Why U.S. Patent Reform is Not Going to Work

Patent reform efforts are a mish-mash of patchwork fixes that are not all that effective. Loser pays? Ever heard of loser pays insurance? You can buy it today before you file! Disclose the real party in interest and allow counterclaims against them? This is not going to impact the typical NPE. Better pleading standards? These proposals in effect just take what is already in the local patent rules of several districts and make them mandatory country-wide. (more…)

Leave a Comment November 20, 2013

Licensing — Developments In The Law You Need To Know

Patent licensing is governed largely by contract law.  Like any contract, you can do a lot by agreement: Stipulate to “ADR”,  shorten statutes of limitations, cap damages, eliminate consequential damages.  Now you have some new twists to work into your contracts as well as some developments that could impact patent value.  On my “Lessons and Learning” page, I will be posting two new power-points on new ideas and issues to be considered in your licensing program as both licensor and licensee. (The intelligent part of the power-points come from Fish & Richardson principals in other offices, but I am keeping their names confidential to protect the innocent).

The biggest impact I see for licensing are increased importance for portfolio licensing and a shift to “joint licensing”:

1) Portfolio licensing:  For the patent owner, the value of a portfolio license is more important than ever to maintain and justify pricing to prospective licensees, compared to the value of one or a few patents.  One school of thought is that portfolio licenses are really licenses to one or a few patents that carry the value of the group, but this valuation model is now subject to challenge.  Indeed, we have seen patent owners who thought they had “landmark, litigated, validated” patents lose them, as in Eolas.  The real problems are that uncertainty over the scope of claims, the increased cost and risk of litigation from the AIA’s “no joinder” rule, and faster PTO procedures under the AIA to challenge patents (post-grant review and inter partes review), now make individual patents more vulnerable and less valuable than in the past.   Even with MDL and consolidation of pre-trial proceedings, the “no joinder” provisions of the AIA (35 U.S.C. 299) make it more expensive and riskier for a patent owner to enforce an individual patent since each defendant typically will get its own trial.  This means the patentee must win infringement in every trial while an invalidity finding in one trial in favor of one defendant might kill the patent in every circumstance where no final judgment has been entered.  The value of a group of patents is much more than its individual component patents.

For the licensee: Portfolio licensing is more important than ever due to new risks they confront from patent owners with active patenting programs:  First, the new prioritized patent examination procedure, which allows certain applications to mature into issued patents in months rather than years, creates an incentive for licensing the portfolio where the patent owner has an active prosecution model, since making payment only to get hit with a new patent from the same owner is not a happy event for any executive.  The prospect of the European Patent Court and European Union Patent becoming a reality for an area with a population the size of the US, with much lower costs, less risk to the patent owner in enforcement, and faster times for enforcement, make it important to capture all relevant past and future PCT patents.  The ability of a patent owner to eliminate questions of invalidity or inequitable conduct for patents issued after September 16, 2012, through Supplemental Examination, give patent owners a powerful and fast tool to cure problems with their patents that come up in negotiations.

Long story short, I think for both sides of the table, the incentive is for portfolio licensing more so than paying on individual or a few patents.

2) Joint Licensing: Traditional wisdom is that when multiple patent owners get together to license the antitrust risks loom so large as to overshadow the benefit to the patent owners in working together.  However, since the DOJ-FTC Joint Guidelines for Licensing Intellectual Property in 1995, the regulatory view of joint licensing has shifted.  First, the 1995 Guidelines argued against risk of per se antitrust liability for patent pools and portfolio licensing (e.g., tying).  In the late 1990s, DOJ approved the MPEG and DVD patent pools in Business Review Letters. In 2007 DOJ issued Business Review Letters that condoned IEEE and VITA standards organization rules for disclosure of “standard license terms”.  In 2010, in In re Princo, the Federal Circuit effectively eliminated the risk of “patent misuse” for patent pools or portfolio licensors that sue on key patents when a prospective licensee refuses a portfolio license.  Today, there is increasing pressure from the EC, DOJ and FTC for standards groups to become more pro-active in licensing to curb abuses of “FRAND”.  MPEG and other licensing companies are now running and organizing more “neutral” patent pools than ever before.  Recently, one U.S. District Judge permitted a defendant in a patent case to use a “joint licensee hypothetical negotiation”.  Long story short, joint licensing now seems safer, more economical, and easier to justify in the current regulatory environment than it has been in the past.  No doubt, abuses in joint licensing are still antitrust “landmines”, and patent pools that are not carefully administered in selecting patents, setting terms and price, are still subject to attack.  Nonetheless, patent pools or “standards rules” for licensing standard-essential patents that are carefully constructed and administered are now recognized as important and valuable.  The joint licensing model also gives both patent owner and licensee the benefits of portfolio licensing.

So do the math, the ground is shifting, and you need to look hard at the evolving landscape in licensing negotiations.

Leave a Comment October 30, 2012

U.S. Patents — More Contradictions Create More Questions on Value

Patents involving joint or divided infringement are now easier to enforce, but you get less for them.

What happened?  The Federal Circuit last week decided two long awaited cases in a combined opinion on joint and divided infringement — this opinion overruled prior law that where all of the acts necessary to show direct infringement are not performed by one person or entity, two or more actors could only be liable when they acted together in some type of legal relationship (e.g., agency, contract).  Now, the majority opinion has outlined how a single actor can be liable for infringement where it does not perform all the elements of the patent’s claim:  Akamai Tech. v. Limelight Networks, Slip Op. 2009-1372  (Fed Cir. August 31, 2012) (En Banc) and Mckesson Tech. v. Epic Systems, Slip Op. 2010-1091  (Fed. Cir. 2012) (En Banc).  The initial impact is claims that could not be asserted on August 30, can now be asserted.  The further significance of these cases is they were decided by a badly divided court (there were three opinions by different judges, and only a 6-5 majority), making it more likely that the U.S. Supreme Court will agree to review them (which adds another year or two of uncertainty to the issue).  Lots of bloggers and firms have already posted detailed analyses of this opinion (yes, that fast!), and I won’t repeat their work here, other than to say, system and method claims now will be easier to enforce under this new set of rules.

But wait — on August 30, 2012, the day before, a panel of the Federal Circuit, issued an opinion on damages that tightens the screws yet further on compensation for infringement: LaserDynamics, Inc. v. Quanta Computer Co., Slip Op. 2011-1440 (Fed Cir. August 30, 2012).  In LaserDynamics, the Court held the entire market value rule is subject to a “higher degree of proof” in a device with multiple features to establish that a consumer would not buy the product absent the accused feature:  In this case, an optical disk drive in a laptop.  Moreover, the Court pressed hard on the point that the correct royalty base should be the “smallest salable patent-practicing unit” (harkening back to Cornell v. HP).   Other holdings will also make damages harder to prove in some cases: evidence of a licensing program and evidence of a survey that did not involve the patent in suit were excluded, use of a royalty rate higher than non-litigation rates was criticized, and use of settlement licenses was circumscribed.

So let’s do the MATH: (Expanded enforcement opportunities for joint/divided infringement) + (Reinforced or further limits on damages and proof of damages) + (limits on injunctions) = patents are easier to enforce but for which you will likely collect less if you win.

Let’s do more MATH: (cost of patent litigation increases) + (potential recovery reduced) = lower incentive to enforce patents.

Worse, the division in the Federal Circuit increases uncertainty about the state of the law on liability — that is what you can do with your patent.  Claim construction is so badly fractured that Judges on the Court have written en banc review is needed to promote more uniformity and less uncertainty on this crucial issue.  The division in the Court in deciding the Akamai and McKesson cases begs for U.S. Supreme Court review, which will extend the uncertainty for at least six months if a request for review is made and refused — or possibly until early summer 2014  if the request for review is granted.

One circumstance that may or may not be indicative of the declining value of U.S. patents in this environment is the Kodak patent auction.  Kodak received bids that were a fraction of what it (and many others in the industry) thought it would receive in the auction.  I can’t say what the real cause of the bids falling significantly below expectation might be, but could it be that U.S. patents just are not worth what they were pre-eBay (before 2006) when the prevailing patentee was entitled to an injunction?

What more is on the horizon?  The old inter partes re-exam system expires on September 15, 2012, and a new procedure will replace it that has some advantages (faster) but also disadvantages (higher standard to initiate, higher filing fees, higher cost due to possible discovery).  How will this change impact value?

In addition, there is the so-called “Shield Act” pending in Congress; a proposal to permit fee shifting in patent cases where there was no reasonable chance that the patentee could recover when it filed the suit. (I don’t see what the Shield Act adds to the existing fee shifting mechanisms in the exceptional case statute or Federal Rule of Civil Procedure 11 or even the courts’ inherent powers, but if it helps some congressmen raise campaign funds, what the heck, that’s politics….).   Venue remains a problem in patent cases because the mandamus practice on venue has now broadened beyond transferring cases out of the Eastern District of Texas, and an appeal on venue is available in most any lawsuit where an argument can be made to move the case (this increases the cost of litigation and also creates bigger backlogs in districts where venue issues are less likely to cause the plaintiff delay and increased cost, e.g., Delaware).  Multi-district litigation practice is being used now in some cases to coordinate lawsuits where “no joinder” rules under the America Invents Act (35 USC 299) or In re EMC, result in a patentee suing multiple defendants in different districts or its cases being divided and transferred to different districts — yet some arguments are emerging against use of “MDL” in this manner.

The result of the equation is greater cost of enforcement coupled with lower potential recoveries, depresses patent value.  The uncertainty of how the law might be applied in any case encourages appeals, discouraging district court settlements.  The backlog of cases in certain districts increases delay, which typically increases cost, as well as uncertainty when operating in a fluid legal landscape.

U.S. patents need a coherent and cost effective enforcement mechanism where timing, cost, results and remedies are somewhat predictable.  This is a system that can exist, and in fact does exist in Germany.  If the EU patent court operates as the German courts currently do, then U.S. patents will become even less attractive as assets.  Oh wait a minute, I have said that before…

Leave a Comment September 4, 2012

FRAND: Can Kindergarten Teach Us Something?

For the last decade, there has been a lot of high profile litigation over the royalties that should be paid for IP essential to implement an industry standard.   Lawsuits have been in every technology area, in different courts, in different countries.  But even after a decade, there is no formula for royalties to be paid for a patent essential to implement all or part of an industry standard.  There is only the vague acronym “FRAND” (sometimes called “RAND”) that is argued back and forth as the “guiding principle” for payment and terms involving industry standards.

How should price be decided?  How should terms be decided?   How can this discussion be informed by the last decade’s NPE litigation, such as the cases on damages and patent injunctions?  What about the increasing convergence of technologies and functions in more complex devices?  The economic bust since 2008?

This post will first briefly touch on some background, and then compare just a couple of the benchmarks argued in this complex mix. I will ask the readership to consider how a group of kids might resolve a similar problem with a ball on a playground. (I am assuming well-behaved children, not “Lord of the Flies”).   While kindergarten kids can’t answer the standard-setting FRAND issue, cooperative behavior on the playground might offer a lesson for us all…

Background to be Considered: Standard-setting is when an industry group decides on a specification or design for a function of a product.  Typically, the design is for the function or form of some type of a “connector” or “interface” to allow for compatibility of different products from different sources.  In some industries compatibility requires more extensive or “deeper” product penetration than in other industries.

Examples of compatibility standards are the configuration of an electrical outlet and “plug” that goes in the outlet. In the U.S. we have the rectangular prongs with the round peg configuration; different countries in other parts of the world use different configurations. But each country uses the same configuration within that country — consumers want products that plug into the wall in any outlet.  By having uniformity in how electrical devices are connected to the power supply in a building through electrical cords and outlets, more products can be made more cheaply, distributed more widely, and more easily used by more people (imagine if these things were not compatible).

Most standards for interfaces do not implicate significant advances in the technology or the device itself — the “landmark” invention is in the design of the LED or the method for its use in a light bulb, or the design of the lamp, or the composition of the chemical in the vessel.  Instead, most standards generally involve the choice — or the refinement — of one of several options for an interface.

When a group of competitors, their suppliers, and vendors, get together to decide they will only make one product or type of product and not another, this is generally a crime, a felony, under the Sherman Antitrust Act, 15 U.S.C. Section 1 or Section 2.  It is no different from a group of competitors, their suppliers and vendors, fixing prices for a product.  However, there are statutory and case law exceptions for standard-setting on the theory that fair, open standards allow different companies to make interoperable products, which promotes competition — increasing supply and reducing price for consumers.

Nearly all standards groups have adopted intellectual property policies to guide their members in avoiding foul play.  A standards process that suffers years of delay while intellectual property lawsuits are fought out among its members probably would not deliver the benefits that justify the antitrust exception.  The rules most groups use are not intended to resolve infringement issues, but to help avoid the market disruption and costs to members and consumers that result from litigation, which undermine the antitrust exception for standards.

General Overview of FRAND or RAND: Fair Reasonable and Non-Discriminatory Royalty or Reasonable and Non-Discriminatory Royalty — At a high and very general level, can loosely be called the compensation (including terms) an intellectual property owner may be permitted or entitled to ask for under a standards’ groups rules.  As a general proposition, antitrust laws will often permit this compensation where, 1) the owner made clear prior to selection of the standard that it would require compensation if its IP were infringed in implementation of the standard — and, 2) the compensation is based on the value of the IP for the function used, without being inflated by selection of the standard by the group.  Indeed, if there were a blanket rule against compensation, an argument might be made that this prevents new market entrants or smaller players from putting their technology into a standard, or participating in standards at all; since they would lose their R&D investments or the opportunity to realize any gain on those investments.

Nonetheless, participants must remember a group’s rules are not law, and are not a substitute for compliance with antitrust laws or principles.  The United States Supreme Court has explicitly held compliance with a standards group’s rules is not a defense to an antitrust violation.  The FRAND commitment may under certain circumstances be mandated by antitrust concerns, whether or not in the group’s rules.  The measure of FRAND may be limited by antitrust and competition laws, just as the patent or other IP laws permit the owner to ask for compensation in the first instance.

What is Reasonable in FRAND? 35 U.S.C. 284 says the minimum compensation a patent owner should receive for infringement of his or her patent in a lawsuit is a “reasonable royalty”.  Some people argue that “reasonable” in FRAND mirrors section 284.  However, “reasonable royalty” in a lawsuit is generally based on a “hypothetical negotiation” between a “willing licensor” and “willing licensee”.  Section 284 damages are not typically based on a group of competitors giving a monopoly to the patent owner:  Some “translation” is required to put Section 284’s “reasonable royalty” into the standards context.  Indeed, once an IP owner has agreed to permit use of his patent in a standard, there is an argument over whether or not there is a limitation on remedies, or an infringement claim at all, or only other contract or relationship based claims?

Moreover, Lucent v. GatewayUniloc v Microsoft, as well as eBay v. MercExchange, are now embedded in Section 284’s “reasonable royalty” definition:  1) compensation must be limited to the contribution the technology makes to the overall product (apportionment); 2) license fees must be put into a context where both the technology licensed and the economics of the license are compared on an “apples to apples” basis;  3) neither arbitrary benchmarks (e.g., 25% rule), nor the entire market value of the product, may ordinarily be used in computing the royalty; and 4) the threat of market disruption by injunction should not be part of the analysis.

Over time, circumstances change, and this may change FRAND.  Consider how the convergence of functions into devices, such as internet based televisions, or netbooks, or others, has made any one function a smaller part of the overall combined device?  Consider whether the economic conditions of the last four years has impacted on margins?  Consider in the last few years, not just Federal Circuit law limiting remedies, but also other cases limiting claim scope (e.g., recent cases on means plus function in software claims).  All of these factors may have impacted the value of any one patent (or patent family) in the apportionment of value of implementation of an interface.

Another place in U.S. law where “reasonable” appears is also relevant here:  That is, the limitation read into Section 1 of the Sherman Act by the United States Supreme Court in Standard Oil Co. of New Jersey v. United States221 U.S. 1 (1911), which held Section 1 only prohibited “unreasonable restraints” on trade.  In the context of antitrust law, there is an argument the group’s decision cannot create an unreasonable restraint on trade — hurdles to entry into, or disruption of supply or prices in, a market.   Consider as well the problems of Section 2’s prohibition against a group of competitors giving one of them a monopoly?  Consider also the concept in many European and Asian competition laws against “abuse of dominant position”, such as abusive pricing?

An agreement on a product function or feature by competitors risks harm to competition since it necessarily is intended to eliminate competing functions (or incompatible products).  There is a concern that adoption of common product features by group decision will increase the risk of price-fixing along with the implementation of those features.

Standards groups typically do not get involved in financial terms of a license to avoid allegations they caused a boycott of the “losing technology”, or price-fixing for essential IP rights, or even price-fixing for products that comply with the standard.  Some standards groups do have guidelines about certain terms, such as the scope of a grant back, but typically terms and price are left to participants to work out among themselves.

This is where notice or disclosure in advance of the work on and adoption of the standard ties back into the process: The theory is that if participants disclose IP they own that they contend will be infringed by a standard, then regardless of how a court might rule on infringement or validity or remedies or surviving claims or any other issue, the participants can work out deals to allow for implementation of the standard without disruption or delay for patent and other lawsuits.  If standards could not be implemented, or could be disrupted by litigation, years of delay would slow standardization — potentially countering all of its pro-competitive benefits, and making the exercise itself an unreasonable restraint on trade.  There is an argument that a license, express or implied, or some other type of promissory estoppel or other limitation on remedies, must come into play at the point of inclusion of the IP into the standard:  Generally, a license, however, is only a right not to be sued for infringement, it is not a right to use the IP without compensation; nor does a limitation against injunction or exclusion from a market imply “free-riding” is permitted.

The bottom line is a patent owner cannot charge whatever it wants, or ask for any terms it likes, when it would not otherwise be in a position to do so but for the group making its technology a standard.  This is especially true when the erosion of patent value is considered as well as the convergence of functions in a tough market.  Yet the users of the standard are not permitted generally to ignore or by-pass the patent owner’s right to compensation.

Kindergarten Rules?: Is the FRAND analysis as complex as some of the technology involved?  At some level, might well-behaved kindergarten children be able demonstrate it for you?  If each kid has a ball, but before they leave school, the kids have to agree that only one of them will bring a ball to the park to play a game after school, is it fair for the kid with the ball to ask for money or terms when everyone shows up later at the park for the game?  Should the kid tell everyone his intentions before they vote at school on whose ball to use later at the park?   If more than one kid has a ball that is “good enough” for the game, even if not as good as the ball picked, wouldn’t most kids who are surprised at the park yell, “no fair”?  Even if no one else had a ball, the kids could have played a different game or done something else after school.

But while it is easy to say you need to disclose, it is harder to figure out how much compensation is fair to ask for from each player.

Back to kindergarten:  If the kid with the ball gets to ask each player in the game for compensation, can he ask everyone for the same reimbursement?  A penny a game?  A dollar a day?  Can he ask the kid who plays once a week to pay the same as the kid who plays three times a day?  Can he ask different kids who play the same number of games to pay different prices? One a dollar another two dollars?  Can he ask for compensation or reimbursement that ends up being multiple times what his ball is worth — many times what he would have sold his ball for before it was picked for the game?  Can he demand payment not just for use of his ball but all his other toys?  If you were supervising a group of kindergarten children in this exercise, how would you moderate the issue?   Would you let the kid with the ball kick people out of the park if they argued with him, or simply resolve what he is entitled to receive from each kid since he has already said every one could play with his ball?  If you asked the kids, what would they say?

Kids don’t have to deal with all the complexities of a research company or manufacturing operation or patent holding company in a tough world — deal with R&D expenses, operating costs or profit margins — kids just want to play in the park.  Yet, what if you looked at the standards issue in the same way?

For example, can the kid with the ball ask for the right to be allowed to play in other games on the same or equivalent terms when someone else’s ball is used later?  Sounds fair?  Can the kid announce at the park to everyone that they must give him the right to use every other toy, bike or ball owned by every other kid any time?  Ask a kid if this sounds fair or unfair?  Again, do you kick kids out of the park who don’t agree or resolve the payment dispute among them and let the game go on?

Kindergarten vs. Antitrust: If the kid is leveraging or exploiting the fact that without permission to use the ball, another kid can’t play in the game or can play but is required to pay whatever compensation is demanded, is this an abuse of the power from the vote?  This is especially problematic if  the ball picked was not the only option for the group, regardless of whether it is the “best ball”.  The leverage results not from the ball itself, but from the group decision.  Should the kid be allowed to do this?  What do you think?  What do you believe an antitrust or competition enforcement official would think in the context of a standards group in a competitive market?  Is this a dispute over compensation or whether kids can play at all?  Ask a kid?

There are multiple theories on these issues in standard-setting, which arise out of the complex thinking of lawyers, business people, and engineers. Whenever smart and highly educated people each come up with different theories on how to implement a goal, you will get different solutions and strong feelings about those solutions.  Companies might feel they can take different positions in different circumstances.  Kids in a simpler situation might come up with simpler solutions.

What is the Answer to FRAND?

So how do we answer the question of FRAND?  How would you moderate the kids’ behavior with the ball?  How would the kids view “fair” and “no fair”?  Maybe we isolate business interests from how we would like to think kids would treat each other to cooperate in a game with a ball at the park after school?   Maybe we get some of our kids or grandkids or nieces or nephews to work it out…assuming they are well-behaved…Are the answers to the FRAND question as complex as the “grown-ups” have made them out to be?

Leave a Comment May 19, 2012

No Joinder Even Pre-AIA: In re EMC and what it means to YOU!

The Federal Circuit today required reconsideration of a motion for severance in a lawsuit filed prior to the America Invents Act, issuing a mandamus in In re EMC.   The opinion addressed severance under the standard used by the Eastern District of Texas and a minority of other district courts prior to “patent reform” and its “anti-joinder” provisions, holding as follows:

“We agree that joinder is not appropriate where different
products or processes are involved. Joinder of independent defendants is only
appropriate where the accused products or processes are the same in respects
relevant to the patent. But the sameness of the accused products or processes
is not sufficient. Claims against independent defendants (i.e., situations in
which the defendants are not acting in concert) cannot be joined under Rule
20’s transaction-or-occurrence test unless the facts underlying the claim of
infringement asserted against each defendant share an aggregate of operative
facts. To be part of the “same transaction” requires shared, overlapping facts
that give rise to each cause of action, and not just distinct, albeit
coincidentally identical, facts. The sameness of the accused products is not
enough to establish that claims of infringement arise from the “same
transaction.” Unless there is an actual link between the facts underlying each
claim of infringement, independently developed products using differently
sourced parts are not part of the same transaction, even if they are otherwise
coincidentally identical.”

Slip opinion page 15, In re EMC


The order from the Federal Circuit gave the case back to the district court to reconsider severance under the correct test, but the result should be a foregone conclusion.  Moreover, the Federal Circuit added that even where joinder might be proper, severance is still an important consideration due to the complexity of multi-defendant patent lawsuits and trials.

Defendants should look hard at severance and/or transfer in pre-AIA cases.  The real impact this ruling is likely to have is cases will be severed —  but then coordinated pretrial, either in the same district, or, alternatively, where transfers are ordered with severance, re-combined in one court for pre-trial litigation by an MDL panel.  An MDL court can handle a case up to and including ruling on summary judgment motions, but then must send the case back to the court where it originated for trial.  Separate trials strongly favor patent defendants because each time invalidity is tried as a defense, the patent owner risks its patent — the first time the patent is found invalid, collateral estoppel will apply, and the patent should be invalidated in all cases.  Since a patent is valid or not, this means each trial could be the last trial for the patent owner.  Equitable defenses or non-infringement defenses or damages issues will also invoke collateral estoppel on subsidiary fact issues if the record is sufficiently clear on the fact issues decided by the jury or court (which may require special attention to the jury charge and questions so that what fact issues were decided and how they were decided is not subject to debate).  Of course, the defendant will also benefit from being able to focus hard on its own story, product, and damages scenario, while forcing the patent owner to do the same:  Any past advantages to painting defendants at trial with a broad brush to blur important differences between them, or from defendants having to present their case at the lowest common point, are now gone.

There is yet the possibility of a “wrinkle” in what appears to be a rather broad ruling in In re EMC because another mandamus raising the identical issue from the same district court remains pending, In re TD Ameritrade, Misc. No. 107.  (It is possible the Court could expand on or narrow or otherwise inject new considerations into the analysis in  In re EMC with a decision in In re TD Ameritrade).

Given the backlog of cases filed prior to the AIA, this is now a significant issue, albeit one that is likely time-limited to the next few months….

Whether for better or worse, agree or not with In re EMC, as patent enforcement costs go up, as patent enforcement risks increase, the value of patents goes down…That’s the bottom line…The consolidated EU patent is moving closer to reality.  Patent protection in the EU and other jurisdictions becomes increasingly important as U.S. patent enforcement and remedies become riskier and more difficult for patent owners.

Do the math…



Leave a Comment May 4, 2012

Software Patents – More Challenging – More Thought Required…

Software patents have taken a beating in the last two years.

Software patents survived In re Bilski and RCT v. Microsoft (which was the first post-Bilski Federal Circuit case on software patents, decided in December 2010): Software patents are not going away absent a change to the statute.  But case law in the last two years has made it harder and harder to enforce software patents, get injunctions or sustain damages for them on appeal.  Further, the slow pace of patent litigation, can leave many high-tech devices or inventions obsolete before there is a final result (the Hynix v. Rambus litigation has been continuing for over 12 years).  Finally, patent litigation in the U.S. is more uncertain than ever given a badly fractured Federal Circuit.

RCT v. Microsoft was a case where there was an immediate connection between the software and the printer it controlled; the invention was described in detail. On the other hand, look at just some of cases that have been tamping back software patents before and since, such as Blackboard v. Desire2Lean, where claims were found indefinite; Trading Technologies v. eSpeed, where claims were found to be much narrower than asserted; and most recently, Ergo Licensing v. Carefusion 303 and Noah v. Intuit,  where the Federal Circuit invalidated claims for failure to disclose sufficient algorithms to provide structure for means plus function limitations.  There are of course other cases, but this is tough sledding.  What does this mean to you?

It means you cannot put software patents that might be important to your business through a low cost provider pipeline and count on quantity to offset quality issues.  Many companies play the “patents by the pound” ploy — get all you can, as cheaply as you can, and scare people with a big thicket of patents.  I have never been a fan of this approach, but it certainly should not be applied to key technology — and definitely not to technology that is now hard to write valid claims over.   If you have a software invention worth pursuing, you need to spend the time and money to have the patent done by a top notch provider with full cooperation from the inventors.  The written description needs to be extremely thorough — with enough of an algorithm disclosed that the patent truly enables, teaches, and discloses an invention that can be implemented by one of skill in the art.

But writing a good patent is only one piece of the puzzle.  You also need to look at software as part of your business and plan for problems just as you would with other parts of your business.  Businesses and individuals spend a lot of money planning on problems: That is why we have a worldwide insurance, and reinsurance industry.  That is why we have fire-hydrants in front of our homes.  Stuff happens.

If you are selling products or services that include software, and are confronted with a claim of infringement of a software patent, the trend by courts to narrowly read software patents, creates not just defensive opportunities, but design around opportunities.  You should have on staff (or as a resource) someone who has the capability to design around narrowly construed software algorithms with new algorithms. A software patch does not require re-tooling of a factory.  If sued for software patent infringement, ask yourself, should we just redesign now to avoid the lawsuit or have a new product design (or component design) ready as soon as possible.  The new case law makes this approach more feasible than it was in the past due to the constriction of the scope of software patents.

The take away from these points: 1) If you have a software invention important to your business put the patent in the hands of an experienced, successful, patent attorney who can write software patents that satisfy the written description requirement but still protect your IP space.  A balance must be struck between protection of your IP and getting such narrow protection you have no real protection.  You will get your money’s worth, one way or another.… 2) Hire the best software designers you can get, not only will this help your business, but when confronted with a software patent, it will enhance your capacity to design around it under current law.  Heck, a lot of software features never get used, not many people are aware of them, even lawyers for the companies who sell the products often don’t know they exist:   If it is not worth the fight, don’t fight.  Remember this is about money, it is not an engineering contest or an ego battle — it is only about MONEY$$$.

BUT – there is a fly in the ointment – Industry standards in telecom and other network areas often adopt very specific software protocols for the “handshakes” or interoperability connections between equipment or signals.  This becomes a problem because infringement may not be contestable:  The main issue may be validity no matter how narrow the patent is if it covers a standard.

Yet, this is where the third piece of the puzzle comes in:  Damages.  The first order of business in defending a suit on a standard is to move to dismiss injunctive relief:  The proponent of the standard offered the proposal to the group with the full expectation it would be implemented by the industry — where does the injunction come in under today’s law?  The only issue is $$$.  Recently we have seen cases between medical device makers where no injunction was awarded, and those guys always wanted and enforced injunctions. Injunctions and exclusion orders based on industry standards for interoperability should not be permitted:  These are money cases from the get go.  In fact, Nokia recognized this when it sued on its standards-related patents for a royalty and did not ask for an injunction.

The next thing is to put damages in perspective:  Of course, the standard is essential to the operation of the device; but one buys a lamp because of the design and how it projects light, not because it comes with a standard electrical connector (plug) that fits in a standard wall socket.  Interoperability interfaces are typically chosen from among several options within a shade or two of difference of each other, or developed quickly by a group, or participant, out of need for an interface (more so than the details of the interface) — which  does not allow for an argument on high damages.  This is especially true in light of Lucent in 2009, Resqnet.com in 2010, and Uniloc in 2011.  Further, the antitrust authorities continue to keep at least one eye on abuse of the standards process, as shown in In re N-Data.  The crux of the matter is if your product uses the standard, defend on validity, estoppel, damages, and wipe out the exclusion order or injunction.  And yes, ask the FTC and the standards group and the EC to investigate…

The bottom line is an effective software patent enforcement strategy requires more planning and more attention from both technical and legal people in the company.  The increased attention and expense needs to be integrated at the “C-Level” with the company’s business goals (in part, because of higher costs and higher risks of failure).  Recall, however, patents cannot stop the better product from winning in the market:  Polaroid beat Kodak in the 1980s on the instamatic camera, got an injunction, yet disappeared not long after.  Kodak itself now is in bankruptcy as technology has leap-frogged to the next generation.  Add to this the slow pace of patent litigation (especially in the US), its unpredictability (can you say “panel dependent”?), and the dilution of remedies  — and a thoughtful business person will see the real battle ground is the marketplace not the courtroom…

Leave a Comment April 22, 2012

Not Confidential and Privileged — License and Settlement Negotiations Discoverable

On Monday April  9, the Federal Circuit decided In re MSTG, Inc., which clearly eliminated any argument that settlement or license negotiations might be privileged from discovery.  The Federal Circuit rejected those cases that had held license negotiations — and other settlement negotiations — were privileged:  Exempt from document production, deposition questioning, and otherwise protected from scrutiny in a lawsuit in the U.S.

Why do you care? You care because signing a non-disclosure agreement, or putting confidentiality provisions in documents, to facilitate a negotiation, will be  binding on the parties, but not the court or in a lawsuit or arbitration.  This means don’t put something in a settlement communication or presentation or licensing letter or presentation that would hurt you in a lawsuit.  That is, if a bad document is not going to be privileged, then don’t allow a bad document to be created…The best way to avoid bad evidence is not to create it in the first place.

What can you do? The opinion has a lot of non-binding commentary, dicta, that gives negotiators, and people in litigation, some possible guidance for keeping negotiations confidential — and possibly even privileged.  Some U.S. states have statutes that make mediation (a moderated negotiation with a third-party neutral, a “mediator”), privileged.  The Federal Circuit did not address this issue directly, but in dicta indicated that mediation might in fact be privileged.  If you have sensitive negotiations (prior to a suit in order to avoid litigation or after litigation), and you want to bar discovery into your negotiations, then do a mediation with a mediator in a state where the mediation is privileged (for example, Texas).

If you are stuck in a lawsuit now and settlement and license negotiation records, presentations or notes, are being requested by the other side, the Federal Circuit said that these types of materials might be subject to a higher burden for discovery, and more protection to maintain their confidentiality once produced.  Again, this is dicta, but the language in the opinion gives parties in litigation something to work with in protecting settlement and license negotiations.

Be careful out there!  Frank talk in settlement or license negotiations may be repeated back in court, notes may be shown to the jury, and presentations dissected in motions.  Yes, there are potential limits of relevance under Federal Court Rules, especially Federal Rules of Evidence 403 and 408, but these limits are up to the court’s discretion, not legal privileges.  Don’t create “bad evidence”…

Leave a Comment April 10, 2012

New Push for Arbitration in US Patent Cases

Yesterday, the Federal Circuit Court of Appeals reaffirmed the strong U.S. policy in favor of arbitration. The Federal Circuit also reaffirmed that it does not matter  what kind or type of contract, or clause, the agreement to arbitrate is found in — if the arbitration clause binds the parties, and the language is broad enough to cover the dispute (even a patent infringement dispute), then arbitration must trump….PROMEGA CORPORATION, et al. v. LIFE TECHNOLOGIES CORPORATION, 2011-1263 (Fed. Cir. March 28, 2012)(precedential opinion).

U.S. Courts have long favored arbitration.  In the U.S., arbitration is generally a dispute resolution mechanism that can only be created by a contract or contract provision to resolve future disputes by arbitration instead of the courts:  It is an agreement to move the dispute from a public court of record to a private self-funded and managed setting chosen by the parties.

An arbitration panel’s authority is limited to the bounds of the parties’ arbitration language:   That is the parties’ agreement to arbitrate if a problem arises between them.

Should businesses with disputes (or anticipating possible future disputes) in patent, licensing or commercial matters arbitrate? Or ask for arbitration agreements?  Yes.

Why? Because arbitration gives those who contract for it the ability to set the ground rules for resolution of their future disputes in their original arbitration contract or contract clause.  The parties can modify the arbitration by agreement later or even in arbitration if they agree to do so.  These contracts give businesses the ability to require more expertise in the decision-maker (e.g., minimum qualifications for arbitrators), to limit or constrain issues to be arbitrated (e.g., infringement and damages but not invalidity), to set time limits to start and complete the process of dispute resolution.  (Some arbitration organization’s rules have built in time limits, albeit subject to change).  Parties can also limit or eliminate discovery.  If an arbitration clause is given serious thought at the time a product sale, indemnity agreement, patent license or settlement is entered into, then a streamlined, effective, informed decision-making process can be structured for future disputes of any kind (whether license, infringement, indemnity, FRAND, or others).

There is also a catch:  The catch is many business forms have arbitration clauses embedded in them in the fine print (typically as part of a long list of terms and conditions).  Under the Uniform Commercial Code in force in most U.S. state jurisdictions, and the Federal Arbitration Act, you may already have an arbitration clause in place with the party suing you if the two of you have bought and sold product from each other in the past or done other business deals in the past.  It does not matter if the present fight between you is completely unrelated to the past deal, purchase or invoice, IF THE LANGUAGE OF THE ARBITRATION CLAUSE IS BROAD ENOUGH to cover your fight (for example, “any and all future disputes of any kind”).  Check all contract, purchase orders, and invoices with parties that sue you if you have done business with them in the past: You may find an arbitration clause — and it may permit you to force arbitration if it is broadly worded, regardless of the scope of the prior contract itself.

Arbitration clauses trump U.S. District Court and U.S. ITC proceedings.  There is little room for appeal or to challenge a final award — or even whether arbitration is required if the trial court or arbitrator say it is required.  Federal law requires arbitration clauses to be enforced (as do most state laws), and do not permit for appeals from the merits of a decision.  Challenges after arbitration are limited to narrow catagories of procedural problems or issues of due process or fraud.  Arbitration awards are enforced by Federal District Courts.

If you want the old fashioned dispute resolution:  Crowded docket; trial judge with hundreds of cases and limited brain space and time for yours; and a lay jury; then blow this off.  But don’t be scared by a past bad experience in arbitration:  Arbitration is a contractual dispute resolution system.   In any case arbitration is only as good as the terms in the contract on which it is based.  One bad arbitration experience, does not mean you will have a second bad one.  Indeed,  this is not much different than any other life for business experience:  For example, one jury trial win does not mean you will win the second jury trial.  The distinction between a good and a bad arbitration process is “in the details” of how you draft and implement the arbitration clause.  (The risk of a bad experience in arbitration can be minimized by designating a reputable arbitration provider with good rules and time limits in your clause, e.g., International Chamber of Commerce Court).

Think about it — especially non-U.S. entities doing business with U.S. entities…..

Leave a Comment March 29, 2012

A House Divided Against Itself: The Federal Circuit’s En Banc that Wasn’t, Marine Polymer Tech v Hemcon

On March 15, 2012, the En Banc Federal Circuit issued Marine Polymers Technologies, Inc. v. Hemcon, Inc., Slip Op. 2010-1548. The opinion decided nothing:  The district court’s claim construction, infringement, and damages rulings were affirmed by an equally divided court.  In other words, since no majority was formed on any question on appeal, the result below in the district court was left “as is”, affirmed.  (The panel decision was vacated by the procedure of the case being taken En Banc).  The issue that prompted the En Banc, whether changes in claim scope in a re-examination proceeding where the words of the claims do not change, but claim scope does due to interaction with the examiner (e.g., disclaimer of scope or re-definition of a term), gives rise to intervening rights, was addressed by dozens of pages of dicta from both sides of the Court, but nothing was decided.  (Not all judges on the Court participated in the case.).  An equally divided court did manage to tilt in favor of Judge Lourie’s “alternative holding” that intervening rights only arises under the statute where the claim language changes (Judge Linn joined Judge Lourie’s opinion on the point):  But this is dicta since the equally divided court affirmed the district court judgment, which did not address the intervening rights issue.  Yet oddly, this is labelled a “precedential” opinion on the Federal Circuit’s website. Of what???

“A House Divided Against Itself Cannot Stand”, Abraham Lincoln, June 16, 1858. (See also, Gospel of Mark 3:25, “And if a house be divided against itself, that house cannot stand.”).  The Federal Circuit is clearly a house divided against itself.  Prior posts have pointed out the conflicting approaches to claim construction that were illustrated six months ago in the dissents from denial of En Banc review in Retractable Technologies, Inc., and later posts on other issues (e.g., standard for preliminary injunction).

Here, right down the line, claim construction, infringement and damages, the Federal Circuit could not muster a majority to issue a ruling on any key aspect of the district court’s order, leaving its judgment “as is”.  The district court’s judgment was left intact by this split,  but the split shows patent law is in tatters:  How can we have a “first world”, reliable, patent system, when the judges charged with bringing uniformity to that system are so deeply divided, they cannot form a majority on any issue in an En Banc opinion.  Volumes of amici briefs, doubtless enormous legal expenses, and yet the Court cannot get a majority to agree on any aspect of the district court’s ruling.  Indeed, as explained below, the Court cannot even reach a consensus on dicta on intervening rights.

If ever these was a single clear sign that our U.S. patent system is broken, it is this En Banc exercise that resulted in no result.

What is a U.S. patent worth?  Maybe it is litigation cost/defense cost only since no one can define the claim scope (coverage), preliminary injunctions are rare, permanent injunctions are limited to narrow circumstances, and damages law remains opaque.  Maybe the seat of patent jurisprudence should be Las Vegas?

Okay, enough of my pontificating: We do not have the uniformity of decision to have a reliable patent system, this drives up enforcement costs, and minimizes patent value.  So now, the 50 pages of dicta in Marine Polymers Tech., Inc.

A brief analysis:  The judges of the Court equally divided on the question of the proper claim construction of the key limitation “biocompatible”:  From reading both opinions this was apparently driven by disagreement over the role of the specification, the doctrine of claim differentiation, and limitation of the invention to the single disclosed embodiment.  The claim construction by the district court was affirmed by an equally divided En Banc court (that is, by default since neither side could muster a majority).  The infringement ruling was likewise affirmed due to an equally divided En Banc court.  So too was the damages ruling:  From Judge Lourie’s opinion, we know that reasonable royalty, entire market value rule, and the evidence needed to sustain a damage award were issues, but again none were decided.  The equally divided court left the district court’s damages decision untouched, affirmed.

The remarkable aspect of this opinion (opinions) is the discussion of intervening rights:  It is all dicta.  Since the district court’s opinion was affirmed by an equally divided court, intervening rights became a non-issue.  The panel decision was vacated by the En Banc, the panel’s split decision was not subject to review, it was left a nullity.   Moreover, since the intervening rights issue was based on events occurring after the district court’s judgment, it was not part of the district court case or judgment below.

The “non-issue ” on intervening rights was whether under Section 307 of Title 35 on re-examination (which refers to Section 252, on re-issue), intervening rights only arise when the claim language actually changes; or if intervening rights can arise if claim scope is changed during a post-grant proceeding (e.g., by disclaimer or re-defining a term in a claim), but the literal wording of the claim does not change.  Judge Lourie wrote for half of the En Banc court (plus one, Judge Linn who switched sides on this issue), that only a change in language in the claim itself creates intervening rights under the statutes.  Judge Dyk, writing for the other part of the En Banc court, invoked the Supreme Court’s advice that when a court is equally divided, no opinion should issue at all (since the only impact is to leave the decision below undisturbed for failure to obtain a majority to reverse it): Since the district court opinion and judgment was affirmed by an equally divided court, no opinion should have issued.  Judge Dyk then went on to argue the Supreme Court’s prior writings on intervening rights were based on changes in legal scope not just words.  That’s a lot of money for a lot of dicta.  And is 50 pages of dicta worth Supreme Court review?

The expense, breadth, and burden of patenting and patent enforcement, are questionable in this state of affairs.  Moreover, the mandate in the United States Constitution on patents is left unfulfilled in a system where there are no rules.  I am not sure if I should beware of the “Ides of March” or just go drink green beer for St. Patrick’s day…

Leave a Comment March 17, 2012

Patent Law Confusion Continues: Disqualification Conflicting Decisions

The Federal Circuit was created to bring uniformity to patent law.  It has done the opposite in recent times:  There is no uniformity in claim construction, as per my prior posts on Retractable Technologies, Inc. and HTC, etc.  There is no uniformity in venue.  If you are in Texas, using an expansive reading of Fifth Circuit Regional law, you are likely to be transferred to the infringer’s home forum.  Of late, in a case from Delaware, Judge Rader did issue a precedential decision transferring a case from Delaware to Northern California, where the parties’ operations were located giving minimal weight to state of incorporation.  Perhaps this is a harbinger of consistency for patent cases under 1404(a), but to date inconsistency has been the rule.

Now we see another area where confusion continues, but this is mainly at the district court level.  Maybe the Federal Circuit will cure this inconsistency? Hopefully in a common-sense manner.  In the Northern District of California, a lawyer can be disqualified based on little more than the client’s “say so” that the lawyer learned litigation playbook, corporate structure, or otherwise has learned confidential information (which need not be revealed and generally the lawyer’s rebuttal is not given the weight the client’s complaint is given).  This might come in a later patent case, as in a recent opinion from Judge Alsup, Talon Research v. Toshiba, an opinion some months ago where I was disqualified from an antitrust case based on prior patent work by Judge Jeffrey White, Oliver v. SanDisk, et al., and other cases.  Often the representation ended years ago, but this seems to have little impact in the Northern District.

Recently, Judge Davis in the Eastern District of Texas denied a motion to disqualify in Secure Axxcess v. Dell, Inc., recognizing that not all patent cases are the same, high level assertions of strategy and confidential playbook type information, in cases that ended years ago, will not themselves permit for disqualification in a later patent case.  There must be a true overlap between the current and former representation, not just buzzwords.  In that opinion Judge Davis found the disqualification request also undermined because similar requests had been filed in multiple patent cases by the same company against the same firm, which tended to show a broad view of disqualification across a field of cases with different subjects.

Today’s market opens up the specter of disqualification as a common litigation tactic:  First, a significant number of companies use requests for proposals or bids, or otherwise shop, for the best rates and deals.  A significant number of companies treat law firms as other service providers, with less concern for continuity or relationships than in the past.  This is by no means true of all companies, but it has been a growing trend.  The internet services that post new filings once or twice a day have facilitated this type of purchasing of legal services as it invites inquiries from firms about representation in new cases.  Moreover, consolidation in certain industries also creates conflicts when a former client is absorbed by a former adversary.

In addition, lawyer mobility is probably more prevalent now than in the past.  Firms grow, open new office, lawyers are laid off and re-hired by other firms, “rain-makers” are courted by other firms, firms merge, firms dissolve (e.g., Brobeck, Heller, Howrey), associates or partners or counsel whose careers hit a ceiling in one firm look for other opportunities.  This mobility of attorneys is difficult to cope with in jurisdictions that do not recognize ethical walls or advance waivers of conflicts or where a court broadly construes the types of information that might lead to later disqualification.

It is time for a realistic and common sense approach to conflicts:  Companies that shop their cases should not complain if in a later case a firm they previously used but declined to hire for later work shows up on the other side (so long as it is not actually the same dispute or a closely related dispute).  Knowledge of a company’s corporate structure, litigation strategy, corporate workings or licensing goals is not a basis for confidential information in many instances, because these facts all change with time, the economy, the product mix: Frankly, among competitors, each others’ corporate structures are hardly secret, and the licensing strategy in most NPE cases is typically pay as little as possible.  Imputed knowledge is a firm dependent if not out dated concept in an era of worldwide or national or regional firms that might have hundreds or even more than a 1000 lawyers in multiple offices.  Many partners in large firms don’t know each other and don’t know what each other’s practices involve.  Disqualification litigation delays lawsuits, runs up expense, and does little to protect clients or the public perception of attorneys.

There is a place for client loyalty, there is a place for disqualification, there is a place for firm loyalty, but right now those concepts are “all over the place”, without consistent or credible boundaries, which vary from jurisdiction to jurisdiction.  I hope this is one area where the Federal Circuit can and does recognize modern business practices and realities, recognize facts are important and recognize distinctions should not be blended away with vague concepts of “strategy” or “corporate structure”.   Clients that use one or a few firms on a fairly regular basis won’t have this issue.  Law firms that respect the bounds of a prior dispute or relationship won’t have this problem.  Strong waivers and ethical walls should cure this problem.  But those who want to swing the DQ stick wildly and broadly, as another litigation weapon, are a problem and the problem should be stopped.

Leave a Comment February 27, 2012

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Dave Healey

Dave Healey

Dave's Bio

I am a principal in the Houston office of Fish & Richardson, a leading global intellectual property law firm. I have been practicing law for twenty-five years, specializing in patent lawsuits. During that time, I have watched IP become more important than ever as a business asset. And I’ve gained some perspective on the best way to protect and exploit IP assets. I hope my ideas offer a unique perspective, and help you create your own practical solutions.

The ideas and opinions on this blog are my own as of the time of posting, have not been vetted with the firm or its clients, and do not represent the positions of the firm, its other lawyers, or any of its clients. None of these posts is intended as legal advice and if you need a lawyer, you should hire one. If you make a comment on the post, the comment will become public and beyond your control to change or remove it.

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