Tag Archives: Venue

Notes from the PPAC Meetings

  1. Global Dossier has now been released (November 2015).
  2. USPTO Collected over $3 billion in user fees in FY2015. That figure was below budget. Spending limit is around $3.5 billion, but is limited by revenue.  As a benchmark, in FY2010 USPTO collected $2.1 billion in revenue.
  3. USPTO is proposing increase in fees
    1. Ex parte prosecution: filing fee up $120 (filing+search+exam) to $1,720; Independent claims (more than three) up $40 to $460; RCE up $300 to $1,500 or $2,000 for 2nd+ RCE; late IDS – $300 after First Action; $600 after Notice of Allowance; Notice of Appeal – up $200 to $1,000; Appeal – up $500 to $2,500; However, no proposed increase in maintenance fees or extension-of-time fees.
    2. Post Grant: Inter partes review up $7,500 to $30,500 (request + institution fee); Decrease in fee – reduced fee for reexaminations with <45 pages.
  4. Median first action pendency is now 17-months.
  5. Design patent filings continue to steadily rise – as does the backlog of unexamined design patent applications.
  6. USPTO Ex Parte Appeals Backlog Continues to Decline – down to 21,000 pending appeals.

En Banc: Should there be a Supplier Exception to the On Sale Bar?

The Federal Circuit has granted a petition for en banc rehearing in The Medicines Co. v. Hospira and requested briefing on the following questions:

(a) Do the circumstances presented here constitute a commercial sale under the on-sale bar of 35 U.S.C. § 102(b)? (i) Was there a sale for the purposes of § 102(b) despite the absence of a transfer of title? (ii) Was the sale commercial in nature for the purposes of § 102(b) or an experimental use?

(b) Should this court overrule or revise the principle in Special Devices, Inc. v. OEA, Inc., 270 F.3d 1353 (Fed. Cir. 2001), that there is no “supplier exception” to the on-sale bar of 35 U.S.C. § 102(b)?

En banc Order.

In the original opinion, penned by Judge Hughes and joined by Judges Dyk and Wallach, the Federal Circuit reversed a district validity determination — holding on appeal that the “district court clearly erred in finding that the bivalirudin batches prepared by Ben Venue Laboratories before the critical date were not sold to The Medicines Company and were prepared primarily for an experimental purpose.”  This is one of a series of cases where the patent has been invalidated based upon a private supplier arrangement that counts as a “sale” or being “on sale” even though there is no public notice of the sales activities.

Although the “on sale” language in Section 102  is identical post-AIA, many believe that the structure of the first-to-file provisions of the AIA should be interpreted to narrow the definition of the term to only include sales and offers to sale that are themselves available to the public.  In that situation, the sale that seemingly occurred here would likely not be seen a prior art.

There are a number of ways that large companies benefit from the patent system (apart from having more money).  In a addition, the laws negate a substantial amount of what would otherwise be prior art if it was created within the company.  Larger companies have more activity going on within their company and thus benefit from this network effect.  In this case, the patentee went outside its company to order supplies for further testing and ran afoul — there would have been no problem if it had first purchased the supplier and then obtained the supplies.  The court is considering a supplier-exception that would eliminate this as prior art — that probably works post-AIA, but not pre-AIA.

 

Support for Mandamus Action to Limit Patent Forum Shopping

Last week I discussed the TC Heartland mandamus petition here and here. Two amicus briefs have now been filed in support of the petition.

The basic issue is whether the particular limits on patent venue spelled out in 28 U.S.C. 1400(b) should be given effect in the face of broader venue allowances in the more generalized Section 1391(c).

1400(b) reads:

(b) Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.

 

For the past several decades, the court has applied the broader statute 1391(c), and permitted venue so long as the district court has personal jurisdiction over the defendant.  That application has opened the door to venue in E.D. Texas even when the defendant has no place of business there.

John Vandenberg’s team at Klarquist has filed a brief on behalf 24 companies many of which are oft-sued in the E.D. Texas, including Asus, Google, eBay, LinkedIn, NewEgg, SAP, SAS, etc.

The analysis … must start by asking whether this special patent venue statute, standing alone, limits a domestic corporation’s residence to its state of incorporation. The answer is yes: “where the defendant resides” in § 1400(b) “mean[s] the state of incorporation only” for a corporation. (quoting the Supreme Court Fourco decision). . . .

The analysis turns next to the current general venue statute. The question is whether it supersedes this restrictive definition of domestic corporation residence in the special patent venue statute. The answer is that it does not [because the]  current general venue statute expressly subordinates itself to the special venue provisions.

On the policy side, the Amici first highlight the recent John Oliver show ridiculing the E.D. of Texas patent litigation.  The amici then make the argument that forum shopping should not be allowed because it “allows patent owners to choose the forum least likely in our country to allow a speedy or low-cost determination of invalidity or non-infringement. . . . This does not merely disadvantage individual defendants. It undermines the public policy favoring strict scrutiny of issued patents. . . . [H]aving 40% of patent suits in a single district not only burdens individual defendants, it also defeats core public policies of our patent system.”

The Electronic Frontier Foundation (EFF) and Public Knowledge also filed a joint brief in support of mandamus. EFF highlights Judge Moore’s earlier work (then as Professor Moore) where she wrote that extensive forum shopping “conjures negative images of a manipulable legal system in which justice is not imparted fairly or predictably.” Kimberly A. Moore, Forum Shopping in Patent Cases: Does Geographic Choice Affect Innovation?, 79 N.C. L. Rev. 889 (2001).  The brief also highlights a new work by Daniel Klerman & Greg Reilly entitled Forum Selling that argues “judges in the Eastern District have consciously sought to attract patentees and have done so by departing from mainstream doctrine in a variety of procedural areas in a pro-patentee (pro-plaintiff) way.” Neither Moore nor Klerman/Reilly make the 1400(b) argument, but both suggest that forum shopping – when taken too far – is a problem.

Documents:

Kraft’s brief in opposition is due November 9.

Choosing a District for Patent Infringement Filing and Giving Meaning to Section 1400(b)

by Dennis Crouch

Back in 2008, I remember speaking with Judge Rader about the court’s recent jurisprudence.  My thought was that In re TS Tech (Fed. Cir. 2008) was the most important of the year thus far. In that case, the Federal Circuit started the trend of mandamus actions for venue change that had an important (although not conclusive) impact on venue in patent cases.  Following TS Tech, patent plaintiffs learned ways to shape their behavior to better ensure venue by, for example, incorporating in Texas and creating a headquarters in Marshall.  At that time, we also saw a rise in patent infringement filings in Delaware – the corporate home for many companies, plaintiffs and defendants alike.

The new pending mandamus petition of  In re TC Heartland (Fed. Cir. 2015) has the potential of even more dramatically shaking-up patent litigation filing strategy and limiting the extensive forum shopping available under current Federal Circuit doctrine.   In particular, the E.D. Texas filings might be brought-back into the norm.

The Federal Circuit has taken its first step toward hearing the mandamus action by ordering Kraft to provide a response to Heartland’s petition.  The per curiam order requires Kraft to respond within seven days. 10-26-15Order.

In the case, Heartland proposes a reinterpretation of the more powerful doctrine of jurisdiction rather than the venue requirements of TS Tech.

Under Heartland’s proposed statutory interpretation, a patent case could only be filed in districts (1) where the defendant resides or (2) where the defendant has both committed acts of infringement and has a regular and established place of business. This stems directly from the language of 28 U.S.C. 1400(b).

Further, in cases where a court’s personal jurisdiction over the defendant is based on acts of infringement in the forum (specific jurisdiction rather than general jurisdiction), Heartland argues that the courts don’t have jurisdiction to adjudge the alleged out-of-state infringement.

Susan Decker provides more perspective in Bloomberg.

 

 

Where does a Defendant “Reside” for Jurisdictional Purposes in Patent Infringement Cases?

By Dennis Crouch

In re TC Heartland LLC (on mandamus to the Fed Cir. 2015) (read-it: Heartland Mand)

An interesting mandamus action was recently filed by the Prof John Duffy and Jim Dabney (both now with Hughes Hubbard) raising the following: Whether 28 U.S.C. § 1400(b) precludes the district court from hearing this action.

Section 1400(b) is the jurisdiction statute for patent cases indicates two mechanisms for jurisdiction: (1) the district where the defendant resides or (2) the district where the defendant infringed and has a regular place of business.

Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.

28 U.S.C. § 1400(b). Section 1391(c) further provides for a broad definition of residency, broadly including both (1) the district of domicile and (2) any district where the defendant is subject to the court’s personal jurisdiction on the issue of the case.

The question ultimately raised by the case is whether the broad residency definition of §1391(c) applies to modify and expand the “resides” language of 1400(b).

The history goes back-and-forth: In Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957), the Supreme Court ruled that “28 U.S.C. § 1400(b) is the sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. § 1391(c).” Then in 1988, §1391(c) was amended to expand the definition of residency and also to include a statement that its residency definition was “for purposes of venue under this chapter.” Subsequently, the Federal Circuit in VE Holdings held that the 1988 amendment overruled Fourco and that the expanded residency definition §1391(c) now applies in patent cases since §1400 (the patent jurisdiction provision) is in the same chapter as §1391. In 2011, Congress again changed its statute – this time repealing the “for purposes of venue under this chapter” and instead added in that the statute applies in all civil cases “except as otherwise provided by law.”

The petition argues that VM Holdings was wrongly decided in the first place and basically led to the reality known as the Eastern District of Texas. In the alternative, the petition also argues that the 2011 amendment overruled VM Holdings.

VE Holding has produced enormous venue shopping opportunities in patent infringement actions to the point where, in the most recent year, one district (E.D. Tex.) has 50% more patent filings than the next most popular district (D. Del.) and more than four times as many filings as the district with the third most patent case filings. . . . “The abuses engendered by this extensive venue,” Stonite Products Co. v. Melvin Lloyd Co., 315 US 561 (1942), are precisely the sort of abuses that were prevented by the Supreme Court’s decisions on § 1400(b) and that would be prevented once again with a return to those controlling precedents.

What isn’t clear to me is whether a mandamus panel has authority to overrule the prior precedent. Of course, an en banc panel will have that authority and in their petition Duffy & Dabney particularly request en banc consideration.

Personal Jurisdiction: The petitioner here also argues an additional personal jurisdiction question that begins with the standard notion that each act of infringement is a separate act of infringement. Their argument then is that the court only has specific personal jurisdiction with reference to allegedly infringing Delaware sales and not the sales in other jurisdictions. The usual practice in patent cases is that once the court has specific personal jurisdiction based upon one alleged act of infringement directed to the state that the court can then adjudge infringement allegations arising nationwide. Of course, that result contravenes the usual rule that “specific personal jurisdiction is limited to claims that arise from “an ‘activity or an occurrence that takes place in the forum state.'” Walden (2014). In its brief, the petitioner does a fine job of distinguishing Keeton v. Hustler (1984) that allowed for nationwide damages for defamation. The difference from patent law is that the substantive single publication rule for defamation means that the nationwide damages all stemmed from the same tortious act that led to the specific personal jurisdiction in NH; in the patent context sales in one state that might create personal jurisdiction in that state are separate acts of infringement than sales in another state. Thus, the petitioner explains: “The district court here plainly lacks personal jurisdiction to adjudicate the merits of claims arising from non-Delaware transactions or events.”

At first glance, you might think that petitioner’s rule would lead to a patentee having to sue a defendant separately in each state across the nation. That would only be true if there was no location with general jurisdiction over the defendant – nationwide claims would still be available in any state with general jurisdiction over a defendant. In addition, the availability of multi-district litigation would streamline cases where multiple parallel lawsuits are filed.

= = = = = =

about_energy_black_cherry_bottle[1]The case below is Kraft Foods v. TC Heartland (D.Del.) and alleges infringement of three patents covering the packaging and contents of a flavored liquid beverage concentrate such as Kraft’s MiO water enhancer. U.S. Patent Nos. 8,293,299; 8,511,472; and 8,603,557.  TC Heartland makes its competing “Splash” water enhancers from its Carmel, Indiana HQ.

= = = = = =

Additional Docs:

 

Federal Circuit: Damages Expert Credibility is a Question for the Jury

Summit 6 v. Samsung (Fed. Cir. 2015)

A jury sided with the patentee – finding that Summit 6 had proven infringement and that Samsung had failed to prove invalidity of U.S. Patent No. 7,765,482 (claims 38, 40, 44-46, and 49).  The award – $15 million in damages.  On appeal, the Federal Circuit affirms that judgment.  Here, I’ll focus on the damages issues.

 

Experts: In a Daubert appeal, Samsung asked the Federal Circuit to rule that Summit 6’s damages expert’s testimony was inadmissible.  The general rules for expert testimony are found in Fed. R. Evid. 702 and allows testimony from a qualified expert relating to:

(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.

Although a court may exclude testimony based upon unreliable principles or methods, once that threshold has been passed the question of expert credibility goes to the fact finder and may be uncovered by “[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.” Daubert.

Here, the damages expert (Paul Benoit) relied upon an unpublished methodology based upon the premise “that a feature’s use is proportional to its value.”   On appeal, the Federal Circuit indicated that this type of “analytical method” for calculating damages was sufficient to pass as expert testimony and be relied upon by a jury.

[W]here the methodology is reasonable and its data or evidence are sufficiently tied to the facts of the case, the gatekeeping role of the court is satisfied, and the inquiry on the correctness of the methodology and of the results produced thereunder belongs to the factfinder.

The particular invention at issue involves pre-processing of an image on a mobile device before uploading it to a server. In estimating a reasonably royalty, Benoit estimated that 65% of phone users regularly use the cameras to take photos; 77% of those share the photos; and 41% of those share by MMS in a way that infringes the patent. Taking the product of these percentages, Benoit found that 20% of the relevant users regularly infringe.  Taking a step back, Benoit estimated Samsung’s camera-related revenue as $14.15 per phone (calculated based upon proportional production costs) and then took the leap of concluding then that 20% of the $14.15 per phone ($2.93) is attributable to the infringement.  Thinking proportionally again, Benoit then estimated that $0.56 of every $2.93 in revenue was profit for Samsung and that – based upon a Nash Bargaining Solution, that a reasonable royalty would split that profit – or $.28 per phone in license fees. Since Samsung has distributed about 100,000,000 phones, that would add up to $29 million.

Reviewing that methodology, the Federal Circuit found:

Mr. Benoit’s damages methodology was based on reliable principles and was sufficiently tied to the facts of the case. Mr. Benoit first estimated Samsung’s economic benefit from infringement by specifically focusing on the infringing features and by valuing those infringing features based on Samsung’s own data regarding use and on its own financial reports outlining production costs and profits. Mr. Benoit then envisioned a hypothetical negotiation in which the parties would have bargained for respective shares of the economic benefit, given their respective bargaining positions and alternatives to a negotiated agreement. Mr. Benoit’s methodology was structurally sound and tied to the facts of the case.

That Mr. Benoit’s methodology was not peer-reviewed or published does not necessitate its exclusion. We recognize that the fact-based nature of Mr. Benoit’s damages testimony made it impractical, if not impossible, to subject the methods to peer review and publication. . . .  Here, the district court did not abuse its discretion in determining that Mr. Benoit’s methodology, involving the correlation of use with value, was not unreliable.

Verdict affirmed.

 

Guest Post: Why the (Previously) Improving Economy Likely (Also) Reduced Patent Litigation Rates

Guest Post by Ted Sichelman, Professor of Law and Director of the Technology Entrepreneurship and Intellectual Property Clinic and Center for Intellectual Property Law & Markets at the University of San Diego School of Law, and Shawn Miller, Lecturer in Law and Teaching Fellow in Law, Science & Technology at Stanford Law School

As Patently-O has described in detail (e.g., here and here), patent litigation rates have been in flux over the last several years. First, in 2010, rates nominally went up because of false marking suits. Then, in 2011, following passage of the America Invents Act (AIA), patent litigation rates appeared to increase (and the media made much ado over this). Yet, the only thing that changed immediately after the AIA was how we counted patent litigation numbers because of new joinder rules. Indeed, the AIA’s joinder rules actually lowered total defendant counts a bit. Next came inter partes review (IPR) and covered business method (CBM) review, which appear to have substantially decreased litigation rates in 2013 and 2014. Then came Alice Corp. v. CLS Bank and its progeny, which some have claimed decreased litigation rates throughout 2014. And now rates seem to be back up in 2015—why, nobody is sure.

To further understand the drivers of patent litigation, Alan Marco (Chief Economist at the USPTO) and the two of us recently conducted the first rigorous study of the effects of the economy as a whole (the “macroeconomy”) on patent litigation rates over the period 1970-2009 (we stopped at 2009 to avoid the counting mess I just described). The study will be published this month in the Journal of Empirical Legal Studies (a draft is available here).

As background, we examined changes in the rates of total litigation, litigation per issued patent, and litigation per in-force patent. To do so, we used a new USPTO dataset that provides the most accurate numbers on total in-force patents by year gathered to date. Figure 1 below shows the number of in-force patents between 1971 and 2009 (the vertical bars represent periods of recession).

Figure 1

Figure 1. U.S. In-Force Patents (1971-2009) [from USPTO data].

Indeed, although many have noted that the litigation rates per issued patent have been fairly stable, Figure 2 below shows that the litigation rates per in-force patent have risen quite dramatically since the early- to mid-1990s (at least from 1970s rates—Ron Katznelson has argued that rates per in-force patent in the 1920s to the mid-1930s are fairly comparable to the recent rates, at least through the 2000s).

Figure 2

Figure 2. U.S. Patent Litigation Per In-Force Patent (1971-2009)

(Total Patent Litigation in Gold (with annual filings on left y-axis) and Litigation Per In-Force Patent in Blue (with annual values on right y-axis)).

We then performed numerous time-series regressions against important macroeconomic variables like GDP, R & D spending, interest rates, and related factors, controlling for in-force patents and other key variables. Our major findings (over the last 20-25 years) are as follows:

  • In economic upswings (i.e., increasing productivity, low interest rates, low economy-wide financial risk), patent litigation rates generally fall.
  • In recessions, whether rates rise or fall depends on the availability of credit.
    • When credit is freely available in a downturn, overall patent litigation rates generally rise.
    • However, when credit is scarce (like in the most recent recession), overall patent litigation rates generally fall.

We explain the first finding on a “substitution” theory—namely, when selling products and services is highly profitable, companies and investors are less concerned about earning revenue from patent litigation. We speculate that our second finding is driven by the increasing reliance by plaintiffs on external funding. Indeed, the availability of credit has only played a significant role in patent litigation rates since roughly the mid-1990s, when licensing-driven litigation began to rise—first by practicing entities such as IBM and Texas Instruments and, later, by non-practicing entities (NPEs).

Over the last five years, the mean U.S. real GDP growth rate has been about 2-3% per year. Ignoring other factors, and assuming our model applies on a going forward basis since 2009, this increase in productivity has very roughly amounted to a 6-9% decrease in annual patent litigation counts over the same period. In general, it is likely that a sizeable portion of the decrease in patent litigation rates over the last several years has been not merely due to the rise of IPRs and CBMs, and the issuance of Alice Corp. v. CLS Bank, but also to the economy as a whole. So the next time the economy worsens, if credit remains relatively available, all other factors equal, it is likely that patent litigation rates will rise significantly—not by a huge amount, but enough to notice. Whether the current increase in patent litigation is somehow related to a declining macroeconomy, only time will tell.

Please note that the views expressed herein solely express our personal views and do not express the views of the U.S. Patent & Trademark Office.

 

Federal Circuit Gives PTO “OK” to Treat Hyatt as a Special Case

Gilbert Hyatt v. Michelle Lee (Fed. Cir. 2015)

Hyatt is a highly successful patentee with more than 75 issued patents and hundreds of millions of dollars in licensing revenue. He also has over 400 patent applications pending before the USPTO that were all filed more than 20-years ago. Hyatt’s applications represent 80% of the applications still-pending that were originally filed prior to the June 1995 patent term transition. Because these old patent applications were filed under the old regime, if they ever issue they will be given a 17-year patent term extending from the issue date (barring a terminal disclaimer or prosecution laches finding). Many of these applications claim priority to much earlier filed applications – some claiming priority back in to the 1970s and most having a complex set of continuation and continuation-in-part applications.

According to the USPTO, these 400 pending applications have – on average – 300 claims each – resulting in about 120,000 pending claims – roughly the equivalent of 6,000 ordinary-sized applications.

I expect that many of Hyatt’s patent claims would cover chip and display technology that is now ubiquitous. If valid and enforceable then we’re talking billions of dollars in licensing fees. If the USPTO has anything to do about it, that result is not coming anytime soon.

Over the years, the USPTO has developed a number of special procedures for Hyatt applications. In 2013, the USPTO began issuing requirements that Hyatt limit each patent family to <600 claims absent a showing of necessity and also identify the earliest priority date for each chosen claim (along with links to the supporting disclosure).

The USPTO also indicated that it would publicize the family linkage of Hyatt’s (otherwise secret) applications. In particular, the disclosure would occur by placing the requirements in the file histories of all of Hyatt’s pending applications, some of which are public. Apparently, this requirements document includes a number of examples of how Hyatt applications overlap claim scope – relying upon specific claim texts of Hyatt’s otherwise secret applications.

In response, Hyatt filed a complaint in the E.D. Virginia asking the district court to enjoin the USPTO from disclosing information in violation of 35 U.S.C. 122(a) (“applications for patents shall be kept in confidence by the Patent and Trademark Office and no information concerning the same given without authority of the applicant or owner unless necessary to carry out the provisions of an Act of Congress or in such special circumstances as may be determined by the Director”). However, the district court dismissed the case for lack of jurisdiction and – in the alternative – held that the extraordinary nature of Hyatt’s situation created “special circumstances” that allowed for the publication.

Although the statute provides the PTO with seeming authority to determining when to disclose the confidential information (“special circumstances as determined by the director”), the Federal Circuit on appeal here found that the PTO’s power is both “narrow and reviewable.” In particular the appellate panel found that the PTO must “determine that special circumstances exist” and those special circumstances must be sufficient and particular enough to “justify the specific content to be disclosed.” However, because of the seeming discretionary nature of the statute, the Federal Circuit determined that it should review the PTO’s determination of these factors with deference and only overturn the PTO’s decision upon finding of an abuse of discretion.

In determining that the PTO had then acted within these requirements, the panel first held that the requirements were proper – given Hyatt’s unique and special status among patent applicants. The court also found that the disclosure of confidential claim scope proper.

In light of the nature of Mr. Hyatt’s applications, longstanding PTO rules justify the issuance of the Requirements. 37 C.F.R. § 1.75(b) provides that, in a patent application, “[m]ore than one claim may be presented provided they differ substantially from each other and are not unduly multiplied” The PTO issued the Requirements to ensure that Mr. Hyatt’s applications complied with § 1.75(b). Given the extraordinary number and duplicative nature of Mr. Hyatt’s various pending applications, all drawn from the same 12 specifications, it was reasonable for the PTO to be concerned that the claims did not “differ substantially from each other,” and that some claims were “unduly multiplied.” § 1.75(b). In fact, in the Requirements the PTO demonstrates that across these applications, Mr. Hyatt has in numerous cases filed identical or nearly identical claims. This sort of redundant, repetitive claiming is inconsistent with § 1.75(b).

These special circumstances, which justify issuing the Requirements, also justify the disclosure of the confidential information contained in them. . . .

We hold that the Director did not abuse her discretion when she found that the “special circumstances” exception justified the otherwise-prohibited disclosure of the Requirements

It is fairly amazing to look at the effort going-in on both sides in Hyatt’s patent applications. One that is public and available in PAIR Application No. 05/849,812 that claims priority back to 1970 through a series of 20 continuations-in-part.

Maintenance Fees 2015

By Dennis Crouch

A substantial percentage of the USPTO budget arrives in the form of maintenance fee payments. This is “easy money” for the USPTO because the Office has already done the work of examination. A patent’s term runs 20-years from the effective filing date, not counting provisional or foreign national priority filing and with the addition of any patent term adjustment. They typical result is a term of 17 years post-issuance, give or take. During that time, a patent applicant must continue to pay maintenance fees at regular intervals: due 3 ½, 7 ½, and 11 ½ years from issuance (with an additional six-month grace-period added on).

The chart below shows the percentage of patents whose maintenance fees have been paid at each of the three stages. You’ll see that the vast majority of applicants pay the first maintenance fee (currently set at $1,600 for large entities); More patents drop out as the second maintenance fee is due ($3,600), and fewer than half of the cases see the third maintenance fee paid ($7,400). I expect that a number of factors drive the apparent trends in maintenance fee payments, including the ever-rising cost, the perceived value of future patent right, patent term remaining, general economic outlook, and current access to funds, for example.

The current fees were put into place in March 2013. It is not surprising that the increased price resulted in the diminished number demanded as shown in the chart. Importantly, however, the drop in maintenance fee payments was slight in comparison to the size of fee increase (3rd Fee increased by 50%).

In addition to the revenue generated, a number of folks (often non-patent-holders) see maintenance fees as a costly-screen configured to weed-out relatively worthless patents so as to ease any freedom-to-operate search.

Guest Post: Technical Detail in Senate PATENT Act Could Have Major Impact in Eastern District of Texas Patent Litigation

Guest Post by Christian E. Mammen.  Dr. Mammen is a litigation partner in the San Francisco office of Hogan Lovells.

The recently-introduced PATENT Act (S. 1137) tracks, in substantial part, many of the reforms proposed in the House’s Innovation Act (H.R. 9). However, the PATENT Act differs in several ways from the Innovation Act. Many of the differences between the two bills have been discussed elsewhere at length.   This article focuses on just one feature of the PATENT Act, which has some potentially far-reaching implications for patent litigation in the Eastern District of Texas, the nation’s most popular patent litigation forum.[1]

Discovery is one of the most costly and time-consuming phases of patent litigation. In patent litigation brought by NPEs, the burdens of discovery are asymmetrical, with the burden falling more heavily on the accused infringer. Particularly where the NPE-plaintiff acquired the patent on the secondary market, it will have few or no documents to produce relating to the invention process, patent-related products, or the like. The cost of discovery, which falls disproportionately on accused infringers, can motivate those accused infringers to settle patent litigation for valuations based on the cost of avoiding further litigation, rather than on the value of the patented technology.

To address this issue, the Innovation Act initially proposed that discovery be stayed until the court issues a claim construction ruling. However, this proposal was in tension with widely accepted practices concerning discovery prior to claim construction. For example, a 2008 Federal Judicial Center report indicated that most courts surveyed held claim construction after at least some fact discovery, and Berkeley Law Professor Peter Menell’s Patent Case Management Judicial Guide (2d ed. 2012), explains, “it is only by knowing the details of the accused product and the relevant prior art that the parties are able to determine which claim terms need construction.” Further, many courts have now adopted Patent Local Rules that require early production of infringement contentions and related documents, and invalidity contentions and related documents, and it is not clear whether those disclosures would also be stayed under the Innovation Act.[2]

Presumably in order to balance these competing concerns, the PATENT Act also includes the idea of a discovery stay in early phases of patent cases, but changes the triggering event. Rather than staying discovery until claim construction, the PATENT Act would stay discovery only while any one of three pre-answer motions is pending: (1) motions to dismiss, (2) motions to transfer venue, or (3) motions to sever accused infringers.

At first glance, this proposed scheme is a bit puzzling, since all three types of motions are typically filed – and resolved – early in the case, generally before discovery even starts.[3] Under the Federal Rules of Civil Procedure, discovery is stayed until the parties have held an initial conference concerning case management under Fed. R. Civ. P. 26(f). The Rule 26(f) conference generally happens about 3-4 months after the case is filed.

However, on closer examination, the PATENT Act’s proposed discovery stay has the potential to disrupt the status quo in one important circumstance. While there is a general preference that motions to transfer venue be brought as quickly as possible (generally before the answer is filed—indeed, the PATENT Act would only stay discovery when such motions are “filed prior to the first responsive pleading”), some courts delay resolution of these motions, and the PATENT Act’s stay of discovery would remain in place until the court rules on the motion. Furthermore, if the motion to transfer venue were filed sequentially after a motion to dismiss—a not implausible scenario under plausible readings of the PATENT Act—the filing date of the venue transfer motion could approach the date of the Rule 26(f) conference, thus extending the discovery stay well into the case’s discovery period. And if the court delays ruling on the motion, the commencement of discovery could be significantly delayed as well.

Famously, the Eastern District of Texas has gained a reputation for deferring rulings on venue transfer motions until the case is substantially advanced. As the Federal Circuit observed in one recent case challenging the Eastern District of Texas’ ruling on a transfer motion, “This case is a prime example of the importance of addressing motions to transfer at the outset of litigation … Congress’ intent to prevent the waste of time, energy and money and to protect litigants, witnesses and the public against unnecessary inconvenience and expense may be thwarted where, as here, defendants must partake in years of litigation prior to a determination on a transfer motion.” In re EMC Corp., 501 Fed. Appx. 973, 975-976 (Fed. Cir. 2013) (citations omitted).

Data recently obtained from Lex Machina indicates that, on average, when motions to transfer cases out of the Eastern District of Texas are granted, the ruling comes in 143 days, or about 4½ months. But when such motions are denied (meaning the case remains in the Eastern District of Texas), the ruling languishes for an average of 225 days, or 7½ months. According to Lex Machina, there were 33 cases in the Eastern District of Texas between January 1, 2010 and May 1, 2015 in which a venue transfer motion was pending for over a year before being ruled on – and only five of those longest-pending motions were ultimately granted in whole or in part. [4]

Particularly for Eastern District of Texas cases in which transfer is denied, the PATENT Act’s proposed discovery stay would prevent the start of discovery for up to 7-10 months from filing. This could have several effects. Without any other changes to the status quo, it could significantly clog the docket with discovery-stayed cases. Additionally, it will provide defendants with a strong incentive to file venue transfer motions, probably as late as possible before the start of discovery, in order to maximize the discovery-stay effect. Alternatively, the court could respond by substantially speeding up its rulings on venue transfer motions.

It is difficult at this time to say whether the drafters of the PATENT Act intended this particular scenario. But if they did, it is very clever indeed, and it will be interesting to watch it play out.

UPDATE: On June 10, Rep. Goodlatte introduced a Manager’s Amendment to the Innovation Act that scales back its proposed discovery stay. Like the PATENT Act, it would stay discovery during the pendency of pre-answer motions[5] to transfer venue or to sever claims or dismiss parties (but it does not provide for a stay pending motions to dismiss).[6] Additionally, the Manager’s Amendment would require the court to rule on any such motion before the court issues a case management order under Federal Rule of Civil Procedure 16. In view of the deadlines specified in the Federal Rules of Civil Procedure, the discovery stay in the Manager’s Amendment would normally only last for a maximum of three to four weeks (from the Rule 26(f) conference until the case management order issues). But it would also (albeit in a roundabout way) require courts to provide timely rulings on venue motions.

[1] In 2014, an estimated 32% of all patent infringement cases, and 48% of all NPE patent cases, were filed in the Eastern District of Texas.

[2] The Innovation Act is silent on whether early Patent Local Rule disclosures would be blocked by such a stay. However, the PATENT Act explicitly exempts from its proposed discovery stay early exchanges of infringement and invalidity contentions (whether by local rule or interrogatory).

[3] “Motions to dismiss” presumably refers primarily to pre-answer motions brought pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, including motions based on lack of jurisdiction, failure to state a claim, improper venue or improper service. Such motions must be brought within 21 days of service of the summons and complaint, and are frequently resolved substantially before the Rule 26(f) conference. Actually, though, “motion to dismiss” is ambiguous, and could also refer to other procedures, such as a motion to dismiss brought by a plaintiff pursuant to Rule 41(a)(2). It is not immediately clear, however, what purpose would be served by staying discovery pending a plaintiff’s Rule 41 motion to dismiss.

“Motions to sever accused infringers” evidently refers to motions to sever a claim or drop a party for misjoinder under Rule 21. While such motions should ordinarily be brought as soon as practicable, on its face, Rule 21 motion permits the court to provide such remedies “at any time, on just terms.” Although not fully analyzed here, motions to sever could potentially provide leeway for the same kind of procedural gamesmanship described in this article in relation to venue transfer motions.

[4] Complete data on file with the author.

[5] During the committee markup on June 11, the committee approved a further amendment, permitting stays to be triggered by such motions if they are filed “within 90 days of service of the complaint” rather than “before a responsive pleading is due.”

[6] The Manager’s Amendment remains silent on the status of early disclosures under Patent Local Rules.

Commil v. Cisco: Belief-of-Invalidity not a Defense to Inducement

by Dennis Crouch

In Commil v. Cisco (Supreme Court 2015), the Supreme Court has held:

A defendant’s “belief” that a patent is invalid does not serve as a defense to charges of inducing infringement of the patent.  “The scienter element for induced infringement concerns infringement; that is a different issue than validity.”  Of course, if the patent is proven invalid then no liability attaches.  Thus, the defense here had asked for a holding that a good-faith-but-incorrect-belief of invalidity serve as a defense.

In what appears to me again as dicta (though powerful dicta), the court also indicated its agreement with the Federal Circuit that inducement requires proof that the accused both (1) knows of the patent-in-suit and (2) knows that the actions induced constitute patent infringement.  Although the court initially wrote that this issue “is not in question here,” it then went-on to explain how Global-Tech should be read to require knowledge-of-infringement as a prerequisite to induced infringement liability.  “Global-Tech requires . . . proof the defendant knew the acts were infringing. And the Court’s opinion was clear in rejecting any lesser mental state as the standard.”

The court had been encouraged to allow belief-of-invalidity as a defense in order to help stifle “abusive patent assertion.”  In a several paragraph statement of dicta, the court explained that it understands the potential problem of frivolous actions, but that district courts are have the tools of addressing the problem. One tool, for instance, is that of sanctioning attorneys through Rule 11 and awarding fees under Section 285. “These safeguards, combined with the avenues that accused inducers have to obtain rulings on the validity of patents, militate in favor of maintaining the separation expressed throughout the Patent Act between infringement and validity.”

Read the Opinion.

All members of the court agreed with notion that inducement does require knowledge of the infringing nature of the accused acts.  Justice Scalia joined by Chief Justice Roberts argued in dissent that a would-be defendant who (in good faith but wrongly) figures out that a patent is invalid (though without actually invalidating the patent) should be free to act without concerns regarding inducement.  Interesting, the pair note that the majority opinion “increases the in terrorem power of patent trolls.”

= = = = =

This is a split decision for patentees.  On the one hand, it pushes away an entire set of defenses to inducement. But, on the other hand, the court solidifies a high wall by requiring proof that an accused inducer have known that the induced acts would constitute infringement of the asserted patent claims.  In my view, this requires at least a limitation-by-limitation claim chart or an admission.

Federal Circuit Finds Scope of Non-Amended Reissue Claims Improperly Broadened

by Dennis Crouch

ArcelorMittal v. AK Steel (Fed. Cir. 2015)

This case provides an important discussion of the “law of the case” doctrine and “mandate rule” as they apply to ongoing parallel patent-office administrative proceedings and in-court infringement proceedings. In particular, the appellate panel holds that the district court is bound by a prior Fed.Cir. claim construction in the same case – despite intervening decisions by the USPTO that the Fed.Cir. construction was too narrow.

The case is also important because of its finding that a claim whose scope is expanded during reissue based upon prosecution history (rather than amendment) will be seen as broadened – and thus may be invalid if the broadening misses the two-year deadline.

= = = = =

Here, the patentee (ArcelorMittal) lost its first round of infringement litigation based upon a narrow claim construction of the claimed steel sheet having a “very high mechanical resistance.”  Meanwhile, the patentee filed a reissue application with the USPTO that added a set of new dependent claims, including one that would seemingly expand the scope of the previously defined term.  In particular, the Federal Circuit originally ruled that the “very high mechanical resistance” is defined as having a resistance >1500 MPa, but the reissue application added a new dependent claim stating that the resistance is “in excess of 1000 MPa.”  That amendment seems to have implicitly increased the scope of claim 1 without actually amending any of the language in claim 1.  As the court writes:

The only relevant change is the addition of a dependent claim which has the practical effect of expanding the scope of claim 1 to cover claim scope expressly rejected by a previous claim construction ruling.

With the original litigation was still pending in district court, the patentee added the Reissued patent to the infringement complaint.  Siding with the defendant, the district court found that the broadened scope was improper because the Reissue application had been filed more than two years after the original patent issuance. On appeal, the Federal Circuit has affirmed, finding that – at least for this case – that the reissue claims are invalid. Here is the court’s logic:

The law-of-the-case doctrine “posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.” Banks v. U.S., 741 F.3d 1268, 1276 (Fed. Cir. 2014) (‘an inferior court has no power or authority to deviate from the mandate issued by an appellate court.’). Under the mandate rule and the broader law-of-the-case doctrine, a court may only deviate from a decision in a prior appeal if “extraordinary circumstances” exist. . . .

The successful prosecution of the [reissue] patent is not “new evidence” sufficient to trigger the extraordinary circumstances exception to the mandate rule and the law-of-the-case doctrine. Permitting a reissue patent to disturb a previous claim construction of the original claims would turn the [broadening] analysis under 35 U.S.C. § 251 on its head. . . . If the reissue claim itself could be used to redefine the scope of the original claim, this comparison would be meaningless.

Thus, the court found that the proper analysis for broadening reissue is whether the scope of claims in the reissued patent (as construed now) are broader than those same claims as found in the original patent (as previously construed).  I should note that the court did not particularly address the fact that the broadened claim was not amended. However, this practical approach to scope is in line with the Court’s prior decision in Marine Polymer Tech. v. Hemcon, Inc. (Fed. Cir. 2011) that created intervening rights (i.e., no past infringement) based upon a narrowed construction during reexamination.  [Update] Of course, that decision was reversed by the court sitting en banc.

= = = = =

The law-of-the-case doctrine was not necessary here because the court also found that, when considering whether scope was improperly broadenend, the reissue’s prosecution cannot impact the scope of the original claims.

Going forward, there will be substantial pressure on law-of-the-case doctrine; the mandate rule; and the final judgment rule in managing the new multi-venue reality of patent enforcement/challenge.

An important question not addressed here for reissue applications is whether the PTO erred allowing the reissue claims to issue in their non-amended but broadened form? Was the PTO also bound by the prior Federal Circuit judgment regarding claim construction? What would have happened if the reissue was asserted in a second lawsuit or against a different party? …

The PATENT Act of 2015

Earlier today, Senator Grassley (R-Iowa) introduced the bipartisan Protecting American Talent and Entrepreneurship Act of 2015 (PATENT) Act.  The PATENT Act is a revised version of prior proposed legislation that addresses some of the most severe criticisms of those proposals.  It’s also well situated to move forward, as it’s supported by leaders from both parties.  From the bill’s summarv (Sec. 1 is the title and table of contents; Sec. 2 are definitions; if the formatting is messed up, click the link for the original source):

SEC. 3. PLEADING AND EARLY DISCLOSURE REQUIREMENTS: Form 18 is
eliminated. Plaintiffs must identify each patent and claim allegedly infringed,
which products or processes are infringing, and describe the alleged infringement.
Allows plaintiffs to describe information in general terms if it is not accessible to
them. Clarifies that pleadings can be amended and allows for confidential
information to be filed under seal. Exempts 271(e) (Hatch-Waxman and biosimilars)
proceedings. Requires plaintiffs to make additional disclosures to the court and the
PTO about the plaintiff and the asserted patents shortly after filing.

SEC. 4. CUSTOMER STAY: Allows a case against a customer to be stayed while
the manufacturer litigates the alleged infringement, provided that the
manufacturer is involved in a lawsuit in the US involving the same issues. The
customer stay is available only to those at the end of the supply chain, who are
selling or using a technology that they acquired from a manufacturer, without
materially modifying it. Allows for a stay to be lifted where it would cause undue
prejudice or be manifestly unjust.

SEC. 5. DISCOVERY LIMITS: Requires a court to stay expensive discovery
pending resolution of preliminary motions—specifically motions to dismiss, transfer
venue, and sever accused infringers. Gives a court discretion to allow limited
discovery necessary to resolve these motions or a motion for a preliminary
injunction, or if it finds that additional discovery is necessary to preserve evidence
or otherwise prevent specific prejudice to a party. Allows parties to consent to be
excluded from discovery limitations. Exempts Section 271(e) (Hatch-Waxman and
biosimilars) cases. Clarifies that timelines for responsive pleadings provided by the
Federal Rules of Civil Procedure are not altered, and nothing prohibits a court from
ordering or local rules from requiring the exchange of contentions.

SEC. 6. JUDICIAL CONFERENCE DISCOVERY REFORMS: Requires the
Judicial Conference to develop rules or procedures to address additional issues
involving discovery in patent cases. These include to what extent each party is
entitled to “core documentary evidence” and if they should be responsible for the
costs of production, and other issues involving discovery sequence and scope. Asks
the Judicial Conference to implement case management procedures for patent
cases.

SEC. 7. FEES AND RECOVERY: Provides that reasonable attorney fees will be
awarded if a court determines the position or conduct of the non-prevailing party
(plaintiff or defendant) was not objectively reasonable, unless special circumstances
make an award unjust. The winner must show that the non-prevailing party’s
position was not objectively reasonable and the judge must make a ruling for fees to shift – this is not a presumptive fee shifting rule. Fee shifting extends to cases
where a party attempts to unilaterally withdraw from a case on the eve of a trial.
Keeps 271(e) (Hatch-Waxman and biosimilars) proceedings under current law.
Fee Recovery: Requires a plaintiff to identify interested parties in the litigation,
and provides a process for a court to recover fees where the abusive litigant is
judgement-proof. If a plaintiff cannot certify it has sufficient funds to satisfy a fee
award, it must notify interested parties, who can opt out of their interest. Permits a
court to exempt institutions of higher education and qualifying parties in the
interest of justice.

SEC. 8. PRE-SUIT NOTICE/DEMAND LETTERS: Prevents vague patent
infringement demand letters from being preludes to litigation by requiring that
certain information be included in order for the letter to be considered evidence that
subsequent infringement was “willful”. If the required information is not in the
written notice, the recipient’s time to respond to a later complaint is extended by 30
days.

SEC. 9. ABUSIVE DEMAND LETTERS: Provides that, if someone violates Section
5 of the FTC Act in connection with patent assertion and has engaged in
widespread demand letters abuse, civil penalties for FTC rule violations will attach.
The provision does not impinge on legitimate licensing activity or expand the
authority of the FTC.

SEC. 10. TRANSPARENCY: Requires patent holders to disclose to the PTO
whenever there is an assignment of interest in the patent that results in a change of
ultimate parent entity. If a patent holder fails to disclose, it will not be able to
recover increased damages of attorney fees (unless this would be manifestly unjust).

SEC. 11. IP LICENSES IN BANKRUPTCY: Makes clear that as a matter of public
policy, US courts will not recognize the action of a foreign court to unilaterally
cancel a license to a US patent or trademark if the licensor goes bankrupt. Extends
current protection of licensees of US patents in bankruptcy to trademarks.

SECTION 12. SMALL BUSINESS PROVISIONS: Directs the PTO to develop
educational resources for small businesses targeted in patent suits and to provide
support to companies named in infringement actions. Instructs PTO to create a
section on its website that will list pending patent cases, so that recipients of
demand letters and defendants in lawsuits can more easily identify ongoing
litigation that may relate to their case.

SEC. 13. STUDIES: Provides for three studies on 1) the secondary market for
patents; 2) the possibility of a pilot program for a patent small claims program: and
3) business method patent quality.

SEC. 14. TECHNICAL CORRECTIONS: Technical corrections and improvements
to the AIA.

SEC. 15. EFFECTIVE DATE: Date of enactment except as otherwise provided.

SEC 16. SEVERABILITY: Should any portion of the law be held invalid, this
provision allows the rest to stand.

The full text of the bill is available here: http://www.judiciary.senate.gov/imo/media/doc/PATENT%20Act.pdf

(Entirely unrelated but also in Sen. Grassley’s Instagram feed: a few hours later he met with my Dean and the Deans of the University of Iowa College of Engineering and Division of Continuing Education.)

Of Printer Cartridges and Patent Exhaustion: The En Banc Federal Circuit is Poised to Clarify Quanta

Guest post by Samuel F. Ernst, Assistant Professor of Law at the Chapman University Dale E. Fowler School of Law.

Lexmark International, Inc. sells its patented printer cartridges directly to customers and indirectly through authorized resellers.  Ordinarily these authorized “first sales” would exhaust Lexmark’s patent rights in the cartridges, such that Lexmark could not sue third parties, such as Impression Products, Inc., for patent infringement when they refill and resell the spent cartridges at a reduced price.  However, after Lexmark’s authorized and indiscriminate first sale occurs, the end user finds that Lexmark has printed a proposed license agreement on the outside packaging providing that by opening his or her printer cartridge, the customer “agree[s] to return the empty cartridge only to Lexmark for recycling.  If you don’t accept these terms, return the unopened package to your point of purchase.  A regular price cartridge without these terms is available.”  In patent parlance, this provision is known as a “post-sale restriction” – an attempt to restrict the use of a patented item for its intended purpose after the patent holder has authorized a first sale.  The Federal Circuit has granted en banc review in the case of Lexmark v. Impression Products to settle once and for all whether such post-sale restrictions are effective to prevent patent exhaustion, allowing the patent holder to pursue the patented item down the stream of commerce to prevent resale price competition or collect infringement damages above and beyond the monopoly price it earned at the first sale.[1]

One would have thought the question settled by the Supreme Court long ago.  In 1917 the Court decided in Motion Picture Patents Co. v. Universal Film Manufacturing Co. that such post-sale restrictions are ineffective to prevent patent exhaustion.[2]  In that case Motion Picture Patents held a patent on film projectors and granted a license to a third party authorizing the manufacture and sale of the projectors.  The licensee was required to affix a plate to the projectors it sold purporting to impose a post-sale restriction very similar to the restriction Lexmark affixes to its printer cartridge packaging: “The sale and purchase of this machine gives only the right to use it solely with moving pictures containing the invention of reissued patent No. 12,192, leased by a licensee of the Motion Picture Patents Company…. The removal or defacement of this plate terminates the right to use this machine.”[3]  Despite authorizing the sale of its patented projectors and collecting a full monopoly price for its invention, Motion Pictures Patent Company sought to restrict end users from using the projectors with film reels other than those licensed under its separate patent on film reels, just as Lexmark seeks to use the patent law to prevent the reuse and resale of its spent cartridges with unauthorized ink.  When Universal Film supplied end users of the projectors with film reels that were not authorized for use with the machines, Motion Pictures Patent Company sued for infringement.[4]  The Court held that the post-sale restriction was invalid and did not prevent the exhaustion of Motion Picture Patent Company’s rights in the machine.  The Court held that “the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it.”[5]

The Supreme Court grounded its holding in two policies that are central to the exhaustion doctrine.  First, because the patent law attempts a delicate balance between encouraging innovation and allowing free market competition, the patent holder should not be overcompensated for a license to its intellectual property beyond the free market value of the invention as determined by the free market at the first sale.  “[T]he primary purpose of our patent laws is not the creation of private fortunes for the owners of patents, but is ‘to promote the progress of science and the useful arts.’”[6]  Accordingly, a right to exclude, exercised and exhausted with a single sale or license of a patented product on the open market is the appropriate compensation to reward the value of the invention; nothing more should be given:

This construction gives to the inventor the exclusive use of just what his inventive genius has discovered.  It is all that the statute provides shall be given to him and it is all that he should receive, for it is the fair as well as the statutory measure of his reward for his contribution to the public stock of knowledge.  If his discovery is an important one, his reward under such a construction of the law will be large, as experience has abundantly proved; and if it be unimportant, he should not be permitted by legal devices to impose an unjust charge upon the public in return for the use of it.  For more than a century this plain meaning of the statute was accepted as its technical meaning, and that it afforded ample incentive to exertion by inventive genius is proved by the fact that, under it, the greatest inventions of our time, teeming with inventions, were made.[7]

Hence, the exhaustion doctrine and the invalidity of post-sale restrictions prevent overcompensation, or “double recovery,” for patent holders.

Second, the Motion Picture Patents Court reasoned that the exhaustion doctrine is grounded in the policy against restraints on the alienation of chattels – i.e., servitudes that run with personal property.  Once a patent holder has authorized the sale of its product, downstream purchasers of the item, including competitors in the used resale market, have a reasonable expectation that the product they buy can be used for its intended purpose.  The Supreme Court explained that a ban on post-sale restrictions avoids 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 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.[8]

The Supreme Court relied on this same policy against restraints on alienation in the recent Kirtsaeng decision, where it decided that the authorized first sale of a copyrighted article overseas exhausts the copyright owner’s right to prevent the used resale of that item.[9]  The Court stated that the exhaustion doctrine is grounded in “the common law’s refusal to permit restraints on the alienation of chattels.”[10]  And the Federal Circuit has recently relied on this policy in support of its decision that giving away a patented product in exchange for no consideration (rather than selling it) can trigger patent exhaustion.  The Circuit reasoned that if patent exhaustion were easily evaded, “consumers’ reasonable expectations regarding their private property would be significantly eroded” and it would “offend against the ordinary and usual freedom of traffic in chattels.”[11]  Nor is the policy against restraints on alienation an outmoded relic of the common law having no justification in the modern economy.  As Professor Molly Shaffer Van Houweling argues in her compelling article, The New Servitudes, personal property servitudes result in notice and information costs for consumers, result in the underuse or inefficient use of resources subject to the restriction (such as the spent printer cartridges at issue here), and waive the limitations built into intellectual property law that are intended to strike the delicate balance between encouraging innovation and allowing for the dissemination of new technology.[12]

In its opening Federal Circuit brief, Lexmark relies heavily on a different Supreme Court case to argue for the validity of its post-sale restriction, the 1938 case General Talking Pictures Corp. v. Western Electronic Co.[13]  But General Talking Pictures does not deal with a post-sale restriction imposed after an authorized first-sale releases a product into the stream of commerce.  Rather, General Talking Pictures recognizes the validity of a pre-sale restriction, whereby a patent holder expressly limits the parties to whom its reseller may sell the patented product in the first place.  In General Talking Pictures, the plaintiff licensed the American Transformer Company to make and sell its patented vacuum tube amplifiers, but stated in the license that American Transformer was only authorized to sell the amplifiers to private consumers “for radio amateur reception, radio experimental reception, and home broadcast.  [American Transformer] had no right to sell the amplifiers for use in theaters as a part of talking picture equipment.”[14]  American Transformer then made an unauthorized sale to the defendant for use in movie houses, even though the defendant “had actual knowledge that [American Transformer] had no license to make such a sale.”[15]  The Court held that the plaintiff could sue for patent infringement because it did not authorize American Transformer to make the sale, and the first requirement of patent exhaustion was therefore not satisfied – there was no authorized first sale: “[t]he Transformer Company could not convey to petitioner what both knew it was not authorized to sell.”[16]  Hence, the Supreme Court drew a distinction between (1) a post-sale restriction, which attempts to impose restrictions on the patented item after an authorized sale; and (2) a pre-sale restriction, which limits the scope of the authority to sell, authorizing sale for only particular uses or to particular customers.  Post-sale restrictions are clearly ineffective to prevent patent exhaustion because the patented item has already passed out of the patent monopoly at the time of sale.  The effectiveness of pre-sale restrictions, and the wisdom of enforcing them, is an interesting and novel question, which I explore in the context of licenses to settle patent litigation in Patent Exhaustion for the Exhausted Defendant: Should Parties be able to Contract Around Exhaustion in Settling Patent Litigation?.[17]  But the adhesion contract Lexmark prints on its cartridge packaging is plainly a post-sale restriction, rendering the General Talking Pictures case inapposite to the Lexmark case.  After Lexmark indiscriminately sells or authorizes the sale of its printer cartridges to all comers, it tries to prevent their resale through the use of a post-sale restriction, but it cannot do so under the patent law because the authorized sale means that the cartridges have already passed out of the patent monopoly.

If the Supreme Court decided this question in the 1917 Motion Picture Patents case, then why is this even an issue for en banc review?  It is because a panel of the Federal Circuit, in Mallinckrodt v. Medipart, held that post-sale restrictions similar to Lexmark’s adhesion contracts can, in fact, prevent patent exhaustion.[18]  In that case Mallinckrodt sold its patented aerosol mist delivery devices to hospitals, stamped with the legend, “Single Use Only,” and a package insert “instruct[ing] that the entire contaminated apparatus be disposed of in accordance with procedures for the disposal of biohazardous waste.”[19]  Many hospitals did not heed the restriction, however.  Instead, they sold the spent devices to the defendant Medipart, who refurbished them and returned them to the hospitals for additional use.[20]  Mallinckrodt sued Medipart for patent infringement and indirect patent infringement, and the Federal Circuit held that the “single use” restriction prevented patent exhaustion.  The court achieved this by cabining the holding of Motion Pictures Patents to circumstances where patent holders attempt to enlarge the scope of their monopoly by tying the use of their patent to the use of unpatented or separately patented items, in violation of antitrust laws or constituting patent misuse.  Hence, the court distinguished Motion Picture Patents and other Supreme Court exhaustion precedent on the basis that “[t]hese cases established that price-fixing and tying restrictions accompanying the sale of patented goods were per se illegal.  These cases did not hold, and it did not follow, that all restrictions accompanying the sale of patented goods were deemed illegal.”[21]  The Federal Circuit then limited the ineffectiveness of post-sale restrictions to circumstances where the patent holder causes anticompetitive effects under the antitrust laws:

Unless the [post-sale restriction] violates some other law or policy (in the patent field, notably the misuse or antitrust law) private parties retain the freedom to contract concerning conditions of sale.  The appropriate criterion is whether Mallinckrodt’s restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.[22]

But why should the patent laws be relegated to the shadows of antitrust policy? Intellectual property law is not solely concerned with preventing supra competitive prices or keeping licensing practices within the “rule of reason,” like some shambling poor relation to antitrust law.  Rather, intellectual property laws promote wholly different policies in wholly different ways, such as by balancing the incentive to innovate against the harm of a limited monopoly.  That is why the policies supporting patent exhaustion enunciated by the Supreme Court in Motion Pictures Patent Company were not limited to preventing illegal patent tying (although the Court did mention as one of the supports for its decision a concern with patent holders enlarging the effective scope of their patent claims beyond the claimed invention).  As discussed above, the Court also invoked the policy against servitudes running with personal property and the need to ensure that the exclusionary right is narrowly tailored to achieve the incentive to innovate.  And these policies in support of patent exhaustion have been repeated by the Court in Kirtsaeng and by the Federal Circuit in cases such as LifeScan.  Hence, under Supreme Court precedent, a post-sale restriction is ineffective to prevent patent exhaustion whether or not it has “anti-competitive effects” or the patent holder has “market power.”

If there were any doubt as to this proposition, it should have been settled by the Supreme Court’s 2008 decision in Quanta Computer Inc. v. LG Electronics, Inc.  In Quanta, LG granted Intel the unconditional right to manufacture and sell its patented microprocessors.[23]  But the license also had a provision in which LG “disclaimed” that it granted a license to downstream purchasers of the microprocessors allowing them to combine the devices with non-Intel parts and resell them.[24]  And by separate agreement, Intel was required to notify purchasers of the microprocessors that they were not authorized to combine the microprocessors with non-Intel parts for resale,[25] similar to the notice Lexmark gives its customers that they are not authorized to return the spent printer cartridges to anyone other than Lexmark.  Intel made the patented processors and sold them to Quanta, which then practiced LG’s patent claims by inserting them into computers and reselling them to customers.[26]  And so LG sued Quanta for patent infringement.  The Federal Circuit held that LG had not exhausted its patent rights, because “[a]lthough Intel was free to sell its microprocessors and chipsets, those sales were conditional, and Intel’s customers were expressly prohibited from infringing LG’s combination patents.”[27]

The Supreme Court reversed the Federal Circuit, holding that LG unconditionally authorized the sale of the chips, despite the contract’s language disclaiming a license to third parties and the notice Intel gave purchasers that they could not combine the chips with non-Intel parts.[28]  Although the contract purported to put restrictions on what Intel’s customers could do with the chips once they bought them, these restrictions came only after an authorized sale, and “[n]othing in the License Agreement restricts Intel’s right to sell its microprocessors and chip sets to purchasers who intend to combine them with non-Intel parts.  It broadly permits Intel to ‘make, use, [or] sell’ products free of LGE’s patent claims.”[29]  The Court dispensed with LG’s language disclaiming an implied license by holding that “the question whether third parties received implied licenses is irrelevant because Quanta asserts its right to practice the patents based not on implied license but on exhaustion.  And exhaustion turns only on Intel’s own license to sell products practicing the LGE patents.”[30]  In other words, once LG authorized Intel to sell the chips to third parties, the patent rights were exhausted, and LG had no more patent rights to license or refrain from licensing.  Quanta could use the microprocessors without a license.  Similarly, once Lexmark sold directly or authorized the sale of its cartridges to customers, its patent rights in the cartridges were exhausted, and Lexmark retained no patent rights in the cartridges to license or refrain from licensing beyond the single use.  Significantly, the Supreme Court makes no mention of market power, the “rule of reason,” or any other antitrust policy as the basis for its decision in Quanta.  Patent exhaustion is not merely a reiteration of antitrust law.

Some commentators have noted that the Quanta decision is arguably ambiguous with respect to whether it did away with post-sale restrictions altogether or whether it was simply the particular way in which the LG-Intel license was drafted that failed to overcome patent exhaustion.  Perhaps the post-sale restriction was ineffective simply because it was drafted in the language of a disclaimer of implied license, separate from the unconditional grant to Intel of the right to sell the microprocessors.  The lower courts, including the Federal Circuit, have rejected this unlikely reading of the Quanta case.

In TransCore, LP v. Electronic Transaction Consultants Corp., the Federal Circuit addressed the issue indirectly.  In that case, the patent holder had entered into a settlement agreement with a third party, Mark IV, in which it covenanted not to sue Mark IV for infringement when it sold the licensed products.[31]  Subsequent to the settlement, TransCore sued Mark IV’s downstream customers for infringement after they purchased the licensed products.  The holding of the case is that a covenant not to sue for patent infringement is no different from an affirmative license to practice patents; both trigger patent exhaustion.[32]  There was no express provision in the settlement license purporting to contract around patent exhaustion.  However, TransCore sought to rely on extrinsic evidence to the contract showing “the parties’ intent not to provide downstream rights to Mark IV’s customers….”[33]  The Federal Circuit held that the district court’s exclusion of the extrinsic evidence did not affect a substantial right of TransCore because “[t]he only issue relevant to patent exhaustion is whether Mark IV’s sales were authorized, not whether TransCore and Mark IV intended, expressly or impliedly, for the covenant to extend to Mark IV’s customers.”[34]  In other words, once the sales are authorized, an express or implied provision purporting to limit the effect of patent exhaustion (such as the product label at issue in Lexmark) has no effect.

In Tessera, Inc. v. International Trade Commission, the Federal Circuit held that a licensee’s authorized sale of an item resulted in patent exhaustion, shielding purchasers of the patented product from an ITC exclusion order.[35]  Moreover, the authorized sales did not retroactively lose their authorization due to the licensee’s failure to pay the patentee its royalties.[36]  The Federal Circuit rejected this argument because “[t]hat absurd result would cast a cloud of uncertainty over every sale, and every product in the possession of a customer of the licensee, and would be wholly inconsistent with the fundamental purpose of patent exhaustion – to prohibit post sale restrictions on the use of a patented article.[37]

Finally, the Eastern District of Kentucky explicitly rejected Lexmark’s post-sale restriction as effective to prevent patent exhaustion in Static Control Components, Inc. v. Lexmark International, Inc.[38]  The court noted that there was a debate among academics as to whether the Supreme Court had broadly rejected post-sale restrictions as sufficient to defeat patent exhaustion, or if “the Quanta holding is limited to the very specific facts, and the very specific license agreement, that confronted the Court.”[39]  The court concluded “that Quanta overruled Mallinckrodt sub silentio.  The Supreme Court’s broad statement of the law of patent exhaustion simply cannot be squared with the position that the Quanta holding is limited to its specific facts.”[40]  One might add that even if one did suppose that the Supreme Court granted certiorari in Quanta to opine on the details of the language of a particular license agreement, it had already ruled that post-sale restrictions are ineffective altogether to avoid patent exhaustion in the 1917 Motion Pictures Patent Co. case.

And so Lexmark’s post-sale notices to customers that they must return their spent printer cartridges to Lexmark are ineffective to prevent patent exhaustion.  This does not mean that Lexmark is without a remedy to quell competition from the used resale market – only a remedy under the Patent Act.  For example, Lexmark spills much ink in its opening Federal Circuit brief arguing that the single-use restriction printed on its product packaging is “an enforceable contract” in the Ninth Circuit.  Accordingly, Lexmark could attempt to sue its customers for their alleged breaches of the adhesion contract (despite the customer relations difficulties this might cause).  As a further example, Lexmark complains in its brief that the used cartridges refilled by third parties are susceptible to malfunctions and poor performance, and that customers often blame Lexmark rather than the supplier of the used cartridge.  If customers are indeed susceptible to such source confusion, then the remedy would appear to sound in trademark law, not patent law.  Finally, Lexmark could pursue non-legal strategies, such as making its prices more competitive with the used resale market, or competing based on quality, which it apparently already does, given the supposed malfunctions of the used cartridges.  It would be a fine world if refilling the ink in one’s printer did not cost nearly so much as the printer itself.

Hence, Lexmark has other avenues to pursue to prevent the resale of its used cartridges.  But patent law has its own requirements and its own remedies, separate from the rules and remedies of contract law and trademark law.  This is appropriate, because patent law promotes different policies than those other branches of law.  These include the rules and policies of patent exhaustion, which prohibit a patent holder from pursuing an item down the stream of commerce once the patent rights in that item have been exhausted.

=====

[1] The Federal Circuit’s en banc order, available here, also asks the parties to brief the separate question of whether the authorized first sale of a patented item overseas gives rise to patent exhaustion, a topic not treated in this post.

[2] 243 U.S. 502 (1917).

[3] Id. at 506-07.

[4] Id. at 508.

[5] Id. at 452.

[6] Id. at 511 (quoting U.S. Const. art. I, § 8).

[7] Id. at 513.

[8] Id. at 518.

[9] Kirtsaeng v. John Wiley Sons, Inc., 133 S. Ct. 1351, 1363 (2013).

[10] Id.

[11] LifeScan Scotland, LTD v. Shasta Techs., 734 F.3d 1361, 1363, 1376 (Fed. Cir. 2013) (internal quotation marks and citation omitted).

[12] Molly Shaffer Van Houweling, The New Servitudes, 96 Geo. L. J. 885, 932-46 (2008).

[13] 304 U.S. 175 (1938).

[14] Id. at 180.

[15] Id.

[16] Id.

[17] 2014 U. Ill. J.L. Tech. & Pol’y 445 (2014).

[18] 976 F.2d 700, 709 (Fed. Cir. 1992).

[19] Id. at 702.

[20] Id.

[21] 976 F.2d 700, 704 (Fed. Cir. 1992).

[22] Id. at 708.

[23] 553 U.S. 617, 636 (2008).

[24] LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F.3d 1364, 1370 (Fed. Cir. 2006), rev’d sub nom., Quanta, 553 U.S. at 638.

[25] Id.

[26] Quanta, 553 U.S. at 624.

[27] LG Elecs., 453 F.3d at 1370.

[28] Quanta, 553 U.S. at 635-37.

[29] Id. at 636.

[30] Id. at 637.

[31] 563 F.3d 1271, 1276 (Fed. Cir. 2009).

[32] Id. at 1276-77.

[33] Id. at 1277.

[34] Id. (emphasis added).

[35] 646 F.3d 1357, 1370 (Fed. Cir. 2011).

[36] Id.

[37] Id. (emphasis added).

[38] 615 F. Supp. 2d 575, 585 (E.D. Ky. 2009).

[39] Id.

[40] Id. at 585-86.

Lexmark v. Impression: The Facts of the Case

In Lexmark v. Impression, the Federal Circuit is holding an en banc hearing to consider the impact of both Kirtsaeng and Quanta on issues of patent exhaustion.  I wanted to provide the following some discussion of the facts at issue in the case. The following synopsis comes from the patentee Lexmark’s opening brief on the merits:

= = = = =

The facts relevant to this appeal are not in dispute, and were largely stipulated below. Lexmark is a leading developer and manufacturer of innovative imaging and information management products and services — including laser printers and toner cartridges. Through extensive in-house research and development, Lexmark develops most of the technology that goes into its products and services. These complex innovations are protected by numerous patents. Those at issue in this suit cover various aspects of Lexmark’s toner cartridges — for example, the “encoder wheel” which determines how much toner remains in the cartridge and optimizes the print settings accordingly.

. . . Although Lexmark is known for its printers, much of its profits derive from the sale of toner cartridges to replace the cartridges that come with Lexmark printers. Lexmark offers end-user customers a choice when they purchase these replacement cartridges: a “Regular Cartridge” sold at full price without any use limitations, or a “Return Program” cartridge sold at a discount in exchange for the purchaser’s agreement to use the cartridge only once.

The two types of cartridges are physically identical. (Id.) But under the Return Program, customers agree that after the cartridge’s toner is exhausted, they will return the empty cartridge only to Lexmark for remanufacturing or recycling. Customers who buy regular cartridges, on the other hand, pay full price, but are not subject to the single-use restriction. They may dispose of or refill the cartridge as they see fit.

The Return Program cartridges cost roughly 20 percent less than the unrestricted version.  That discount reflects the limitation on customers’ use of the cartridges.

Lexmark sells Return Program cartridges directly (to end-user customers) and indirectly (through “authorized resellers”).  The Return Program contractually binds both Lexmark’s authorized resellers and its customers. No Lexmark reseller is authorized to sell a Return Program cartridge that is not subject to the single-use restriction. And whether a customer buys a Return Program cartridge directly from Lexmark or indirectly from an authorized Lexmark reseller, it does so subject to a user agreement that obliges the customer to use the cartridge only once. Given Lexmark’s agreements with resellers as well as end-users, the Return Program is a restriction on both sale and use.

The use restriction — a combination patent license and contract — is clearly displayed, in multiple languages, on the outside packaging of a Return Program cartridge. It also appears on Lexmark’s website. Before opening the product, therefore, customers are advised that they have a choice whether to participate:

RETURN EMPTY CARTRIDGE TO LEXMARK FOR RECYCLING
Please read before opening. Opening this package or using the patented cartridge inside confirms your acceptance of the following license agreement. The patented Return Program cartridge is sold at a special price subject to a restriction that it may be used only once. Following this initial use, you agree to return the empty cartridge only to Lexmark for recycling. If you don’t accept these terms, return the unopened package to your point of purchase. A regular price cartridge without these terms is available.

This user agreement is an enforceable contract. Both the Ninth Circuit and the U.S. District Court for the Eastern District of Kentucky have rejected *9 challenges to the Return Program. The Ninth Circuit held that Lexmark’s user agreement provides customers with pre-sale notice, an opportunity to opt out, and consideration in the form of the price discount. The Ninth Circuit also found that Lexmark’s label was not misleading. And the Kentucky district court in Static Control Components, Inc. v. Lexmark International, Inc., rejected the argument that Lexmark and its customers lacked a “meeting of the minds,” holding instead that the Return Program “clearly set[s] forth contractual terms” of the type that have been “held to be valid.” Neither Impression nor any other defendant in this litigation challenged the enforceability of the Return Program on contract-law grounds. Indeed, Impression acknowledges that “Lexmark has an express and enforceable” contractual agreement with each of its end-user customers and with its authorized resellers.  All remain free, of course, to opt for a Regular Cartridge at regular price.

The Return Program serves a number of important functions.

First, it protects the quality and reputation of Lexmark’s products. Many spent cartridges end up in the hands of “remanufacturers” that refill the toner and repackage the cartridge for sale. (See infraat 12–13.) Used cartridges refilled by third parties are susceptible to malfunctions and poor performance. Because the malfunctions can appear to involve the printer rather than the remanufactured cartridge, customers often blameLexmark rather than the supplier of the inferior knock-off cartridge — leading to warranty claims and fewer future purchases from Lexmark.

Second, the Return Program facilitates Lexmark’s own recycling and remanufacturing programs. In the 1990s, Lexmark began reconditioning its own spent cartridges.  The Return Program provides a reliable stream of cartridges for Lexmark’s own remanufacturing efforts, which allow Lexmark to control the quality of its remanufactured cartridges. It also helps the environment by ensuring that *11 cartridges are properly recycled if they are not reused.

Third, the Return Program is part of Lexmark’s defense against piracy and grey-market suppliers. Lexmark’s cartridges are “regionalized” such that a cartridge sold in Europe, for instance, will not work in a printer sold in North America or Latin America.  Recovering the cartridges after a single use reduces the opportunity for third-party grey-market activities.  Regionalization makes it harder for third parties to use a product sold at a lower price in one market to undercut sales in another, higher-priced market. And even within a region, single-use licensing limits the chances for unauthorized reuse. Rather than restricting post-sale use across the board by imposing single-use requirements on all of its cartridges, however, Lexmark decided to give customers a choice of replacement cartridges by offering both single-use Return Program cartridges and unrestricted regular cartridges. It accounts for the potentially negative consequences of the unrestricted cartridges by pricing them differently than Return Program cartridges.

The Infringement

Each Return Program cartridge contains a computer chip that, among other things, enforces the single-use restriction. The chip monitors the cartridge’s toner level: once all the toner in a Return Program cartridge is consumed, the chip stores this fact in its memory. If the cartridge is later reinstalled, the chip will interact with the printer to disable the cartridge.

Despite this protection, piracy threatens Lexmark’s cartridge sales. Third parties, including foreign companies, have hacked Lexmark’s computer chips and produced new versions that circumvent the single-use license. Those illegitimate chips, once installed in place of Lexmark’s originals, suppress the fact that the cartridge’s original toner was already consumed. This allows a used cartridge sold by a third party to masquerade as a genuine Lexmark cartridge. A Lexmark printer will accept the cartridge despite software designed to disable cartridges reused in violation of their single-use license.

Once the chip is circumvented, Lexmark’s Return Program cartridges may be reused multiple times, in violation of the single-use restriction. “Remanufacturing” a spent toner cartridge for reuse involves replacing worn components and refilling the toner. Companies like Impression and its suppliers gather spent cartridges, install hacked replacement chips, refill the cartridges with non-Lexmark toner, and sell the refilled cartridges for use in Lexmark printers. Although the cartridge may continue to function, the remanufacturing process, if not done correctly, will reduce its print quality over time, causing Lexmark reputational harm. This has happened many times when third parties have refilled and resold used Lexmark cartridges.  . . .

This Dispute

In response to widespread piracy, Lexmark took legal action to protect its intellectual property, reputation, and revenues. It first initiated proceedings in the International Trade Commission, where it obtained a general exclusion order and cease-and-desist orders barring the importation of clone, counterfeit, remanufactured, refilled, and empty Lexmark toner cartridges.

Lexmark also sued several parties for patent infringement in this action in the U.S. District Court for the Southern District of Ohio. The suit targeted two types of infringement: the sale of “clone” cartridges manufactured by third parties as unauthorized copies of Lexmark’s genuine toner cartridges; and the sale of other cartridges originally manufactured and sold by Lexmark, such as remanufactured cartridges that had been refilled, repackaged, and resold by third parties under non-Lexmark labels.

During four years of litigation, most defendants agreed to individual settlements with Lexmark, leading the district court to enter consent judgments and stipulated permanent injunctions. In some instances, the court enforced Lexmark’s patent rights through contempt proceedings or default judgments. Impression is the sole remaining defendant litigating against Lexmark. . . .

With respect to Lexmark cartridges first sold outside the United States, Impression maintained that Lexmark’s sales abroad precluded Lexmark from suing for infringement of its U.S. patents when those cartridges were imported, remanufactured, or resold in the United States. Impression acknowledged that its position contradicted this Court’s ruling in Jazz Photo, which held that a foreign sale does not exhaust U.S. patent rights. But Impression contended that Jazz Photo had been implicitly overruled by the Supreme Court’s decision in Kirtsaeng. The district court disagreed, noting that Kirtsaeng construed a distinct provision of the Copyright Act and therefore did not implicitly overrule Jazz Photo’s application of the Patent Act.

As to Lexmark cartridges first sold in this country, Impression argued that Lexmark’s patent rights were exhausted despite the express contractual conditions under the Return Program. Again, Impression recognized that the *16 law of this Court was to the contrary, given Mallinckrodt’s holding that a sale under a single-use license did not exhaust the seller’s patent rights.  But the district court accepted Impression’s contention that the Supreme Court’s decision in Quanta — which addressed an unrestricted first sale — implicitly overturned Mallinckrodt’s holding regarding a restricted sale. The district court’s opinion rested on its (mistaken) understanding that Lexmark resellers possess blanket authority to sell Return Program cartridges without restriction on their subsequent use. In this respect, the court held, Lexmark’s domestic sales of cartridges were analogous to Intel’s sales of software without restriction in Quanta — sales that, as decided by the Supreme Court, exhausted patent rights.

Both Lexmark and Impression, however, recognized that the district court had misunderstood the facts concerning Lexmark’s domestic sales, and that Lexmark’s contracts and licenses did in fact restrict the resale of Return Program cartridges. To avoid the need to amend the Complaint and undertake additional briefing, the parties submitted a joint motion asking the court to supplement the record with stipulated facts and then either to reconsider its decision on the Return Program cartridges or enter final judgment to facilitate appeal.

The district court supplemented the record with the stipulated facts, but declined otherwise to revisit its decision.  Instead, the court entered a stipulated judgment of non-infringement in favor of Impression with respect to Return Program cartridges first sold inside the United States, and a stipulated judgment of infringement in favor of Lexmark with respect to cartridges first sold outside the United States. The court also entered a stipulated permanent injunction, barring Impression from selling the Accused Products in the United States, except to the extent that Lexmark’s patent rights had been held to have been exhausted.

Federal Circuit: Litigation Misconduct Should Probably Result in Attorney Fee Award

In Oplus Tech v. Vizio, the Federal Circuit remanded with an order for the district court to expressly determine whether an award of attorney fees are warranted.  After the merits were determined (summary judgment of non-infringement) the district court found the case “exceptional” under 35 U.S.C. 285 based upon litigation misconduct by Oplus.  However, the district court then refused to award fees to the victorious accused (without fully articulating its reasons for the denial).  On appeal, the Federal Circuit reviewed the record and could not “find a basis to support the court’s refusal to award fees.”

Although the “exceptional case” finding can still be a distinct step from a fee award. The case here suggests that a court should ordinarily award fees in exceptional cases.

Although the award of fees is clearly within the discretion of the district court, when, as here, a court finds litigation misconduct and that a case is exceptional, the court must articulate the reasons for its fee [denial] decision. In light of the court’s fact findings regarding the extent of harassing, unprofessional, and vexatious litigation, the change in legal standard by the Supreme Court, and the lack of sufficient basis to deny fees under § 285, we vacate and remand for the district court to consider whether and the extent to which fees are warranted. Because the court premised its decision regarding fees under § 1927 and its inherent power at least in part on its decision to deny fees under § 285, we vacate those rulings and remand for further proceedings.

Thus, on remand, the district court will reconsider whether fee award is appropriate based upon its prior determination of litigation misconduct.

The particular misconduct here that went unchallenged on appeal:

The court found that from the start Oplus “delayed the litigation by strategically amending its claims to manufacture venue,” and, in doing so, “flouted the standards of appropriate conduct and professional behavior.” It found that “Oplus provided only the most tenuous basis in its initial complaint for bringing suit in Illinois” and that its “first amended complaint took its first step over the boundaries of professionalism” because the “amendment rendered its allegations against Sears prima facie inadequate.” It chastised Oplus for “ignor[ing] well-settled law” by asking “the [Panel on Multidistrict Litigation] to return the case to Illinois after it lost” the motion to transfer to the Central District of California.

The court found that “Oplus misused the discovery process to harass Vizio by ignoring necessary discovery, flouting its own obligations, and repeatedly attempting to obtain damages information to which it was not entitled.” It found that Oplus implemented an “abusive discovery strategy” that involved “avoid[ing] its own litigation and discovery obligations while forcing its opponent to provide as much information as possible about Vizio’s products, sales, and finances.” The court noted that its “greatest concern . . . was Oplus’s counsel’s subpoena for documents counsel had accessed under a prior protective order.” In that instance, counsel for Oplus represented an unrelated patentee in a prior litigation against Vizio and, pursuant to the protective order in that prior litigation, retained copies of documents produced by Vizio. Here, counsel for Oplus, Niro, Haller & Niro, drafted what it called a tailored subpoena for documents retained by counsel for the earlier plaintiff, which also happened to be Niro, Haller & Niro. The court concluded that it “strain[ed] credulity” to believe that Oplus “issued the subpoena without using any knowledge by three attorneys [that both worked on the earlier case and the present case] as to the content of the discovery sought.” The court found that “Oplus blatantly misinterpreted its own prior discovery requests in an attempt to obtain the same information the Court had previously refused to compel.”

The court found that “Oplus used improper litigation tactics including presenting contradictory expert evidence and infringement contentions as well as misrepresenting legal and factual support.” It found that Oplus’s response to Vizio’s complaint about contradictory expert opinions—where Oplus disavowed “its own expert’s statement when Vizio cited the paragraph, rather than the paragraph heading” of its expert’s report—was “merely one example of Oplus’s strategic manipulation of the facts and evidence provided to the Court.” In another example, it noted that whereas “Oplus’s infringement contentions cite[d] a patent to show infringement” of Oplus’s patents, its “expert testifie[d] that the same patent did not disclose the methods of Oplus’s patents.” It found that “Oplus consistently twisted the Court’s instructions and decisions” and attempted “to mislead the Court.” It complained that when “Oplus had no evidence of infringement of one element of a claim, it simply ignored that element and argued another.” It found that “Oplus regularly cited to exhibits that failed to support the propositions for which they were cited” and that “Oplus’s malleable expert testimony and infringement contentions left Vizio in a frustrating game of Whac-A-Mole throughout the litigation.”

The district court particularly highlighted the activities of four lawyers from Niro, Haller & Niro: Gabriel Opatken, Raymond Niro, Arthur Gasey, and Paul Gibbons. [District Court 285 Denial][Patently-O Discussion].  The story told to the district court was that Opatken was a fresh new attorney handling most of the case but who was insufficiently supervised.  Once put on notice of the misconduct Ray Niro put a stop to those activities.  I suspect that the district court felt that internal reprimand was sufficient.

 

Guest Counterpoint: Patent Exhaustion and Helferich’s Assertion Problem

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).

Guest Counterpoint by Prof. Sichelman: The Innovation Act’s Fee-Shifting is Biased against Patent Holders and Will Likely Increase PAE Activity

Ted Sichelman is a Professor of Law and Director of the Technology Entrepreneurship and Intellectual Proerty Clinic and Center for Intellectual Property Law & Markets at the University of San Diego School of Law. 

Representative Bob Goodlatte’s bill, HR 9 (the “Innovation Act”), has been receiving much attention in the press and on the Hill. The Innovation Act is largely identical to the one (HR 3309) that passed the full House in late 2013, so of all the pending patent reform bills, it is likely to receive the most play in Congress this term.

The Innovation Act includes what seems to be a neutral fee-shifting provision. Specifically, it would require a court to “award, to a prevailing party, reasonable fees and other expenses … unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.”

Unfortunately, many commentators have focused the issue of whether this provision creates a presumption in favor of fee-shifting without carefully considering the many affiliated provisions in the bill. These additional provisions are particularly important because—contrary to the language quoted above—they significantly skew the effects of fee-shifting against patent holders. Given this lopsided effect, the fee-shifting provisions would probably increase patent assertion entity (PAE) activity. As I explain further below, this is because the provisions would most likely substantially reduce PAEs’ costs of acquiring patents.

A close reading of these additional fee-shifting provisions makes their skewed nature readily apparent. Take, for instance, the provision for “interested” third-party liability. It essentially makes those with a “direct financial interest in the patent . . . damages [award] or . . . licensing revenue” liable in the event a losing patent holder cannot pay a fee award (subject to certain exclusions). By its terms, the third-party liability provision only benefits “a prevailing party defending against an allegation of infringement of a patent claim” (emphasis added). So while third-party liability is quite expansive for those affiliated with losing patent holders, it is nonexistent for those affiliated with losing accused infringers.

Beyond discriminating against patent holders, the third-party liability provision further discriminates against non-practicing patent holders. Third-parties may only be joined in the event that the “prevailing party shows that the nonprevailing party has no substantial interest in the subject matter at issue other than asserting such patent claim in litigation.” This limitation would clearly capture non-practicing entities (NPEs), at least those who do not perform any R&D—although whether and when R&D is sufficient to meet the “substantial interest” threshold is undefined in the statute and thus unclear. If fee-shifting is truly designed to reduce low-quality suits, there is little basis to limit third-party liability only to NPEs. Anyone who has litigated knows that practicing entities, like NPEs, bring both strong and weak suits. There is a substantial economic interest in preventing frivolous suits regardless of the plaintiff’s business model.

Another example of the skewed nature of HR 9 is that settlement counts as a win for the accused infringer when the patentee “unilaterally extends to [the accused infringer] a covenant not to sue for infringement,” unless the patentee could have voluntarily dismissed the action without a court order. My understanding from experienced litigators is that these unilateral covenants tend to occur when the patent holder simply runs out of money and cannot continue to litigate. In this case, courts will often force the patent holder to provide a covenant not to sue in exchange for allowing it to drop the action. Presumably a patent holder providing such a covenant would sometimes not be able pay a fee award, which—if the patent holder is non-practicing—would allow the court to impose judgment on qualifying “interested” third-parties. On the other hand, if an accused infringer goes bankrupt, leading to a default judgment, the patent holder cannot join interested third-parties of the accused infringer when attorneys’ fees are owed.

The upshot of these provisions is to massively skew fee-shifting against the interests of patent holders, leading to an asymmetric risk that would very likely cause risk-averse inventors and assignees to avoid directly enforcing their patents, sometimes even strong ones. This is especially so because patent litigation is highly uncertain and costly, and the relevant test in the provision is the fairly open-ended “reasonably justified in law and fact” standard. Indeed, “reasonable fees and other expenses” in patent cases can be quite high—in large cases, well over $5 million—which would generally be a huge sticker shock to small companies and individual inventors with limited resources. Even a small percentage chance of a paying these fees could deter risk-averse inventors and assignees. In my personal experience running and dealing with many startups and individual inventors, they often are very risk averse when it simply comes to paying their own litigation expenses, much less the opposing party’s fees.

Oddly, the asymmetric nature of the Innovation Act’s fee-shifting provision may have the very opposite effect of what it purports to achieve by reducing so-called “patent troll” suits. As others have argued, the reason is straightforward: PAEs can more easily absorb the risk of bringing suit in the face of potential fee-shifting than startups and individuals. As I already pointed out, startups, individual inventors, and small companies are generally highly risk-averse patent holders. They would therefore fear liability being imposed on them for the direct enforcement of their patents (or if they simply retained an “interest” in a patent that was enforced by a third-party). As such, they would be more likely to sell their patents outright to PAEs instead of retaining a percentage in the litigation (as is standard today).

In fact, PAEs and their funders have already become savvy in this regard and often use single-purpose litigation entities with passive equity investors who cannot “influence, direct, or control” the litigation, removing these investors from liability under the Innovation Act. This approach makes the risk that the plaintiff would not be able to pay fee awards even more acute, leaving the original inventors on the hook if they retain a percentage stake of the proceeds (or probably even an equity stake in the single-purpose entity, because arguably the inventors can “influence” the litigation via their direct involvement). Indeed, even large companies and universities that monetize their patents via PAEs may decide to sell their patents outright to these PAEs, rather than retain a percentage stake, because of the unnecessary risk of placing their assets on the line. (Although the Innovation Act contains an escape valve whereby third parties can renounce all interest in the patents and avoid liability, it must be done very soon after a complaint is filed, which makes it of little use in a typical PAE deal.)

This shift from percentage deals to outright purchases would likely substantially drive down PAE patent acquisition costs. Because independent inventors and startups are risk averse—and some larger companies and universities likely are as well—these entities would expand the number of patents available for direct purchase by PAEs. This would likely push costs low enough that PAEs could afford to acquire much larger pools of patents, thereby increasing PAE assertions and reducing funds remitted back to original inventors and assignees.

Conversely, even though the Innovation Act is highly biased in favor of accused infringers, a risk-neutral PAE or large practicing patentee may be able to extract greater settlements from risk-averse accused infringers, such as startups and small companies, by credibly threatening to take a strong case to trial. This is contrary to the poorly reasoned analysis by organizations such as the Electronic Frontier Foundation, which wrongly assumes that PAEs are “patent trolls” that file “weak” suits and also seemingly forgets small companies are regularly sued by larger competitors. Thus, the Innovation Act’s fee-shifting provisions could very well hurt small companies and startups that are defendants accused of infringement.

In sum, the gains from the Innovation Act’s fee-shifting provision, may simply go to large, risk-neutral companies, regardless of whether they are the Intellectual Ventures or Ciscos of the world, just as scholarly analysis has shown how fee-shifting operates in other areas of the law. Perhaps that is why it is not a coincidence that the Intellectual Property Owners Association , which is dominated by large companies, does not oppose it, while the National Venture Capital Association effectively does oppose it. Like the America Invents Act, the Innovation Act’s fee-shifting provisions would probably shift today’s innovation footprint away from the radical and disruptive (associated more with startups and individuals) towards the incremental (associated more with large, established companies).

There is no solid evidence that the potential benefits of the Innovation Act’s biased fee-shifting provision would outweigh its likely substantial costs. These costs could be so large that that even if we include the touted benefits from all of the other provisions in the Innovation Act, some of which could prove useful, I doubt the Act is worth it. In the very least, we should not impose radical and potentially very costly changes in the patent system without very good evidence. As such, anyone who cares about innovation as a whole should oppose the Innovation Act as it stands.

Who is to Blame for High Litigation Costs: Plaintiffs for filing the lawsuits or Defendants for refusing to deal and instead fighting?

The recent WSJ op-ed by John Chambers (CEO Cisco) and Myron Ullman (CEO JCPenny) is interesting, but largely not compelling. What the article does do is indicate (1) that patent litigation is the monetization avenue being used by non-practicing patent holders and (2) that it is pretty clear that manufacturers and retailers would be better off (at least in the short term) without being charged with patent infringement.

The core of their argument is here:

A 2012 study by Boston University researchers estimated that companies spent upward of $29 billion a year defending patent lawsuits, and the problem has not let up. According to RPX Corp., more than 3,600 companies and named defendants were sued by so-called patent-assertion entities in 2014, triple the number in 2006. Patent-assertion entities—aka nonpracticing entities, or as some would call them, trolls—that own patents but do not make products or sell services based on them file more than 60% of patent litigation in the U.S.

A civil lawsuit generally comes about based upon a failure of the parties to negotiate a just solution.  Of course, for any given lawsuit, we don’t know beforehand whether it is the plaintiff or the defendant who is being more unreasonable.

The op-ed suggests that the plaintiffs are to blame for filing the lawsuits, but there is also a strongly compelling case for arguing that the defendants are to blame for refusing to deal and instead fighting every lawsuit tooth-and-nail. When reach a point where out-of-litigation resolutions are rare, we should recognize that it is a systemic problem.  And, at this point – where the primary complaint is high litigation costs – the solution is not to favor one side or the other, but instead to look for systemic changes that substantially decrease the cost of resolution.

Gene Quinn provides his take on the op-ed at IP Watchdog.

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

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.