traded in such a market is of a different nature than most assets. Patents represent a conscious decision by the Federal government to encourage certain types of behavior by members of the public by creating a new type of property. As a result, patents themselves and the operation of the system that grants them are invested with a stronger government and public interest than is the transfer of most other types of property. This suggests that justification exists for a greater degree of scrutiny into whether the operation of entities that engage in the buying, selling, and licensing of patents do so in a way that supports (or at least does not frustrate) achieving the goals of the patent system.
Should the Patent "Market" Be Considered Part of the Patent System?
A threshold issue is whether a marketplace for the transfer of patent assets should be considered as part of the overall patent system, or instead whether it should be considered a part of the free market system (and as such, evaluated independently of its impact on the patent system). The existence of patent aggregators, NPEs, and PAEs would be expected to have at least some impact on the innovation process; such entities provide an additional exit strategy to enable inventors and companies to recoup some portion of their investment in generating the assets. In addition, the ability to sell a patent may enable an inventor to continue working on other projects, which may lead to more innovation. In general, having a marketplace in which patents may be sold is a positive development, as it may prevent a waste of assets, which is typically a desirable outcome. Therefore, it would seem that having this exit strategy would provide an incentive for at least some additional risk taking and investment in innovation.
At the least, it seems disingenuous to say that the existence of such patent buying entities has no impact on the innovation process or other aspects of the patent system. Given that there is at least a possible impact, I believe that there is justification for considering the still-developing market for patent assets as part of an overall patent system that is intended to fulfill specific goals. And, if the existence of that market is part of a system that is supposed to create an incentive for innovation, then it stands to reason that a properly functioning market is desirable in order to ensure a proper level of incentives and to most efficiently produce the desired benefits of those incentives.
Assuming that there is some impact on the patent system and its operation that can be traced to the operations of patent buying entities, what (if anything) should be done about it? Given the possible inefficiencies or distortions in the operation of a market for patents (and the overall patent system) that can result from a lack of transparency, one could simply accept this as a by-product of exposing patent rights to the operation of a free market system. However, because patents are a property right created by the Federal government for a specific purpose, it may be preferable to recognize a strong enough public interest in the operation of the market for patent rights to justify considering additional controls that would increase the transparency in transactions that occur within that market. This approach seems desirable for at least two reasons: (1) until we can be more certain that such patent buying entities are not having an undesirable impact on the patent system, it is more likely to be in the public interest to err on the side of requiring increased transparency rather than accepting decreased transparency; and (2) since the overall patent system is one designed around establishing and fostering incentives to innovate, it is expected that greater transparency would be more conducive to achieving the proper incentives than would less transparency. If controls that functioned to increase transparency were to be adopted, then such controls would assist in ensuring that the proper incentive structure was in place for an efficiently operating market, and one which presumably would operate more effectively in achieving the goals of the patent system.
Arguments for Increased Buy-Side Transparency
As noted, the article referred to in the Introduction discusses some of the problems caused by a lack of transparency in the patent licensing operations conducted by patent aggregators, NPEs, and PAEs. However, there is another aspect of the use of shell companies and other factors that reduce transparency that may impact the proper operation of a marketplace for patent assets. This is the impact such a practice has on the buying side operations of these entities; specifically, how a lack of transparency may distort the operation of a market for patents, including by preventing a more accurate valuation of patents. The lack of an accurate valuation (or at least the existence of obstacles to a more accurate valuation) does not serve the interests of those selling patents or those to whom they have a fiduciary obligation (such as venture capital investors or stockholders in a company that is selling some of its patent assets).
For example, by using shell companies and preventing disclosure of the ultimate purchaser (and in some cases the beneficiaries of a purchase) of a patent portfolio, a patent buying entity is allowed to distort the market for the value of the rights they are negotiating to purchase. This is because an inventor or other potential seller of a patent portfolio has a reduced amount of information about who wants to buy their patents and what previously existing agreements are in place between the buyer and other parties. For example, such agreements might result in the buyer granting a license to a party that might have paid much more for the patents if the seller had negotiated with them directly.
In the case of the seller being an operating company, such agreements may cause the undesired result of granting a license to a competitor with whom the company would have rather negotiated in an effort to obtain an agreement of greater value to the company (such as a joint development agreement, co-marketing agreement, more desirable distribution terms, a patent cross-license, etc.). The use of a shell company and the failure to disclose existing agreements that may impact the licensing of a purchased patent portfolio may therefore place the seller at a severe disadvantage during negotiations. In addition, due to the lack of transparency, a seller is unable to evaluate how their patents fit into the overall holdings of the prospective buyer. This is likely to further impact the seller's appreciation of the potential value of their own patents to the buyer. Investors in a selling company may not recapture the full value of a patent that resulted from a company's investment in research and development (R&D) if the market value for a patent is distorted. Thus, it is in the interests of the investors of the selling company to have increased transparency since it impacts the valuation of the company and may impact how investors view the decisions made by the executives of the company.
The seller's lack of knowledge regarding the actual buyer and any possible beneficiaries of the sale of their patents prevents them from determining the true demand for their asset, and hence its actual value in the marketplace. As is the case with a lack of transparency in other markets, this distorts the valuation of the assets being exchanged and introduces inefficiencies into the operation of a market for such assets. However, in contrast with transactions involving other goods, the lack of transparency may also introduce a need for greater oversight in order to protect the public interest and prevent unfair and/or anti-competitive business practices that act to prevent (or at least lessen) the ability to achieve the goals of the patent system.
Increased oversight may be provided by one or more suitable mechanisms. These include interpreting unfair competition laws to require disclosure of the actual purchaser and any expected beneficiaries of the purchase of a patent portfolio, or by the establishment of new requirements on the transfer of patents as part of the Federal laws that establish and regulate the operation of the patent system. Judicial action may also have a role, such as where a Court decides that proper valuation of a patent cannot be determined without knowledge concerning the actual purchaser and its holdings, or that the validity of a patent that is being asserted cannot be determined without knowing the full holdings of the party asserting the patent.
Other Operational Aspects That May Be of Concern
The previous discussion has focused on the impact of the lack of transparency arising from using shell companies to obscure the actual buyer of a patent and/or beneficiaries of a purchase on the seller of a patent. In addition, there may be other aspects of patent buying entities that should be considered in order to determine if the operations of such entities are supportive of the goals of the patent system.
Consider the situation where a patent buying entity has investors. If the entity is publicly traded, then disclosure obligations will presumably act to make sellers (i.e., inventors or corporations that employs inventors) aware of at least some of the implications of selling their patents to the entity. However, if the entity is private, many of these obligations do not apply and information regarding operational methods may not be available. In such a case, if a patent buying entity has investors, it may be useful to know if those investors have input into what portfolios are being bought. This is because such inputs or direction may act to further reduce efficient operation of the market by hiding the interest of those investors in a particular portfolio. This affects valuation because it prevents a seller from knowing which parties may be most interested in their patents, and hence the potential demand for the assets. It therefore may enable the investors to acquire patents or licenses at less than the true market value of such assets.
Perhaps, more importantly, it may also raise antitrust or unfair competition concerns because the lack of transparency can permit investors to hide behind the buying entity while having their risk exposure to the patent assets reduced. This may reduce competition by (1) permitting investors to cooperate in efforts to reduce their risk by purchasing certain patents at below market value, and (2) providing the investors with a mechanism for asserting the purchased patents against competitors of the investors. Further, if the investment opportunity in the patent buying entity is not open to all, then those excluded may be at a competitive disadvantage relative to those that are able to invest and exercise some direction over how the patents are asserted. Another benefit to investors in a patent buying entity is that they do not have to make the R&D investment that would typically be required in order to obtain the purchased patents.
Note that even if any direction or guidance exerted by investors is indirect or informal, it may still amount to a business practice which is unfair or which alters the competitive environment. This is because the patent buying entity would be expected to act in the interests of its investors with regards to which patents to purchase and against which targets to assert those patents. Thus, the type and degree of direction exerted by investors (in a formal or in an informal sense) with regards to the purchase and assertion of patents is an aspect of the operation of patent buying entities that may need to be considered.
Regardless of the outcome, it seems appropriate to consider whether the operational behaviors of patent aggregators, NPEs, and PAEs are supportive of (or at least devoid of any negative impact on) achieving the intended goals of the patent system. This would help to ensure that the goals that were intended to be accomplished by the grant of an important Federal right are not being harmed by exposing patents to the operation of the free market system. It is likely that patent aggregators, NPEs, and PAEs are themselves not the problem, but only that certain aspects of their operations need to be modified.
The "Bottom Line"
Because the Federal government created the rights at issue and intended for them to be used for a specific purpose, it may be necessary to introduce additional controls into the operation of the developing market for patent rights. If the actions of, or the methods of operating a business that are practiced by, patent aggregators, NPEs, and PAEs are counter-productive to (or even simply unsupportive of) the goals of the patent system, then additional controls may be justified in order to restore the market for patent assets to a more desirable form. If such controls are to be adopted, their form is uncertain but presumably would include fuller disclosure of the entities that would benefit from a purchase of a patent portfolio, such as the actual buying entity and any other parties that would be expected to benefit by having a license to the purchased assets. The controls may also require disclosure of the investors in a patent buying entity and the ways (if any) in which the investors may impact the acquisition or assertion of patents.
While other markets may accept a similar lack of transparency (and the resulting inequities) as part of the free market process, such an approach may be inappropriate where patents are concerned. At the least, it seems desirable to determine if the lack of transparency being practiced by certain patent buying entities is having an undesired impact on the operation of the patent system.
[1] Alan D. Minsk is a Patent Attorney and former in-house Counsel for Unwired Planet and Intellectual Ventures. His practice focuses on counseling clients with regard to intellectual property issues that arise during the course of their business operations. He has extensive experience as a patent strategist, concentrating on the development and strategic management of patent portfolios, and has represented clients ranging from start-ups to publicly traded companies. Alan received his J.D. from Harvard Law School (1991), and received a Masters degree in Physics and a Bachelors degree in Astronomy from the University of California, Berkeley. The views, statements, and opinions expressed in this article are solely those of the author, and in no way represent or should be associated with those of the author's current employer or of a previous employer.
[3] See "Roundtable on Proposed Requirements for Recordation of Real-Party-in-Interest Information,"http://www.uspto.gov/ip/officechiefecon/roundtable_01-11-2013.jsp.
[4] Congress shall have power . . . To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries. U.S. Constit., Art. I, Sec. 8.
[5] The Patent Act, 35 U.S.C.
[6] Note that examples exist of the introduction of federal oversight to establish greater transparency and a more level playing field in other areas, such as the trading of stocks, in order to provide for a more efficient and trustworthy market. With regards to stock transactions, the transparency, disclosure, and insider trading regulations all act to protect the interests of one party (i.e., the public) in a situation in which an imbalance of information exists.
[7] Patents represent more than a collateral output of the product development cycle. Because of the many possible value propositions for a patent, a properly constructed patent portfolio can effectively protect a company's assets and in some cases may be used to reduce operating costs or generate revenue. This perspective on patents as a business asset is discussed in my articles entitled, "Old Model: Patents Protect Products. New Model: Patents Themselves Are Products," Forbes magazine's CIO Central (June 1, 2012), and "Protect Your Company — And Increase its Value with a Strategic Patent Portfolio," Seattle Business magazine (October 2012).
Guest post by James Bessen, Boston University School of Law and Berkman Center for Internet and Society, Harvard, and Michael J. Meurer, Boston University School of Law
As Congress considers the SHIELD Act, it is helpful to review some of the empirical evidence on the economics Patent Assertion Entities (PAEs). Following up on Colleen Chien’s recent post (Patent Trolls by the Numbers), this post looks briefly at data on the 10 publicly listed firms that were predominantly in the patent assertion business during the period from 2005 to 2010 (Acacia, Asure, Interdigital, Mosaid, Network-1, OPTi, Rambus, Tessera, Virnetx, and Wi-Lan). These companies accounted for about one sixth of all PAE lawsuits filed during this period. Although these companies might not represent the entire universe of PAEs, the greater amount of available financial information helps paint a rich picture of their business. We explored three questions:
1. How much licensing revenue do PAEs get per company sued?
We matched these patent trolls to the lawsuits filed listed in Patent Freedom’s database of patent trolls (see our paper The Private and Social Costs of Patent Trolls for details on this database and the matching). During the period from 2005 through 2010, licensing revenues totaled nearly $6 billion. The mean licensing revenue per defendant comes to $3.8 million in 2010 dollars. This figure includes licensing revenues from non-litigated patent assertions. But it understates the magnitude of licensing revenues per suit because it does not account for accruals — much of the revenue from lawsuits filed in 2010 was not collected in 2010 (and there were many more lawsuits in 2010 than in earlier years). Overall, this figure corresponds rather well with survey-based estimates in our paper The Direct Costs of NPE Disputes.
2. How does revenue vary with PAE business model?
We identified three different types of business models: “middlemen” who acquire or license patents from third party inventors (e.g., Acacia), “R&D-based” who conduct R&D and file their own patents (e.g., Rambus), and “salvage” where an operating company becomes a PAE using patents it developed for its own business (e.g., Asure / Forgent). The R&D-based PAEs file fewer lawsuits, but their licensing revenues are much greater. The R&D-based PAEs account for only 6% of the lawsuits, but 83% of the revenues, earning $54 million per defendant. The “middlemen” file 80% of the lawsuits, but earn only $0.7 million per defendant. These wide disparities correspond to other evidence about the high heterogeneity of PAEs and licensing outcomes.
3. How much of the licensing revenue flows to inventors?
Using the firm’s 10-K reports, we estimated the flows of funds to third party inventors as royalties and as patent acquisitions, as well as the flows to PAE’s own R&D departments including capitalized development costs when the PAE exited an operating business. Of the total licensing revenues earned, only 7% flowed to third party inventors. If we look at just the “middlemen” PAEs, 31% of the licensing revenues flow to third party inventors. If we include own R&D in the whole sample of PAEs, total flows to inventors of all types come to 26% of licensing revenues. These numbers suggest that on the whole, not much of the revenue received by publicly listed PAEs ends up supporting independent inventors. They also suggest that most of the licensing revenues are consumed as transaction cost, even for the “middlemen” PAEs.
James Bessen is a former software innovator and an economist studying innovation; Michael J. Meurer is an economist and law professor. Bessen and Meurer wrote Patent Failure, an economic analysis of the performance of the US patent system in 2008 (Princeton University Press).
The decision here focuses on the evidentiary value associated with the fact that a patent licensee marked its products as patented but then later claimed that the same products are not covered by the listed patent. After the break, I also discuss the arising-under jurisdictional issue raised by the situation but not challenged by the court.
Background: Frolow's patent covers a tennis racket with a particular moment-of-inertia and center of percussion. U.S. Patent Reissue No. Re 33,372. Wilson licensed the original patent back in 1989 but Frolow later sued – alleging breach of contract and patent infringement based upon Frolow's test that showed 42 Wilson rackets were covered by the patent but that were not subject of royalty payments. The district court partially dismissed the case on FRCP Rule 56 summary judgment – holding that Frolow had failed to present material facts sufficient to create a genuine dispute as to whether 37 of the rackets were covered by the patent and/or license. At trial, the district court then granted Wilson's FRCP Rule 50 judgment as a matter of law – holding that the patentee had failed to present sufficient evidence that the remaining five rackets fell within the scope of the patent. On appeal, the Federal Circuit has reversed the summary judgment holding.
Three Judges Four Decisions: The decision structure here is odd to say the least. All three judges agreed on the outcome but were still able to produce four separate opinions. The majority opinion is written by Judge Moore and signed by Judge Clevenger. Judge Moore and Clevenger each provided their own separate opinions with "additional views." And, Judge Newman filed a concurring opinion that agreed with the final judgment.
Here, Wilson had marked all of its rackets as patented and listed the Frolow patent number on each. Frolow asked the court to apply a doctrine of "marking estoppel" to prevent Wilson from later arguing that the products are not covered by the patent. The appellate court refused to adopt the doctrine of marking estoppel, but did find that Wilson's marking should serve as factual evidence of extra-judicial admission tending to prove infringement. In the process, the appellate court rejected the lower court's ruling that the marking was irrelevant to infringement analysis.
Placing a patent number on a product is an admission by the marking party that the marked product falls within the scope of the patent claims. The act of marking is akin to a corporate officer admitting in a letter or at a deposition that the company's product infringes a patent. A defendant, of course, is free to introduce counter evidence or explanation. Thus, the district court erred when it concluded that Wilson's marking had "no bearing on whether literal or doctrine of equivalents infringement has occurred."
Like any other type of extrajudicial admission, evidence of marking is relevant evidence. And such an admission, that the accused product falls within the asserted claims, is certainly relevant on the issue of infringement. Of course, whether a party's marking, in view of the record as a whole, raises a genuine issue of material fact, will depend on the facts of each case. . . . .
On remand, a new jury may be finally asked to decide the infringement question.
In her concurring opinion, Judge Newman suggested that the marking by Wilson should create a presumption of infringement rather than simply circumstantial evidence of infringement. That would place the burden on Wilson to disprove infringement in a manner akin to the rule created in Medtronic v. Boston Scientific, 695 F.3d 1266 (Fed. Cir. 2012). In that case, the court ruled that a licensee in good standing who files a declaratory judgment lawsuit challenging the patent has the burden of proving non-infringement. The Medtronic case is now pending before the Supreme Court on petition for writ of certiorari.
The additional separate opinions by Judges Clevenger and Moore focused on the potential unfair prejudice associated with telling the jury that Wilson had marked its rackets as covered by Frolow's patent. For Clevenger argued that evidence should probably be excluded under Fed. R. Evid. 403 because of the danger of unfair prejudice that outweighs the evidentiary value. Judge Moore disagreed.
= = = = =
Arising Under Jurisdiction?
One oddity about the case is that the patent claim was dismissed early on for failure to state a claim. In particular, Frolow admitted in the complaint that Wilson had a license and that the only problem was Wilson's failure to pay the required royalty amount. Based on meritless allegations, the court dismissed the patent claim. See Vulcan Engineering Co., Inc. v. Fata Aluminum, Inc., 278 F.3d 1366 (Fed. Cir. 2002); Cyrix Corp. v. Intel Corp., 77 F.3d 1381 (Fed. Cir. 1996); United States v. Studiengesellschaft Kohle m.b.H., 670 F.2d 1122 (Fed. Cir. 1981) ("The license waives this right to judicial relief against what, but for the license, would be an infringement."); Schering Corp. v. Zeneca, Inc., 958 F. Supp. 196 (D. Del. 1996) ("Zeneca's license provides an absolute immunity from Schering's infringement action," citing DeForest Radio Telephone and Telegraph Co. v. United States, 273 U.S. 236 (1927)).
After dismissing the patent claim, the district court was left only with the contract dispute. Certainly, that aspect of the case still involved lots of patent issues. Since the scope of licensed products was contractually defined as products that fall under the patent, the court had to figure out which rackets are "infringing" in order to know which ones are covered by the license. However, we know now (under Gunn v. Minton) that the contract claim probably does not arise under federal patent law. The absence of the patent issues was not a problem for the district court here, since there was also diversity jurisdiction. However, the jurisdictional basis is important for knowing whether the appeal goes to the Federal Circuit or to the regional circuit court of appeals. Only cases arising under the patent laws are appealed to the CAFC.
The question in my mind is whether this case arose under the patent laws. In Hunter Douglas v. Harmonic Design, 153 F.3d 1318 (Fed. Cir. 1998), the Federal Circuit found a distinction between claims cases dismissed for lack of subject matter jurisdiction under FRCP R. 12(b)(1) and claims dismissed for failure to state a claim under FRCP R. 12(b)(6). According to the court, 12(b)(1) dismissal indicates a lack of arising under jurisdiction while a claimed dismissed on 12(b)(6) can still be said to have arising under jurisdiction. This creates a difficult to comprehend result because we may result in a situation where the well pleaded complaint is considered to include a federal patent claim even though the court dissmisses that same claim for on 12(b)(6) for failure to state a claim in the pleadings.
The catchphrase of the Hunter Douglas decision by Judge Clevenger is whether the federal claim being stated is "wholly insubstantial." Other courts similarly look to see whether the federal claim is a "frivolous" federal claim. If the federal claim meets either of these tests then it is said to arise under federal law even if the court later dismisses that claim.
The question that the appellate court failed to address here is whether it had appellate jurisdiction and, that question will turn on wether the original patent claim was frivolous or wholly insubstantial. Because jurisdictional questions are generally not waivable, Wilson could immediately file for reconsideration based upon the court's lack of appellate jurisdiction. This also makes sense because the Gunn decision was released well after briefing and oral arguments were complete.
Radio Systems Corp. v. Lalor (Fed. Cir. 2013) (Moore (majority author), Reyna, & Newman (in partial dissent)).
In a split decision, the Federal Circuit has affirmed that the judicial doctrine of equitable estoppel applies to block a patentee from alleging patent infringement following a five-year delay in pursuing charges. Writing in partial dissent, Judge Newman argued that estoppel should additionally apply to family members of the patent in question.
In the 1992 en banc decision of Aukerman v. Chaides Constr., the Federal Circuit identified three elements of the equitable estoppel doctrine applicable here:
Misleading Silence: The patentee, through misleading conduct (or silence), leads the alleged infringer to reasonably infer that the patentee does not intend to enforce its patent against the alleged infringer;
Reliance: The alleged infringer relies on that conduct; and
Prejudice: The alleged infringer will be materially prejudiced if the patentee is allowed to proceed with its claim.
As background, the patentee (Bumper Boy) sent a demand letter to Innotek back in 2005. The letter indicated that Innotek's "UltraSmart" dog collar infringed Bumper Boy's U.S. Patent No. 6,830,014. Innotek quickly responded with a letter claiming that the patent was invalid. Following that, there was no communication between the parties for 4 ½ years. In fact, Bumper Boy never again communicated with Innotek because that company was acquired by Radio Systems. Radio Systems continued to develop the UltraSmart and other dog collar product lines. Meanwhile, Bumper Boy filed a continuation application and obtained a second patent in 2007 (U.S. Patent No. 7,267,082) with a somewhat more focused claim scope. In 2009, Bumper Boy sent a demand letter to Radio Systems alleging infringement of both the old '014 patent and the new '082 patent.
Radio Systems then filed a declaratory judgment action and the district court awarded summary judgment for Radio Systems. The summary judgment ruling held the patentee equitably estopped from pursuing an infringement action against the UltraSmart products based on either the old or the new patent.
On appeal, the Federal Circuit has affirmed-in-part – affirming that the patentee is estopped from suing the successor-in-interest (Radio Systems) on the old patent (subject of the 2005 letter exchange) but denying to extend the estoppel to the new family-member patent that was not mentioned in the letter and that had not issued at the time.
Judge Moore's language suggests that equitable estoppel could never apply to pending patent applications. She writes "quite simply, the '082 patent claims could not have been asserted against Innotek or Radio Systems until those claims issued." However, that interpretation of the decision is likely unduly expansive – especially since a patentee can collect back-damages for pre-issuance infringement under 35 U.S.C. § 154(d). Thus, for instance, a patentee who sends a pre-issuance 154(d) notice of infringement and then waits to sue for four years following the issuance may well (in my estimation) fall within the realm of equitable estoppel. Of course, these are hypothetical facts that do not apply in the Radio Systems case. A second potential factor in the decision here is that the patentee added new matter to the second patent, but the majority appears to have disregarded that fact as immaterial since the asserted claims do not rely on new matter.
Judge Newman has previously provided an expansive view of equitable estoppel in her majority opinion in the case of Aspex Eyewear v. Clariti Eyewear (Fed. Cir. 2009) (Judge Rader dissenting). In the present caes, Judge Newman penned a quite short opinion that argued that the estoppel should be extended to the continuation application, although her analysis does not directly confront the majority's reasoning.
A second pressure point in the decision involves the corporate restructuring from Innotek to Radio Systems. The Federal Circuit has previously held that equitable estoppel can be claimed by successors-in-interest where privity has been established. Jamesbury Corp. v. Litton Indus. Prods., Inc., 839 F.2d 1544 (Fed. Cir. 1988). At some point, there may be a need to explore the privity element, but here that was not a real problem since Radio Systems (1) wholly owns Innotek, (2) is headed by the same individual as Innotek, (3) incorporated Innotek designs and products in its own product lines; and (4) exerts substantial control over Innotek. In my view, privity alone should be insufficient to transfer equitable estoppel rights to the new entity if the estoppel has not yet vested and if the patentee has no reasonable knowledge of the shift.
This decision provides some food-for-thought to patentees. On the one hand it places more pressure of having enforcement-through-litigation as a genuine and timely option during any license negotiations. On the other hand, the case also offers a roadmap for avoiding equitable estoppel problems with the use of continuation applications.
Patent versus Portfolio: The conceptual problem with this decision is one that we'll be struggling to deal with for years – and that is the distinctions between a single patent claim, a single patent, a family of patents, and a portfolio of loosely related patents. The law still largely focuses on single patent claims while business leaders are increasingly focused on a portfolio analysis. Equitable estoppel is largely related to reasonable reliance by business leaders and in that context it makes sense to apply the estoppel principles to a portfolio rather than single claims or single patents.
= = = = =
In addition to the estoppel decision, the lower court also found that the claims were not infringed by other Radio Systems products. In the appeal, the Radio Systems offered as an alternative ground for affirmance that the asserted patents were invalid. However, the Federal Circuit refused to hear that contention on technical grounds since the contention was raised in an opposition brief rather than as a cross-appeal. An invalidity holding is generally broader than a holding of equitable estoppel or non-infringement since those holdings are limited to the products or parties involved in the case. Invalidity on the other hand will apply to all future Radio Systems products as well as other would-be infringers and even current licensees. That change-in-scope creates a problem for Radio systems because of the ordinary rule that an appellee cannot request expansion of the lower court holding. Rather, a party unsatisfied with the scope of a lower court ruling must become an appellant by filing an appeal or cross-appeal.
The Supreme Court has long recognized that "[a]bsent a cross appeal, an appellee . . . may not attack the decree with a view either to enlarging his own rights thereunder or of lessening the rights of his adversary." El Paso Nat. Gas Co. v. Neztsosie, 526 U.S. 473 (1999). We have held that a judgment of invalidity is broader than a judgment of noninfringement. "[A] determination of infringement applies only to a specific accused product or process, whereas invalidity operates as a complete defense to infringement for any product, forever." Typeright Keyboard Corp. v. Microsoft Corp., 374 F.3d 1151 (Fed. Cir. 2004). Thus, invalidity cannot be an alternative ground for affirming a judgment of noninfringment absent a cross-appeal.
While we acknowledge the inefficiency that may result from requiring cross-appeals in situations where the scope of a judgment would be enlarged, we are cabined by our jurisdiction and may not reach issues that are not properly before us. On remand, Radio Systems may pursue its invalidity defense in further proceedings, and, should there be additional rulings on invalidity by the district court, Radio Systems may pursue a proper appeal at that time. Because Radio Systems did not properly file a cross-appeal on the invalidity issue in this appeal, Bumper Boy's motion to strike Radio System' alternative grounds for affirmance is granted.
Just to be clear, it doesn't appear that Radio Systems failure to file a cross-appeal was a technical error. Rather, the company could not file an appeal arguing invalidity because the district court had not reached that issue yet.
Radio Systems Corp. v. Lalor (Fed. Cir. 2013) (Moore (majority author), Reyna, & Newman (in partial dissent)).
In a split decision, the Federal Circuit has affirmed that the judicial doctrine of equitable estoppel applies to block a patentee from alleging patent infringement following a five-year delay in pursuing charges. Writing in partial dissent, Judge Newman argued that estoppel should additionally apply to family members of the patent in question.
In the 1992 en banc decision of Aukerman v. Chaides Constr., the Federal Circuit identified three elements of the equitable estoppel doctrine applicable here:
Misleading Silence: The patentee, through misleading conduct (or silence), leads the alleged infringer to reasonably infer that the patentee does not intend to enforce its patent against the alleged infringer;
Reliance: The alleged infringer relies on that conduct; and
Prejudice: The alleged infringer will be materially prejudiced if the patentee is allowed to proceed with its claim.
As background, the patentee (Bumper Boy) sent a demand letter to Innotek back in 2005. The letter indicated that Innotek's "UltraSmart" dog collar infringed Bumper Boy's U.S. Patent No. 6,830,014. Innotek quickly responded with a letter claiming that the patent was invalid. Following that, there was no communication between the parties for 4 ½ years. In fact, Bumper Boy never again communicated with Innotek because that company was acquired by Radio Systems. Radio Systems continued to develop the UltraSmart and other dog collar product lines. Meanwhile, Bumper Boy filed a continuation application and obtained a second patent in 2007 (U.S. Patent No. 7,267,082) with a somewhat more focused claim scope. In 2009, Bumper Boy sent a demand letter to Radio Systems alleging infringement of both the old '014 patent and the new '082 patent.
Radio Systems then filed a declaratory judgment action and the district court awarded summary judgment for Radio Systems. The summary judgment ruling held the patentee equitably estopped from pursuing an infringement action against the UltraSmart products based on either the old or the new patent.
On appeal, the Federal Circuit has affirmed-in-part – affirming that the patentee is estopped from suing the successor-in-interest (Radio Systems) on the old patent (subject of the 2005 letter exchange) but denying to extend the estoppel to the new family-member patent that was not mentioned in the letter and that had not issued at the time.
Judge Moore's language suggests that equitable estoppel could never apply to pending patent applications. She writes "quite simply, the '082 patent claims could not have been asserted against Innotek or Radio Systems until those claims issued." However, that interpretation of the decision is likely unduly expansive – especially since a patentee can collect back-damages for pre-issuance infringement under 35 U.S.C. § 154(d). Thus, for instance, a patentee who sends a pre-issuance 154(d) notice of infringement and then waits to sue for four years following the issuance may well (in my estimation) fall within the realm of equitable estoppel. Of course, these are hypothetical facts that do not apply in the Radio Systems case. A second potential factor in the decision here is that the patentee added new matter to the second patent, but the majority appears to have disregarded that fact as immaterial since the asserted claims do not rely on new matter.
Judge Newman has previously provided an expansive view of equitable estoppel in her majority opinion in the case of Aspex Eyewear v. Clariti Eyewear (Fed. Cir. 2009) (Judge Rader dissenting). In the present caes, Judge Newman penned a quite short opinion that argued that the estoppel should be extended to the continuation application, although her analysis does not directly confront the majority's reasoning.
A second pressure point in the decision involves the corporate restructuring from Innotek to Radio Systems. The Federal Circuit has previously held that equitable estoppel can be claimed by successors-in-interest where privity has been established. Jamesbury Corp. v. Litton Indus. Prods., Inc., 839 F.2d 1544 (Fed. Cir. 1988). At some point, there may be a need to explore the privity element, but here that was not a real problem since Radio Systems (1) wholly owns Innotek, (2) is headed by the same individual as Innotek, (3) incorporated Innotek designs and products in its own product lines; and (4) exerts substantial control over Innotek. In my view, privity alone should be insufficient to transfer equitable estoppel rights to the new entity if the estoppel has not yet vested and if the patentee has no reasonable knowledge of the shift.
This decision provides some food-for-thought to patentees. On the one hand it places more pressure of having enforcement-through-litigation as a genuine and timely option during any license negotiations. On the other hand, the case also offers a roadmap for avoiding equitable estoppel problems with the use of continuation applications.
Patent versus Portfolio: The conceptual problem with this decision is one that we'll be struggling to deal with for years – and that is the distinctions between a single patent claim, a single patent, a family of patents, and a portfolio of loosely related patents. The law still largely focuses on single patent claims while business leaders are increasingly focused on a portfolio analysis. Equitable estoppel is largely related to reasonable reliance by business leaders and in that context it makes sense to apply the estoppel principles to a portfolio rather than single claims or single patents.
= = = = =
In addition to the estoppel decision, the lower court also found that the claims were not infringed by other Radio Systems products. In the appeal, the Radio Systems offered as an alternative ground for affirmance that the asserted patents were invalid. However, the Federal Circuit refused to hear that contention on technical grounds since the contention was raised in an opposition brief rather than as a cross-appeal. An invalidity holding is generally broader than a holding of equitable estoppel or non-infringement since those holdings are limited to the products or parties involved in the case. Invalidity on the other hand will apply to all future Radio Systems products as well as other would-be infringers and even current licensees. That change-in-scope creates a problem for Radio systems because of the ordinary rule that an appellee cannot request expansion of the lower court holding. Rather, a party unsatisfied with the scope of a lower court ruling must become an appellant by filing an appeal or cross-appeal.
The Supreme Court has long recognized that "[a]bsent a cross appeal, an appellee . . . may not attack the decree with a view either to enlarging his own rights thereunder or of lessening the rights of his adversary." El Paso Nat. Gas Co. v. Neztsosie, 526 U.S. 473 (1999). We have held that a judgment of invalidity is broader than a judgment of noninfringement. "[A] determination of infringement applies only to a specific accused product or process, whereas invalidity operates as a complete defense to infringement for any product, forever." Typeright Keyboard Corp. v. Microsoft Corp., 374 F.3d 1151 (Fed. Cir. 2004). Thus, invalidity cannot be an alternative ground for affirming a judgment of noninfringment absent a cross-appeal.
While we acknowledge the inefficiency that may result from requiring cross-appeals in situations where the scope of a judgment would be enlarged, we are cabined by our jurisdiction and may not reach issues that are not properly before us. On remand, Radio Systems may pursue its invalidity defense in further proceedings, and, should there be additional rulings on invalidity by the district court, Radio Systems may pursue a proper appeal at that time. Because Radio Systems did not properly file a cross-appeal on the invalidity issue in this appeal, Bumper Boy's motion to strike Radio System' alternative grounds for affirmance is granted.
Just to be clear, it doesn't appear that Radio Systems failure to file a cross-appeal was a technical error. Rather, the company could not file an appeal arguing invalidity because the district court had not reached that issue yet.
Radio Systems Corp. v. Lalor (Fed. Cir. 2013) (Moore (majority author), Reyna, & Newman (in partial dissent)).
In a split decision, the Federal Circuit has affirmed that the judicial doctrine of equitable estoppel applies to block a patentee from alleging patent infringement following a five-year delay in pursuing charges. Writing in partial dissent, Judge Newman argued that estoppel should additionally apply to family members of the patent in question.
In the 1992 en banc decision of Aukerman v. Chaides Constr., the Federal Circuit identified three elements of the equitable estoppel doctrine applicable here:
Misleading Silence: The patentee, through misleading conduct (or silence), leads the alleged infringer to reasonably infer that the patentee does not intend to enforce its patent against the alleged infringer;
Reliance: The alleged infringer relies on that conduct; and
Prejudice: The alleged infringer will be materially prejudiced if the patentee is allowed to proceed with its claim.
As background, the patentee (Bumper Boy) sent a demand letter to Innotek back in 2005. The letter indicated that Innotek's "UltraSmart" dog collar infringed Bumper Boy's U.S. Patent No. 6,830,014. Innotek quickly responded with a letter claiming that the patent was invalid. Following that, there was no communication between the parties for 4 ½ years. In fact, Bumper Boy never again communicated with Innotek because that company was acquired by Radio Systems. Radio Systems continued to develop the UltraSmart and other dog collar product lines. Meanwhile, Bumper Boy filed a continuation application and obtained a second patent in 2007 (U.S. Patent No. 7,267,082) with a somewhat more focused claim scope. In 2009, Bumper Boy sent a demand letter to Radio Systems alleging infringement of both the old '014 patent and the new '082 patent.
Radio Systems then filed a declaratory judgment action and the district court awarded summary judgment for Radio Systems. The summary judgment ruling held the patentee equitably estopped from pursuing an infringement action against the UltraSmart products based on either the old or the new patent.
On appeal, the Federal Circuit has affirmed-in-part – affirming that the patentee is estopped from suing the successor-in-interest (Radio Systems) on the old patent (subject of the 2005 letter exchange) but denying to extend the estoppel to the new family-member patent that was not mentioned in the letter and that had not issued at the time.
Judge Moore's language suggests that equitable estoppel could never apply to pending patent applications. She writes "quite simply, the '082 patent claims could not have been asserted against Innotek or Radio Systems until those claims issued." However, that interpretation of the decision is likely unduly expansive – especially since a patentee can collect back-damages for pre-issuance infringement under 35 U.S.C. § 154(d). Thus, for instance, a patentee who sends a pre-issuance 154(d) notice of infringement and then waits to sue for four years following the issuance may well (in my estimation) fall within the realm of equitable estoppel. Of course, these are hypothetical facts that do not apply in the Radio Systems case. A second potential factor in the decision here is that the patentee added new matter to the second patent, but the majority appears to have disregarded that fact as immaterial since the asserted claims do not rely on new matter.
Judge Newman has previously provided an expansive view of equitable estoppel in her majority opinion in the case of Aspex Eyewear v. Clariti Eyewear (Fed. Cir. 2009) (Judge Rader dissenting). In the present caes, Judge Newman penned a quite short opinion that argued that the estoppel should be extended to the continuation application, although her analysis does not directly confront the majority's reasoning.
A second pressure point in the decision involves the corporate restructuring from Innotek to Radio Systems. The Federal Circuit has previously held that equitable estoppel can be claimed by successors-in-interest where privity has been established. Jamesbury Corp. v. Litton Indus. Prods., Inc., 839 F.2d 1544 (Fed. Cir. 1988). At some point, there may be a need to explore the privity element, but here that was not a real problem since Radio Systems (1) wholly owns Innotek, (2) is headed by the same individual as Innotek, (3) incorporated Innotek designs and products in its own product lines; and (4) exerts substantial control over Innotek. In my view, privity alone should be insufficient to transfer equitable estoppel rights to the new entity if the estoppel has not yet vested and if the patentee has no reasonable knowledge of the shift.
This decision provides some food-for-thought to patentees. On the one hand it places more pressure of having enforcement-through-litigation as a genuine and timely option during any license negotiations. On the other hand, the case also offers a roadmap for avoiding equitable estoppel problems with the use of continuation applications.
Patent versus Portfolio: The conceptual problem with this decision is one that we'll be struggling to deal with for years – and that is the distinctions between a single patent claim, a single patent, a family of patents, and a portfolio of loosely related patents. The law still largely focuses on single patent claims while business leaders are increasingly focused on a portfolio analysis. Equitable estoppel is largely related to reasonable reliance by business leaders and in that context it makes sense to apply the estoppel principles to a portfolio rather than single claims or single patents.
= = = = =
In addition to the estoppel decision, the lower court also found that the claims were not infringed by other Radio Systems products. In the appeal, the Radio Systems offered as an alternative ground for affirmance that the asserted patents were invalid. However, the Federal Circuit refused to hear that contention on technical grounds since the contention was raised in an opposition brief rather than as a cross-appeal. An invalidity holding is generally broader than a holding of equitable estoppel or non-infringement since those holdings are limited to the products or parties involved in the case. Invalidity on the other hand will apply to all future Radio Systems products as well as other would-be infringers and even current licensees. That change-in-scope creates a problem for Radio systems because of the ordinary rule that an appellee cannot request expansion of the lower court holding. Rather, a party unsatisfied with the scope of a lower court ruling must become an appellant by filing an appeal or cross-appeal.
The Supreme Court has long recognized that "[a]bsent a cross appeal, an appellee . . . may not attack the decree with a view either to enlarging his own rights thereunder or of lessening the rights of his adversary." El Paso Nat. Gas Co. v. Neztsosie, 526 U.S. 473 (1999). We have held that a judgment of invalidity is broader than a judgment of noninfringement. "[A] determination of infringement applies only to a specific accused product or process, whereas invalidity operates as a complete defense to infringement for any product, forever." Typeright Keyboard Corp. v. Microsoft Corp., 374 F.3d 1151 (Fed. Cir. 2004). Thus, invalidity cannot be an alternative ground for affirming a judgment of noninfringment absent a cross-appeal.
While we acknowledge the inefficiency that may result from requiring cross-appeals in situations where the scope of a judgment would be enlarged, we are cabined by our jurisdiction and may not reach issues that are not properly before us. On remand, Radio Systems may pursue its invalidity defense in further proceedings, and, should there be additional rulings on invalidity by the district court, Radio Systems may pursue a proper appeal at that time. Because Radio Systems did not properly file a cross-appeal on the invalidity issue in this appeal, Bumper Boy's motion to strike Radio System' alternative grounds for affirmance is granted.
Just to be clear, it doesn't appear that Radio Systems failure to file a cross-appeal was a technical error. Rather, the company could not file an appeal arguing invalidity because the district court had not reached that issue yet.
Editorial by David A. Balto and Brendan Coffman. Mr. Balto and Mr. Coffman are antitrust attorneys in Washington D.C. whose representations include high technology firms. In addition to his practice, Mr. Balto was formerly a policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and an antitrust lawyer at the U.S. Department of Justice.
When Patent Pools Attack: Competitive Concerns from the Devolution of MPEG LA
By David A. Balto and Brendan Coffman
Patent pools pose a unique challenge to antitrust enforcement. On the one hand they solve collective action problems and allow participants to achieve economies of scale that would otherwise be impossible. Patent pools enable market participants to join complementary intellectual property to better manage those IP rights. As the Department of Justice noted, patent pools may “provide competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation.”
On the other hand, patent pools can create competitive problems by conferring market power on a group (in the case of member-owned patent pools) or entity (in the case of stand-alone patent pools). Thus, the antitrust enforcement agencies have always been concerned if the pools are over-inclusive and include competing technologies. Where this is the case patent pools may leverage their position to interfere with competition in at least two ways. First, a pool may interfere with the relationships and convergent intellectual property rights of pool members. This result may be particularly pernicious if one of the patent pool participants seeks to introduce a new business model that may compete head-to-head with the pool’s customers. Second, pools may leverage their market power within the supply chain to extract higher or duplicative royalties on downstream purchasers of the pool’s licensed technology. These concerns are typical in the high-tech/intellectual property field, and come up very often in discussions of patent assertion entities, or PAEs.
The key for regulators and policy-makers alike is to ensure that patent pools remain committed to the procompetitive collaborative efforts that justify their creation, and do not change their business model to exploit or create market power. In theory this sounds simple. In practice, it is anything but.
History of MPEG LA
MPEG LA is an interesting case study in the trade-off between the efficiencies of pooling arrangements and the potential competitive risks. MPEG LA has been a personification of the debate since the group’s incipiency. Formed in 1996 to administer the pooling of 27 digital video patents deemed essential to the MPEG 2 video compression technology into a single portfolio, MPEG LA aggregated and offered a collective license to 27 patents from eight companies and Columbia University. MPEG LA presented its idea to the Department of Justice, seeking ex ante approval through the DOJ’s Business Review Procedure [pdf].
The DOJ responded in an oft-cited 14-page letter containing 49 footnotes. The DOJ concluded that the joint licensing of the MPEG 2 essential patents is likely to provide significant cost savings to licensors and licensees alike because “the licensing arrangement have features designed to enhance the usual procompetitive effects and mitigate potential anticompetitive dangers.” The DOJ also emphasized that the structure of the patent pool appeared well-suited to ensure that only truly essential patents become included in the pool, and that the patents in the pool remain complements, not substitutes. Finally, the DOJ opined “there does not appear to be any potential for use of the Portfolio license to disadvantage particular licensees” because the pool’s most-favored-nations clause ensures equivalent rates to all takers on non-discriminatory terms. In approving the arrangement, the DOJ laid forth the following four guidelines for when a patent pool may gain approval:
1. The patents must be valid and enforceable;
2. The pool must not aggregate competitive technologies and set a single price for them;
3. An independent expert should determine whether the patents are essential; and
4. The pool must not disadvantage competitors or facilitate collusion
The DOJ’s approval of MPEG LA’s turned in large part on one fundamental and pivotal fact: MPEG LA’s operating procedure called for the participation of an independent expert at every turn. In fact, the Business Review Letter mentions the independent expert sixteen times.
There was significant concern raise about the MPEG LA pool. As one antitrust scholar exclaimed “the anticompetitive potential of the MPEG LA patent pool is enormous. The DOJ’s approval of the pool validates a collectively enforced monopoly over a fundamental communications standard.”1Despite this and public criticism, the DOJ approved the behavior. MPEG LA stated publically that the company’s mission was to “provide a service that brings all parties together so that technical innovations can be made widely available at a reasonable price.” As history shows, it is not long before a company with this model succumbs to the pressure of exercising and extending its monopoly power.
Emerging Competitive Concerns
In recent years, MPEG LA has been accused of inhibiting the innovation that it was designed to foster. Notably, the company’s practice of charging high licensing fees for patents that are near or past expiration has led critics to assert that the firm has placed profit above its core mission of cheap and accessible licensing of digital video patents. Technology market players have also alleged that MPEG LA has violated the terms of its original agreement with DOJ by failing to invite oversight of its licensing practices by independent experts, and neglecting to adhere to FRAND guidelines. A firm that was once a model (at least in theory) of the potential benefits from collaboration has morphed into one of the industry’s most notorious and most harmful players.
Interestingly MPEG LA embodies both of the concerns with patent pools outlined above and by the DOJ in its approval of the patent pool’s licensing structure. First, MPEG LA may overtly inhibit the ability of its members to develop any technology that may compete with customers of the MPEG LA pool. Most notably, MPEG LA was involved in a dispute with pool-participant Google. In 2010 Google introduced WebM, an open-source solution to uploading videos to the web. Google designed WebM to serve as an alternative to H.264, the primary video compression technology in Microsoft and Apple devices that is covered by the MPEG LA patent pool. All three are members of the MPEG LA patent pool, and pay royalties to the company (although Apple contributed only one patent to the pool). MPEG LA asserted that Google’s WebM product practices on or infringes patents in the pool, and demanded that users of the WebM product pay royalties to the pool. A license from Google would not be enough. In fact, in early 2011 MPEG LA instructed patent owners to inform the pool of patents they believe the WebM product uses. The DOJ initiated an investigation into whether MPEG LA is acting anticompetitively by trying to quash the Google WebM product through assertion of patents as a patent pool. The investigation appears to be on-going.
It is not only Google that MPEG LA has targeted – German software company Nero also filed complaints with the DOJ alleging that MPEG LA is illegally maintaining and enhancing its monopoly power by failing to adhere to the conditions of the DOJ Business Review Letter. Nero points out that MPEG LA does not rely on independent experts as it said it would, but instead allows its membership to drive patent inclusion decisions. Nero also argues that MPEG LA did not offer the patents in question on fair, reasonable, and non-discriminatory terms as required.
MPEG LA has also devolved into a PAE. A PAE may accumulate and leverage patents as a business model by taking advantage of economies of scale and the high cost of patent litigation. A common business model of PAEs is to divide patents among shell companies, thereby making it difficult for defendants to identify the original patent owner and impossible to assert a counterclaim. MPEG LA’s President, Larry Horn, is also the president of MobileMedia Ideas, a known PAE jointly owned by MPEG LA, Sony, and Nokia. The firm controls patents for technologies used in mobile phones, computers, tablets, cameras, and videogame consoles, among other devices. MobileMedia Ideas has engaged in a significant amount of successful litigation, and continues a business model of leveraging these patents against numerous operating companies, including those that have business relationships with MPEG LA.
What is the Lesson?
The lesson cannot be that patent pools are inherently bad. Pooling complementary products displaces litigation in favor of innovation, and is absolutely a win-win for consumers and manufacturers alike. Instead, the lesson must be that continued oversight is necessary in the case of patent pools, especially when there is so much incentive for a pool to step outside the confines of approved activity, and to begin leveraging its unique market position anticompetitively.
With that in mind, there are some basic steps that can be taken to prevent the problems identified above from replicating. First, the antitrust agencies should disapprove of patent pools that place a restriction on how a participant may deploy its own technology. It is appropriate to require a patent owner to make technology available on certain terms and to as large an audience as possible, but it is inappropriate to restrict the patent owner from actually competing. Second, the agencies should condition approval of a patent pool on the continued use of independent experts. A neutral voice is essential to prevent a pool from devolving into a firm seeking to include as many substitute patents as possible. Third, the agencies should condition approval of a patent pool on a commitment to maintain autonomy and to refrain from engaging in any other business activities outside of the pooling arrangement. It is too easy for a patent pool to learn the business of its members and position itself in the market as another barrier to entry.
1Steven C. Carlson, Patent Pools and Antitrust Dilemma, 16 Yale J. on Reg. 359, 372 (1999).
I was just looking at the jury verdict in this patent infringement case. Stryker sued on about twenty claims patents coming from three different patents. The jury found the patents infringed and not invalid.
The damages section of the verdict has three interesting elements.
Backup Award: The court asked the jury to decide both lost-profits and, as a backup, a reasonable royalty. That approach stems from the patent statute that sets reasonable royalty as a floor for compensatory damages. The jury found that Stryker had proven lost profits of $70 million and alternatively should be awarded 25% royalty on Zimmer's the $254 million in revenue from infringing sales. Assuming the verdict holds up, Stryker should receive $70 million lost profit award since it is greater than the $63 million reasonable royalty calculation. This is area where a more detailed verdict form actually helps the plaintiff.
Creating Its Own Form: Part of the power of jury verdicts is that they operate as a black-box decision making tool. Since the jury does not explain its decision, it is difficult to point out errors in that decision making process on appeal. The losing party often has to resort to the difficult task of proving that no reasonable jury could have reached the ultimate conclusion based upon the evidence. In this case, the jury may have given the defense a bit of a boost. In addition to setting the reasonable royalty at 25%, the jury added its own explanation – writing that the 25% is "double initial percentage of [a low comparable] license as we felt 32.2% [requested by the plaintiffs] was too high." We'll see whether the defense is able to use this added tidbit to challenge the verdict.
Three Patents, One Royalty: The theory for calculating damages when multiple patents is a bit dicey and ill defined. Here, three patents were at stake and the jury was asked "Do you find that the reasonable royalty rate would be any different if fewer than all three of the patents in suit are valid and infringed?" The jury answered "no." That response creates some hypothetical problems – most pointedly would be whether this result is the same if the patents were each held by a different entity.
In a 9-0 decision, the Supreme Court has limited the scope of "arising under" jurisdiction for patent cases and held that the Minton's patent litigation malpractice case does not arise under the patent laws and therefore is not amenable to exclusive federal jurisdiction. This decision collaterally overrules the Federal Circuit's prior case law in Air Measurement Technologies, Inc. v. Akin Gump Strauss Hauer & Feld, L. L. P., 504 F. 3d 1262 (2007) and Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F. 3d 1281 (2007)). As I discuss at the end of this essay, the America Invents Act of 2011 expanded the scope of federal court jurisdiction and thus counteracts some of the impact of this decision.
28 U. S. C. §1338(a) indicates that federal "district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents" and that the jurisdiction "shall be exclusive of the courts of the states." (Note, this language has now been somewhat amended by the AIA).
Gunn used to be Minton's attorney and represented Minton in prior patent infringement litigation. However, in that prior litigation, the district court declared Minton's patent invalid because he had placed it "on sale" more than one year prior to filing his application. Minton later found that he may have won under the "experimental use" exception to the on-sale bar, but Gunn had allegedly failed to advise him on that front. Minton then sued Gunn for attorney malpractice in Texas state court. However, after losing in State court, Minton changed heart and asked that the case be sent to Federal Court based upon Section 1338(a)'s provision for exclusive federal jurisdiction over any case "arising under any Act of Congress relating to patents." The Texas Supreme Court agreed with Minton and found that the exclusivity prong of the federal law denied jurisdiction to the state. Gunn then petitioned the Supreme Court to decide the scope of federal arising under jurisdiction in this case.
The "arising under" language used in Section 1338(a) has its foundation in the U.S. Constitution. Article III states that "[t]he judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution." §1338(a) language is also parallel to §1331's general principle of federal court jurisdiction over "all civil actions arising under the Constitution, laws, or treaties of the United States." §1338(a) is particularly limited to "any civil action arising under any Act of Congress relating to patents." However, the statute is also particularly strong because, unlike most causes of action, the statute provides for exclusive federal jurisdiction if the arising under condition is met. §1338(a).
In most patent cases the arising under analysis is simple because the complaint asserts a cause of action that is based on federal patent law, such as patent infringement or declaratory judgment of invalidity. Supreme Court has additionally held that arising under jurisdiction may exist in cases where the cause of action is not based upon federal law, but where there is an underlying federal issue arising from the well pled complaint. Most importantly, see Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U. S. 308 (2005). In Grable, the Supreme Court indicated that this secondary form of arising under jurisdiction only exists when the claim made in the complaint "[1] necessarily raise[s] a stated federal issue, [2] actually disputed and [3] substantial, [4] which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities." Grable was an interpretation of §1331 arising under jurisdiction, but the court previously held in Christianson v. Colt Indus. that§1331 arising under analysis applies to §1338(a) analysis as well. Christianson v. Colt Industries Operating Corp., 486 U. S. 800, 808–809 (1988).
Regarding the present case, we know that malpractice is ordinarily a state law claim and thus we need to consider whether the case qualifies under Grable. On that point, the Supreme Court agreed that [1] Minton's "experimental use" theory was a federal patent question necessary for his case and that [2] the issue was actually disputed. However, the Court found Minton's case failed [3] to raise a "substantial" federal issue with [4] the appropriate balance of state and federal interests.
Here, the substantiality requirement is focused on the impact that the case may have on the federal system as a whole. The court writes:
[T]he federal issue in this case is not substantial in the relevant sense…. I]t is not enough that the federal issue be significant to the particular parties in the immediate suit; that will always be true when the state claim "necessarily raise[s]" a disputed federal issue, as Grable separately requires. The substantiality inquiry under Grable looks instead to the importance of the issue to the federal system as a whole.
This case, the court found carries no significance with regard to the federal system:
Because of the backward-looking nature of a legal malpractice claim, the question is posed in a merely hypothetical sense: If Minton's lawyers had raised a timely experimental-use argument, would the result in the patent infringement proceeding have been different? No matter how the state courts resolve that hypothetical "case within a case," it will not change the real-world result of the prior federal patent litigation. Minton's patent will remain invalid.
At the creation of the Federal Circuit, patent law was given a somewhat special status based upon the congressional sense for national uniformity of the patent law. The Supreme Court confirmed that notion in Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U. S. 141 (1989). Here, the Supreme Court found that the sense of national uniformity is not disturbed by state law decisions since (1) the federal courts are of course not bound by state court decisions; and these particular malpractice proceedings only ask hypothetical patent questions of "what would have happened."
One point that Minton raised in the case is that the Texas state court applied patent law doctrine in a way that varies from Federal Circuit precedent. On that point, the Supreme Court merely stated that "state courts can be expected to hew closely to the pertinent federal precedents" and that issues not already covered by federal precedent will eventually be "decided by a federal court in the context of an actual patent case, with review in the Federal Circuit. If the question arises frequently, it will soon be resolved within the federal system, laying to rest any contrary state court precedent." This is the one point where the Supreme Court decision is somewhat disingenuous since state courts are not obligated to follow precedent set by either district courts or the Federal Circuit. Thus, the reality is that it is well within a state court's power to unsettle issues seemingly well-settled by Federal Circuit precedent.
Although not so holding, the Supreme Court also suggested that state court decisions on patent issues should not have preclusive effect on other courts. Thus, a state court decision involving a licensing dispute that results in invalidation of a patent would have no preclusive effect on either the USPTO or other Federal Courts. Rather, "the result would be limited to the parties and patents that had been before the state court."
Since Minton failed to prove a substantial Federal interest in deciding the state cause of action., it also follows that Minton fails the fourth prong of Grable that involves the balancing of State and Federal interests.
In its conclusion, the Court makes a clear statement of its decision:
As we recognized a century ago, "[t]he Federal courts have exclusive jurisdiction of all cases arising under the patent laws, but not of all questions in which a patent may be the subject-matter of the controversy." New Marshall Engine Co. v. Marshall Engine Co., 223 U. S. 473 (1912). In this case, although the state courts must answer a question of patent law to resolve Minton's legal malpractice claim, their answer will have no broader effects. It will not stand as binding precedent for any future patent claim; it will not even affect the validity of Minton's patent. Accordingly, there is no "serious federal interest in claiming the advantages thought to be inherent in a federal forum," Grable. Section 1338(a) does not deprive the state courts of subject matter jurisdiction.
The judgment of the Supreme Court of Texas is reversed, and the case is remanded for further proceedings not inconsistent with this opinion.
On remand, the Texas Supreme Court will now be asked to decide the merits of Minton's appeal rather than merely the jurisdictional question.
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In many ways, this decision is the echo of EBay and MedImmne where the court basically said: patent litigation is not special, it is just litigation. Patent cases are not untouchable by state courts and Congressional statements regarding the uniformity principle are not statements also declaring that patent law is especially unique.
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Impact: This case will have some immediate impact in that patent law malpractice suits currently being litigated in federal court, absent special circumstances or diversity, should be dismissed for lack of subject matter jurisdiction. And, malpractice cases will likely be almost uniformly heard in state court going forward.
Role of the AIA: For licensing dispute, the decision here means that few breach-of-contract allegations will be seen as arising under the patent law. However, the impact of this case on licensing disputes is likely wholly overwhelmed by the changes to §1338(a) and the new removal statue 28 U.S.C. §1454. The new law does not apply to the Gunn case because the complaint was filed before the law was enacted. However, under the new law, the question is not whether the "civil action" arises under the patent laws, but instead whether the lawsuit involves "any claim for relief arising under any Act of Congress relating to patents." Section 1454 makes clear that the federal court will have jurisdiction whenever "any party" asserts a claim arising under the patent laws. Thus, in a breach-of-patent-license dispute it is almost always the case that the accused breaching party can assert a counterclaim of patent invalidity. When that occurs, the new law expressly eliminates state court jurisdiction and offers an option for removal to Federal Court rather than straight dismissal. This change in the law essentially overrules the Supreme Court's decision in Holmes Group, Inc. v. Vornado Aircirculation Systems, Inc., 535 U.S. 826 (2002). In Holmes Group, the Supreme Court held that patent claims that arise only in a counterclaim did not trigger Federal jurisdiction under §1338(a).
Bowman v. Monsanto Company (SCOTUS 2013) Transcript
The Supreme Court heard oral arguments today in the patent exhaustion case involving Monsanto's glyphosate-resistant soybeans. Acting in a pro bono basis, Mark Walters represented Mr. Bowman, the Indiana farmer accused of patent infringement. Decidedly not pro bono, Seth Waxman represented Monsanto, and Melissa Arbus Sherry spoke on behalf of the US Government.
My expectation here is that the court will side with Monsanto and find that a sale of patents seeds does not exhaust the patent rights as to progeny seeds that are grown. I will not be surprised if that result is 9-0. I suspect that there will also be a concurring opinion arguing that the Federal Circuit's conditional sale doctrine is bad law and that restrictions on the use of personal property do not normally bind subsequent purchasers who are not privy to that restriction agreement – regardless of whether the personal property is covered by a patent right.
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There are two major questions at stake: (1) what is the scope of patent exhaustion for goods that are naturally self-reproducing; and (2) to what extent do use restrictions placed on a licensed grower (or manufacturer) persist as servitudes that create potential liability for downstream purchasers.
Everyone agrees that the first authorized and unrestricted sale of a patented article exhausts the patent rights in that particular article and allows the purchaser to use and sell the article without fear of patent liability. Bowman argues that, for seeds, this right to use includes the right to sow the seeds and use the harvest. Under Bowman's construct, once a seed is sold without restriction, the patent rights are exhausted to that seed and to its generations of progeny. Bowman's argument also relies upon the disputed assumption that the patent rights covering the initial seeds he purchased were actually exhausted. Monsanto has kept tight control over its product throughout the years and always requires farmers who want to plant its seeds to sign a technology licensing agreement. That agreement includes a promise not to save and replant seeds. Monsanto has argued that use restriction (or license limitation) is binding on subsequent purchasers – even those who purchase the seeds in a fungible commodity market without agreeing to any restriction. Thus, for Bowman to win, the court needs to find (1) that the rights in the original seeds were exhausted by the time Bowman purchased them from the commodity market and (2) that the exhaustion applies to all future progeny of the seeds. So far, the courts have sided with Monsanto.
Out of the gate, a plurality of justices appeared concerned about the policy implications of a decision in favor of Bowman.
Chief Justice Roberts: Why in the world would anybody spend any money to try to improve the seed if as soon as they sold the first one anybody could grow more and have as many of those seeds as they want?
There are several ways to answer this question: (1) an innovator could use contract law to ensure a better market structure; (2) patent rights are rarely sufficient alone to ensure profit; and (3) that soybeans are not really fungible in the way that you might think. The Court already knew the first two answers wanted to explore the third.
Mr. Walters: [S}eed that's available at a grain elevator is not a very good source of seed and farmers are not going to be able to eliminate the need to go to Monsanto or the other seed companies every year by going to the grain elevator. . . . Taking our example here where — where Petitioner bought commodity seeds, it's an undifferentiated mixture, it can't be overemphasized how different every single seed is, you don't know a Monsanto from a Pioneer from an Asgrow. You don't know the maturity rate. If I am a farmer, I need a particular maturity bean for my field because I don't want it to mature before it gets high enough for the combine to come around and cut it.
So you want to be able to have — you have all these things dialed in, these different variabilities. So if you go to the grain elevator and you don't know what exactly it is that you want and you just get a mixture, that's not going to be real -competitive at all to Monsanto's first generation seed. Now, the possibility of somebody selecting one and saying, ah, that's the exact one that I need for my field, I'm going to cultivate that and let it grow into enough seeds so I can plant my first crop, that would take a number of years to grow a 1,000-acre farm, and it's not — and by that time, farmers — the nature would have changed and evolved where you would want the latest disease resistance by that point….
Justice Scalia: Some of them would — would grow at different rates than others.
Mr. Walters: Absolutely. . . .
Justice Scalia: The original batch that he buys from Monsanto, in addition to being resistant to the chemical that kills the weeds, in addition to that, they all mature at the same rate.
Mr. Walters: Exactly. They're a uniform variety. They are exactly what a farmer needs …
Justice Scalia: So all the Monsanto seeds are not — are not fungible.
In addition to these elements, both Ms. Arbus Sherry and Mr. Waxman explained that the seed lines are additionally protected by PVPA certificates and that grain elevators are sales are prohibited by state and federal law from labeling its commodity goods as seed.
On the actual law of exhaustion Mr. Walters did not appear to fare so well.
Justice Sotomayor: I'm sorry. The Exhaustion Doctrine permits you to use the good that you buy. It never permits you to make another item from that item you bought. So that's what I think Justice Breyer is saying, which is you can use the seed, you can plant it, but what you can't do is use its progeny unless you are licensed to, because its progeny is a new item.
Mr. Walters: This is obviously a brand-new case where we're dealing with the — the doctrine of patent exhaustion in the context of self-replicating technologies.
It was around this point that Justice Breyer gave his best one-liner of the day, declaring that "three generations of seeds is enough." (see Buck v. Bell).
The government's Ms. Arbus Sherry began her discussion with a somewhat disingenuous parade of horribles that was quickly countered by Justice Scalia his is well known for his parades.
Ms. Arbus Sherry: If the concept is the sale of a parent plant exhausts the patentholder's rights not only with respect to that seed but with respect to all the progeny seed, we would have to go all the way back to the very first Roundup Ready plant that was created as part of the transformation event. Every single Roundup Ready seed in existence today is the progeny of that one parent plant and, as Your Honor pointed out, that would eviscerate patent protections. There would be no incentive to invest, not just in Roundup Ready soybeans or not even agricultural technology, but it's quite a bit broader than that.
In order to encourage investment, the Patent Act provides 20 years of exclusivity. This would be reducing the 20-year term to essentially one and only sale. It would be near impossible to recoup your investments with that first sale and so the more likely consequence is that research dollars would be put elsewhere.
Justice Scalia: That's a pretty horrible result, but let me give you another horrible result, and that is if — if we agree with you, farmers will not be able to do a second planting by simply getting the undifferentiated seeds from a grain elevator, because at least a few of those seeds will always be patented seeds, and no farmer could ever plant anything from a grain elevator, which means — I gather they use it for second plantings where the risks are so high that it doesn't pay to buy expensive seed. Now they can't do that any more because there's practically no grain elevator that doesn't have at least one patented seed in it.
Ms. Arbus Sherry: And the answer to that is this is actually not a traditional farming practice. Despite what Petitioner says, farmers do not generally go to grain elevators, buy commingled grain, plant it in the ground as seed.
Mr. Waxman's performance appears to be a tour-de-force, although he did not push for affirmance of the Federal Circuit's conditional sale doctrine. The one area where the court focused attention was on innocent infringement.
Justice Kagan: Mr. Waxman, there is a worrisome thing on the other side, though, too. And that is the Bureau position has the — has the capacity to make infringers out of everybody. And that is highlighted actually in this case by how successful this product is and how large a percentage of the market it has had.
So that — you know, seeds can be blown onto a farmer's farm by wind, and all of a sudden you have RoundUp seeds there and the farmer is infringing, or there's a 10-year-old who wants to do a science project of creating a soybean plant, and he goes to the supermarket and gets an edamame, and it turns out that it's Roundup seeds.
And, you know, these Roundup seeds are everywhere, it seems to me. There's, what, 90 percent of all the seeds that are around? So it seems as though — like pretty much everybody is an infringer at this point, aren't they?
Mr. Waxman: …Your point about the ubiquity of Roundup Ready's use is a fair one. I mean, this is probably the most rapidly adopted technological advance in history. The very first Roundup Ready soybean seed was only made in 1996. And it now is grown by more than 90 percent of the 275,000 soybean farms in the United States.
But size — that is, success — has never been thought and can't be thought to affect the contour of patent rights. You may very — with soybeans, the problem of blowing seed is not an issue for soybeans. Soybeans don't — I mean, it would take Hurricane Sandy to blow a soybean into some other farmer's field. And soybeans, in any event, are — you know, have perfect flowers; that is, they contain both the pollen and the stamen, so that they — which is the reason that they breed free and true, unlike, for example, corn.
The point that there may be many farmers with respect to other crops like alfalfa that may have some inadvertent Roundup Ready alfalfa in their fields may be true, although it's — it is not well documented. There would be inadvertent infringement if the farmer was cultivating a patented crop, but there would be no enforcement of that.
The farmer wouldn't know, Monsanto wouldn't know, and in any event, the damages would be zero because you would ask what the reasonable royalty would be, and if the farmer doesn't want Roundup Ready technology and isn't using Roundup Ready technology to save costs and increase productivity, the — the royalty value would be zero. …
Justice Breyer: And some of the self-replicating items, which are infringing items, end up inadvertently all over the place. Is there anything — is there precautions that you take? I mean, is there anything in patent law that helps?
Mr. Waxman: So infringement is — unlike contributory infringement or induced infringement, the act of infringement, that is a violation of Section 271 is a strict liability tort, but it requires affirmative volitional contact -conduct. That is, it's not that — a thing doesn't infringe; a person infringes. …
Justice Breyer: But you're just saying that would need a modification in patent law.
The folks at IP Offerings have released a summary of publicly available US patent sales from 2012. The 35 transactions on the list included 6,985 patents assigned at a total value of $2.9 billion. The average price per patent was $422 thousand with a median of $221 thousand. IP Offerings also reports that the average transaction price is $374 thousand per patent.
It is nice to have these numbers, but the reality is that the vast majority of patent sales (and licenses) are done out of the public eye and without distributing any public information regarding price or terms. It is hard to know whether these numbers are typical.
If the owner is a “person” (i.e. individual or individuals) who has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey, or license, any rights in the invention.
If the owner is a “small business concern.” Under the SBA regulations, this means that the owner, including affiliates, has fewer than 500 employees and the owner has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey, or license, any rights in the invention.
A non-profit organization (regardless of size), including institutions of higher education who has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey, or license, any rights in the invention.
If the owner has transferred or licensed rights, or is under obligation to do so, it can still qualify for small entity status so long as each party individually meets the requirements listed here.
It will be interesting to see how this chart develops with the new “micro entity status” being implemented next month.
Adding a bit of drama to the slide-to-unlock debate, Micron has just received its own patent covering a "system and method for controlling user access to an electronic device." U.S. Patent No 8,352,745 issued in January 2013 but claims priority to an original application filed in February 2000 and lists Jim McKeeth as inventor.
Claims:
1. A system comprising:
a touch screen upon which a user is to enter, by drawing, a geometric pattern in a specified direction to gain access to the system; and
a processing circuit coupled to the touch screen to compare the user entered geometric pattern to a predefined geometric pattern stored in a memory.
6. The system of claim 1 wherein the user entered geometric pattern is a line.
Apple's slide-to-unlock patents claim priority only to the 2004-2005 timeframe and, although they may be separately patentable, Apple's patents will not serve to invalidate Micron's new patent.
Samsung has a 10-year cross-license deal with Micron. I have not seen reports of any similar deals with Apple, Google\Motorola, or RIM. It will be interesting to see whether Micron holds onto the patent or shifts it to an enforcement company as it did in 2010 in sending 4,000+ patents to John Desmarais for enforcement. Micron is a major manufacturer of computer memory with a market valuation of about $8 billion, perhaps they should just ask for Apple to endorse-over its recent billion dollar patent infringement judgment. One complicating factor is that I suspect Micron is a supplier for all of the potential defendants.
The Caribbean nation of Antigua and Barbuda has won its case against the United States at the World Trade Organization (WTO) and is now authorized and moving forward with the granted sanction – suspension of all American-owned intellectual property rights within the Antigua borders. This trade sanction comes as a response to the US campaign against off-shore on-line gambling. That campaign has decimated an Antiguan industry and was found to violate the US WTO trade obligations. Antigua has been negotiating with the US for the past decade on some mechanism to resolve the dispute.
In a press release, Hon. Carl Roberts High Commission from Antigua to the UK indicated the following: “For nearly a decade, Antigua has sought to resolve the dispute with the United States Government over the US failure to abide by American treaty obligations with regard to remote gaming.” Colin Murdoch, Trade Ambassador for Antigua goes on: “This decision [to suspend US IP rights] did not come easily. After countless proposals from our government have been more or less ignored by the Office of the USTR – numerous decisions by the WTO declaring the United States Government’s position illegal – and failure of the United States Government to provide meaningful proposals to end the dispute, the WTO provides this remedy not to encourage illicit behavior by nations; but rather to provide them with a way to secure their legal rights as sovereign nations.”
At this point, the Antiguan government has not indicated the exact date when suspension will begin or whether the suspension will apply to both IP procurement and enforcement. About 10 patent applications were filed in Antigua in both 2010 and 2011.
The Land of 365 Beachesmay soon become the hot site for unlicensed but legal copyright streaming. Companies may want to proactively register their .AG domain as well.
This Federal Circuit decision is fairly big news as far as its legal results. District Court Judge Davis rejected Newegg's obviousness argument on summary judgment – finding each of the asserted patent claims not invalid. On appeal, the Federal Circuit has completely reversed that holding and instead finds here that all of the asserted claims are invalid as obvious. The case also raises a novel argument for secondary indicia of nonobviousness.
The unanimous opinion is written by Judge Newman and joined by Judges Prost and Reyna.
The Federal Circuit panel's approach here follows the lead of KSR International Co., v. Teleflex, Inc., 550 U.S. 398 (2007). In that case, the Supreme Court was able to make the legal conclusion that the asserted claims were obvious because the factual underpinnings of obviousness were not in material dispute.
Where, as here, the content of the prior art, the scope of the patent claim, and the level of ordinary skill in the art are not in material dispute, and the obviousness of the claim is apparent in light of these factors, summary judgment is appropriate.
In his usual quotable way, Greg Aharonian writes that "A bit of commonsense leaks into the CAFC."
The asserted patents in this case are all eCommerce patents purchased out of bankruptcy. United States Patent Nos. 5,715,314, 5,909,492, and 7,272,639. The court walked through the obviousness of each different claim finding that (1) each element was found in the prior art and (2) the combination of elements would have been well within the skill of an ordinary database designer and GUI developer.
Licensing as Secondary Indicia of Nonobviousness: The court does have an interesting discussion of secondary indicia of nonobviousness. The patentee argued that the extensive licensing of its patent provided evidence of the patent's nonobviousness – asking the rhetorical question "why would someone pay to license an invalid patent?" The court did not entirely foreclose that argument in the future, but appears to have sided with Newegg's contention that the licenses were taken "to avoid the costs of litigation" and not to take advantage of the invention.
In its newly filed brief, the US Government has agreed with Bowman that violation of use restrictions on commodity GM soybeans cannot result in patent infringement. However, the Government ultimately sides with Monsanto in arguing that the progeny beans grown by Bowman represent an infringing "mak[ing]" of Monsanto's patented invention.
Briefing continues in the GM seed case between the Indiana farmer Vernon Bowman and the developer of GM glyphosate resistant "RoundUp Ready" soybeans Monsanto. Monsanto holds two patents that clearly and literally cover the seeds in question. U.S. Patent Nos. 5,352,605 and RE39,247E. For several years, Bowman had been looking for a legitimate way to grow RoundUp Ready soybeans without paying the large license fee charged by Monsanto. What he did was find a seeming loophole in the Monsanto license agreement that allowed farmers to sell soybeans to the commodity market without any ongoing restrictions on the use of those beans. Call these "authorized sales" because the unrestricted sale of GM seeds to commodity market was authorized by the patentee, Monsanto. Normally, those commodity beans are purchased by CAFO and public school lunch operators, but Bowman purchased them with the intent of growing more soybeans. The nice thing about soybeans is that they self-pollinate and thus apart from mutation, soybean progeny are genetically identical to their forebears. The US commodity marketplace does not normally distinguish between GM and non-GM soybeans. However, Bowman relied on his reasonable assumption that most of the beans would be RoundUp Ready because of Monsanto's deep market penetration. Bowman planted the beans and fond that the bulk were resistant to the glyphosate herbicide. Bowman saved some of his harvest for replanting and sold the rest back to the commodity market. This continued for several years until Monsanto sued Bowman alleging patent infringement – arguing that Bowman's operation was "making" new infringing seeds in violation of the Patent Act. 35 U.S.C. 271(a) ("whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States … during the term of the patent therefor, infringes the patent").
Thus far, courts are siding with Monsanto, but now the Supreme Court will weigh in on whether those Monsanto-authorized sales should be seen as exhausting the patent rights in the progeny. The judicially created doctrine of exhaustion is designed to better ensure free alienation of goods and a robust secondary market. Exhaustion fits within the centuries long common law history of rejecting covenants and conditions that unduly limit the alienability (resale) and use of property rights. Although much of the property case-law has focused on real estate, the rules against unreasonable limits on alienation and use are at their peak in the context personal property, such as the soybeans at issue in this case. For the most part, restrictions on use and resale of personal property will not be enforceable against a bona fide purchaser. Under the patent exhaustion doctrine, patent rights are said to be exhausted for goods that enter the stream of commerce with the patentee's authorization and without restriction. Thus, when Ricoh sells a patented copier to a customer, the patent rights are exhausted and Ricoh cannot later assert patent infringement when the customer sells the copier to a third party or when that third party uses the copier. Unauthorized sale and use can each constitute patent infringement, but Ricoh would have no case here because its patent would be deemed exhausted. Final point on exhaustion is that it normally applies on an item-by-item basis. The fact that a customer owns an authorized Ricoh copier whose patent is exhausted does not provide the customer with any authority to build another copier that infringes the patent. Making that new copier would constitute patent infringement.
The case at hand is unique because of the self-replicating nature of soybeans (and life in general). In its brief, the US Gov't frames the issue as:
Whether the authorized sale of one generation of a patented plant seed exhausts a patentee's right to control subsequent generations of that seed.
In his framing of the question, Bowman identifies the Federal Circuit's decision as creating a loophole for self-replicating technologies.
Whether the Federal Circuit erred by (1) refusing to find patent exhaustion in patented seeds even after an authorized sale and by (2) creating an exception to the doctrine of patent exhaustion for self-replicating technologies?
Monsanto took its turn by presenting questions in apparently ad absurdum form:
1. Whether the first-sale doctrine grants the purchaser of a patented article the right to make, use, and sell an unlimited number of new copies of the patented invention that have never been sold.
2. Whether patent treats as per se unenforceable all restrictions imposed by license on the use of a patented article following an authorized sale.
There is some amount of cross-talk in these questions presented. Each party accuses the other of seeking an exceptional rule for self-replicated technology. Monsanto here also attempts to bring-in an additional factual question regarding whether the commodity seeds were actually sold without use restrictions.
As suggested above, the key briefs have now been filed (except Bowman's reply brief) and oral arguments are set for February 19, 2013.
U.S. Government Brief: The most important brief filed in the case is most likely that of the US Government filed as a joint effort by both Department of Justice and the US Patent Office. That brief fully supports the Federal Circuit's holding that patent exhaustion does not apply to the progeny because the progeny are new articles of manufacture. The brief cites case-after-case where Supreme Court has indicated that exhaustion only applies to the article sold and does not permit the purchaser to make new copies. Unfortunately, the Government brief does not seriously engage the peculiarity of this case – that the patented article is life form that self-replicates by its nature- other than by noting that Bowman "creat[ed]" the progeny "through planting and cultivation." In his brief, Bowman disputes that growing crops constitutes "making" because seeds that fall to earth will naturally sprout and grow without human intervention. The Government also tries to make a distinction based upon elements of the PVPA, but I don't believe those hold water.
On one element, the US Government agreed with Bowman – that the Federal Circuit rule that a patentee's conditional sale of patented goods binds subsequent downstream purchasers. The Government writes that the proper rule, under Supreme Court precedent, is that downstream purchasers will not be liable patent infringement based upon failure to comply with use restrictions placed on the original authorized sale.
Restrictions on downstream use or resale may be enforceable as a matter of state contract law, but a purchaser's failure to comply with such restrictions does not constitute patent infringement.
Although agreeing in principle with Bowman, the Government then reiterated that Bowman is liable for the progeny that are not exhausted.
A recent Third Circuit decision focuses on the impact that a bankruptcy has on a patent license. In 2009, Spansion and Apple settled a patent dispute with Spansion agreeing to end its case at the ITC and to refrain from suing in district court. The agreement stated:
Provided that neither Spansion nor any successor in interest to any of the patents being asserted in the referenced ITC action do not bring an action of any nature asserting any such patent before any legal, judicial, arbitral, administrative, executive or other type of body or tribunal that has, or claims to have, authority to adjudicate such action in whole or in part against Apple or any Apple product, Apple agrees Spansion will not be disbarred as an Apple supplier as a result of the referenced ITC action.
The agreement also particularly stated that Spansion will remain a primary supplier "for the life-time of the product" and will be considered for future platforms.
Later that year, Spansion filed for bankruptcy and the trustee moved to reject the settlement as an executory contract. The normal rule in bankruptcy (under 11 U.S.C. § 365(a)) is that the debtor (here Spansion) can unilaterally reject executory contracts if it so chooses. Any resulting contract damages will be unsecured debts that are unlikely to receive any payout. IP law has a special exception codified in 11 U.S.C. § 365(n). Under that rule, a licensee can elect to retain its license rights despite a debtor's rejection. The statute states:
If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect . . . (B) to retain its rights . . . under such contract . . . to such intellectual property . . . as such rights existed immediately before the case commenced."
On appeal, the question is whether the contract between Spansion and Apple is a license or instead merely a promise not to sue. The bankruptcy court initially held that Apple's § 365(n) election did not apply because the agreement was not a license. Reviewing that decision, the Delaware District Court found that the agreement was a license "because it was a promise not to sue." Now, the Third Circuit has affirmed the District Court with quotation from the Supreme Court's 1927 decision in De Forest Radio.
"[A] license … [is] a mere waiver of the right to sue by the patentee." De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927). A license need not be a formal grant, but is instead a "consent[ ] to [the] use of the patent in making or using it, or selling it … and a defense to an action for a tort." Id. The Court of Appeals for the Federal Circuit explained that the inquiry focuses on what the agreement authorizes, not whether the language is couched in terms of a license or a covenant not to sue; effectively the two are equivalent. TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271 (Fed. Cir. 2009).
Here, the promise to "dismiss the ITC action" and "not re-file the ITC action or another action related to one or more of the same patents against Apple" was a promise not to sue on a patent and therefore is a license of patent rights.
Thus, Apple retains its license regardless of who buys the patent rights.
One question not resolved by the appeal are Apple's ongoing duties vis-à-vis the agreement. The statute calls for ongoing payment of royalties. However, it appears that there is no further monetary payment due in the agreement, although Apple has promised to keep Spansion as a supplier and consider Spansion for future contracts. If Apple is released from those commitments then it will actually be better off because of its business partner's bankruptcy – a result that is not often the case.
by Dennis Crouch
by Dennis Crouch 
By Dennis Crouch