Tag Archives: Licenses

Guest Post by Prof. Ghosh – Kimble v. Marvel: Exorcising the Spirit of Justice Douglas

Patent

Shubha Ghosh is the Vilas Research Fellow & George Young Bascom Professor in Business Law at the University of Wisconsin Law School.  He is currently serving as the inaugural AAAS Science, Technology, and Policy Fellow at the Federal Judicial Center in Washington, D.C.

I attended the oral arguments on March 31 in the Kimble v Marvel case, in which the Court considers whether to overrule Brulotte v. Thys. A 1964 precedent authored by Justice Douglas, the Brulotte decision employs an amalgam of preemption and patent misuse analysis to hold that post-expiration royalty payments for patent licensing are invalid.

Judging from the oral arguments, the Court is grappling with two issues. The first is that of stare decisis. The second is what standard should replace the per se rule articulated in Brulotte if it is overruled.

Stare Decisis and Living Economists

The divisions on the Court parallel that of Leegin v Creative Products, a 2007 decision in which the Court overruled the 95 year old per se rule against minimum resale price maintenance. The Court was split five to four with Justices Kennedy writing for Justices Roberts, Thomas, Scalia, and Alito. Justice Breyer wrote in dissent with Justices Ginsburg, Souter, and Stevens signing onto his defense of precedent.

During the Kimble oral arguments, Justice Breyer defended Brulotte with an elaborate hypo involving a patent owner that locks in all potential licensees with obligations for royalty payments going beyond the term of the patent. His point: contracts can extend the exclusivity of a patent beyond its limited time. Questioning from Justices Sotomayor and Kagan suggested that they may follow the reasoning of their predecessors Justices Souter and Stevens from the Leegin decision. Justice Sotomayor wondered why changes in the viewpoint of economists should guide precedent. “What if fifty years from now economists agree that Brulotte was correct?,” she asked. Justice Kagan adopted a similar tack by asking petitioners what problems Brulotte caused that would require overruling. Even if a bad rule, she implied, knowledgeable parties can readily contract around it.

My prediction is that the final vote will parallel that in Leegin for an overruling of Brulotte. Whatever one thinks of the result, the opinion itself is not clearly reasoned with a mix of preemption and patent misuse analysis. The problem with Brulotte is that the 1979 Aronson v. Quick Point decision tempers its reasoning by allowing parties flexibility in contracting over patentable subject matter.

While there has been much criticism from economists about the rationality of the Brulotte per se rule, from a transactional perspective the real problem is that the rule provides a trap for the unwary. Justice Scalia pointed out that the beneficiaries of the rule are licensees who knowingly enter into licenses with post-expiration payment obligations hoping that the licensor does not know of Brulotte. Such seemed to be the case in the Kimble case. Such opportunistic licensees can obtain lower royalty payments knowing that any post expiration obligation would be invalid. The Brulotte rule can be transacted around or used opportunistically. In order to avoid the latter possibility, the decision should be overruled.

 

After Brulotte: A Reasonable Rule or a Rule of Reason?

Harder to predict is how the Justices will overrule Brulotte. The Court had an easier choice in Leegin which was a pure antitrust case. Once the Court rejects a per se rule, it is replaced with the rule of reason in antitrust cases. Petitioners were advocating a rule of reason approach as has been adopted in patent misuse cases. Justice Sotomayor questioned why antitrust principles should be introduced into patent law. If there is an antitrust problem, the licensee can just bring an antitrust claim, she suggested. Justice Breyer raised the specter of administration costs that a rule of reason approach would imply. Other justices were less vocal about what could replace Brulotte.

It is true that Brulotte is not an antitrust case. But patent misuse tracks antitrust law (for example, see the treatment of tying as misuse under 35 USC 271(d)). So the petititoners’ advocating for a rule of reason approach is appropriate and perfectly consistent with any accompanying antitrust claims to a defense of patent infringement.

What is interesting to me is how the Court might address issues of preemption. The Court has not considered an intellectual property preemption cases since 1989 even though the issue has been percolating in the lower courts in the context of licensing and contract. Part of me hopes that the Court resolves the lower court’s treatment of preemption. Realistically, neither the briefs nor the argument address the preemption issue head on. The issue should await more careful consideration of the relationship between patents and contracts.

However, if the Court does address the preemption issue, then the 1979 Aronson issue should be its guide. In that case, the Court addressed the validity of an escalator clause which created two tiers of royalties based on whether a patent was granted on an invention. When the licensee ended up paying royalties for an invention which was found to be unpatentable, it raised preemption of the escalator clause under Brulotte. The reasoning was straightforward: if royalties after patent invalidity are preempted because of conflict with the limited terms of patents, then royalties on an invention for which a patent was denied should also be in conflict. The licensee reasoned that if such contracts were upheld, an inventor would not need to seek a patent since contract could provide equivalent protection.

The Court correctly rejected the reasoning. Patents offer benefits beyond contract. Furthermore, contracting supplements patenting and does not interfere with it. So the escalator clause was upheld. But Justice Blackmun in concurrence wondered about the conflict with Brulotte. As he wrote in 1979:

[As in Brulotte], Mrs. Aronson has used the leverage of her patent application to negotiate a royalty contract which continues to be binding even though the patent application was long ago denied. The Court… asserts that her leverage played “no part” with respect to the contingent  agreement to pay a reduced royalty if no patent issued within five years. Yet it may well be that Quick Point agreed to that contingency in order to obtain its other rights that depended on the  success of the patent application. The parties did not apportion consideration in the neat fashion the Court adopts.

Justice Blackmun reconciles the two cases by saying that Brulotte is solely about leveraging that allows the patent owner to extend the patent term through contract. Perhaps a better reconciliation would have been to temper the leveraging analysis, grounded in patent misuse, through application of a rule of reason analysis. That course should be the one the Court adopts in Kimble after it overrules the pre se rule of Brulotte.

SCOTUS: Post-Expiration-Licensing

Patent

Last week the Supreme Court heard oral arguments in the patent licensing dispute known as Kimble v. Marvel Enterprises, Docket No. 13-720.   In that case the license of Mr. Kimble’s patent covering a web-shooter-toy appears to extend beyond the expiry date of the patent and Supreme Court’s prior precedent holds that such post-expiry royalty arrangements are not enforceable. Brulotte v. Thys, 379 U.S. 29 (1964) (post expiry patent license is per se patent misuse).

The per se rule created in Brulotte is what Chief Justice Roberts called a “problem with the ’60s.” More recently, the Supreme Court has overruled a whole set similar per se antitrust cases — and instead applying a rule of reason.

The patentee’s basic argument is that it makes sense to allow parties to negotiate for their own contract terms and decouple a private contract from the patent’s right to exclude.

MR. MELNIK (for patentee):  The way that I would reconcile it … is to decouple the notion of the right to exclude, which is what the statutory term is about, the right to prevent the public as a whole from using the patented invention from the specific royalty arrangement.

Under a rule of reason, a post-expiry license could still be seen as misuse, but that result would depend upon the particular circumstances.

One reason not to overrule Brulotte is that such a course is a rather drastic policy-based action.

JUSTICE SOTOMAYOR: How long has Brulotte been around?

MR. MELNIK: 50 years.

JUSTICE SOTOMAYOR: Why don’t we just let Congress fix it, because if it’s wrong, people can complain to [Congress]. . . .

JUSTICE KAGAN: It may or may not be right, but there’s nothing incredibly sort of wierd and anomalous about it. . . . we have a very strong rule of statutory stare decisis.  We need some special justification to break away from that rule. . . .  But [this issue] surely is a question for Congress, to go back to what Justice Sotomayor was saying, you know, to the extent that there’s a real world problem, and maybe there is and maybe there’s not, it’s a little bit hard to tell from the amicus briefs.  I mean, they’re surely better equipped than we are to deal with that.

The response to the Court here is that the court has been revising statutes for many years without much concern for stare decisis — i.e., that it is really too late for the court to claim it is not an activist court.

On the policy side – the basic reason to keep the rule is as a mechanism for better insuring that inventions are available to the public at the patent term’s expiration.

Willfulness: Federal Circuit Denies En Banc Review in Halo v. Pulse

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By Jason Rantanen

Halo Electronics, Inc. v. Pulse Electronics, Inc. (Fed. Cir. 2015) (denial of rehearing en banc) Halo Order

The Federal Circuit denied Halo’s petition for rehearing en banc today over the dissent of Judges O’Malley and Hughes.  (For background, Dennis and I previously wrote about the opinion and the petition for rehearing).  The concurrence and dissent focused solely on the issue of willfulness, which Halo had framed as:

Willfulness: Whether an infringer who subjectively knew pre-suit that it was infringing a valid patent (after being given notice of the patent, and failing to design around, seek a license, or stop infringing) can use an unsuccessful defense developed post-suit as a per se bar to liability for pre-suit willful infringement, despite the flexible text of 35 U.S.C. § 284.

This is not the right case: Concurring in the denial of the rehearing en banc, Judge Taranto, joined by Judge Reyna, wrote separately to explain that the denial was appropriate because “Halo raises only one question about the enhanced-damages provision of the Patent Act, 35 U.S.C. § 274, and I do not think that further review of that question is warranted.”  Concurrence at 4.  In the concurrence’s view, “[t]he only enhancement-related question that Halo presents for en banc review is whether the objective reasonableness of Pulse’s invalidity position must be judged only on the basis of Pulse’s beliefs before the infringement took place.” Id. at 5.  In Judge Taranto’s view, “Halo has not demonstrated the general importance of that question or that the panel’s assessment of objective reasonableness is inconsistent with any applicable precedents or produces confusion calling for en banc review.”  Id.  Nor is the requirement of objective recklessness affected by Octane Fitness.

Nevertheless, the concurrence observed, there are many aspects of the court’s § 284 jurisprudence that could bear revisiting en banc, including “whether willfulness should remain a necessary condition for enhancement under § 284’s “may” language,”” the proper standards for finding willfulness,” “who makes which decisions and what standards of proof and review should govern those decisions,” whether “a judge or jury decide willfulness, in full or in part,” whether “willfulness (or, rather, its factual predicates) have to be proved by clear and convincing evidence,” and “what standards govern appellate review”?  In Judge Taranto’s words, “Whether such questions warrant en banc review will have to be determined in other cases.”  Id. at 1.

The Willfulness Jurisprudence Should be Reevaluated: Judge O’Malley, joined by Judge Hughes, disagreed for the same reasons provided in her dissent to the original opinion (discussed here).  The court’s “jurisprudence governing the award of enhanced damages under § 284 has closely mirrored our jurisprudence governing the award of attorneys’ fees under § 285.” Dissent at 2. But “[w]e now know that the artificial and awkward construct we had established for § 285 claims is not appropriate. We should assess whether the same is true with respect to the structure we continue to employ under § 284.”  Id. at 4.  Both the court’s framework for assessing willfulness and the framework for attorneys’ fees were predicted on its interpretation of Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993).  But in Octane Fitness, the Supreme Court held that the Federal Circuit had misunderstood PRE for its attorneys’ fees inquiry.  Consequently “[w]e should now assess whether a flexible test similar to what we have been told to apply in the § 285 context is also appropriate for an award of enhanced damages.”  Id. at 5.

Beyond the effect of Octane Fitness, Judge O’Malley identifies additional issues with the current willfulness framework: its requirement of clear and convincing evidence, the court’s imposition of de novo review, which was rejected for fee awards by the Court in Highmark, and who should be making the decision to enhance damages: the judge or the jury?

The Unsettled Standard of Review: Shortly after releasing its denial of rehearing en banc in Halo, the court issued a revised opinion in Stryker v. Zimmer, in which it added a new footnote:

6   This court has not yet addressed whether Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), or Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744, 1746 (2014), altered the standard of review under which this court analyzes the objective prong of willfulness. However, as the district court failed to undertake any objective assessment of Zimmer’s specific defenses, the district court erred under any standard of review and thus this court need not now address what standard of review is proper regarding the objective prong of willfulness.

Combined with the additional language in Stryker v. Zimmer, the court may be gearing up to take on a compromise issue in willfulness: namely, whether a modified standard of review is appropriate.  That said, it is entirely possible that the Supreme Court will take on the bigger question that Judge O’Malley raises in dissent.  Halo remains an appeal to watch.

Guest Post: The Layered Patent System

Patent,

Guest post by Michael Risch, Professor of Law, Villanova University School of Law.  Professor Risch also recently joined the Written Description blog as a regular author.  The full article, forthcoming in the Iowa Law Review, is available here.

This follows my last guest post about my article A Generation of Patent Litigation and is the third in my Patent Troll Myths series of studies of the ten most litigious NPEs from 2000-2010. To recap, I gathered data on 1313 randomly selected patent cases distributed over a 25 year period in roughly the same proportion as the 917 cases filed by the most litigious NPEs over the same time period. The number of cases grew substantially starting in 2004. This led to 792 nonNPE patents versus 352 NPE patents, which indicates that the NPEs asserted the more patents per case. This article expands on the last one by looking at the technology categories for each patent as well as the initial source of the patent that wound up in litigation.

The results of my analysis confirmed much of what we already knew, but the data allowed me to demonstrate it. In short, patent litigation is a complex system made up of at least three layers: inventors and their assignees, patent plaintiffs, and technology. There are surely more layers, like defendants and licensees, but these three layers have some of the most relevance to patent quality. The problem is that most of our discourse examines one—or maybe a second—layer at a time, but rarely all three. Thus, we have NPEs versus producers, software versus pharma, individuals versus corporations. We rarely have data that includes all three of these layers in one place. When they are included, they are usually considered control variables rather than additional explanatory measures.

This study seeks the interconnection between the layers. I’ll give a few examples in this post, but there is a lot more detail in the paper.

Consider, for example, initial assignees. Both the random plaintiffs and the most litigious NPEs obtained a majority of their patents from product companies. And a substantial percentage of those companies were public for both groups (though about twice as many for the random plaintiffs). But not all product companies are created equal. Among the random companies, the initial assignees were bigger, better funded by venture and stock market investors, had more employees, and earned greater sales.

What does this mean? Any quality differences we might see between the NPEs and random plaintiffs might relate to the size and types of companies obtaining those patents. It also means that the technologies we see the NPEs enforcing might be the types of technologies that require less investment.

In fact, we do see different types of technologies. The following table shows the top five patent classes for each group with a comparison to the percentage held by the other group. The differences are stark. The paper shows the top 13 categories, and shows that 66% of the NPE patents are in the top 13 classes, while only 30% of the random group’s patents are in the top 13 classes.

Top NonNPE Classes Top NPE Classes
Class   NonNPE NPE Class   NonNPE NPE
514 Drug 4.17% 0.28% 379 Telephonic Comm. 2.40% 17.05%
362 Illumination 4.17% 0.28% 360 Mag. Info. Storage 0.00% 8.24%
348 Television 3.66% 6.53% 705 Fin. Bus. Meth. 1.01% 6.82%
424 Drug 3.54% 0.00% 348 Television 3.66% 6.53%
349 Liquid Crystal 2.53% 0.00% 709 Data Process. Trans. 1.89% 4.55%

 

When we break down by technology and by plaintiff type (two different layers), we see differences that weren’t apparent before. The graphs below show two categories, e-commerce, which has higher invalidation rates, and electric circuits, which has lower.

Risch1
Risch2

In electronic commerce, the nonNPE group saw no challenges – at all. Among the litigious NPEs, however, nearly half of the patents were challenged. When there was a decision on the merits, patents were completely invalidated about half as often as they were held valid. But much of the time, challenges were denied or pending at dismissal.

For electric circuits, however, patents were challenged at about the same rate. But this time it was the nonNPE group that was more likely to reach a decision on the merits – with validation more than twice as much as invalidation when there was a decision on the merits, but also a decision on the merits almost three-fourths of the time. Among the litigious NPE group, however, all of the challenges were denied or pending at settlement, and none went through to final judgment.

These are just two technology categories. The paper compares several others, including optics, chemistry, and medical instruments. It also considers results for different types of software (and for non-software).

As a final test, I ran a series of regressions to test the likelihood that a patent would be adjudicated to have any invalid claim. The full model is presented in the paper, but a few of findings stood out.

First, patents coming from failed startups had the highest correlation with invalidity, regardless of who enforced the patent.

Second, patents left unassigned at issuance were more likely to be invalidated whether asserted by either group (though individual obtained patents fared better when asserted by the random plaintiffs). However, the same was not true of patents assigned to inventor-owned companies. The data does not allow a causal inference, but there appears to be something about inventors starting their own companies that improves validity outcomes later.

Third, once source of the patent and type of plaintiff is controlled for, invalidity differences appear for only some types of technology. This is consistent with the graph I show above, but more rigorous. Thus, for example, cryptography patents are invalidated about one-third as often when we consider the source of the patent and type of plaintiff as compared to just looking at the average cryptography patent without patentee/plaintiff type. On the other hand, optics patents are invalidated at about the same rate, whether or not we consider the source or plaintiff type.

Fourth, these findings continue for software. Though software patents are, on average, invalidated more often than other patents (a finding consistent with other studies), when the type of patentee and plaintiff is considered, whether the patent covers software is no longer statistically significant.

This last point is ultimately the point of the article. When we consider all of the layers of the system rather than just the averages on any one layer, the picture gets far more complex. My data can’t answer every question, of course. After all, I only studied the most litigious NPEs. But even this sample shows the complexity. There’s much more I could write, but I’m out of space. The full article is here if you are interested in reading more.

Most Cited Supreme Court Patent Decisions (2005-2015)

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by Dennis Crouch

The list below considers all of the U.S. Supreme Court patent cases decided during the past decade (Since January 2005) and ranks them according to the number of citations.  Citation offers some insight into the influence of decisions, but is obviously limited for a number of reasons. Cases may be cited because of their importance in changing the doctrine (KSR, eBay) or simply as the court’s most recent statement of the law on an important issue (Microsoft v. i4i and KSR) or for a narrow procedural issue that applies in many cases (Unitherm).   EBay’s high citation rate is also boosted because its principles have been applied broadly to injunctive relief across many areas of law. Some cases with low citation counts may also have major impacts. They may, for instance impact a small number of very important cases (Caraco) or perhaps they cause folks to change behavior so that the issue stops arising.

With this list we also have the timeline problem where older cases are more likely to be highly cited since there has been more opportunity for those cites.  I Alice Corp to rise in the ranks Nautilus and Teva, on the other hand,  may well flounder (based upon the Federal Circuit’s treatment of those cases thus far).

  1. KSR Intern. Co. v. Teleflex Inc., 550 U.S. 398 (2007) (obviousness)
  2. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) (injunctive relief)
  3. MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007) (challenging licensed patents)
  4. Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060 (2011) (inducing infringement)
  5. Bilski v. Kappos, 561 U.S. 593 (2010) (subject matter eligibility)
  6. Microsoft Corp. v. i4i Ltd. Partnership, 131 S.Ct. 2238 (2011) (presumption of validity)
  7. Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) (tying)
  8. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) (exhaustion)
  9. Microsoft Corp. v. AT & T Corp., 550 U.S. 437 (2007) (infringement by export of components)
  10. Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc., 546 U.S. 394 (2006) (post-verdict civil procedure requirements)
  11. Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S.Ct. 1289 (2012) (patent eligibility)
  12. Carlsbad Technology, Inc. v. HIF Bio, Inc., 556 U.S. 635 (2009) (appellate jurisdiction)
  13. Merck KGaA v. Integra Lifesciences I, Ltd., 545 U.S. 193 (2005) (research exception to infringement)
  14. F.T.C. v. Actavis, Inc., 133 S.Ct. 2223 (2013) (competition law – drug settlements)
  15. Gunn v. Minton, 133 S.Ct. 1059 (2013) (federal jurisdiction over cases involving patent law)
  16. Lexmark Intern., Inc. v. Static Control Components, Inc., 134 S.Ct. 1377 (2014) (unfair competition based upon false infringement allegations)
  17. Nautilus, Inc. v. Biosig Instruments, Inc., 134 S.Ct. 2120 (2014) (indefiniteness)
  18. Already, LLC v. Nike, Inc., 133 S.Ct. 721 (2013) (standing after covenant not-to-sue)
  19. Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, Inc., 131 S.Ct. 2188 (2011) (ownership under Bayh-Dole)
  20. Association for Molecular Pathology v. Myriad Genetics, Inc., 133 S.Ct. 2107 (2013) (subject matter eligibility)
  21. Alice Corp. Pty. Ltd. v. CLS Bank Intern., 134 S.Ct. 2347 (2014) (subject matter eligibility)
  22. Limelight Networks, Inc. v. Akamai Technologies, Inc., 134 S.Ct. 2111 (2014) (divided infringement)
  23. Caraco Pharmaceutical Laboratories, Ltd. v. Novo Nordisk A/S, 132 S.Ct. 1670 (2012) (forcing correction of Orange Book listings)

KSR has actually rocketed to the position of most-cited Supreme Court patent case of all time followed by Markman (1996); U.S. Gypsom (1948) (antitrust-patent); Graham v. Deere (1966); and Warner-Jenkinson (1997).

Guest Counterpoint: Patent Exhaustion and Helferich’s Assertion Problem

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Guest Post by Professor Amelia Smith Rinehart (University of Utah)

Recently, the Federal Circuit held that the New York Times and others infringed patents claiming methods and systems for delivering content to smartphones.[1] In a related Patently-O essay, Professor Sam Ernst states that the Federal Circuit’s opinion in Helferich is “directly contrary to Supreme Court precedent and represents a fundamental misunderstanding of one of the core purposes of the exhaustion doctrine.”[2] To support his premise, Ernst claims that the Federal Circuit made “a broad and novel pronouncement that patent exhaustion only shields an authorized acquirer from liability, and does not follow the licensed device down the stream of commerce to protect all users of the device for its intended purpose.” [3]

I respectfully disagree. There is nothing broad or novel about the Federal Circuit’s “authorized acquirers” concept. In fact, as the Federal Circuit explains in Helferich, it comports with 150 years of judicial authority examining the patent exhaustion doctrine in a variety of contexts.[4] Likewise, Helferich squares directly with the Supreme Court’s recent exhaustion decisions in Quanta Computer v. LG Electronics[5] and Bowman v. Monsanto Co.[6] More surprising, perhaps, may be the fact that this is so—that Helferich could win infringement suits against New York Times and J.C. Penney based on their provision of content to smartphones that were already licensed by Helferich.[7] Accordingly, the difficulty with Helferich is not that the Federal Circuit stretches the exhaustion doctrine in a new way, but that the doctrine, in its old way, fails to provide an easy way to remove infringement liability in an increasingly complex world of patent assertion.

In his well-reasoned post, Professor Ernst contends that the exhaustion doctrine “has frequently applied to shield from liability persons who are not ‘authorized acquirers’ of the licensed devices,” and looks to both Quanta and the much older Motion Picture Patents v. Universal Manufacturing Co. for support. In my view, neither of these cases provides authority for applying the exhaustion doctrine directly to third parties who have not acquired the sold articles.

Quanta involved a license agreement that authorized the licensee to make, use, and sell the licensed products without restriction. In a separate agreement, the licensee agreed to notify its customers that they did not have a license to combine the licensed products with other non-licensed components. The Supreme Court held that the notice restriction was irrelevant because the licensee had a blanket authorization to make, use, and sell the licensed products. Once made then sold under this first authorization to make, sell, and use, the licensed products could be used by anyone downstream without liability for infringement on the grounds of exhaustion, including those purchasers who had notice of the separate notice restriction.[8] In Quanta, the purchasers of the licensed products—the customers of the licensee, Intel—were authorized acquirers (having acquired title to the products from one authorized to make and sell them unconditionally) shielded from liability when the patent owner sued them for infringement. The Quanta Court did not have to address the question of whether a third party who has not acquired title to a licensed product is shielded from direct liability for its own infringement by an authorized acquirer’s unlimited right to use and sell the patented good obtained via exhaustion.

Motion Picture Patents provides a more nuanced account of the exhaustion doctrine, but still involves authorized acquirers shielded from infringement liability.[9] The patented movie projectors in Motion Picture Patents carried a label notice that restricted the projector owner’s permission to use the projector to use solely with the patent owner’s films. After the patent owner sued a projector owner and a third party film manufacturer for infringement, the Court held that the projector patent rights were not infringed because of exhaustion. The label notice was not enforceable as a matter of patent law because the films were not within the patent rights in question—“to enforce [the label notice] would be to create a monopoly in the manufacture and use of moving picture films, wholly outside of the patent in suit and of the patent law as we have interpreted it.”[10] The projector owner clearly qualified as an authorized acquirer (with an invalid restriction on use) and avoided infringement liability because the authorized projector sale exhausted the patent rights covering those projectors.

Professor Ernst seems to extrapolate from the Motion Picture Patents opinion (which admittedly is unclear on this point) that the third party film manufacturer could not be liable for infringement of the projector patents because it made and sold films for use in the projectors obtained from the patent owner in an authorized sale. In other words, Professor Ernst reads Motion Picture Patents to hold that exhaustion shielded the film manufacturer from liability because otherwise the patent owner could interfere with a projector owner’s use of the machines themselves.[11]

But Motion Picture Patents doesn’t go that far. The questions addressed by the Supreme Court both focus on whether the patent owner can restrict by mere notice a machine’s use by its purchaser or his successors in interest.[12] Later in its opinion, the Supreme Court distinguishes the machine from the materials to be used with it, declaring that “the right of the owner [of the machine] . . . to control by restriction the materials to be used in operating [it] . . . must be a right derived through the general law from the ownership of the property in the machine.”[13] Plainly, the Court applies the exhaustion doctrine to the possessor of the projector, a patented good now in commerce and owned free and clear from the patentee’s right to control the use and sale of the good itself. Therefore, I believe the better view of Motion Picture Patents is that the film manufacturer would’ve been liable, if at all, on a theory of contributory infringement. When the label notices could not be enforced, the sales of the projectors exhausted the projector patent rights as to those machines, and the film manufacturer could produce unpatented film for use in any of the sold machines without contributing to or inducing any infringement by the machine users.

Like the projectors in Motion Picture Patents, goods can travel through many hands downstream from the first authorized acquirer of title to the good. Nothing in Helferich indicates that the Federal Circuit is construing its “authorized acquirer” concept so narrowly as to exclude a good’s future owner (no matter how that downstream party obtained the good) from claiming exhaustion as a defense, should that good’s owner be charged with infringement by use or sale. Rather, the Federal Circuit seems to be unremarkably suggesting that an alleged infringer cannot assert an exhaustion defense unless she has acquired a good from the patent owner (directly or indirectly through someone with authorization to make and sell) that exhausts the claims at issue. Difficult questions may arise as to whether the good was acquired without condition on sale, whether the good’s sale exhausts claims to methods or combinations, whether any post-sale restrictions on the good are enforceable, and so on, but those questions are not at issue in the Helferich appeal.

When Professor Ernst states that “patent exhaustion adheres in the patented device, not in ‘certain persons’ who are authorized to use the device,” he might be conflating the exclusive rights of a patent with the exclusive rights of a purchased good, a conundrum that itself supports the existence of the patent exhaustion doctrine in the first place. Patent exhaustion is a defense to patent infringement. As such, it belongs to juridical persons accused of infringement (people, corporations, etc.), not the good itself.[14] Although we might talk in shorthand about the patented good traveling in commerce unencumbered by patent rights, a patent grants to its owner the right to exclude others (people, corporations, etc.) from infringing the patent. The purchaser of a good holds the rights inherent to the good as a piece of personal property. When the good is patented, these rights overlap. The doctrine of patent exhaustion emerged to reconcile that overlap in favor of the purchaser (and downstream acquirers, too) when it comes to using and selling a patented good acquired from an authorized seller: “one who buys patented articles of manufacture from one authorized to sell them becomes possessed of an absolute property in such articles, unrestricted in time or place.”[15] If the patented good is bought from someone unauthorized, if the transfer of the good’s title is conditional, if the good carries a post-sale restriction, then the purchaser may not be able to avail itself of the exhaustion defense. Thus, it is true that “patent exhaustion removes those legal restrictions [imposed by the patent statute] on certain persons in certain circumstances”[16]

The Federal Circuit makes Helferich look easy (and much less groundbreaking than Professor Ernst suggests) by assuming that Helferich controls separate and distinct patents from an exhaustion standpoint. The court holds that Helferich’s content claims are distinct patentable inventions from its handset claims, and, importantly, the allegedly infringing content providers are distinct infringing entities from the handset owners. This enables the court to affirm that exhaustion does not apply to “multiple related and separately patentable inventions” in this manner, without addressing the possibility offered by Professor Ernst that the exhaustion doctrine’s protection of downstream uses of a purchased good might inure to third parties who practice a claimed invention simply referencing a downstream device.[17]

During the parties’ oral arguments, all three judges asked both sides to consider that more difficult question of whether exhaustion would apply to the third party content providers if the content and handset patents were not separate and distinct. The plaintiffs not surprisingly answered no, that third parties not in possession of the patented good could not benefit from the exhaustion defense. The defendants admitted that no case existed on this point, but that cases like Hewlett Packard and Keurig, Inc. v. Sturm Foods, Inc. held that claims contemplating that an alleged infringer interferes with the use of a patented good would suffice to trigger exhaustion as to that third party.[18] In its opinion, the court confirmed that third party exhaustion was a question of first impression— “[n]either the parties nor we have identified any case from the Supreme Court that has found exhaustion without this common feature [of an authorized acquirer infringing the asserted claims].” Then, distinguishing the Keurig case directly, the court held that an alleged infringer who does not acquire the relevant patented good in an authorized manner cannot claim an exhaustion defense for his own direct infringement.[19]

Professor Ernst concludes that “[a] primary reason why patent exhaustion liberates the patented device from infringement claims is to promote the policy against restraints on alienation.” This notion obviously relates to the restrictions that factored so heavily into the early cases about exhaustion: territorial restrictions, post-sale restrictions, and tying restrictions like the ones in Motion Picture Patents. The holding in Helferich does not, as Professor Ernst urges, “threaten to impose a servitude on devices as they pass down the stream of commerce” because a downstream acquirer of the device can fully avail himself of the defense due to his property rights in the device. Judge Bryson’s walkie-talkie owner can sell his walkie-talkie, use it as an expensive paperweight, or otherwise dispose of it as he sees fit without fear of suit from the patent owner. In contrast, Helferich may continue to bring its infringement claims because these alleged infringers cannot avail themselves of a patent exhaustion doctrine defense. In my view, the Federal Circuit gets it right on the law from Quanta and earlier cases. Indeed, the court recognizes that to hold otherwise would expand the judicial doctrine.[20]

Unfortunately, the exhaustion doctrine presently can’t regulate what is most troubling about Helferich: the patent owner’s licensing practices. Helferich is a patent assertion entity that generates revenue from handset device licensing, making all handset device owners authorized acquirers of its patented goods. Yet, Helferich also intends to generate revenue from content licensing that allows companies like the New York Times, J.C. Penney, CBS, and others to provide content to those same handsets. It cannot do so unless it can threaten these companies with infringement. In this manner, Helferich wields what Justice Clarke in Motion Picture Patents called “a potential power for evil over an industry which must be recognized as an important element in the amusement life of a nation. . .”[21] Like the patent owners in that case, Helferich sells its machines and attempts to prohibit their use with content providers not authorized by Helferich. Unlike the patent owners in that case, Helferich’s content provision claims are independently patentable (or so the Federal Circuit determined based on the limited evidence before it) and, even if they were not, the content providers themselves (who do not use or sell the purchased handset devices) are not subject to the exhaustion doctrine based upon those claims.[22] Confirming the Court’s recent decisions in Quanta and Bowman, the class of “certain persons in certain circumstances” who can avail themselves of the patent exhaustion defense remains bound up in questions of what is used and sold, who bought the things used and sold, and what conditions are placed on that use or sale. None of these relevant limitations are apparent in Helferich.

Nevertheless, Professor Ernst is right to balk at carte blanche enforcement of these patents. The patent exhaustion doctrine fails to eliminate infringement liability for the defendants in Helferich, but the case offers an opportunity for scholars, courts, and other policymakers to reexamine the underlying goals of patenting along with mechanisms within patent law and antitrust law, like the narrowly applied exhaustion doctrine, that may promote or impede those goals in the context of patent assertion entities.[23]

—– notes —–

[1] Helferich Patent Licensing Co. v. New York Times Co. (Fed. Cir. Feb. 10, 2015).

[2] Samuel F. Ernst, The Federal Circuit’s New Authorized Acquirer Restriction on Patent Exhaustion, Patently-O blog, available at https://patentlyo.com/patent/2015/02/authorized-restriction-exhaustion.html.

[3] Id.

[4] Helferich, slip op. at 18.

[5] Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008).

[6]

[7] Helferich, slip op. at 7.

[8] Quanta, 553 U.S. at 638.

[9] Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917).

[10] Id.

[11] See Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. Corp., Inc., 123 F.3d 1445 (Fed. Cir. 1997). Counsel for the Helferich defendants argued that the concept of interference with use laid out in Hewlett-Packard, a case about printer cartridge refilling, laid the grounds for a third party’s assertion of an exhaustion defense despite not owning the article sold. See Oral Argument, available at http://oralarguments.cafc.uscourts.gov/default.aspx?fl=2014-1196.mp3.

[12] Id. at 508–509.

[13] Id. at 513.

[14] See 35 U.S.C. § 271(a) (2012) (“whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.”) (emphasis added).

[15] Keeler v. Standard Folding Bed Co., 157 U.S. 659, 666 (1895).

[16] Helferich, slip op. at 18.

[17] Helferich, slip op. at 17.

[18] Hewlett-Packard, 123 F.3d at 1455; Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1374 (Fed. Cir. 2013).

[19] See Helferich, slip op. at 21 (“in contrast to Keurig, the present cases involve no assertion that the defendants are inducing or contributing to authorized acquirers’ infringement of the claims asserted against defendants.”)

[20] Id. at 29. Bowman further supports a goods-based view of exhaustion. There, the patented technology could self-replicate, meaning a use of the patented invention also made the patented invention. The Supreme Court held that an authorized sale only exhausted the right to use and sell the patented invention, not the right to make the invention, and so the second generation seed, despite being a product of a use of the first generation seed, infringed the patent when a farmer used it to grow (make) a third generation seed. Bowman, __ U.S. at __.

[21] Motion Picture Patents, 243 U.S. at 514–15.

[22] Notably, the films in Motion Picture Patents were also independently patentable, but the patent had expired before Universal began supplying film to the projector in suit. See Motion Picture Patents Co. v. Universal Film Mfg. Co., 235 F. 398, 399 (2d Cir. 1916) aff’d, 243 U.S. 502 (1917). (“Reissued letters patent No. 12,192 expired subsequent to the execution of the license by the complainant to the Precision Machine Company. Thereupon the Universal Film Manufacturing Company made a film embodying that invention, and sold it to the Universal Film Exchange, who furnished it for use to the [projector owner].”

[23] See also Mark A. Lemley & Douglas A. Melamed, Missing the Forest for the Trolls, 113 Colum. L. Rev. 2117 (suggesting changes to improve the patent system generally, including revising patentability standards, remedies and fee-shifting in patent litigation, and importantly, using antitrust to limit anticompetitive patent dispersion).

Apple-Samsung Lawsuit Raises Important Questions about Scope of Injunctions

Patent, ,

Guest Post by Professor Daryl Lim (John Marshall Law School)

Apple and Samsung will once again lock horns at an appeals court. Apple is seeking a permanent sales ban on patented features contained in Samsung’s Galaxy S3 smartphone and nine other older smartphone models. The U.S Court of Appeals for the Federal Circuit, which will hear the oral arguments on March 4, had earlier ruled that those seeking injunctive relief must show a “causal nexus” between the infringement and the asserted “irreparable” harm.

The patents cover user-interface designs for software covering the “autocorrect,” “slide to unlock,” and “quick link” features. A lower court ruled (ruling here) that Apple had failed in carrying its burden to show the infringed features drove consumer demand for Samsung’s products. It also rejected Apple’s argument that its reputation had suffered “irreparable” harm.

 

1. Feature-Based Injunctions

Apple has argued that the narrow ban it sought covering the infringing features should have been granted. A ban focusing on infringing features rather than whole products has much to commend itself. It better tailors the remedy to address the harm and comports with the equitable basis of injunctive relief. The need for proportionality also manifests itself in the requirement that courts weigh the relative hardships to the parties in deciding whether to grant or deny an injunction, as well as in deciding whether the injunction is in the public’s interest.

At the same time, Apple’s view that a nexus “necessarily” exists because its injunction is narrowly tailored leans too far in the other direction. That kind of categorical thinking was rejected by the Supreme Court in its seminal eBay decision, which required courts to undertake an approach that emphasizes a careful balancing of the effects of granting the request for an injunction. Google, LG and others also cautioned against it, warning that it would breed patent hold-ups, with smartphones typically containing 250,000 patents. Rather than devoting time and resources to develop new products or improving existing ones, companies could be consumed with waves of vexatious litigation by patentees seeking feature-specific injunctions.\

On the other hand, Nokia warned that the value of exclusive licenses turns on robust exclusion rights, and their absence “would devalue those patent rights and stifle incentives for further innovation.”  However, the Supreme Court has repeatedly held that the exclusive rights are a means to furthering the public interest by facilitating the dissemination of new and useful technology.  The proper remedy for infringement is monetary compensation; unless eBay standards are met. Sales bans are the exceptions to that norm.

 

2. Reputation as a Proxy for “Irreparable Harm”

Apple also sought to show that infringement by a rival would harm its reputation. According to Apple, this qualifies for “irreparable harm,” warranting an injunction. As with all cases for injunctive relief, the facts are crucial in providing the proper context for delineating the scope of its applicability.

Apple relied principally on Douglas Dynamics, where the Federal Circuit held that the patentee’s reputation as an innovator would be damaged if customers found the same features in snowplows sold by its rivals. The owner promoted this “easy on, easy off” feature in its advertising, and the infringer had marketed itself as the patentee at “half the price.”

Apple argues that Douglas Dynamics did not require patent-specific proof in finding reputational harm. But it cannot have it both ways. If Apple seeks a feature-specific injunction to remedy a specific harm, then it must also accept that the harm to reputation must be similarly linked to the patented feature. Injunctions are a response to threats of imminent harm. It will be difficult for Apple to show this nexus.

First, during the relevant period Samsung launched nine flagship devices containing features Apple did not offer, such as near field communications technology. The lower court found its products independently reputable.

Second, consumers are unlikely to link the patented features with Apple. In the same way an infringing cooling fan in a computer does not harm the innovator’s reputation as a computer maker, features such “quick link”, “slide to unlock” and “autocorrect” do not harm Apple’s reputation for making smartphones.    Moreover, Apple’s latest operating system, iOS7 has already abandoned features like the spot-specific “slide to unlock” feature.

Third, few would have missed Apple’s muscular pursuit of patent litigation. Its reputation cuts against the conclusion that “irreparable” harm has resulted from the infringement.

 

Fourth, its reputation as an innovator remains stellar. At $700 billion, Apple is the world’s largest company by market capitalization.

 

Fifth, if Apple is truly concerned about Samsung misappropriating its goodwill or consumer confusion, it is barking up the wrong tree. Trademark law, not patent law is Apple’s remedy to protecting its reputation.

 

This case represents one of the last in Apple-Samsung global litigation. Many in the tech world will watch with great interest where the Federal Circuit stands on both issues. Its pronouncements will define the final contours of the end-game.

 

Daryl Lim is an Assistant Professor at The John Marshall Law School where he teaches courses in intellectual property law as well as antitrust law.  In 2014, he was nominated “Professor of the Year”, and was one of 24 law professors worldwide nominated for a list of top 10 antitrust/competition law professors under 40 on the Antitrust & Competition Policy Blog. His latest article “Standard Essential Patents, Trolls, and the Smartphone Wars: Triangulating the End Game” may be found here.

 

 

A Patent on the Internet

Patent, , ,

Guest Post by Professor Marketa Trimble (UNLV). 

Imagine that someone had a patent on the internet and only those who had a license from the patent holder could, for example, do business on the internet. This internet patent would not need to concern the internet protocol, the domain name system, or any other technical features of the network; the patent could, in fact, cover something else – a technology that everyone, or almost everyone, who wants to do business on the internet needs, a technology that is not, however, a technical standard. There might be one such patent application – the patent application discussed below – that could be approaching this scenario.

We must accept, however reluctantly, that activities on the internet will not be governed by a single internet-specific legal regime or by the legal regime of a single country. Although countries might agree on an internet-specific regime for the technical features of the internet, and might even adopt some uniform laws, countries want to maintain some of their country-specific national laws. People and nations around the world are different, and they will always have diverse views on a variety of matters – for example, online gambling. Online gambling might be completely acceptable in some countries, completely unacceptable in others, or somewhere in between; likewise, countries have different understandings of privacy and requirements for the protection of personal data. Therefore, countries now have and likely always will have different national laws on online gambling and different national laws on privacy and personal data protection. Compliance with multiple countries’ laws regarding the internet is nonnegotiable, certainly for those private parties who wish to conduct their activities on the internet transnationally and legally. Nevertheless, in practice and for some matters, the number of countries whose laws are likely to be raised against an actor on the internet may be limited, as I discussed recently.

For some time the major excuse for noncompliance with the laws of multiple countries on the internet was the ubiquitousness of the network. The network’s technical characteristics seemed to make it impossible for actors to both limit their activity on the internet territorially, and also to identify with a sufficient degree of reliability the location of parties and events on the internet, such as customers and their place of consumption. However, as geolocation and geoblocking tools developed, location identification and territorial limitation of access became feasible. Of course the increase in the use of geolocation tools generated more interest in the evasion of geolocation, and increased evasion has prompted even further improvements of the tools. The argument that we cannot limit or target our activity territorially because we don’t know where our content is accessed or consumed no longer seems valid. (Also – at least in some countries – courts and agencies have permitted internet actors to employ low-tech solutions as sufficient territorial barriers, for example, disclaimers and specific language versions.)

The multiplicity of applicable laws that originate in different countries and apply to activities on the internet is more troubling in some areas of law than in others. One area of law that permeates most internet activity is data privacy and personal data protection. Any internet actor who has customers and users (and therefore probably has user and traffic analytics) will likely encounter national data protection laws, which vary country-by-country (even in the EU countries, which have harmonized their personal data protection laws, national implementing regulations may impose country-specific obligations). Therefore, compliance with the varying national data protection laws will become one of the essential components of conducting business and other activities transnationally. If someone could patent a method for complying simultaneously with multiple countries’ data privacy laws on the internet and claim the method broadly enough to cover all possible methods of achieving compliance with the national privacy laws, that patent owner might just as well own a patent on the internet, or at least on a very large percentage of internet activity.

A U.S. patent application that seeks a patent on simultaneous compliance with multiple countries’ data privacy laws on the internet through broad method claims is application No. 14/266,525, which concerns “Systems and Methods of Automated Compliance with Data Privacy Laws,” meaning “laws of varying jurisdictions” (the title and the “Abstract”). The invention is designed to facilitate an automatic method of complying with the data privacy laws of various jurisdictions, which are, as the “Introduction” notes, “complicated, diverse, and jurisdiction specific.” The method envisions that once “person-related data” are requested from a data provider, a “filter is the [sic] automatically applied to the person-related data to restrict transfer of person-related data [that] does [sic] not meet the data privacy regulations applicable to the jurisdiction” (the “Introduction”); the filter also checks for any consents by the data subject if the particular regulations require them. The method also foresees, for example, the possibility of “identif[ying] different origins of the person-related data sources” in terms of their geographical location (“Trust Object and Trust Data”).

The patent application still must be prosecuted, and the – undeniably useful – invention will be subject to scrutiny as to its compliance with the requirements of statutory subject matter, novelty, and non-obviousness. A patent on the application may not issue at all, or the language of the application may be amended and the claims narrowed. Whatever the future might bring for the claimed invention, this patent application serves as a useful prompt for thinking about the components that have been or are becoming essential to conducting business and other activities on the internet.

The Federal Circuit’s New “Authorized Acquirer” Restriction on Patent Exhaustion

Patent,

The following is a guest post by Professor Samuel F. Ernst of Chapman University’s Dale E. Fowler School of Law.  I asked Prof. Ernst to add his insight to the Helferich case and how it relates to his interesting 2014 article on Contracting Around Exhaustion.  — Dennis

* * * * *

by Samuel F. Ernst

Under the “first sale” or “exhaustion” doctrine, when a patent holder authorizes another party to sell a patented item, the patent holder’s right to exclude with respect to that item is exhausted, and the patent holder cannot pursue the licensed device down the stream of commerce to restrict subsequent parties from using the device for its intended purpose.  “[W]hen the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly.  It passes outside of it, and is no longer under the protection of the Act of Congress.”  Bloomer v. McQuewan, 55 U.S. 539, 549 (1852). The Federal Circuit’s panel opinion in Helferich Patent Licensing v. NYTimes and JCPenney (Fed. Cir. 2015) imposes a wholly novel restriction on the exhaustion doctrine by holding that the doctrine only protects “authorized acquirers” of a device.  Exhaustion no longer adheres in the licensed device itself as it moves in the stream of commerce.  Hence, although Helferich authorized the cell phone industry to sell handsets that practice its patents – indisputably a “first sale” – the exhaustion doctrine did not prevent Helferich from pursuing the New York Times and other content providers for infringement based on the delivery of messages and content to those cell phones.  The new “authorized acquirer” requirement directly carves out of the exhaustion doctrine protection for the very third party downstream uses of a licensed device that the doctrine is intended to protect.  The panel opinion is directly contrary to Supreme Court precedent and represents a fundamental misunderstanding of one of the core purposes of the exhaustion doctrine.  As I point out in my recent article, Patent Exhaustion for the Exhausted Defendant: Should Parties be able to Contract Around Exhaustion in Settling Patent Litigation?, 2014 U. Ill. J.L. Tech. & Pol’y 445 (2014), the exhaustion doctrine promotes the policy against servitudes attaching to goods in commerce in restraint of the free trade and use of those goods.  Exhaustion is intended to prevent a situation where a patent holder can “send its machines forth into the channels of trade of the country subject to conditions as to use or royalty to be paid, to be imposed thereafter at the discretion of the patent owner.”  Motion Picture Patents Co. v. Universal Film Manufacturing Co., 243 U.S. 502, 518 (1917).

Helferich Patent Licensing LLP owns a portfolio of more than fifty patents related to mobile communications devices and the provision of media and content to such devices.  Helferich sold a license to its patents “to what, at least at one time constituted most – we may assume all – of the manufacturers of mobile handsets for sale in the United States,” according to the Federal Circuit.  Helferich thereby authorized cell phone manufacturers to make phones that practice its patents and send them out into the stream of commerce.  But after brokering these licenses, Helferich sought to pursue the phones down the stream of commerce.  It sued the New York Times and other content providers for infringing their patents by alerting cell phone users in a certain fashion that content is available for download on the devices. Helferich’s licenses to cell phone makers contain various carve-outs and exceptions, according to the Federal Circuit, including a recitation of claims that would not be infringed by a handset manufacturer (but are nonetheless licensed), and a disclaimer of any grant of rights to content providers to practice Helferich’s patents.  Under current law, it is uncertain whether such provisions are sufficient to “contract around” exhaustion or if they are ineffective “post-sale restrictions.”  This is a topic I scrutinize in detail in Patent Exhaustion for the Exhausted Defendant, and which could have been a narrower basis for reversing (or affirming) the district court’s grant of summary judgment.  But the Federal Circuit does not address the relevance of these license provisions to the exhaustion doctrine, saying only that there can be no claim of implied license due to these provisions.

Instead, the court bases it reversal of summary judgment on the broad and novel pronouncement that patent exhaustion only shields an “authorized acquirer” from liability, and does not follow the licensed device down the stream of commerce to protect all users of the device for its intended purpose.  The court states, “[t]he doctrine has never applied unless, at a minimum, the patentee’s allegations of infringement, whether direct or indirect, entail infringement of the asserted claims by authorized acquirers.”  Exhaustion only applies as to these “certain persons,” and does not exhaust the patent holder’s rights in the device itself.  Hence, although there was indisputably an authorized first sale of the devices, the New York Times and other defendants were not “authorized acquirers” of the patented devices.  Indeed these defendants never acquired the devices at all; they merely sent messages to consumers who happened to be using the devices.  For this reason, the court held, the defendants were not relieved from liability by the fact that Helferich had exhausted its patent rights in the licensed cell phones.  The court concludes that it will not “expand” the exhaustion doctrine “to hold that authorized sales to persons practicing the handset claims exhaust the patentee’s rights to enforce the asserted content claims against different persons.”  Helferich is free to pursue the devices down the stream of commerce.

Contrary to the panel’s pronouncements, the exhaustion doctrine has frequently applied to shield from liability persons who were not “authorized acquirers” of the licensed devices.  That is the very purpose of the exhaustion doctrine – to shield licensed devices from infringement claims as they move down the stream of commerce.  Hence, in Quanta Computer v. LG Electronics, 553 U.S. 617 (2008), LGE authorized Intel to make and sell microprocessors that practiced LGE’s method claims, but prohibited third parties from purchasing the microprocessor for use in combination with non-Intel parts.  LGE sued Quanta for using the licensed microprocessors under the theory that Quanta was not authorized to use the parts in Quanta computers.  The Supreme Court held that LGE’s patent rights in the microprocessors were exhausted as to downstream users, whether “authorized” or not, because “[o]n LGE’s theory, although Intel is authorized to sell a completed computer system that practices the LGE Patents, any downstream purchasers of the system could nonetheless be liable for patent infringement.”  553 U.S. at 630.  This, said the Court, would be contrary to the longstanding principle that “once lawfully made and sold, there is no restriction on [the licensed product’s] use to be implied for the benefit of the patentee.”  Id. (quoting Adams v. Burke, 84 U.S. 453, 457 (1873)) (emphasis in original).

A case very close to the facts of Helferich is Motion Picture Patents v. Universal Film, 243 U.S. 502 (1917).  The patentee in that case granted a third party a license to manufacture and sell its patented film projectors, but inserted a provision in the license provision stating that the projectors could only be used to display certain films.  When Universal Film supplied to the purchaser of a licensed projector films that were not authorized for use on the machine, Motion Picture Patents sued Universal for patent infringement.  The Court held that Motion Picture’s patent rights in the projectors were exhausted by their authorized sale.  Motion Picture could not thereafter sue a third party, Universal, for a use of the machine that it believed constituted patent infringement, anymore than Helferich can sue the New York Times for the use of cellular phones in a way that it believes infringes its patents.  This is because the cell phones, like the film projectors at issue in Motion Picture Patents, are licensed, and Helferich’s patent rights in those phones are thereby exhausted.  Most critically, Universal, like the New York Times, was not an “authorized acquirer” of the patented projectors; like the New York Times, Universal had not acquired the licensed items at all.  Patent exhaustion adheres in the patented device, not in “certain persons” who are authorized to use the device.

A primary reason why patent exhaustion liberates the patented device from infringement claims (and not “certain persons”) is to promote the policy against restraints on alienation.  In Kirtsaeng v. John Wiley & Sons, 133 S.Ct. 1351 (a copyright case), the Supreme Court recognized that the “[t]he ‘first sale’ doctrine is a common-law doctrine with an impeccable historic pedigree.”  The Court grounded the doctrine in “the common law’s refusal to permit restraints on alienation of chattels.”  In Lifescan Scotland v. Shasta Technologies (Fed. Cir. 2013), the Federal Circuit extended this analysis to the patent exhaustion context.  The court concluded that if patent exhaustion is easily evaded, “consumers’ reasonable expectations regarding their private property would be significantly eroded.”  Hence, a rule restricting the protections of patent exhaustion to “authorized acquirers,” rather than grounding it in the licensed device, threatens to impose a servitude on devices as they pass down the stream of commerce.  In this case, Helferich licensed the making and selling of cell phones for their intended purposes, including consumers receiving notifications and content from content providers such as the New York Times.  Now Helferich seeks to extract an additional royalty from content providers for sending those notifications and content to the licensed cell phones.  The Federal Circuit’s new “authorized acquirer” exhaustion restriction thereby improperly allows a patentee to “send its machine forth into the channels of trade of the country subject to conditions as to use or royalty to be paid, to be imposed thereafter at the discretion of such patent owner.  The patent law furnishes no warrant for such a practice, and the cost, inconvenience, and annoyance to the public which the opposite conclusion would occasion forbid it.”  Motion Pictures Patent Co., 243 U.S. at 518.

Patent Exhaustion: Licensing Handset Manufacturers Did not Exhaust Patent as to Downstream Content Providers

Patent, ,

by Dennis Crouch

A patent holder has exclusive rights in the patented invention and a cause of action against “whoever without authority makes, uses, offers to sell, or sells” the invention. 35 U.S.C. 271(a). One limit on those rights is the non-statutory doctrine of patent exhaustion. Under exhaustion, after a patentee authorizes the making/sale of a particular individual article, the patentee no longer has any further exclusive patent rights in association with that authorized article.  Thus, the when the authorized product is later used or re-sold, the patentee could not claim further damages for infringement.  In other words, the power of the patent is ‘exhausted’ by the first authorized sale. As noted, the exhaustion doctrine is non-statutory, but the Supreme Court has repeatedly supported its existence as a parallel the statutory version found in copyright law. 17 U.S.C. 109.

In Helferich Patent Licensing v. NYTimes and JCPenney (Fed. Cir. 2015), the Federal Circuit (Judge Taranto) has narrowly construed the exhaustion doctrine – finding that the district court erred in holding that the patentee’s claims were barred due to exhaustion.

Helferich’s 30+ patents all relate to wireless handsets and related communication methods.  All the patents stem from a common original application and are thus closely related, although the PTO did not find obviousness-type double patenting.

Helferich has licensed its portfolio to essentially all handset makers selling in the U.S.  However, those licenses expressly carves-out activity by “content providers” — stating particularly that the licenses do not grant any rights for content providers to practice the claimed methods.

When Helferich then brought suit against content providers (NYTimes & JCPenny), those accused infringers argued exhaustion — namely that the manufacture and sale of the phones had been licensed under the now-asserted patents and that, as a consequence, the exhaustion doctrine blocks any there is no use of the phones that could now be seen as infringing.

[T]he premise of defendants’ exhaustion defense is that all handsets in the United States are licensed and that the asserted claims contemplate a use of handsets by handset owners/possessors.

However, in the appeal, the Federal Circuit found that the exhaustion doctrine does not bar Helferich’s claims here.

The Federal Circuit identifies exhaustion as a personal defense held by the acquirer of an authorized article (here, a handset).  However, according to the court, exhaustion does not apply to protect other parties. This distinction here is important because the accused infringers are content providers and – apparently – the content claims do not require any proof that the handset acquirers are practicing any aspects of the claims.  Secondly, the court also identifies the content claims being asserted here as separate and distinct inventions from the licensed handset claims.

In short, the decisions finding exhaustion (or relying on exhaustion to reject an antitrust defense) have done so only when the patentee’s assertion of infringement was, or depended on, an assertion that an authorized acquirer was using the same invention by infringing the asserted claims.

The closest case-on-point found by the Federal Circuit is Morgan Envelope Co. v. Albany Perforated Wrapping Paper Co., 152 U.S. 425 (1894) where the court wrote (in dicta?) that that exhaustion would not apply to excuse infringement of related – but distinct – patents.

The Morgan Court thus indicated that, even though an authorized buyer of product X was free of the patent owner’s patent on that product, the buyer could not, by virtue of his purchase, prevent the patent owner from enforcing his patent as to product Y, even though Y was specifically designed to be used with X and, at a minimum, made X more useful than it otherwise would be and, indeed, was essential to X’s utility.

Of course, a major difference with the old cases is that the added-element being supplied here is in the form of information rather than a tangible product.

In considering the impact of the 1952 and 2011 patent reforms on the judge-made law of exhaustion, the court writes “[w]e presume, from Congress’s refusal to disturb the existing decisional law of this doctrine (which predated the 1952 Act by nearly a century), an implicit authorization to continue applying the doctrine within its familiar boundaries. . . . But we do not think that Congress has granted the courts a license to erase those boundaries and expand the doctrine into difficult new territory unmapped by lines drawn, or even sketched, by Congress.” Thus, the court refused to consider policy considerations that would suggest doctrinal expansion.

The decision winding here by Judge Taranto is well supported, but I would also expect a strong challenge to be mounted for Supreme Court review.

You Own Devices Act (‘YODA’) of 2015

Patent

Reps Farenthold and Polis today reintroduced the You Own Devices Act (‘YODA’) that I discussed in September 2014.  The provision attempts a statutory end run against end-user-license-agreements (EULA) for computer software.  The current and growing market approach to software to license rather than sell software.  That approach cuts-out the first-sale (exhaustion) doctrine and allows the copyright holder to limit resale of the software by the original purchaser and to impose substantial use restrictions.  That approach is in tension with the common law tradition of refusing to enforce use or transfer restrictions.  However, a number of judges have bought into the idea that existence of an underlying copyright somehow requires the favoring of “freedom of contract” over the traditional unreasonable-restraint-of-trade doctrines.

YODA addresses this issue in a limited way – focusing on transfer rights – and would provide someone transferring title to a computer with the right to also transfer an ‘authorized copy’ of software used on the computer (or transfer the right to obtain such copy).  That right would be absolute – and “may not be waived by any agreement.”  Even without the proposed law, courts and the FTC should be doing a better job of policing this behavior that strays far from our usual pro-market orientation. However, the provision would make the result clear cut.

In some ways, I think of this provision as akin to the fixture rules in real property — once personal property (such as a brick) is fixed to the land (by being built into a house), the brick becomes part of the land and can be sold with the land. In the same way, a computer would come with rights to use all (legitimate) software therein.

To be clear, YODA would not allow transfer of pirated software, but would allow transfer in cases where the owner has a legitimate copy but is seemingly subject to a contractual transfer restriction.

 

Farenthold is a Texas Republican and a member of the IP Subcommittee of the Judiciary Committee.  On Twitter, Farenthold quipped: “Luke didn’t have to re-license Anakin’s lightsaber, so why should you?”

lego-star-wars-games-to-play-on-computer-1oli8qnz[1]

IEEE Amends its Patent (FRAND) Policy

Patent,

Guest Post by Professor Jorge L. Contreras

On February 8, the Board of Directors of the Institute of Electrical and Electronics Engineers (IEEE) voted to approve a set of amendments to the organization’s patent policy.  The changes largely relate to the commitment of IEEE members to license patents to users of IEEE standards on terms that are “fair, reasonable and nondiscriminatory” (FRAND).  As most readers are aware, these commitments have been the subject of recent litigation.  IEEE’s Wi-Fi standards alone have played prominent roles in Microsoft v. Motorola, Apple v. Motorola, In re. Innovatio and Ericsson v. D-Link, among others.  In most of these cases, there has been sharp disagreement over whether the patent holder complied with its FRAND obligations.  To decide these cases, judges and juries have been required to speculate regarding the scope and intent of these obligations, choosing between the divergent views advanced by the litigants and their experts.

Observers of these disputes have long wondered why standards-setting organizations (SSOs) like IEEE have not simply clarified these issues in their patent policies.  Doing so would eliminate much of the uncertainty and debate that currently characterizes disputes over FRAND compliance.  In fact, in a 2013 article, the chief economists of the U.S. Department of Justice, Federal Trade Commission and European Commission Directorate-General for Competition jointly urged SSOs to clarify issues surrounding FRAND in their patent policies.  Yet few SSOs, if any, did so.  Until now.

The IEEE amendments do several things.  Most notably they makes clear that IEEE members holding patents covering IEEE standards:

  • must offer to license those patents to all applicants requesting licenses, and cannot pick and choose among licensees,
  • may not seek, or threaten to seek, injunctions against potential licensees who are willing to negotiate for licenses,
  • may insist that licensees offer them reciprocal licenses under their own patents,
  • may arbitrate disputes over FRAND terms,
  • may charge a reasonable royalty that is based, among other things, on the value that the patented technology contributes to the smallest salable component of the overall product, and
  • should ensure that subsequent purchasers of these patents agree to abide by the same commitments.

Readers may recall that disputes regarding several of these issues have arisen in recent litigation. For example, myriad articles and briefs have debated whether or not a FRAND licensing commitment precludes a patent holder from seeking injunctive relief against an infringer who is willing to negotiate a license.  On one hand, committing to license one’s patents on FRAND (or any) terms implies that monetary compensation is acceptable to the patent holder, thus weighing heavily against the issuance of an injunction under the Supreme Court’s 4-factor test in eBay v. MercExchange (U.S. 2006).  However, patent holders have argued that FRAND commitments were never intended to eliminate one of the principal equitable remedies available to them should potential licensees be intransigent or unwilling to negotiate on reasonable terms.  Arguments have been made under antitrust, contract, estoppel and various other theories, all seeking to adduce the “intention” of the parties submitting to the FRAND commitment. Now, the speculation is over, at least for IEEE standards.  The SSO members have announced what their FRAND commitment means, and further dispute is unnecessary.  The same can be said for most of the other issues addressed by the IEEE amendments.  Such clarity can only help to reduce the uncertainty and litigation burden that has affected the standardization world over the last few years.

IEEE sought and obtained clearance for the amendments from the Department of Justice, which issued a favorable Business Review Letter on February 2.  Among other things, the DOJ concluded that the amendments have “the potential to benefit competition and consumers by facilitating licensing negotiations, mitigating hold up and royalty stacking, and promoting competition among technologies for inclusion in standards.”  Readers may recall that this is not the first DOJ Business Review Letter that the IEEE has obtained.  It 2007 it also sought clearance for a set of patent policy amendments that permitted patent holders to disclose maximum royalty rates prior to approval of a standard (so-called “ex ante” disclosure).  Though the DOJ approved these amendments as well, the procedures they introduced were not widely used by IEEE members.

The passage of the amendments within IEEE required a significant effort over a period of approximately two years.  As reported in the DOJ letter, the initial drafts generated 680 public comments.  The resulting document was narrowly approved by a 3-2 vote of the IEEE Standards Association’s (IEEE-SA) Patent Committee.  The IEEE-SA Standards Board approved it by a vote of 14-5, and the IEEE-SA Board of Governors, usually the final authority on standardization matters, voted 9-3 in favor of the amendments.  Nevertheless, opponents brought the amendments before the Board of Directors of the IEEE parent organization, which finally voted to approve the amendments on February 8.  In the weeks leading up to the final vote, both supporters and opponents of the amendments mustered support from industry and academia, resulting in numerous public statements and letters both pro and con the proposed amendments.

The vigorous pubic debate over the IEEE amendments highlights a rift in the standardization world between what I have termed patent-centric and product-centric firms.  The business models that these firms have adopted are different, yet they have co-existed for decades.  Some have predicted that important contributors will leave IEEE as a result of the recent amendments.  This may happen.  But more likely it will not.  Similarly dire predictions were made prior to the IEEE’s 2007 amendments, but the ill effects that were predicted never materialized.  In this author’s opinion, the IEEE’s policy amendments offer much-needed clarity to the murky world of FRAND commitments, and it is hoped that other SSOs will soon follow with clarifications of their own patent policies.

Guest Post: Transfer Prices Are an Evidentiary Gold Mine for Patent Defendants

Patent, , , ,

Guest Post by Andrew Blair-Stanek, Assistant Professor of Law at University of Maryland Carey School of Law

Patent owners routinely tell the IRS, under penalties of perjury, that their patents have little value.  Litigators representing defendants should take advantage of these remarkable admissions.

IP has become the world’s leading tax shelter.  Multinational corporations develop IP in the U.S. and promptly transfer it for artificially low prices to subsidiaries in tax havens, where profits from the IP escape tax.  As IP becomes increasingly essential to economic activity, more and more profits have been siphoned off to tax havens.  The low transfer price is crucial to this strategy, minimizing the tax paid in the U.S.  Tax law cannot easily stop this abuse, because of international tax law norms enshrined in bilateral tax treaties.

But this tax avoidance presents great opportunities for litigators representing IP defendants sued by multinationals.  As I discuss in a new UCLA Law Review article, defendants can discover transfer-pricing evidence and use it to argue for invalidity, non-infringement, lower damages, and no injunctions.

For example, a low transfer price for a patent weighs towards lower damages.  Tax law requires multinationals to use a transfer price equal to a patent’s fair market value.  Multinationals must hire appraisers to justify this valuation and then attest that the valuation is accurate under penalties of perjury.  The fair market value of a patent approximately equals the profits or royalties that it is expected to generate, so a low transfer price is an admission by the multinational that it expected low profits or royalties.  Since patent damages are measured by either lost profits or royalties, the low transfer price is evidence weighing towards lower damages.

As another example, a patent’s low transfer price is nontechnical evidence – akin to the existing secondary considerations – that the patent is invalid for obviousness.  Obviousness is measured by reference to a person having ordinary skill in the art before the patent application’s filing date.  To minimize taxes, multinationals typically transfer patent rights as soon as possible, often around the same time the patent application is filed.  A multinational is ideally situated to evaluate how substantial the advance was, because it employs the inventors, who have ordinary or above-ordinary skill in the art.  In short, low transfer prices are admissions, at the relevant time, by an ideally-situated party, that the invention was not a substantial advance.

A low transfer price also negates evidence of a patent’s commercial success.  Courts consider commercial success to be evidence of nonobviousness under the reasoning that if the invention had been both obvious and lucrative, then someone would have thought of it earlier.  But this reasoning rests on the implicit assumption that the invention’s potential commercial success was perceived before its development.  A low transfer price refutes this implicit assumption and severs any logical connection between commercial success and nonobviousness.  A low transfer price proves that the multinational perceived little potential commercial success from the invention, even after its development.

Low transfer prices can also help defendants fight injunctions, which require the patentee to demonstrate that it faces irreparable injury that cannot be compensated by damages.  But a patent’s value roughly correlates with the maximum damages for infringing it.  A low transfer price for a patent demonstrates that harm from infringement can be quantified and, indeed, was quantified at a low number.

The transfer prices themselves are only half of the evidentiary gold mine.  IRS regulations require that multinationals hire appraisers to prepare rigorous documentation justifying the low transfer prices as accurate valuations.  This documentation typically makes as strong a case as possible that the patents have little profit or royalty potential.  Sometimes the documentation even contains damaging opinions or facts about the patent’s validity or scope.

My article’s arguments do not impact patents transferred between unrelated parties, such as an individual inventor selling a patent to a manufacturer.  When unrelated parties sell or license patents, the prices can reflect any number of distortions ranging from information asymmetries to differences in bargaining power.  None of these distortions exist when a multinational transfers a patent to its own tax-haven subsidiary.

Individual inventors, start-ups, and other small businesses cannot avoid taxes by transferring their IP to tax-haven subsidiaries.  Multinationals can.  This advantage distorts the employment market for scientists and engineers, making them more likely to work for multinationals.  This distortion likely reduces the overall progress of the useful arts, given the higher research productivity of start-ups and other small firms.  By making the arguments discussed in the article, litigators representing patent defendants can not only serve their clients’ interests, but also reduce this distortion.

In sum, during discovery, patent defendants should request transfer prices and the supporting appraisal documentation.

Federal Circuit Affirms 10% Royalty on “Pure Profit” Infringement by US Government

Patent,

Gaylord v. US (Fed. Cir. 2015)

In this case’s third-trip to the Court of Appeals, the Federal Circuit has again sided with Sculptor Frank Gaylord — This time affirming the lower court’s award of 10% of $5.4 million in US Postal Service revenue as a reasonable royalty for its unauthorized use of Gaylord’s copyrighted work on a postage stamp.

Gaylord was commissioned by the U.S. government to design what turned out to be “The Column” as part of the Korean War Memorial in DC.  Gaylord, however, retained copyright to the work and, when the the Postal Service released a stamp depicting the work Gaylord sued.  Because this case is against the U.S. government, the lawsuit was brought in the Court of Federal Claims (CFC) and appeals from the CFC are heard by the Federal Circuit (CAFC). Memorial

In the first appeal, the Federal Circuit held that the government’s use was not a “fair use” but rather copyright infringement. In round-two, the Federal Circuit rejected the CFC’s award of $5,000 as a reasonable-royalty for the use.  Rather, the Federal Circuit held that the lower court must award “the fair market value of a license for Mr. Gaylord’s work based on a hypothetical negotiation with the government.”

The stamp business is interesting.  Most postage stamps are purchased and then used to mail letters with very little profit margin.  For those, the appropriate royalty rate is quite low and Gaylord agreed that he would not seek any royalty for used-stamps.  However, there are also a large number of stamp collectors and the USPS profit on those stamps is well over 90%. And, the popularity of collectible stamps tends to directly correlate with the quality and popularity of the work depicted on the stamp.  For this second category, the Court of Federal Claims determined that an appropriate royalty was 10% of revenues for the unused stamps.  On appeal, the Federal Circuit affirmed:

The basic premise of the hypothetical negotiation in this case would have been the opportunity for making substantial profits if the two sides were willing to join forces, which we must [hypothetically] assume they were. The Court of Federal Claims in this case determined that the negotiators, presented such an opportunity and acting under assumptions designed to identify market value, would have agreed to a 90/10 split of the revenue from retained stamps, which, here, is in substance a 90/10 split of profits, because the revenue for the unused stamps is almost pure profit to the Postal Service. The question for us is whether that result—giving the Postal Service 90% of the profits and Mr. Gaylord 10%—is within the range of reasonable findings from the evidence.

In reviewing that award, the Federal Circuit first confirmed that a royalty-approach was appropriate even though the USPS has never paid a royalty – its practice has always been to pay an up-front award of $5,000 or less.

The familiar advantages of a per-unit royalty can readily be found present here. A per-unit royalty is a logical way to tie the amount paid for the asset to the marketplace success it helps produce, which fits the objective of measuring market value.

Regarding the 10% split, Gaylord was able to show that he had previously obtained a 10% rate for other uses of the image and the 90% remaining leaves USPS with significant profit.  Those reasons sat well with the appellate court as well.

Thus, Gaylord gets $570,000 in royalties.

Patent Reform: Innovation Act of 2015

Patent, ,

by Dennis Crouch

On February 5, 2015, Rep. Goodlatte reintroduced his patent reform bill: the Innovation Act.  Co-sponsors already include the bipartisan group of Reps. Defazio, Issa, Nadler, Smith, Lofgren, Chabot, Eschoo, Forbees, Pierlusi, Chaffetz, Jeffries, Marino, Farenthold, Holding, Johnson, Huffman, Honda, and Larsen.

Read the Bill: Innovation Act 2015

The bill as introduced includes the following provisions:

  • Heightened Pleading Requirements: Significant raising of the pleading requirement for patent cases.  A patent holder filing an infringement lawsuit – at the time of filing – would need to include a set of infringement charts showing how each limitation of each asserted claim in each asserted patent is found within each accused product or instrumentality.  However, the plaintiff would not be required to complete the entire chart if the infringement is not readily available after a reasonable amount of pre-filing due diligence.  Form 18 would also be eliminated.  Pharmaceutical companies filing infringement actions under 271(e)(2) wouldn’t need to comply.  The approach here raises some separation of powers concerns (ordering the Judicial Conference to act). The Judicial Conference has also already moved to eliminate Form 18 in a way that would implicitly increase pleading requirements. Those changes are expected to take-effect December 2015.  However, the Judicial Conference changes do not go nearly as far as the legislative proposal here.
  • Presumption of Attorney Fees:  Under the new law, a court would be required to award attorney fees and “other expenses” to the prevailing party unless a judge “finds that the position and conduct of the nonprevailing [was] reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.  This flips the current rule where attorney fees are only available in “exceptional cases” and instead replaces it with a roughshod version of the “English Rule.”  In cases where the patentee is undercapitalized, the law would allow the court to pierce the corporate veil and make investors and other ‘interested parties’ pay the attorney fee award.  Unlike the English system, the proposal here does not place any limits on the potential fee award other than it be “reasonable.”  In my view, an improvement upon this would be to set reasonableness early-on based upon an estimation of the case value.
  • IPR Claim Construction: Rejecting the Federal Circuit’s recent Cuozzo decision, the Bill would require the USPTO to construe claims in post-issuance reviews (IPR/PGR/CBM) in the same manner as would be done by a district court and “in accordance with the ordinary and customary meaning of such claim as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent.”  And, if a court has already construed the claim then the PTO must “consider such claim construction.”  This particular change is one that favors patentees.
  • Discovery Limits:  The bill would limit discovery in litigation until after a claim construction ruling (if one is necessary for the case).  For cases where claim construction is dispositive, this ruling has the potential of reducing costs. It also will create further pressure on courts to conduct early claim construction decisions.   At the same time, the approach seems to increase the likelihood that a court will separate the claim construction decision from its summary judgment decision (which would likely require further discovery) except, perhaps in cases involving definiteness under Section 112(b).  Additionally, discovery of non “core” documents would also be severely limited, and anyone asking for discovery would need to first either (a) post a bond sufficient to cover the expected costs of additional discovery or (b) be a large enough company.
  • Willful Infringement:  Willful infringement can lead to treble damages, but the Bill would limit the applicability of pre-suit demand letters for proving willfulness unless  the demand letter identifies: (1) the patent in question; (2) the ultimate parent entity that owns the patent; (3) the accused products; and (4) how the product infringes at least one claim of the patent.
  • Transparency of Ownership: In any lawsuit, the patent owner must disclose “the ultimate parent entity” of any assignee of the patent. Further, the patentee will be under an ongoing duty to update the USPTO of any change in ownership, including ultimate parent entity within 90-days of any change. Failure to keep-up the information results in no enhanced damages or attorney fees for the patentee in litigation and an award of attorney fees to the defendant who spent money researching the actual ownership information.
  • Stay of Customer Suits: In limited cases, the courts will stay customer lawsuits when the manufacturer of the accused product steps up to challenge the patent.
  • Foreign Bankruptcy: The bill would stop the practice of a bankruptcy executor canceling US IP licenses in foreign bankruptcies.  This is already barred for U.S. bankruptcies under 365(n) of the Bankruptcy code.
  • Codifying Double Patenting: The bill would codify a double patenting regime that would seemingly replace the obvousness-type double patenting system developed by the courts. The proposal would particularly allow prior filings by overlapping inventors to count as prior art unless a terminal disclaimer is filed.

Delano Farms v. California Table Grape Commission (Fed. Cir. 2015)

Patent, ,

by Dennis Crouch

Like their utility and design patent brethren, plant patents must also satisfy the patentability requirements of Section 102 and 103 of the Patent Act. In Delano Farms v. California Table Grape Commission (Fed. Cir. 2015), the plant patents at issue relate to Scarlet Royal and Autumn King table grapes. Plant Patent Nos. PP16,229 and PP16,284.  The declaratory-judgment plaintiffs are grape growers seeking to invalidate the patents so that they can grow the grapes without continuing to pay a license fee.

Public Use: Under pre-AIA law, Section 102(b) renders patents invalid if the claimed invention was “in public use” more than one year before the application priority filing date and here, the question is whether certain proven third-party uses count under the law.

Interesting Factual Story: The patented grapes here were created through a USDA project and the patents are owned by the USDA. More than one year before filing the patent applications, the USDA held an open house where it displayed the two varieties.  At the event, a USDA employee (Klassen) gave some of the plants to a local grower (Ludy) but asked Ludy not to sell the grapes he might grow.  Ludy also apparently understood at the time that Klassen had no authority and should not have given out the plants.  Nevertheless, Ludy did grow the variety and also gave some buds to his cousin for him to grow.  However, Ludy testified that his cousin also understood that he should keep the variety secret until it was commercially released by the USDA.  (However, there was nothing written regarding the secrecy needed).   The cousin grew several hundred plants but did not sell any of the resulting grapes before the one-year critical 102(b) date.  Finally, Ludy also showed the plants to Sandrini who was an outside marketer of grapes for both Ludy and his cousin.

Public Use: In interpreting the public use prong of 102(b), the Federal Circuit has focused on whether the invention was either accessible to the public or commercially exploited.  Importantly, the court has previously held that “secret or confidential third-party uses do not invalidate later-filed patents.” Dey v. Sunovion.  But the Leading public use case continues to be Egbert v. Lippmann, 104 U.S. 333 (1881).  In that case, the inventor gave an under-garment corset to his love (who was not yet his wife) who wore it in various forms for 11 years before the patent application was filed.  Even though there was no evidence that anyone in the public saw the corset, the Supreme Court found an impermissible public use and the patent void writing:

If an inventor, having made his device, gives or sells it to another, to be used by the donee or vendee, without limitation or restriction, or injunction of secrecy, and it is so used, such use is public, even though the use and knowledge of the use may be confined to one person.

The challengers in the grape case here latched onto Egbert and argued that there was no real secrecy limitation here despite the fact that only a few individuals actually knew of the public use.

Siding with the USDA Patentee, the Federal Circuit affirmed the district court’s factual findings that the patentee did not authorize Klassen to facilitate third party use of the invention and that Ludy understood that he should keep the variety secret until publicly released by the USDA. “The findings of the district court clearly establish, therefore, that both Ludys knew that they were not authorized to have the plants and that they needed to conceal their possession of the plants.”

Distinguishing Egbert, the Federal Circuit noted that case turned on the inventor’s lack of effort to maintain secrecy.  Here, the USDA made attempts to keep secrecy and, to a large extent, was successful.  The tale here is interesting because of the way it softens the otherwise harsh limits under Section 102(b).

Impact of the AIA: This case was decided under pre-AIA law because the patent application was filed prior to March 2013.  The AIA rewrote much of the novelty provision of Section 102, but included the limit on patenting inventions already “in public use.”  I would expect that under the new law, these same activities would likewise not be seen as being in public use. One difference with the AIA is that the critical date for public use is no longer one-year prior to the application filing date, but instead is moved-forward the actual filing date itself.  In this case, that change would likely have made a difference because the third-parties were less private in the year leading up to the application filing, including commercial sales of the grapes.

Using 35 USC 285 to Impose Fees on Patentee’s Counsel

Ethics, , ,

When Dreams Come True? Using Section 285 to Impose Fees against a Losing Patentee’s Lawyers

By David Hricik

[This article first appeared in Landslide Magazine.]

 

A patentee can use the extraordinary costs of defense to extract settlements that far exceed the value of the technology to the defendant. Further, if the patentee’s business is asserting patents, it likely will have, compared to a manufacturer-defendant, fewer documents, fewer employees, and less to lose in a patent case.[1] These asymmetrical costs can lead to frivolous claims being made solely to extract unreasonable settlements.

Defense counsel has some tools, imperfect as they are, to shift those costs, including Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and a court’s inherent power.[2] But only one tool generally allows for all fees to be shifted from a prevailing defendant to a losing patentee: 35 U.S.C. § 285. Section 285 authorizes fee shifting only in an “exceptional case.” Earlier this year, the Supreme Court in Octane Fitness, LLC v. Icon Health & Fitness, Inc., made it easier to recover fees, holding that an “exceptional case” was simply that: unusual, in that it “stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”[3] Presumably, Octane will result in awards of fees in a greater number of cases, because the Court rejected interpreting the statute to allow fee shifting only upon clear and convincing evidence of both objective and subjective bad faith.[4]

Yet, particularly where the patentee is an asset-less “troll,” shifting fees is a hollow victory. An uncollectible judgment is literally not worth the paper it is printed on. But often trolls are represented by plaintiffs’ counsel, who may have deep, if not the only, pockets. No court has rigorously analyzed whether fees under § 285 may be imposed on the loser’s attorneys (either singly or jointly with the patentee), though motions to shift fees onto lawyers post-Octane are already being filed.[5]

This article shows that whether § 285 authorizes a prevailing accused infringer to have fees awarded against the patentee’s lawyer, either alone or jointly with the client, is an open question with strong arguments that it does. The article concludes by explaining why, even if lawyers are not directly liable to the opposing party, ultimately much of the increase in § 285 fee awards will be borne by lawyers, not their clients.

 

History, Text, and Purpose of Section 285

Fee shifting became available in patent cases for the first time in 1946 under 35 U.S.C. § 70, which permitted a court “in its discretion” to award fees “to the prevailing party.”[6] Congress made § 70 applicable to both accused infringers and patentees. Fee shifting in favor of a patentee was deemed necessary not only to ensure that a patentee who was forced to file a suit to protect its patent would not merely receive a reasonable royalty—what it would have received had the accused infringer taken a license in the first place—but also to prevent “a gross injustice.”[7]

Of course, the primary “gross injustice” a prevailing accused infringer faces in this statute’s context is paying its defense costs. Thus, with respect to the issue here, the statute’s purpose is to compensate a prevailing accused infringer to achieve justice. Consistent with this, courts soon emphasized that the statute focused on equity, fairness, and justice, stating for example that a fee award should be “bottomed upon a finding of unfairness or bad faith in the conduct of the losing party, or some other equitable consideration of similar force, which makes it grossly unjust that the winner . . . be left to bear the burden of his own counsel fees.”[8]

Congress recodified § 70 into what is now § 285. Rather than effecting substantive change, Congress added the phrase “exceptional case” to § 285 to codify the approach of those cases that had applied § 70 between 1946 and 1952.[9] Thus, § 285 focuses on achieving fairness, justice, and equity. With respect to accused infringers, § 285 is intended to avoid the injustice of a prevailing accused infringer having to bear the cost of defense in an exceptional case.

No one doubts that an award of fees in favor of a prevailing accused infringer can be entered against the patentee. But can an award be entered against the patentee’s lawyers, either alone or jointly with the patentee? In related cases and without rigorously analyzing the statute, the Federal Circuit gave mixed signals. In a nonprecedential opinion, the court reversed a district court’s award of fees under § 285 against the patentee’s counsel, but in a later precedential opinion, over a dissent, it apparently affirmed an award jointly and severally against the patentee and its counsel.[10]

 

Arguments that Section 285 Permits Shifting Fees onto Loser’s Counsel

The text is the starting point: nothing in § 285 indicates who must pay. Instead, the statute only states that fees may be awarded to a prevailing party. Congress could have but did not specify that the losing party must pay the prevailing party its fees, only that a party must prevail to receive a fee award. When Congress has wanted to limit statutes in that way, it has done so. Foremost, the Copyright Act allows the court to award “the recovery of full costs by or against any party.”[11] Congress’s decision not to limit § 285 in this same way confirms § 285’s plain meaning: it only specifies who can win, not who must pay.

Further, rules with similar structures have been interpreted in this way. For example, Federal Rule of Appellate Procedure 38 allows an award of fees for frivolous appeals “to the appellee.” That rule has been interpreted to permit an award against counsel, the appellee, or both.[12] Section 285 is likewise open-ended with respect to who must pay.

Moving beyond the text, the purpose of § 285 and congressional intent each suggests that an award against attorneys might be proper: an uncollectible award of fees does nothing to avoid the injustice of a wrongfully accused infringer paying the cost of defense in an exceptional case. The intent of Congress and the purpose of § 285 would be frustrated by a construction that does not permit awards against attorneys, at least where they are the only real recourse for compensation.

Further, construing § 285 to not permit fee awards against counsel results in some absurdities. Foremost, that interpretation would impose costs on the patentee for decisions that it may be incapable of making and, in fact, did not make. For example, many patentees cannot assess what a claim means; yet, courts have found cases “exceptional” for unreasonable infringement claims.[13] In that circumstance, imposing costs on patentees, not lawyers, punishes the wrong party and does not deter the offensive conduct. It may in fact result in punishing the innocent patentee, and yet awarding nothing in substance to the victim, the accused infringer.

Illustrating that point further, Rule 11 does not permit sanctions to be awarded against a client where the basis for the sanction is a frivolous legal argument.[14] Where the basis of a fee is a frivolous legal argument, interpreting § 285 to not permit awards against lawyers would result in clients being on the hook for fees, which is clearly against public policy. Further, unless a lawyer can be liable under § 285, the lawyer’s interest is to characterize any legal arguments as being solely the basis for an award under that statute, rather than Rule 11. In this regard, some courts have refused to permit a client to indemnify an attorney for sanctions imposed against the lawyer, recognizing that the deterrent effect of sanctions would be diminished.[15]

Finally as a matter of policy, sanctions are generally not insurable, but damages for malpractice are.[16] Thus, by imposing fees only on the patentee, courts may indirectly allow lawyers to insure themselves for damages that otherwise would not be insurable.

 

Arguments against Interpreting Section 285 to Permit Shifting Fees onto Counsel

Some statutes do permit awards expressly against attorneys. Foremost, 28 U.S.C. § 1927 permits sanctions against “[a]ny attorney or other person admitted” to practice. The existence of these statutes suggests that when Congress wants to permit an award of fees against a lawyer, it knows how to do so, and it did not do so in § 285. Where a fee shifting statute does not mention attorneys, some courts infer that awards against counsel are improper.[17]

In addition, at least after Octane, imposing liability directly onto attorneys may chill advocacy. Specifically, an attorney may not make an argument permitted by Rule 11 in light of the potential for liability under the much lower, and amorphous, standard in Octane.

Finally, although the purpose of § 285 was to avoid an injustice to prevailing accused infringers, Congress no doubt understood that normal limitations of liability that benefit corporations would apply. What matters is what Congress intended in 1952, and nothing suggests that it was concerned about asset-less trolls enforcing patents but leaving accused infringers actually uncompensated for their loss.

 

Conclusion

It is an open question whether § 285 allows fee awards against losing counsel. Given the statute’s open-ended language and broad equitable purpose of avoiding the injustice of an accused infringer paying its own fees, the text would seem to permit such awards when justice so requires. Those circumstances may include where counsel has assisted the patentee to structure its operations to avoid having assets to pay any award of fees, or where the lawyer’s conduct causes the exceptional nature of the case. In making any award, however, courts should carefully consider any chilling effect that an award may have on advocacy.

Lawyers should carefully consider several things in the post-Octane world:

The patentee’s counsel faces different issues than the accused infringer’s. First, to some extent it may be unethical to seek indemnity or reimbursement of such claims.[18] Second, suppose the lawyer of a patentee who loses faces the motion of the prevailing accused infringer asserting that the lawyer is liable to the accused infringer for its fees. That lawyer must face the fact that the patentee’s interest is that the lawyer bears those costs, while the lawyer’s interest is the opposite. As a result, it may be necessary for the lawyer, at a minimum, to obtain the client’s informed consent to continue the representation.

Counsel for an accused infringer must determine whether to attempt to shift fees onto the patentee’s counsel, rather than the patentee. Even if the patentee has assets, an order holding the patentee and its counsel jointly liable may best serve the accused infringer.

Finally, fee awards are going to be borne largely by lawyers, not clients. A client ordered to pay the other side’s fees will often contend that the lawyer’s incompetence caused the client to bring, or defend, an exceptional case. A lawyer should consider insurance, indemnification, revisions to engagement letters to permit withdrawal, and other ways to protect the lawyer and to make the risks clear to the client.

All lawyers should analyze § 285 carefully. It may be a dream come true, or a dark nightmare.

 

BIO: David Hricik is a professor at Mercer University School of Law and of counsel at Taylor English Duma LLP in Atlanta, Georgia. He clerked for Chief Judge Rader in 2012, has written on statutory interpretation, and is nationally recognized as an expert in legal ethics in patent practice. The title is from “When Dreams Come True,” by John Wesley Harding on the CD Garden of Eden (2003).

 

[1]. See David Hricik, Legal Ethics and Non-Practicing Entities: Being on the Receiving End Matters Too, 27 Santa Clara Computer & High Tech. L.J. 793 (2010); Randall R. Rader, Colleen V. Chien & David Hricik, Make Patent Trolls Pay in Court, N.Y. Times, June 4, 2013, http://www.nytimes.com/2013/06/05/opinion/make-patent-trolls-pay-in-court.html?_r=1&.

[2]. See David Hricik, Patent Ethics: Litigation § 5.01 (LexisNexis 2014).

[3]. 134 S. Ct. 1749, 1756 (2014).

[4]. Id. at 1756–57.

[5]. See, e.g., Opinion and Order, Rates Tech. Inc. v. Broadvox Holding Co., LLC, No. 13 Civ. 0152 (S.D.N.Y. Oct. 7, 2014) (concluding without rigorous analysis that § 285 did not authorize awards against lawyers).

[6]. See Octane, 134 S. Ct. at 1753.

[7]. See S. Rep. No. 79-1503 (1946).

[8]. Park-in-Theatres, Inc. v. Perkins, 190 F.2d 137, 142 (9th Cir. 1951) (emphasis added). Courts considered all facts, including whether the patentee could have simplified the case, made unreasonable infringement claims, or delayed in suing or in dropping customer-defendants. E.g., Merrill v. Builders Ornamental Iron Co., 197 F.2d 16 (10th Cir. 1952); Aeration Processes, Inc. v. Walter Kidde & Co., 170 F.2d 437 (2d Cir. 1948); Brennan v. Hawley Prods. Co., 98 F. Supp. 369 (N.D. Ill. 1951).

[9]. See Mach. Corp. of Am. v. Gullfiber AB, 774 F.2d 467 (Fed. Cir. 1985) (explaining addition of the “exceptional case” language).

[10]. Compare Phonometrics, Inc. v. ITT Sheraton Corp., 64 F. App’x 219 (Fed. Cir. 2003) (reversing § 285 award against lawyer), with Phonometrics, Inc. v. Westin Hotel Co., 350 F.3d 1242, 1253 (Fed. Cir. 2003) (affirming an apparent award of joint and several liability against client and lawyer over the dissent of Judge Newman, who argued that awards against counsel under § 285 were permissible only for egregious conduct). See also Stillman v. Edmund Scientific Co., 522 F.2d 798, 800 (4th Cir. 1975) (opining that “it is not the purpose of [§ 285] to discipline uncooperative or overzealous counsel”).

[11]. 17 U.S.C. § 505 (emphasis added).

[12]. “[M]any cases under rule 38 assess sanctions against offending counsel, alone or jointly with the client . . . .” Coghlan v. Starkey, 852 F.2d 806, 818 (5th Cir. 1988) (citing cases).

[13]. See Hricik, Patent Ethics, supra note 2, § 5.03[5][b] (collecting cases).

[14]. Fed. R. Civ. P. 11(c)(5)(A).

[15]. See Young Apartments, Inc. v. Town of Jupiter, Fla., 503 F. App’x 711 (11th Cir. 2013) (collecting cases and discussing policy issues); N.Y. Cnty. Lawyers’ Ass’n Comm. on Prof’l Ethics, Op. 683 (Nov. 15, 1990) (analyzing propriety of clients reimbursing lawyers for sanctions).

[16]. If a lawyer brings a patent case and fees are shifted under § 285 and imposed on the patentee, the patentee can contend that that lawyer acted incompetently by pursuing the case at all, or continuing after some point. Courts have already entertained these suits. For example, in E-Pass Technologies v. Moses & Singer, LLP, fees had been imposed on a losing patentee who then brought a legal malpractice claim against its lawyers. No. C-09-5967, 2011 WL 5357912 (N.D. Cal. Nov. 4, 2011); see also Deutch & Shur, P.C. v. Roth, 663 A.2d 1373, 1375 (N.J. Super. Ct. 1995) (stating that “the client may seek indemnification against the attorney for sanctions”); In re S. Bay Med. Assocs., 184 B.R. 963 (C.D. Cal. 1995) (analyzing indemnity of sanctions orders). Of course, and particularly under the broader Octane standard, simply because fees are imposed under § 285 does not automatically evidence incompetence.

[17]. E.g., Neft v. Vidmark, Inc., 923 F.2d 746, 747 (9th Cir. 1991).

[18]. For a discussion of indemnification in the context of sanctions, see N.Y. Cnty. Lawyers’ Ass’n Comm. on Prof’l Ethics, Op. 683 (Nov. 15, 1990).

Halo v. Pulse: Escaping Willfulness with Ex Post Reasoning

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by Dennis Crouch

Halo has petitioned the Federal Circuit to rehear its electronics patent case against Pulse with two questions presented:

  1. Willfulness: Whether an infringer who subjectively knew pre-suit that it was infringing a valid patent (after being given notice of the patent, and failing to design around, seek a license, or stop infringing) can use an unsuccessful defense developed post-suit as a per se bar to liability for pre-suit willful infringement, despite the flexible text of 35 U.S.C. § 284.
  2. Sale/Offer for Sale: Whether a requirements contract for a patented product that is negotiated and executed in the U.S., subject to California law, and includes binding pricing and quantity terms constitutes a “sale” and “offer for sale” under 35 U.S.C. § 271(a).

The petition is well designed and holds a strong possibility of review.  In the original panel decision, Judge O’Malley (joined by Judge Hughes) called for en banc review of the court’s willfulness jurisprudence. Jason Rantanen wrote more here.  The case also has interesting links with Commil v. Cisco that is now pending before the Supreme Court.

Regarding the Sale issue, I see less merit. As Lucas Osborne writes, although the contract was negotiated and signed within the US, the actual performance was to be done outside of the US.  In the litigation, the patentee was able to capture royalties for all of the products imported into the U.S., but here is seeking damages for worldwide sales.

Federal Circuit: Next Round of Myriad Patent Claims Are Also Invalid

Patent, , ,

by Dennis Crouch

In an important decision, the Federal Circuit has affirmed the invalidity of a number of additional genetic testing claims.  Based upon this decision, the USPTO may need to again reevaluate its subject matter eligibility procedures. 

In AMP v. Myriad (2013), the Supreme Court found that some of Myriad’s BRCA gene patent claims were valid – or at least that they did not violate the prohibition against patenting products of nature.  Following the decision, several companies – including Ambry – began marketing BRCA genetic testing, and Myriad sued.

The new lawsuit – captioned In re BRCA1- and BRCA2-Based Heredity Cancer Test Patent Litigation (Fed. Cir. 2014) – was brought by Myriad (the exclusive patent licensee) along with patent owners University of Utah and University of Pennsylvania. The plaintiffs here assert a set of patent claims that were not previously a part of the Supreme Court or lower court analysis.  Now asserted are U.S. Patent Nos. 5,753,441 (claims 7 & 8); 5,747,282 (claims 16 & 17); and 5,837,492 (claims 29 & 30).

The appeal here stems from the Utah District Court’s denial of Myriad’s motion for a preliminary injunction based upon its conclusion that the asserted claims are “likely drawn to ineligible subject matter.”  On appeal the Federal Circuit has now affirmed and taken a step further by holding on de novo review that none of the asserted claims are patent eligible.

DNA Primers: The asserted claims from the ‘282 and ‘492 patents are all directed to DNA primers used to bind the chromosomal section of the BRCA1 gene during PCR (the DNA-amplification process).  In reviewing these claims, the Federal Circuit found that the “primers before us are not distinguishable from the isolated DNA found patent-ineligible in Myriad and are not similar to the cDNA found to be patent-eligible.”

Now, although not particularly claimed, it appears that the primers are synthetically created through a lab process. In the appeal, the Federal Circuit rejected the importance of that distinction – holding that “it makes no difference that the identified gene sequences are synthetically replicated.”  Rather, the rule of law is that:

[N]either naturally occurring compositions of matter, nor synthetically created compositions that are structurally identical to the naturally occurring compositions, are patent eligible. . . .  A DNA structure with a function similar to that found in nature can only be patent eligible as a composition of matter if it has a unique structure, different from anything found in nature. . . . Primers do not have such a different structure and are patent ineligible.

The difference here from the cDNA patents that were allowed in Myriad is that(a) the cDNA is structurally different from naturally occurring DNA because the introns had been removed leaving exons only and (2) the cDNA is structurally different from naturally occurring exon-only mRNA because cDNA is a different substance. “To the extent that the exon-only sequence does not exist in nature, the lab technician “unquestionably creates something new when cDNA is made.”

Method of Screening: The asserted ‘441 patent claims are directed to a particular method of screening for BRCA1 mutation by comparing a patient’s gene sequence with a germline BRCA sequence. Both claims 7 and 8 depend from claim 1 that the Federal Circuit found invalid in its 2012 decision as “a patent-ineligible abstract idea of comparing BRCA sequences and determining the existence of alterations.”

Following the two-step analysis from Mayo and Alice, the Federal Circuit first determined that the asserted claims embody an abstract idea through the comparison steps.

Here, under our earlier decision, the comparisons described in the first paragraphs of claims 7 and 8 are directed to the patent-ineligible abstract idea of comparing BRCA sequences and determining the existence of alterations. The methods, directed to identification of alterations of the gene, require merely comparing the patient’s gene with the wild-type and identifying any differences that arise.

Going to the second part of the Alice/Mayo test, the court looked to the claims to find any “non-patent-ineligible elements” sufficient to “transform the nature of the claim into a patent-eligible application.”  Here, the claims require various physical transformations, including hybridizing the gene probe; amplification of the gene; and sequencing the gene.   However, according to the appellate panel, those transformations are insufficient – primarily because those steps “set forth well-understood, routine and conventional activity engaged in by scientists at the time of Myriad’s patent applications” and are the activities that a scientist would have relied upon to achieve the goals of the invention.

The second paragraphs of claims 7 and 8 do nothing more than spell out what practitioners already knew—how to compare gene sequences using routine, ordinary techniques. Nothing is added by identifying the techniques to be used in making the comparison because those comparison techniques were the well-understood, routine, and conventional techniques that a scientist would have thought of when instructed to compare two gene sequences.

With the claims invalid, Myriad has now lost the case.  In my view, an en banc reversal is highly unlikely.

Supreme Court to test its Spidey-Sense in Patent-Antitrust Case

Patent,

The Supreme Court has granted certiorari in the patent licensing case of Kimble v. Marvel Enterprises (13-720) with the following question:

Whether the Court should overrule Brulotte v. Thys Co., which held that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.”

The policy goal behind the 1964 Brulotte decision is to avoid the potential antitrust harm associated with an ongoing patent monopoly beyond the 20-year term.  However, antitrust law has generally moved away from this sort of per se rule – especially as to freedom-of-contract.

In this case, the patentee’s patent has expired, but the license agreement seemingly calls for ongoing payments even beyond expiration.  The Ninth Circuit held that, under Brulotte, Marvel is no longer required to pay royalties on its sales of the Spider-man toy.  The Solicitor General recommend that the Supreme Court not take the case — a move that I called “somewhat surprising” since the government had previously noted that Brulotte does not mesh well with contemporary antitrust practice.

With Brulotte on the chopping block, we can also expect that the holding in Lear v. Adkins, 395 U.S. 653 (1969). In that case, the court held that a contractual promise not to challenge a patent’s invalidity is unenforceable.