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

September 4, 2012

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…

Filed under: 28 U.S.C. 1407 (MDL Statute),damages and remedies,EU enforcement,Federal Circuit,German Enforcement,joinder of parties,litigation planning,Multi-District Litigation,patent,reasonable royalty,U.K. Patent

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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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