Tag Archives: Venue

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

Patent

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

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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.

Upcoming Conferences and Workshops

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By Jason Rantanen
Three upcoming conferences that may be of interest to readers:
This Friday and Saturday, January 16 and 17, the University of San Diego School of Law’s Center for Intellectual Property Law & Markets is holding its 5th Annual Patent Law Conference.  This year’s topic is “Patent Invalidity after the America Invents Act.”  Speakers include Judges Bencivengo, Bartick & Chen.  I attended last year as part of PatCon and thought it was a great event.  More details here: http://www.sandiego.edu/law/centers/ciplm/detail.php?_focus=49377#overview
Hal Wegner’s 3rd Annual Naples Patent Law Experts Conference will be held February 9 and 10.   This beachfront Conference in Naples, Florida, will involve  an interactive discussion by more than thirty faculty members.  Topics to be covered include recent and pending Supreme Court patent law decisions, potential legislative activity, issues of international law, and more. Further information from the sponsoring organization, the University of Akron, is available here: http://www.uakron.edu/law/ip/naples-midwinter.dot
On March 5-6, Don Chisum and Janice Mueller will conduct a two-day patent roundtable seminar.  The program is limited to a total of ten participants to maximize opportunities for interactive discussion and debate.  All sessions are led by treatise authors and educators Don Chisum and Janice Mueller. Coverage focuses on recent significant patent decisions of the Federal Circuit and U.S. Supreme Court. Topics currently planned for discussion include:
  • The Supreme Court’s Alice Corp. decision on patent-eligible subject matter and subsequent Federal Circuit decisions applying Alice; 
  • The Supreme Court’s grant of certiorari in Commil USA concerning the intent requirement for inducing infringement;
  • The Supreme Court’s grant of certiorari in Kimble v. Marvel concerning the propriety of post-patent expiration royalties;
  • The Supreme Court’s pending decision in Teva v. Sandoz on review of patent claim construction;
  • The Federal Circuit’s grant of en banc review in SCA Hygiene to determine whether the Supreme Court’s Petrella decision changed the law of laches as a defense to patent infringement;
  • Patent Practice Gone Wrong: Lessons from Patent Malpractice, Exceptional Case and Rule 11 Sanctions, and Inequitable Conduct Cases;
  • Patent Claim Construction and Definiteness in the Wake of Nautilus (and Anticipating Teva); and
  • Inter Partes Review: Two-Year Snapshot and Lessons from Case Studies.
No advance preparation is expected or required. The Supreme Court of Ohio Commission on Continuing Legal Education has approved the seminar for 12.0 hours of CLE instruction. For additional details on the venue, topics, and registration form, see http://chisum-patent-academy.com/upcoming-patent-law-seminars/advanced-patent-law-seminars-cincinnati-oh/ or e-mail info@chisum.com.

 

Looking at Inter Partes Reviews

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Since the new procedure launched in 2011, third parties have filed more than two thousand requests for Inter Partes Review.

IPR Filings

In their new University of Chicago Law Review essay, Professor Brian Love and Shawn Ambwani explore some of the results from these past two years. See Inter Partes Review: An Early Look at the Numbers, 81 U Chi L Rev Dialogue 93 (2014) [Essay].

Love, who tends to favor a strong post-issuance review regime, suggests that (based upon the initial numbers) the regime is doing its job:

Though it would be premature to make sweeping claims about IPR at this time, so far IPR appears to be a powerful shield for those accused of patent infringement (and those who anticipate that they may soon be). Compared to requests for inter partes reexamination, petitions for IPR are currently granted at a similar rate, but once instituted, they result in the elimination of every challenged claim about twice as often, reach a final decision almost twice as quickly, and make accused infringers almost twice as likely to win motions to stay co-pending litigation. In its attempt to create a formidable avenue for administratively challenging issued patents, Congress appears to have hit the mark—but only time will tell for sure.

Looking particularly at NPEs, the article reports that IPR-challenges of patents being elsewhere asserted by NPE are more likely to be instituted (as compared with the population), but less likely to result in cancellation of claims.

Over the next year, the number of results will grow tremendously and we will have a better understanding of the process and its merits. In addition, I suspect that the results will vary over time as Office hones its approach and the composition and leadership of the PTAB changes.

 

Notes from the Patent Public Advisory Committee Meeting

Patent,

by Dennis Crouch

  1. Notice has been prepared for Subject-Matter-Eligibility Guidance, but the USPTO and White House is reviewing that notice based upon Ultramercial and will be released “as soon as we can.”  Will provide an avenue for written and verbal comments from the public.
  2. RCEs Backlog is again under control.
  3. Average pendency (filing-to-issuance) is 38 months for FY2014.  Only about 11 months of that represents time where the PTO is waiting on applicant responses.  Track-One (the fast-track) applications are averaging 16-months to issuance/abandonment.
  4. 1.1 million utility applications are in the pipeline (not counting provisional or PCT applications) has remained relatively steady.  The number of applications awaiting a first action on on the merits has dropped to about 600,000. These figures are major accomplishments considering that more applications are being filed than ever before.
  5. Patent examiner attrition rate is low <5%.  This means that the USPTO needs to take steps to make sure that more experienced examiners continue to do an excellent job.
  6. Interviews continue to rise – about 30% of applications involve an interview prior to the initial disposal (marked by an allowance, abandonment, RCE).
  7. USPTO along with the IP5 is rolling out a “Global Dossier” for patent applications filed in the various countries with the hope of facilitating the sharing of information between offices. Expected in FY2015.
  8. PTAB now has over 200 judges – up from 80 in 2010 with a goal of hiring 60 more judges in FY2015.  About half of judge time is spent on ex parte appeals.
  9. Of the 161 IPRs with final written decisions, in 63% all challenged and instituted claims were found unpatentable while in only 16% of cases were all claims found patentable.
  10. The backlog of ex parte appeals remains over 25,000 pending cases. Most of these have been waiting 18-months or more.
  11. In FY2014, the USPTO collected $3.17 billion in user fees.  The USPTO’s IT Department (OCIO) has a budget of $670 million.
  12. USPTO Expects that Congress will address patent reform as well as trade secret reform.

Patent Ownership and Standing: Legal Title vs Effective Title

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by Dennis Crouch

Azure Networks and Tri-County Excelsior v. CSR, et. al (Fed. Cir. 2014)

The court here holds that the legal owner of the patent has no standing to be a co-plaintiff with the exclusive licensee. When all substantial rights in the patent are transferred to an exclusive licensee that entity becomes the effective owner and the license is an effective assignment. In my mind, the decision here is an incorrect results-oriented decision in reaction to the plaintiffs’ too-clever pre-filing actions. 

The ownership and control history of U.S. Patent No. 7,756,129 is fairly interesting, if also obscuer.  The “personal area networking” patent was originally owned by the innovative company BBN, but by 2009 Azure Networks was the owner.  Missing from the USPTO records is the chain-of-title from BBN to Azue. In its opinion here, the court alluded to the chain by mentioning that the patent has “passed through many hands of ownership.”  From context, I believe that the chain of title was discussed in the Federal Circuit briefs, but those portions are confidential and non-public.

In an odd move, Azure transferred ownership of the patent (as a gift) to a non-profit organization – the Tri-County Excelsior Foundation which is a sub-org of the E.D.Texas Court Appointed Special Advocates (CASA) group. As part of the transfer, Azure retained (or was transferred-back) an exclusive license of “all substantial rights” that include “the exclusive, worldwide, transferable right to bring enforcement actions, unfettered control over litigation, and exclusive authority to reach settlements and grant sub-licenses” further, under the agreement the charity “may participate in litigation only at Azure’s sole discretion.” In return for grantin the back-license, the charity receives 1/3 of proceeds on the patent.

The court here suggests that the motivation for the donation was largely to ensure that the case venue would remain in the Eastern District of Texas.

In this lawsuit, Azure and Tri-County jointly filed the complaint and the question on appeal is whether Tri-County – as the patent owner – has standing as a co-plaintiff. In its decision, the Federal Circuit ruled no – the owner has no standing to join the lawsuit because it had transferred substantially all rights to the exclusive licensee.

As the district court recognized, nothing about this relationship structure indicates that Tri-County has control over any aspect of litigation involving the ’129 patent. Rather, it is clear that Azure is holding all the strings. In sum, Azure’s exclusive right to sue, exclusive license, and freedom to sublicense are factors that strongly suggest that the Agreement constitutes an effective assignment.

There are several problems with this conclusion.  First, legal title remains with the charity and the tradition is that a party with legal title can be joined as a plaintiff with an exclusive licensee who has the right to enforce.  Second, the charity here retains a major and direct interest in the outcome of the case (33%) that creates a genuine conflict in fact. Third, the agreement also gives the charity the right to cancel the license at will (during an annual window) or for breach (anytime). And fourth, the implicit good faith elements of the contract provide additional rights to the legal title holder.

Need Not vs Shall Not: The usual rule is that all owners of a patent must be joined-together in a lawsuit asserting the patent.  In a number of prior cases, the Federal Circuit has held that a title-owner need not be joined if the plaintiff/exclusive-licensee holds all substantial rights in the patent.  See Morrow v. Microsoft, 499 F.3d 1332 (Fed. Cir. 2007).  Here, the court turns takes that approach substantially further by holding that the title-holder shall not be joined in this situation.

= = = = =

Recording License Agreements: License agreements are not normally recorded with the USPTO. What this means is that someone who purchases a patent (or receives the patent as a security interest) without notice of the license will still be bound by the license.  However, when a license is (as here) an “effective assignment,” the implicit suggestion is that it must be recorded to fully secure rights against future bonafide purchasers and creditors.

The Patentee’s Risk of Multiple-Jeopardy

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In Blonder-Tongue Labs., Inc. v. Univ. of Ill., 402 U.S. 313 (1971), the Supreme Court precluded a patentee from re-asserting a patent that had been found invalid in a separate suit.  Prior to that case, a patentee who lost on validity against one party was not generally precluded from asserting the same patent against another party.  The doctrinal hook in Blonder-Tongue is known as non-mutual collateral estoppel and it allows a new-challenger to take advantage of the success of a prior-challenger. In a new decision, Judge Bryson has applied the doctrine mid-stream to quickly conclude a pending lawsuit by simply precluding the patentee from continuing to assert the patent after another court has ruled it invalid.  DietGoal v. Chipotle, 12-cv-764 (E.D.Tex. 2014).

Risk of Multiple Jeopardy: The case here highlights the difficulty faced by patent assertion entities seeking to enforce their patents against multiple parties.  Each accused infringer has the right to independently challenge a patent’s validity. But, if the patentee loses even one of those challenges, then the patentee will be estopped from further asserting the patent.  Importantly, an invalidity finding in one case operates to shut down both pending and future assertions of the patent.  Prior to the America Invents Act of 2011 (AIA), many patent enforcers had begun joining multiple defendants into single lawsuits and that setup-at least procedurally-helped patentees avoid the multiple-jeopardy risk.  However, the AIA has forced a separation of these lawsuits in a way that again highlights the one-way risk.  Under this new system, parallel infringement actions (same patent, different defendants) are now more likely to be heard in different venues and before different judges in a way that makes alternative outcomes more likely.  And, the rise in post-issuance challenges further removes the risk-decision from the patent holder’s discretion.

Here: Federal Circuit Judge Bryson is sitting by designation in DietGoal v. Chipotle.  The infringement litigation was filed in back in 2012 and involves U.S. Patent No. 6,585,516 that covers a computerized meal planning tool. Claim 2 of the patent is listed below:

2. A system of computerized meal planning, comprising:
a User Interface;
a Database of food objects; and
a Meal Builder, which displays on the User Interface meals from the Database, and wherein a user can change content of said meals and view the resulting meals’ impact on customized eating goals.

The same patent has been asserted in 60 other recent infringement lawsuits.  Importantly, in one-such-case – DietGoal v. Bravo Media – the district court judge found all claims of the patent invalid as impermissibly claiming an abstract idea.  In that decision, Judge Engelmayer (S.D.N.Y.) wrote:

[T]he claims of the ’516 Patent recite nothing more than the abstract concept of selecting meals for the day, according to one’s particular dietary goals and food preferences.

Following that decision in favor of Bravo, the defendants here (Chipotle) asked Judge Bryson to apply issue preclusion to end its case as well.

Collateral estoppel – also known as issue preclusion – applies to bar a party from re-litigating certain issues.  There are typically four elements that must be met before estoppel will attach:

  1. The issue sought to be precluded from relitigation is identical to the issue decided in the earlier proceeding;
  2. The issue was actually litigated in the former proceeding;
  3. The determination on the issue in the prior action was necessary to the resulting judgment in that case; and
  4. The person against whom collateral estoppel is asserted had a full and fair opportunity to litigate the issue in the prior action.

Here, Judge Bryson found that all four of those elements had been met with regard to patent-ineligibility as decided in the prior Bravo case.

In Blonder-Tongue, the Supreme Court noted that estoppel might not apply in “those relatively rare instances where the courts wholly failed to grasp the technical subject matter and issues in suit.” DietGoal here argued, that this was one of those relatively rare instances — especially since the district court in Bravo failed to conduct a claim construction before making its determination. However, according to Judge Bryson, DietGoal failed to indicate how claim construction would have been important to the 101 analysis.  Judge Bryson also cited the several Federal Circuit decisions that

On Appeal: The Bravo decision is on appeal. That said, an important element of collateral estoppel is that it applies after the original district court final judgment – even if an appeal is pending and even if the “later” case was well underway at the time of the prior decision.  Now, assuming that DietGoal can keep this case alive (likely via appeal) until the Bravo appeal is decided, and assuming that DietGoal wins on appeal (which I suspect is unlikely), then Judge Bryson would be forced to reconsider the case on its merits.

USPTO Continues to Reduce Patent Term Adjustments

Patent

By Dennis Crouch

Although the Patent Act provides for a 20-year patent term, that term can be extended in a few ways. The most common avenue is through Patent Term Adjustment that is automatically awarded to patentees if the USPTO fails to meet its guarantee of timely examination. As the backlog of pending cases grew, so has the average patent term adjustment. More recently, however, the USPTO has moved to reduce the backlog and average pendency – that result is that PTA has also been significantly reduced — for the first time in several years, the average PTA is below 1-year. The time series below shows the average PTA for all utility patents granted since January 2005. The jump in PTA seen in 2009 was due to a legal change in how the term is interpreted. The second chart shows the percentage of patents that are awarded PTA – that figure is also trending down, but is still a troubling 70%.

Patent Reform 2014: Removing Non-Practicing Entities from the USITC’s Jurisdiction

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This is a Guest Post from attorney Ben Snitkoff who originally posted it on the blog Technically Legal. Technically Legal is a blog and podcast run by three technology-focused lawyers and their technology expert: David O’Brien, Dominik Rabiej, Ben Snitkoff, and David Lu.

Two Representatives have introduced a bill in the House aimed at preventing non-practicing entities (NPEs) from using the International Trade Commission (ITC) as a venue for patent disputes.

First, some background. The ITC is an administrative body charged with holding hearings and making adjudications regarding imports into the United States. In addition to its other duties, it may prevent the importation of items that infringe US patents, trademarks, or copyrights. However, in order to prevent importation of infringing articles, a complainant (or plaintiff) in the ITC must prove that there is a domestic industry protected by that IP.

Before 2006, injunctions were regular in patent cases in Federal District Court. If an NPE won a case against an operating company, the NPE would almost certainly get an injunction, causing substantial damage to that company. The risk of facing an injunction was a powerful force in driving operating companies to settle cases. If the alternatives are pay money or shut down, many companies would opt to pay.

After the eBay v. MercExchange case, obtaining an injunction in District Court became more difficult, particularly in cases where the plaintiff was an NPE. However, the ITC is a creature of statute, and doesn’t play by the same injunction rules. If a complainant wins a case in the ITC, they automatically get an importation ban against at least the parties found to infringe. However, in order to win the case, you must prove that there is a domestic industry in products protected by the patents the other parties infringe. The most obvious case is that the complainant makes a product protected by a patent, and the respondents are importing devices that infringe that same patent.

After revisions to the statutes that govern the ITC in 1998, complainants could prove that there was a domestic industry by showing that they made substantial investments to license other parties to their patents, or that people who have licenses also have products that practice the asserted patents.

In recent years, investigations filed by NPEs have accounted for a growing percent of investigations before the ITC, and the call for reform has been growing.

The bill introduced in the House purports to be that reform. However, whether the bill would be effective is questionable, particularly because there is no word yet of a corresponding bill introduced in the Senate.

There are several immediate problems with the bill. First, the bill attempts to modify the ability to rely on licensing by replacing the word “licensing” with:

substantial investment in licensing activities that leads to the adoption and development of articles that incorporate the patent, copyright, trademark, mask work, or design

This provision is, at best, inartfully drafted. “Articles that incorporate the patent” has no clear meaning in case law. Similarly, with “incorporate the . . . copyright.” This invites litigation over the meaning of the term when it could be more clearly stated as:

substantial investment in licensing activities that leads to the adoption and development of articles that practice the patent, embody the copyrighted work, or incorporate the trademark, mask work, or design

It is also not very clear what the drafters mean by “adoption and development” and why both actions are necessary, as long as there is “substantial investment” in those articles.

The bill proceeds to put in statute, with some modifications, some recent rule making changes in the ITC which allowed a preliminary investigation with respect to domestic industry. However, the short-description of the bill and the bill itself disagree on the timing. The 1-pager says that “once a preliminary investigation in initiated, requiring [sic] an early initial determination as to the DI standing of a complaint within 45 days.” However, the bill requires that “The Commission shall render its determination in the preliminary investigation under this paragraph not later than 45 days after the filing of the complaint.”

Typically, in ITC practice, an investigation is not initiated until thirty days after the complaint is filed. Additionally, forty-five days is less than half the time the Commission has previously allotted for these preliminary investigations. It seems virtually impossible to allow the parties to conduct discovery, submit briefing, hold a preliminary hearing, and issue a written opinion within either forty-five days of filing, or even forty-five days after a preliminary investigation was initiated.

Finally, even in cases where a complaint fully proves their case, the ITC may choose not to exclude certain articles for importation if it was not in the public interest. Those rare cases were traditionally limited to cases where public safety and welfare were endangered by an importation ban. This bill expands the public interest to include competitive conditions in the United States. This section appears to accomplish what it sets out to do, though the ITC’s Administrative Law Judges may be reluctant to hold that the importations of consumer luxury goods rise to a level of public interest so important as implicate these new guidelines.

Fee Shifting as a Risk Management Exercise

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By Dennis Crouch

I have written before that patent plaintiffs may welcome more fee-shifting so long as they are balanced in the way that they apply both to plaintiffs and defendants. In Octane Fitness, the Supreme Court followed this pathway – giving trial court judges discretionary authority to determine which cases are sufficiently “exceptional” to warrant an attorney fee award.

Because of the expense, unpredictability, and potential delays of patent litigation, patent assertion entities spend a considerable amount of time managing and hedging against downside risks. They do this by finding contingency fee attorneys and partners willing provide substantial up-front monies in order to fund an enforcement campaign. Still, in the wake of Octane Fitness, some assertion entities have at least informed their investors of potential risk. Spherix Inc, for instance, recently filed a quarterly report remarking on the topic:

Recent rulings also create an increased risk that if the Company is unsuccessful in litigation it could be responsible to pay the attorney’s fees and other costs of defendants by lowering the standard for legal fee shifting sought by defendants in patent cases.

Link.

Of course, for masters-of-risk-management, the increased risk of owing attorney fees upon losing a case is just another risk to be managed.

Athena Fee Shifting Protection (FSP): A new product being offered by Athena FSP is designed to help in this regard. In return for a percentage share of any eventual award or settlement, Athena FSP will promise to pay any attorney fee award lodged against their partner. For patent assertion entities, this model eliminates the downside risk of losing a fee shifting award by reducing the potential upside by a few points. (Note: the standard policy limit is $3m).

Although Athena FSP’s product looks like insurance, the company wants to ensure that its product is not regulated as insurance. One difficulty with insurance is that state regulators typically enforce a rule against providing insurance for intentional torts — and losing on an exceptional-case finding has many parallels to intentional torts. Because of the upside-only payout, a better analogy may be to think of Athena FSP as an investor who, instead of paying cash for shares, takes a percentage of revenue in return for co-signing the loan.

I asked Athena’s Director Ashley Keller whether there is some fear that judges will be more likely to award fees in their cases since the partnership with Athena FSP seems designed as a plan toward malfeasance. The well-considered retort is twofold: Athena’s approach is to conduct an extensive deep dive into the potential lawsuit as a way to vet the case and only partner in situations where an exceptional case award is quite unlikely. That vetting process can then serve as evidence that an outside entity was willing to put significant money at risk based upon its thorough analysis that the case was not exceptional. In other words, if this was an insurable risk then it shouldn’t be seen as exceptional.

Guest Post: Are APIs Patent or Copyright Subject Matter?

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Guest Post by Pamela Samuelson, Richard M. Sherman Distinguished Professor of Law at Berkeley Law School. I asked Professor Samuelson to provide a discussion of the recent Federal Circuit decision in Oracle v. Google. DC.

Application programming interfaces (APIs) are informational equivalents of the familiar plug and socket design through which appliances, such as lamps, interoperate with the electrical grid. Just as a plug must conform precisely to the contours of the socket in order for electricity to flow to enable the appliance to operate, a computer program designed to be compatible with another program must conform precisely to the API of the first program which establishes rules about how other programs must send and receive information so that the two programs can work together to execute specific tasks.

No matter how much creativity might have gone into the design of the existing program’s interfaces and no matter how many choices the first programmer had when creating this design, once that the API exists, it becomes a constraint on the design of follow-on programs developed to interoperate with it. Anyone who develops an API is, in a very real sense, designing that aspect of the program for itself and for others.

One of the many errors in Judge O’Malley’s decision in the Oracle v. Google case was her insistence that the merger of idea and expression in computer program copyright cases can only be found when the developer of an API had no choice except to design the interface in a particular way. If there is any creativity in the design of the API and if its designer had choices among different ways to accomplish the objective, then copyright’s originality standard has been satisfied and not just the program code in which the API is embodied, but the SSO of the API, becomes copyrightable. Indeed, harkening back to an earlier era, Judge O’Malley repeated the unfortunate dicta from the Apple v. Franklin case about compatibility being a “commercial and competitive objective” which is irrelevant to whether program ideas and expressions have merged.

The Ninth Circuit in the Sega v. Accolade case, as well as the Second Circuit in Computer Associates v. Altai, have rejected this hostility toward achieving software compatibility and toward reuse of the APIs in subsequent programs.

Although purporting to follow Ninth Circuit caselaw, Judge O’Malley in Oracle v. Google ignored some key aspects of the holding in Sega. Accolade reverse-engineered Sega programs in order to discern the SSO of the Sega interface so that it could adapt its videogames to run on the Sega platform. The principal reason that the Ninth Circuit upheld Accolade’s fair use defense as to copies made in the reverse engineering process was because “[i]f disassembly of copyrighted object code is per se an unfair use, the owner of the copyright gains a de facto monopoly over the functional aspects of his work—aspects that were expressly denied copyright protection by Congress,” citing § 102(b). To get the kind of protection Sega was seeking, the Ninth Circuit said it “must satisfy the more stringent standards imposed by the patent laws.”

Judge O’Malley in Oracle also ignored the Ninth Circuit rejection of Sega’s claim that Accolade infringed based on the literal copying of some Sega code insofar as that code was essential to enabling the Accolade program to run on the Sega platform. That Sega code might have been original in the sense of being creative when first written in source code form, but by making that code essential to interoperability, the expression in that program merged with its function, and hence Accolade’s reproduction of it was not an infringement.

The SSO of the Sega interface was almost certainly creative initially as well. Yet, once that interface was developed, it was a constraint on the design choices that Accolade and other software developers faced when trying to make videogames to run on Sega platforms. The Second Circuit similarly rejected Computer Associates’ claim that Altai had infringed the SSO of its program interface and suggested that patents might be a more suitable form of legal protection for many innovations embodied in software.

Under Sega and Altai, the SSO of APIs are not within the scope of copyright protection for computer programs. Subsequent cases—at least until the Federal Circuit decision in Oracle v. Google—have overwhelmingly endorsed this approach to compatibility issues in software cases.

Perhaps Judge O’Malley was worried that if she did not extend copyright protection to the Java APIs in Oracle v. Google, there would be too little intellectual property protection available to computer programs. After all, she was one of the Federal Circuit judges who would have upheld all of the patent claims for computer-implemented inventions in the CLS Bank v. Alice Corp. case that is now pending before the U.S. Supreme Court. She joined an opinion that warned that if courts struck down the claims in CLS Bank, this mean that hundreds of thousands of software and business method patents would be invalidated. Given the Supreme Court’s skepticism about the Federal Circuit’s rulings on patentable subject matter, there is reason to think that at least some software patents may indeed fall when the Court issues its opinion in Alice. Would such invalidations affect the scope of copyright protection for software?

In the most expansive interpretation of software copyright law since Whelan v. Jaslow, Judge O’Malley in Oracle v. Google endorsed dual protection for APIs from both copyright and patent law. This ignored an important statement from that court’s earlier ruling in Atari Games v. Nintendo that “patent and copyright laws protect distinct aspects of a computer program.” The Oracle opinion instead invoked the dicta from Mazer v. Stein that “[n]either the Copyright Statute nor any other says that because a thing is patentable it may not be copyrighted.”

While it may have been true that the statuette of a Balinese dancer in Mazer was eligible for both copyright as a sculpture and a design patent for an ornamental design of an article of manufacture (as a lamp base), nothing in that decision or any other has upheld utility patent and copyright protection in the same aspect of the same creation, and it seems unlikely that the Supreme Court would abrogate the longstanding tradition tracing back to Baker v. Selden that copyrights protects expression in works of authorship and patents protect utilitarian designs.

In “The Strange Odyssey of Software Interfaces as Intellectual Property,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1323818, I traced the tortuous evolution of the law in relation to the protection of software interfaces. At first, they were not treated as intellectual property at all. Firms published APIs so that others would make programs to run on their computing systems. As firms recognized that they could license interface information to generate revenues, APIs were protected as trade secrets. In the mid- to late 1980s, some argued that the “structure, sequence, and organization” (SSO) of APIs should be protected by copyright law, but by the early 1990s, courts decided they were unprotectable elements of programs, more suited to patent than to copyright protection. And so firms began patenting interface designs, as well as continuing to license them as trade secrets.

If Judge O’Malley’s opinion in the Oracle v. Google case is to be believed, APIs have migrated back into copyright’s realm big time. Unless overturned by the Supreme Court or repudiated or distinguished in subsequent cases, the Oracle decision may well reignite the software copyright wars that so many of us thought had died out after the Sega, Altai, and their progeny.

Spouses of Inventors as Co-Owners

Ethics, , , , , ,

I’ve written about this issue:  in a community property state, does the spouse of an inventor own the patent?  The answer every “family law” expert I know of says yes; every patent lawyer says “no.”  It’s come up in at least one CAFC opinion, and now came up tangentially in a non-prec opinion that did not decide the issue.  That case, Taylor v. Taylor Made Plastics, Inc., is here. (Why does the opinion call James Taylor “James T.” and his wife “Mary T.”?)

Here’s my article on this, which I think I posted a few months ago somewhere. Someday this is going to matter, big time, or not!

DRAFT

A Fifty-Fifty Split:  What if the Spouse of Every Inventor in a Community Property State has an Undivided Interest in an Invention?

By David Hricik*

I. Introduction

If you think the title raises a wild possibility, consider what happened in a recent case appealed to the Federal Circuit.  After being sued for infringement, the defendant had the ex-wife of the inventor effectively grant to it any interest she had in the patent-in-suit.  As a result, the defendant argued that there could be no infringement, both because lack of standing and because it had acquired an undivided interest in the patent.

It almost worked.

The Federal Circuit recognized that under California law the patent was “presumptively community property in which [the wife] had an undivided half interest.”  Fortunately for the accused infringer, the wife had not listed the patent as community property when she was divorcing, and so the court held that res judicata precluded her from arguing that she in fact had an interest in the patent.

But, the odd facts of that case should not give great comfort.  It is important to recognize that if something is community property, it means it belongs to both spouses.  If the spouse of every inventor in a community property state has an undivided equal interest in every patent granted during marriage to the other spouse, then employers of inventors may need to obtain assignment of both spouse’s interests for the employer to have full title. If that is the law, then many patent infringement suits can proceed only if the spouse of the inventor is joined as a party.  If that is the law, many companies do not own, outright, the patents that they believe they do.

This article shows, first, that every court that has addressed the issue has held that a patent issued during marriage to one spouse is community property.  Second, many states hold that property rights can arise prior to issuance, and sometimes even at the time of conception.  Third, it shows that the general rule appears to allow just one spouse to alienate personal community property, but with some exceptions.  Finally, it describes the implications for this body of law on patent practitioners.

2. Basic Community Property Law

No federal statute addresses ownership of a patent application, let alone an “idea” that has simply been conceived: state law would apply. Likewise, the question of who has title to even an issued patent is a question of state law.

Eleven states currently follow community property law:  Alaska, Arizona, California, Hawaii, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin. Obviously, the laws of these states likely vary significantly on some issues, but a few basic points seem true among them all:

The statutes of several community property states provide that each spouse has a present, vested, one-half ownership interest in community property with equal management…. The equal management statutes give each spouse managerial rights over community property.  A spouse may prevent the disposition of certain community assets by the other spouse. Further, either spouse may contract debts during the marriage that may be satisfied with community property.

The concept expressed in the first sentence is worth repeating, since those unfamiliar with community property law often think of it as mattering only upon divorce. This is dangerously incorrect: when something is community property, each spouse owns it – then and there, not just in divorce court.  Also, it is important to emphasize that the community presumptively owns all property acquired during marriage, each spouse holding an undivided equal interest.[6]

With these basic principles in mind, the first question is what is “property” under these statutes, and does it include intellectual property and, most particularly, inventions, patent applications, and patents?

2. “Property” Includes Patents, and Sometimes Applications and Even Intangible Intellectual Property. 

As one would expect, “property” is construed very broadly.[7]  As one court stated:

The word “property” is in law a generic term of extensive application. It is not confined to tangible or corporeal objects, but is a word of unusually broad meaning. It is a general term to designate the right of ownership and includes every subject of whatever nature, upon which such a right can legally attach. It includes choses in action and is employed to signify any valuable right or interest protected by law and the subject matter or things in which rights or interests exists.[8]

An issued patent is, of course, by federal statute to be treated as personal property under state law.[9]  Thus, presumptively a patent acquired by one spouse during marriage belongs to the community, not separately to the inventor.[10]

Numerous divorce courts have divided patents issued during marriage as “property” under community property statutes[11]  Typically these courts assume a patent issued during marriage is community property and do not analyze whether that assumption is correct.[12]   Occasionally a court engages in at least a minor amount of analysis.  For example, a Florida appellate court stated that “[c]ourts outside Florida have reached the same logical conclusion — a patent is personal property that may be the subject of equitable distribution when the inventor and his or her spouse dissolve their marriage.”[13] The Kansas Supreme Court is the only court to have engaged in a lengthy analysis of the question, stating in part:

Vincent believes that the interest in the patents does not have the qualities listed [in the definition of property.] This is not self-evident….

[I]ntellectual property, once it has been created, is less inextricably related to its creditor than other assets now characterized as marital property, such as pensions and professional goodwill. Unlike pensions and professional goodwill, rights in intellectual property are highly transferable, and title may be placed in the name of one who did not originally produce them.[14]

The point here is that state courts either assume or readily conclude that patents issued during marriage are community property.

In some states, a spouse has interests even before the patent issues, depending on which approach to the “inception of title” doctrine the jurisdiction takes:

Arguably, inception [of title] may occur at any of three times:  (1) when the concept is sufficiently developed to generate a plan to build the invention [i.e., conception]; (2) when the invention is actually built [i.e., actual reduction to practice]; or (3) on the effective date of the patent [i.e., constructive reduction to practice].[15]

Courts have applied each view, though often not using the bracketed terms of art that patent practitioners would find comforting.

As an example of the first view, a California court divided patents that had been “perfected” during marriage but issued afterward.[16]  In addition, in a rare case that provided somewhat extended discussion, a Florida appellate court reasoned that a patent application was property that was subject to equitable division because it had been “deemed sufficiently well developed to submit to the federal patent authorities on a non-provisional basis.”[17]

As an example of the third view, a Washington appellate court held that a patent issued during the marriage was community property even though the invention had been conceived prior to marriage.[18]

Some courts adopt a muddled view that seems to reflect both the third and first views.  For example, the Supreme Court of Hawaii stated that “a patent does not exist until it is granted,” and so there was no property right “unless and until the patent issues.”[19] Nonetheless, it recognized that in making equitable division trial courts should determine “whether there was value in the pre-patent intangible intellectual property and the patent itself.”[20]

This shows that patents, and in some states applications and even merely conceived inventions, are “property.” All property acquired during marriage is presumptively community property, belonging to both spouses, not just the inventor.

The approach of state courts and state divorce lawyers to this question stands in stark contrast to common patent practice, at least as I know it.  In my experience patent practitioners do not obtain assignments from an inventor’s spouse.  Similarly, a key treatise on acquisitions makes no mention of spousal rights even as a part of due diligence during acquisition of patents.  I have never seen litigated the question of whether an inventor’s spouse must be joined as an indispensable party to a patent infringement brought by the inventor’s assignee.

The incongruity between how patent lawyers and divorce lawyers look at spousal rights is significant:  if the state courts are right, then spouses may have rights in patents that assignees may think they own outright.  If the spouse has an undivided equal interest in the patent, then they have the unfettered right to do exactly what the assignee can: sue, license, or otherwise enforce the patent.  Either state divorce courts or patent lawyers have it wrong.

Whether those rights exist means turns on the myriad facts that can arise, as well as application of particular state law. This article cannot examine all the permutations, but instead next includes several scenarios that may commonly arise where state courts have found that the spouse holds an ownership interest.  It concludes by describing potential avenues to reduce the uncertainty that may face assignees, attorneys, inventors, and spouses.

II. Federal Statutes Governing Ownership of Patents and Common Practice

The Constitution of the United States rejects the proposition that inventions should at least initially belong to anyone other than their creator.  In light of this, federal statutes provide that a patent must be applied for in the name of the inventor.  If nothing further is done, the patent will issue in the inventor’s name.  At that point, state law determines ownership.  “It is important to note that only inventorship, the question of who actually invented the subject matter claimed in a patent,’ is a question of federal patent law.  ‘Ownership, however, is a question of who owns legal title to the subject matter claimed in the patent, patents having attributes of personal property.’”  Consequently, for example, absent written assignment, an inventor’s employer will not own any patent naming the employee as the inventor.  This is true even if the employee uses only the employer’s equipment to make the invention and is paid a general salary while conceiving of or reducing to practice the patented invention.

State law determines whether there is an obligation of assignment and its scope.  By federal statute, assignments are to be construed under state law.  Thus, the Supreme Court has held that state courts “may try questions of title, and may construe an enforce contracts relating to patents.”  Similarly, state intestacy laws govern ownership of patents of deceased inventors, and foreign intestacy laws govern patents owned by foreign individuals.

There are other circumstances where state law determines ownership of an invention.  The point here is that nothing in the Patent Act, at least,  indicates that state marital property law should not also apply.  Thus, absent operation of state law to the contrary, the inventor owns the patent.

As a result, it is routine for corporations and other entities that employ those likely to invent patents to require that employees assign any ownership rights to the entity. The assumption is that because the inventor has assigned his invention to the entity, the entity holds full legal title, and thus is the not just the only party with standing to enforce the patent, but also the only party necessary to enforce the patent. All rights, lawyers and assignees believe, belong to the assignee.

Consistent with this practice and beliefs, in my experience no patent lawyer seeks assignment of any right from any inventor’s spouse.  The form assignment used by patent practitioners that originated with the USPTO does not do so. Thus, if the spouse has an interest, then on its face the typical form and practice do not accomplish assignment of the spouse’s interest, especially – for reasons that will become clear —  if the assignment is obtained after the patent has issued.  The next question is: does the spouse have an interest?

III. State Court Application of Community Property Laws to Patent Ownership

The precise contours of each particular community property state are beyond the scope of this article.  No doubt in particular circumstances those facts will matter greatly.  However, three basic principles seem to apply across the jurisdictions, with no doubt differences at their margins but not at their core.

First, the community presumptively owns all property acquired during marriage, each spouse holding an undivided equal interest in the whole.   While it is just that – a presumption – nonetheless it is the starting point.

Second, with narrow exceptions addressed below, one spouse cannot alienate community property; only both spouses can.  For example, a Louisiana statute provides:

A spouse may not alienate, encumber, or lease to a third person his undivided interest in the community or in particular things of the community prior to the termination of the regime.

Under this statute, any contract not signed by both spouses to alienate community property is void.

Again, the statutes and case law do vary.  Washington has a similar statute, but requires that both parties sign any agreement conveying community property only if it is real property.  Thus, it may be that in some community property states patents may be alienable by only the inventor.

Third, with respect to personalty, “property” is construed very broadly.  As one court stated:

The word “property” is in law a generic term of extensive application. It is not confined to tangible or corporeal objects, but is a word of unusually broad meaning. It is a general term to designate the right of ownership and includes every subject of whatever nature, upon which such a right can legally attach. It includes choses in action and is employed to signify any valuable right or interest protected by law and the subject matter or things in which rights or interests exists.

Patents are, of course, by federal statute to be treated as personal property under state law.  Thus, presumptively a patent acquired by one spouse during marriage belongs to the community, not separately to the inventor.  As next shown, that is in fact the result that the courts have uniformly reached in the family law context, when addressing divorce, alimony, or child support.

While patents are personal property and treated as such by state courts, there is less agreement on whether intangible intellectual property that leads to or could lead to a patent is community property.  The “inception of title” doctrine is a critical concept in community property states, and perhaps should be to patent lawyers, because if title is obtained prior to marriage, that property is separately owned. Thus, for example, if a husband conceives of an invention during marriage, and then gets divorced, the spouse may have an interest in any resulting patent.  Conversely, if title only arises when the patent issues, then the spouse would have no interest in patents issued after divorce from an employed inventor.

The state courts have recognized that inception of title to patent rights can occur before a patent issues:

 Arguably, inception [of title] may occur at any of three times:  (1) when the concept is sufficiently developed to generate a plan to build the invention [i.e., conception]; (2) when the invention is actually built [i.e., actual reduction to practice]; or (3) on the effective date of the patent [i.e., constructive reduction to practice].

Courts have adopted the second view.  For example, a Washington appellate court held that a patent issued during the marriage was community property even though the invention had been conceived prior to marriage.  A California court likewise divided patents which had been “perfected” during marriage.  In a rare case that provided somewhat extended discussion, a Florida appellate court reasoned that a patent application was subject to equitable division because it had been “deemed sufficiently well developed to submit to the federal patent authorities on a non-provisional basis.”  Thus, a spouse can have an interest in patent applications filed during marriage, not just patents issued during marriage.

Some courts adopt a muddled view that seems to reflect both the third and first views.  For example, the Supreme Court of Hawaii stated that “a patent does not exist until it is granted,” and so there was no right protected “unless and until the patent issues.” Nonetheless, it recognized that in making equitable division trial courts should determine “whether there was value in the pre-patent intangible intellectual property and the patent itself.”  Further, it held that a trade secret became community property when the trade secret had presently existing value.  “[O]ne ‘owns’ a trade secret when one knows of it….”  This holding could, of course, create a conflict between the spouses over whether to file for a patent application or to maintain protection of the invention only as a trade secret. The employer’s interests may conflict with the spouse’s.

Numerous courts have divided patents issued during marriage as “property” under community property without needing to address whether inception of title could have occurred earlier.  Several cases have simply assumed that patents are community property subject to division by just dividing them.

Typically these courts assume a patent issued during marriage is community property and do not analyze whether that assumption is correct.   Occasionally a court engages in at least a minor amount of analysis.  For example, a Florida appellate court stated that “[c]ourts outside Florida have reached the same logical conclusion — a patent is personal property that may be the subject of equitable distribution when the inventor and his or her spouse dissolve their marriage.”  The point here is that frequently state courts either assume or readily conclude that patents issued during marriage are community property.

The Kansas Supreme Court is the only court to have engaged in a lengthy analysis of the question, stating:

Vincent believes that the interest in the patents does not have the qualities listed [in the definition of property.] This is not self-evident. The business plan, which is built on the patented concept, undoubtedly will be used in an effort to raise capital for the enterprise. Thus, there is a sense in which the patents may be said to have loan value. Another, perhaps more typical, arrangement is for a patent holder to enter into a licensing agreement with a manufacturer/distributor for use of a patent. Consideration under the licensing agreement might be a lump sum. An initial fee and royalties is another likely form for consideration to take.

The court went on to state that:

  [I]ntellectual property, once it has been created, is less inextricably related to its creditor than other assets now characterized as marital property, such as pensions and professional goodwill. Unlike pensions and professional goodwill, rights in intellectual property are highly transferable, and title may be placed in the name of one who did not originally produce them.

Thus, state courts either assume, conclude, or have held that patents issued during marriage are community property.  The most-cited treatise by these courts as indicating that patents are community property does not aggressively take that position, instead discussing the cases and stating among other things that “a spouse would expect to share as fully in intellectual property acquired during marriage as in any other variety of property.”

Finally, while obviously income from patents that are community property belongs to the community, the majority of courts that have addressed the issue have also held that income received during a marriage from even separately owned patents is community property.

III. Federal Law Allowing for Prosecution by Persons With a Proprietary Interest in the Application May Permit Spouses to Control or Interfere with Prosecution.

While it is clear that an assignee of the entire interest in application may prosecute it, federal law sometimes permits even those with merely a “proprietary interest” to continue and even undertake prosecution, at least where the inventor refuses to do so. Specifically, Section 118 of the Patent Act states:

Whenever an inventor refuses to execute an application for patent, or cannot be found or reached after diligent effort, [1] a person to whom the inventor has assigned or agreed in writing to assign the invention or [2] who otherwise shows sufficient proprietary interest in the matter justifying such action, may make application for patent on behalf of and as agent for the inventor on proof of the pertinent facts and a showing that such action is necessary to preserve the rights of the parties or to prevent irreparable damage; and the Director may grant a patent to such inventor upon such notice to him as the Director deems sufficient, and on compliance with such regulations as he prescribes.

The PTO has interpreted this statute to permit heirs, for example, to not only continue prosecution upon the death of an inventor, but to file an application for an inventor who dies prior to filing the application.  The heirs thus must have a proprietary interest in the application or patent.

Does a spouse in a community property state?  The meaning of “proprietary interest” would seem to encompass rights of a spouse in a community property state.  “A ‘proprietary’ interest at the very least suggests some element of ownership or dominion….”  Given, as shown above, that a spouse in a community property state may have an undivided equal interest in the patent, that interest would clearly qualify as “ownership or dominion.”  Thus, federal law would seem to permit spouse to control prosecution if the inventor dies.

IV. Possible Ways to Defeat a Spouse’s Interest

A. Federal Preemption of State Community Property Law

Courts have uniformly held that state law determines ownership of patents – in every context in which the issue has arisen.  Federal law thus is held to apply, and so there is no conflict, and nothing to preempt state law.

In fact, the few courts that have analyzed whether federal law preempts state law have each rejected preemption, though without rigorous analysis.   Divorce lawyers believe there is no conflict between state and federal law.  As a leading commentator wrote:

The federal statute on the transfer of patents, 35 U.S.C. § 261, states generally that patents constitute property and that they are subject to assignment. Courts considering the issue have held that an inventor’s creditors can reach the inventor’s patents, although with somewhat more difficulty than other types of assets. 60 Am. Jur. 2d Patents § 1168 (1987). Given these points, there is general agreement that federal law does not prevent a court from treating a patent as divisible property in a divorce case.

Significantly, state courts have not analyzed this question at length, but instead seem to accept the proposition that patent law does not preempt state community property law.  State courts regularly divide patents among divorcing spouses — despite federal statutes and the Constitution and the obvious federal source of patent rights.

There is a distinction between the cases that apply state law relied upon by these courts and applying state law in this context:  in the other instances, the state law determines who owns a patent or application from the inventor, while application of community property law divests sole ownership from the inventor.

B. The Exception for Sole Management Community Property

Some states allow one spouse to alienate certain property, even if community property.  The Washington Statute quoted above, for example, requires both spouses to consent to alienation of real, but not personal, property.

Other states recognize similar doctrines, including recognizing that some community property is, nonetheless, subject to the “sole management” of one spouse.  Under this doctrine, it may be that an invention qualifies as “sole management” community property, and so assignment by the spouse is not required

C. Estoppel

Estoppel likely would not be a useful tool at least in those states that require that both spouses engage in the conduct that gives rise to the estoppel.  So, for example, in an Arizona case the fact that the husband engaged in conduct that might have estopped him from denying an agreement to sell property did not mean that the wife, or the community was estopped.  While facts could of course give rise to an estoppel against both, in routine transactions that seems unlikely.

IV. Application of State Law to Common Fact Patterns

As explained in the introduction, accused infringers have raised ownership interests in spouses as a defense to standing in a few cases, but have lost due to procedural issues.  The case law suggests that there may be more opportunities for this defense, and some thorny issues concerning ownership of existing patents that lawyers and owners of intellectual property need to consider.

Suppose, for example, that an inventor acquires a patent while married.  If the buyer fails to obtain assignment from the spouse, then the buyer may acquire merely an undivided equal interest with the inventor’s spouse.

Or, suppose that the employee is subject to an obligation to assign any patent issued during assignment.  The spouse may have an interest in a patent application filed on that invention before the obligation to assign the patent arises.  Again, the purported assignor may own only an equal undivided interest in the patent.

There are myriad fact patterns that could arise.  State law may provide the answer to some of them, indicating that the spouse has no interest, or that the inventor alone can alienate the property.  But where state law indicates that the spouse has an interest, then only if state law is preempted or the spouse assigns its interest can the assignee feel comfortable in believing it owns full and clear title.

V. Conclusion: What to Do?

As noted at the outset, this article was intended to raise the issues arising from the conflicting approaches of divorce lawyers and patent lawyers to patent ownership.  It may be that state laws will need to be reformed to exclude patents from community property, or to allow for the inventor to alienate all rights without its spouse’s consent.  It may be that a condition of employment must be that the spouse either relinquish any community property rights or to permit the inventor to alienate any intellectual property rights without permission.

In pending cases, there may be standing defenses that can be raised, since the plaintiff may not have full title.  Further, particularly thorny issues may face corporations that have acquired intellectual property from inventors or from small companies in bulk without due diligence on these issues.

 

The Price Elasticity of Demand for Patents

Patent

By Dennis Crouch

In March 2013 the USPTO significantly raised the maintenance fee charges. Most pointedly, the 11 ½ year renewal fee has jumped 65% from $4,810 to $7,400. The 11 ½ year renewal is last of three fees due and also the most expensive. Market theory for ordinary goods suggests that an increase in the price of goods will result in a reduction of the quantity demanded. The relative proportionality of the reaction depends on a number of factors, including the price elasticity of demand. In the past, I have suggested that the price elasticities of many of the patent office fees are relatively inelastic at their current price point, but I wanted to see how patent owners are responding to the increased fees.

Initial Conclusion: The price elasticity of demand for the 11 ½ year renewal fee is quite inelastic.

Data: I created two groups of patents: One where the 11 ½ year renewal fee was due prior to the March 2013 fee-change and a second group where the 11 ½ renewal fee was due after that date. To simplify the analysis, the pre-fee-change group only included the patents whose 12-year date was prior to the fee change in order to also capture late payments. Similarly, the post-fee-change group only includes patents whose 11 ½ year date was more than 6-months after the fee date to avoid cases where the lower-fee was pre-paid. For each group, I pulled up data for 11-weeks of patents to see what percentage of 11 ½ renewal fees were paid (of those eligible). Those results are shown in the table and charts below.

Fee Due     Paid Second Fee Paid Third Fee Percentage
Pre-Fee-Change 4,810 23,686 17,709

75%
Post-Fee-Change 7,400 23,014 16,592

72%

050514_1628_ThePriceEla2.jpg

This change was relatively constant for both large and small entities. [Small entities are less likely to pay renewal fees, but the relative drop at the time of the fee change was proportional.]

What does this mean?: First, the USPTO fee raise is a boon to USPTO revenue – at least tens of millions of additional dollars per year for the agency. The USPTO has monopoly power over patent rights in the US and, in that situation, the high inelasticity generally indicates 050514_1628_ThePriceEla1.gifthat raising prices will raise revenues. To even further maximize this profit, the PTO could hold an auction for each patent at the 11 ½ year mark – giving the patent to the highest bidder. Of course, this money must come from somewhere and many corporate patent budgets are relatively fixed – leading to a choice between new filings and maintenance fee payments. The USPTO is likely wise to avoid more substantial increases in fees – over the long run markets find ways to avoid monopoly power that is abused.

Big Caveats: I looked at this particular fee change because it was so large and so I suspected that a response would be fairly easy to measure. These fees are typically due at a point about 15-years after the invention date. Many folks would suggest that – by that point – the patentees should have a fairly good handle on the value of the underlying innovation and the patents covering that innovation. Further, at that point patent valuation will likely have a strong bi-modal distribution with a substantial number of patents having essentially no value because technology has moved-on (and is never coming back) and then a substantial number with value because the innovation (or its kin) is being used in products on the market. If an innovation covered by a patent is being used in the marketplace then the patent is likely worth significantly more than $10,000. The leading theory is that, by this 15-year-mark, there are not many patents in no-mans-land that are still not on the market but that have a good chance of being on the market within the next few years. Of course, this is a theory with little empirical basis except that it does help to explain the low elasticity shown above.

In other realms, I have shown more price elasticity due to USPTO fee changes. These are most likely where the patentee is not choosing between patenting and abandonment but instead is choosing whether or not to add a feature, such as additional patent claims or an extremely long disclosure. When the USPTO significantly raised the costs for both of those, patentees reacted by substantially reducing demand for those services.

Penn State’s Auction Fail

Ethics

Not sure how much to read into one anecdote, but Penn State tried to put constraints on who could purchase its patents.  Sale didn’t go well, as reported here.

On a professor listserv I’m on they’re reading a lot into it. I’m not sure that, without a whole lot of analysis, you could really conclude anything…

Supreme Court Takes-On Question of Joint Infringement

Patent, Supreme Court, , , ,

By Dennis Crouch

[Transcript of Oral Arguments]

The Supreme Court heard oral arguments today in Limelight Networks Inc. v. Akamai Technologies, Inc. Limelight is best seen as part of a series of cases considering what it means to be an infringer. In particular, the court has struggled to determine what to do when one party performs a portion of a patented invention and then another party performs the remaining portion. In this setup, the parties are able to collectively benefit from the invention without being labelled infringers under the Federal Circuit’s strict single-entity-infringer rule. See BMC v. Paymentech (Fed. Cir. 2007). The BMC line of cases creates an avenue for avoiding infringement by properly dividing the corporate structure. That pathway is further solidified by our current age of distributed computing that allows for servers and systems to closely interoperate even though controlled by different parties. In this case, the invention is focused on a mechanism for quickly delivering video streams to lots of people over the internet by distributing servers. The patent spells out the entire method and system for accomplishing this result, but the defendant here each only practice a portion of the whole invention but expressly encourages its customers to perform the rest. In an admittedly biased way, the patentee’s attorney Seth Waxman explained the setup as follows:

Mr. Waxman: This case is not complicated. This case involves a four­ or five­step method in which Limelight performs all but one or two of the steps and tells its customers, if you want to use our service, you have to perform the other step. Here’s exactly how you do it. We have somebody 24 hours a day, seven days a week assigned to you to help make sure you do it the right way.

In Limelight, the Federal Circuit (sitting en banc) offered one outlet to limit avenues-of-infringement. Here, the appellate court held that an entity can be liable for inducing infringement if that party induces performance of the entire invention, even if no single party performed all of the elements. That holding is a shift in thinking – prior case law required evidence of underlying single-actor direct infringement as a pre-requisite to an inducement finding. The statute for inducement indicates simply that “whoever actively induces infringement of a patent shall be liable as an infringer.” 35 U.S.C. § 271(b). An interesting element of this case is that the Limelight originally indicated that it would reconsider the BMC doctrine regarding direct infringement. However, the en banc panel decided to limit its analysis only to the inducement theory. If Limelight is successful on appeal, the Federal Circuit may then have an opportunity to reconsider the single-actor rule for direct infringement under Section 271(a). More particularly, the Federal Circuit has applied a fairly strict agency doctrine rule, but other areas of law have allowed for a more liberal agency doctrine that would potentially capture the type of joint infringement alleged in this case.

The question presented is:

Whether the Federal Circuit erred in holding that a defendant may be held liable for inducing patent infringement under 35 U.S.C. § 271(b) even though no one has committed direct infringement under Section 271(a).

Aaron Panner argued on behalf of the petitioner Limelight (the accused infringer) and shared time with Assistant Solicitor Ginger Anders who filed a brief in support of the petitioner. Seth Waxman argued on behalf of the respondent-patentee Akamai. In the case, the US government took the middle-ground position that the patentee has the best policy argument but that the statute clearly supports reversal.

Focusing first on the policy issues, the court asked whether Limelight is asking for a rule that allows patentees to skirt infringement simply by altering its corporate structure:

CHIEF JUSTICE ROBERTS: Your position makes it pretty easy to ­­ to get around patent protection, doesn’t it? All you’ve got to do is find one step in the process and essentially outsource it or make it attractive for someone else to perform that particular step and you’ve essentially invalidated the patent.

MR. PANNER: I don’t think so, Your Honor. In the two following senses.

First of all, empirically speaking, there have not been very many cases in which this has proven to be a problem. It has been a long understood principle of patent claim drafting that method claims should be drafted from the point of view of a potential infringer so that all of the steps can be carried out by that potential infringer. And prospectively, certainly ­­ and given that this rule has been clearly articulated by the Federal Circuit now for many years, or at least several years, prospectively, the patent applicant has every incentive to draft claims from the point of view of a single potential infringer.

This ­­ the claim that’s at issue here, there’s no dispute. It could have been written in such a way that the steps would have been carried out by a single infringer and, indeed, that may have been the intent. . . .

JUSTICE SCALIA: I’m just arguing about whether the safe haven you have given us for patentees really exists. It doesn’t seem to me you can avoid the problem by simply requiring all the steps to be conducted by one person.

MR. PANNER: Well, Your Honor, in ­­ in my experience in ­­ in terms of dealing with patents that are written to technologies that do involve interaction, for example, between cellular phones and networks and content providers who are sending content to a phone, for example, it is very common to draft claims from the point of view of someone who’s participating in that process so that all of the steps will be carried out in that ­­ by that person. . . .

JUSTICE KAGAN: [N]otwithstanding what you said about 10 of 11 judges, it was clear that the judges thought that there was a real problem here in terms of an end run, and that they looked at this and said, well we could do it under 271(a) or we could do it under 271(b), and 271(b) seems a lot more natural and better for various reasons. But your sense in reading the opinion that all those judges who did it under 271(b) are just going to go back and do the exact same thing under 271(a).

Panner’s argument here does not seem like one that the judges would truly support – that the patentee wins or loses here based upon whether it correctly followed the proper claim-drafting trick.

Responding to the same issues, the US Government lawyer (Anders) recognized the “end run” problem as legitimate.

MS. ANDERS: I think the Federal Circuit was understandably concerned about allowing inducers to perform some stops of a process themselves to escape liability, but this Court has twice held in both Microsoft v. AT&T and before that Deep South v. Laitram that judicial concerns about gaps in 271’s coverage should not drive the Court’s interpretation of that provision. That is because any time that you close a gap in 271, expanding patent rights, you are invariably implicating competing concerns and it’s for Congress to resolve those concerns.

When his turn to speak, Waxman hit home the policy concerns:

MR. WAXMAN: Please make no mistake about what Limelight is asking you to do. Under Limelight’s theory, two or more people can divide up and perform the steps of any method claim, however drafted, without liability. . . . Let’s assume that there is disclosure and patenting of a cure for cancer or a novel treatment for cancer that involves, as they often do, the administration of different drugs sequentially. And two parties get together and say, I’ll administer Drug 1, you administer Drug 2, and we can take advantage of this marvelous patented process without paying anything ­­ giving anything whatsoever to the company that spent a billion dollars and 25 years developing.

Several of the Justices rightly recognized the potential notice problems of joint liability in a strict liability scenario. However, those fears are greatly reduced in the inducement context because liability requires knowledge that the acts being induced would constitute infringement. Waxman attempted to also allay those fears by referencing a common law knowledge requirement implied into joint-concert liability.

When the Federal Circuit decided this case, it appeared to be a new rule regarding inducement liability. In his appealing way, Waxman argued that it is not really new but rather it is a return to the common law notions that were disrupted by the Federal Circuit’s unnatural limitations on 271(a) joint liability that began in 2008.

JUSTICE SOTOMAYOR: [Is] this is a new rule by the Federal Circuit?

MR. WAXMAN: The answer is no. What is new is the 2008 ­­ beginning in 2008 jurisprudence in the Federal Circuit on 271(a) that unnaturally limited the common law attribution rules.

Very little time was spent on statutory construction – what is meant by the term “infringement” in 271(b)? Waxman does lay out his textual argument that infringement in 271(b) is not limited to “direct infringement under 271(a).” but rather offers the following notion:

MR. WAXMAN: A patentholder has the exclusive right to make, 15 sell, use, or offer to sell his invention during the term of the patent. That’s what sets out the metes and bounds of the property right. And any encroachment on that property right is an infringement. . . .

JUSTICE GINSBURG: An infringement without an infringer?

MR. WAXMAN: You can certainly have infringement without an actionable infringer, absolutely. Under anybody’s rule you can do that. The whole debate we have with the other side on the (a) question is how ­­ what attribution rules do or don’t apply. . . . .

JUSTICE SCALIA: What does ­­ what does (b) require? Does it require inducing an infringement or inducing an infringer?

MR. WAXMAN: Inducing an infringement. And I’ll give you a concrete example. Let’s say that there’s a five­step patented method that I know about, and I convince ­ I induce Mr. Panner to do steps 1, 2, and 3 and Ms. Anders to do steps 4 and 5. If I’m doing that because I know about the patent and I want to take advantage of their otherwise innocent performance collectively of the steps, at common law and at patent law, it was uncontroversial that I was liable. I was responsible.

Overall the oral arguments here are difficult to follow and thus the outcome is difficult to predict. The justices are rightly concerned that the their decision on 271(b) is dependent upon the meaning of joint infringement 271(a), but that may only be decided on remand.

JUSTICE ALITO: It’s ­­ it’s a good reason to think that the question before us really has no significance that I can think of unless the ­­ the Court of Appeals ­­ unless the Federal Circuit is right about [the limited scope of 271](a). . . . So you’re asking us to decide a question ­­ to assume the answer to the question on (a) and then decide a question on (b) that is of no value ­­ no significant ­­ maybe I don’t understand some other ­­ I don’t see some other situations where it would apply, and no significance unless the ruling on (a) stands, unless Muniauction is correct?

Waxman expressly suggested that the court go ahead and rule on the 271(a) issue (as it had suggested in a cross petition for certiorari) or simply remand the case to the Federal Circuit to decide the underlying 271(a) issue.

SCOTUS: District Courts Have Broad Discretion in Awarding Attorney Fees in Patent Litigation

Patent,

By Dennis Crouch

Octane Fitness v. Icon Health (Supreme Court 2014)

The Patent Act allows district courts to award attorney fees to the prevailing party in “exceptional cases.” 35 U.S.C. § 285. However, the Federal Circuit has repeatedly limited district court discretion in determining whether a particular case is exceptional. See Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F. 3d 1378 (Fed. Cir. 2005).

In a 9-0 decision, the Supreme Court has rejected the Federal Circuit’s Brooks Furniture test as “unduly rigid.” In its place, the Supreme Court returns discretion to the district courts in determining whether a case is exceptional based upon the general principle:

[A]n “exceptional” case is simply one that stands out from the others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances [and without any] precise rule or formula for making these determinations.

Even without Section 285, courts hold the inherent power to impose fees on parties for bad behavior. Here, the court made clear that Section 285 should be construed to go beyond that inherent power – otherwise it would be merely superfluous.

The decision here is balanced in that it does not expressly favor plaintiffs or defendants; patentees or accused infringers. However, it has eliminated an important safe-harbor created by the Federal Circuit to protect plaintiffs. In the past, attorney fees were not allowed based upon filing a losing case unless the case was “objectively baseless.” In patent cases, that standard is difficult to meet because of all the avenues for ambiguity. That safe-harbor is now gone.

Finally, and importantly, the Supreme Court rejected the Federal Circuit’s rule requiring clear and convincing evidence before an award of fees. Here, the court held that there is “no specific evidentiary burden.” Rather, as mentioned, the decision is “a simple discretionary inquiry.”

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Highmark Inc. v. Allcare (Supreme Court 2014)

In the Octane Fitness companion case, the Supreme Court also rejected the idea that exceptional case determinations should be reviewed de novo on appeal. Rather, consistent with the discretionary standard offered above, the appeal standard should focus on whether the district court abused that discretion. Typically, that is a difficult threshold to meet on appeal.

Both opinions were penned by Justice Sotomayor and unanimous.

Transfer on Mandamus

Patent,

By Dennis Crouch

Since its 2008 TS Tech decision, the Federal Circuit has repeatedly received Mandamus requests to force transfer of patent infringement lawsuits – usually out of the Eastern District of Texas and – into other, more convenient, districts. The statute, 28 U.S.C. § 1404(a), provides district court with discretion to transfer a lawsuit to another district “for the convenience of parties and witnesses [and] in the interest of justice.” Although the transfer decision is within the district court’s discretion, TS Tech and its progeny have indicated that a court abuses that discretion by unreasonably refusing to transfer a case. Because transfer of venue is not a question of patent law, the Federal Circuit purports to follow regional circuit law – primarily that of the 5th Circuit. See In re Microsoft Corp., 630 F.3d 1361 (Fed. Cir. 2011); In re Nintendo, Co. Ltd., 589 F.3d 1194 (Fed. Cir. 2009); In re Genentech Inc., 566 F.3d 1338 (Fed. Cir. 2009); In re TS Tech USA Corp., 551 F.3d 1315 (Fed. Cir. 2008); accord In re Volkswagen of Am., Inc., 545 F.3d 304 (5th Cir. 2008) (en banc). A key element for successful motions to transfer is that the movant needs to show both that the current venue is poor that the proposed venue is much better.

The Federal Circuit just released three additional mandamus decisions, denying two and granting one. In re Altair Engineering (Fed. Cir. 2014) (mandamus motion to transfer denied); In re Groupon (Fed. Cir. 2014) (mandamus motion to transfer denied); In re WMS Gaming (Fed. Cir. 2014) (mandamus motion to transfer granted). In the past, venue transfer motions have seemed quite formalistic without really reaching the issues of justice and convenience. These opinions suggest to me that the court has improved its jurisprudence on this point:

In Altair, the petitioner asked the court to move the case against Uniloc from Texas to Michigan. In denying the petition, the Federal Circuit found it relevant that the Texas court had seen the same patent in two other cases – creating significant judicial economies. In addition, some of the relevant witnesses were also located near the Texas court. Thus, although more relevant evidence was sited in Michigan, the district court did not abuse its discretion in denying the transfer motion.

In Groupon, the court also refused to order transfer out of the Eastern District of Texas. In this case, the patentee – Blue Calypso is located in Texas and that was the site of the invention and the home of the key inventor along with all of its documents. The fact that Groupon is based in Illinois does not mean that the case should be transferred to Illinois.

Finally, in WMS Gaming, the Federal Circuit ordered the case moved from the Southern District of Mississippi to Northern District of Illinois. In the case, the patentee (MTG Gaming) sued WMS and another gambling-machine manufacturer as well as several casinos that operate in Mississippi, including MGM Resorts and Caesar’s Entertainment. The district court stayed the casino lawsuits and severed the suit involving the other manufacturer. With WMS standing alone, the Illinois venue appeared much better since it was the base of operations of the accused infringer and the patentee has no connections on its own to the Southern District of Mississippi. In addition, the Federal Circuit found that no relevant evidence or witnesses were located in Mississippi.

Retailer Lawsuit May be Severed and Stayed Pending Outcome Against Manufacturer

Patent,

By Dennis Crouch

In re Toyota Motor Corp (Fed. Cir. 2014)

AVS – an Acacia company – sued Toyota for patent infringement in the Eastern District of Texas. As part of the litigation strategy, AVS included Gulf States Toyota – a large Texas-based dealer/distributor as a co-defendant. The AIA limited joinder of multiple unrelated defendants in a single infringement action. However, here joinder of these defendants appears proper because the manufacturer and distributor are both dealing in the same infringing products – Toyota vehicles.

Although venue is “proper”, Toyota argues that E.D. Texas is an inconvenient forum under 28 U.S.C. §1404(a) and that a better venue is E.D. Michigan, both because of the location of witnesses and because that court has previously adjudged the patent in question. That proposal wouldn’t exactly work because the Michigan court apparently has no personal jurisdiction over Gulf States. Thus, Toyota and Gulf States collectively argued that the case against the franchisee (Gulf States) should be severed and stayed pending outcome of the Toyota case. District Court judge Schneider rejected those proposals – finding that the case would not be moved to Michigan even if Gulf States were not a defendant and that therefore there was no cause to either transfer or sever.

On Mandamus, the Federal Circuit has vacated the district court denial – holding instead that (1) absent Gulf States as a defendant, the case against Toyota should be transferred to Michigan; and (2) therefore the district court should reconsider the request for severance-and-stay on remand.

This decision seemingly serves as the Federal Circuit’s first pass at addressing retailer/customer lawsuit concerns that are at the heart of legislative patent reform initiatives. The proposed legislation would provide a right to stay customer lawsuits while the current law seemingly only provides that such a stay can occur at a district court’s discretion. The provision most on point is likely Fed. R. Civ. Proc. 42(b) that calls for a district court to hold separate trials on various issues or claims “for convenience, to avoid prejudice, or to expedite and economize.”

 

Guest Post: Patent Remedies Should Not Depend on a Patentholder’s Business Model

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Guest Post by Prof. Ted Sichelman, University of San Diego School of Law

The standard justification for patents is that they are necessary to allow inventors to recoup R & D costs in the presence of low-cost copying. As the Supreme Court stated in Kewanee Oil, “The patent laws . . . offer[] a right of exclusion . . . as an incentive to inventors to risk the often enormous costs in terms of time, research, and development.” Yet, if patent law is designed to provide a “reward” for R & D related to the invention—rather than the commercialization of the invention—then why do these rewards depend on whether the inventor is an operating company that makes and sells the invention or a non-practicing entity (NPE) that does not?

In a recent article in the Texas Law Review (here), I argue that if patent law is truly concerned about R & D, then remedies should generally be the same for operating companies and NPEs for a given patented invention, because the “reward” necessary to induce the R & D for that invention should generally be the same regardless of the business model of the underlying inventor.

One reason commonly offered for varying awards is that commercializing entities should be provided an additional reward for bringing inventions to market as commercial products (or, conversely, NPEs should be penalized for not doing so). Although I am quite sympathetic to this view—and have argued as much several years ago (here)—this is decidedly not the reason the courts have used to distinguish between operating companies and NPEs.

Rather, the distinction arises historically from patent law’s importation of traditional tort law principles into remedies law. Like traditional tort remedies, a patentee who wins in court is typically entitled to be returned to the status quo ante—in other words, the state of the world that existed prior to when the infringement occurred. For money damages, this means that operating companies are generally entitled to “lost profits” on sales forgone from the infringement of the patented invention and NPEs are entitled to “reasonable royalties” for forgone licensing revenue (which, typically, are less than lost profits awards). For injunctive relief, the historical practice was to assume that all patentees were entitled as a matter of course to choose who could (or couldn’t) practice their patents. Yet, relying on the status quo ante principle, scholars and policymakers argued that NPEs—at least ones that license non-exclusively—should not be entitled to injunctions as a matter of course, because such an equitable remedy is unnecessary to return an NPE patentee to the status quo (and additionally generates a host of social costs). Such views ultimately influenced Justice Kennedy’s prominent concurrence in eBay, which has since led to the routine denial of injunctive relief for NPEs.

In my article (here), I argue that these hoary tort law principles do not achieve optimal incentives for engaging in innovative activity, because they differentiate among patentholders in ways that are entirely unrelated to the value of the underlying invention. Indeed, as soon as a patent is assigned from an NPE to an operating company its value increases because of patent remedies doctrine—an odd result. Rather than aiming to restore the patentee to the status quo, remedies law should instead provide those incentives necessary to induce a sufficient level of R & D in order to generate the invention in the first instance—perhaps with some modification if the patent-in-suit is shown to be integral to undertaking post-R & D commercialization activity (such as FDA clearance or unpatentable market testing).

This innovation-centric approach would lead to some immediate changes in remedies law. As an initial matter, the baseline assumption should be that remedies should be the same for operating companies and NPEs alike. This would entail rejecting the current statutory scheme for injunctive relief—and, hence, much of the reasoning in the majority and concurring opinions in eBay. Under my proposal, in some situations—like those involving multi-component products and high switching-costs—I argue that injunctions should be routinely denied both to NPEs and operating companies. In other situations, such as those involving simple mechanical inventions or discrete pharmaceutical chemical compositions, courts should typically issue injunctions to any type of patentholder.

As for money damages, the lost profits-reasonable royalty framework should be discarded entirely in favor of an approach that assesses the incremental economic value of the patented invention in relation to R & D costs actually expended by the patentees (and potentially third parties), taking into account failure rates, technological and market risk, and in some cases, commercialization and testing costs and risks, for the invention and similar types of inventions. This alternative framework would better align rewards with the actual costs and risks undertaken by the inventor. In circumstances in which a patent played an important role in the commercialization process, the remedy could be adjusted to further reward operating companies (or penalize NPEs).

I realize that implementing such an approach to remedies is not an overnight fix and could take many years to implement in a feasible manner. In the meantime, rather than attempting to restore inventors to the status quo, remedies law should generally ensure that the same invention yields the same reward. Doing so would better promote the innovation-centric aims of the patent system.

 

Ongoing Royalty against Apple: Higher than Back Damages and Willfulness a Given

Patent, ,

By Dennis Crouch

VirnetX and SAIC v. Apple (E.D. Tex 2014)

The VirnetX/SAIC/Leidos patents cover methods of creating virtual private networks (VPNs) and secure domain name services. Here, SAIC is the multi-billion-dollar government contractor and the patents were apparently developed as part of SAIC’s work for the CIA and NSA. SAIC spun-off several of its IP assets to VirnetX who is an independent publicly traded patent enforcer. Apparently, VirnetX’s market cap is around $1B based almost on its 80 patents and several court wins. However, the company only has 15 employees. SAIC/Leidos retain a revenue stream from patent profits as well.

A jury found that Apple infringed the VirnetX patents with its FaceTime and VPN On Demand applications. The jury awarded $368 million in past damages. However, District Court Judge Davis denied VirnetX’s motion for injunctive relief to stop ongoing infringement. Those decisions are on appeal to the Federal Circuit.

Meanwhile, Judge Davis severed the case so that he could separately consider the issue of ongoing damages. Now, Judge Davis has awarded an ongoing royalty of 0.98% for devices configured to run either FaceTime or VPN ON Demand. Breaking-down that award: 0.65% in damages and 0.33% in enhanced damages for the willfulness of the ongoing infringement.

The ongoing damage award rate is substantially higher than that awarded for back-damages. The explanation is several fold: the patents have now been adjudged valid; Apple’s ongoing infringement is now willful; and some changed circumstances. Regarding the changed circumstances – since the verdict, VirnetX licensed its patents to Siemens at a substantially higher rate than its pre-verdict licenses.

One issue that appeared to stick to Judge Davis involved Apple’s changed theories during the case. In particular, at trial, Apple had argued that the invention was rather minimal and that it would have only cost Apple $3.6 million to make a “very simple change” to its servers so that they would operate in a way that VirnetX admits would be non-infringing. Later, when VirnetX sought injunctive relief, Apple “dramatically reversed course” and argued that implementation of a design around would be incredibly expensive and disruptive. (The actual numbers of estimated costs are redacted from the filings.) Apple appeared to lose significant credibility with those arguments. Judge Davis wrote:

While Apple has taken steps to mitigate its infringement, Apple grossly misrepresented its ability to implement a non-infringing alternative to the jury. The huge disparity between Apple’s position at trial and Apple’s position post-judgment also warrants increasing the implied royalty rate.

Regarding enhanced damages for willfulness, Judge Davis suggests that post-verdict infringement should generally be considered willful and subject to enhanced damages.

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In my mind there is a minor, but million dollar issue with the decision. Judge Davis awarded a 0.65% ongoing royalty and then enhanced the damage award by an additional 50% of that. In my calculation, that would take the award to 0.975%. However, Judge Davis rounded up to 0.98%. The Judge wrote: “Considering four factors favor enhancing the implied royalty rate, the ongoing royalty rate [of 0.65%] is increased 50% to 0.98%.” Those five thousandths of a percent appear small, but will likely add to at least a million dollar difference.

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Further reading: