Address Abusive Patent Litigation By Reducing Innocent Infringement

Vol. 6 No. 6

By

Matthew K. Blackburn is the managing partner of Locke Lord LLP in San Francisco, California. He is a patent lawyer who advises clients on patent litigation.

Complaints about abusive patent litigation are in vogue. The popular press is filled with stories about so-called “patent trolls” or patent assertion entities (PAEs) waging war against technology innovators. These PAEs are a tax on the U.S. economy. PAEs do not make products or supply services based upon their patents—they enforce patents only to generate licensing fees. The desire to thwart these PAEs has led to a myriad of patent reform proposals to fix the “broken” U.S. patent system. These proposals range from creating a fee shifting system where a losing litigant would pay the accused infringer’s legal fees, to requiring disclosure of patent ownership records, to requiring a patent holder to provide additional details in the complaint when filing suit. These proposals miss the mark, placing at risk the U.S. patent system—which is the envy of the world.

Patent owners are entitled to extract value for their valuable U.S. patents. There is nothing wrongful or untoward in suing to enforce a patent. The essence of the patent right is the ability to exclude others from practicing an invention for a limited time. Yet, aspects of PAE litigation are troubling. Innocent or unintentional patent infringement is not a defense to a patent assertion. With the proliferation of U.S. patents, some technology companies find it all but impossible to “clear” new products. These technology companies may have to wait six years or more to find out if they accidently infringe an unknown, third-party patent, and they may owe significant damages at that time.

This innocent infringement problem is made worse by a quirk in the U.S. patent laws. Producing patent owners (those making or selling patented goods) are required either to give actual notice to accused infringers or to give constructive notice by marking their patented goods. PAEs do not labor under these notice requirements, however, and can more easily obtain presuit infringement damages from innocent infringers.

As a measured and targeted patent reform, Congress should clarify that the damages limitations of § 287 of the Patent Act apply equally to patent owners that produce patented goods (“producing patent owners”) and to patent owners that do not produce patented goods (“nonproducing patent owners”). To be entitled to presuit damages for nonmethod/nonprocess patents, all patent owners would need to show actual notice to the alleged infringer, or that they produced the patented goods and marked substantially all of them. This change in the law would end preferential PAE treatment, help to reduce innocent infringement, and potentially decrease undesirable PAE litigation.

Limitation on Damages of Producing Patentees

Producing patent owners cannot always collect presuit infringement damages. Section 287(a) limits recoverable patent infringement damages:

In the event of failure so to mark [the patented article with the patent number], no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice.1

Thus, a producing patent owner must either (i) mark goods covered by the patent with the patent number (constructive notice), or (ii) provide the infringer with notice of infringement (actual notice).2 If a patent owner has granted a patent license to a third party, that third party has to mark the patented goods.3 Noncompliance with § 287(a) prevents producing patent owners from recovering any prenotice damages.4

“The marking statute serves three related purposes: 1) helping to avoid innocent infringement; 2) encouraging patentees to give notice to the public that the article is patented; and 3) aiding the public to identify whether an article is patented.”5 However, the reach of § 287(a) is limited. Marking is not required when the patent owner does not produce the patented article or when the patent is only directed to a process or a method, because in both situations there is “nothing to mark.”6 Nor does § 287 penalize patent owners who suffer infringement by unauthorized third parties.7

Prior to 1936, at least the Second, Third, Sixth, and Eight Circuits followed the rule that the inventor must give notice of infringement when it does not manufacture and mark the patented goods.8 As explained by the Third Circuit, infringement was presumed to be innocent because of the lack of notice (actual or constructive).9 It was not sufficient notice that the patent had in fact been issued by the U.S. Patent Office.10

In 1936, the Supreme Court reached a different conclusion in Wine Railway Appliance Co. v. Enterprise Railway Equipment Co.11 The patent owner did not produce the patented articles, and no one licensed by the patent owner had made or sold the patented goods.12 The Supreme Court held the patent marking statute then in effect13 did not require a patentee who did not produce the patented device to give actual notice to an infringer before damages could be recovered.14 This statute was intended to protect against “deception by unmarked patented articles.”15 The Court believed it unfair to allow a patent to be “secretly infringed with impunity, notwithstanding injury to owners guilty of no neglect.”16

Recent PAE Litigation Boom

The volume of newly filed patent suits has grown significantly in the past several years (see Fig. 1). This increased patent litigation activity has been linked to PAEs. Over half of new patent suits in 2012 were filed by PAEs, by some estimates.17 According to data compiled by RPX Corp., two of the largest PAEs (IPNav and Acacia) accounted for 2,914 patent infringement lawsuits from 2008–2012.18 In 2012 alone, PAEs sued nearly 2,500 different companies. Well-known technology companies are frequent targets. PAEs sued Apple Inc. 191 times from 2009–2013, followed by Samsung (152), Hewlett-Packard (150), and AT&T (147).19

PAEs are in the patent litigation business. These are “firms [that] use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.”20 Through litigation or threatened litigation, PAEs obtain revenue from companies that make, use, or sell technology that was allegedly patented. The PAE business model is straightforward. They evaluate patents on two fronts: (i) the potential damages for infringement, and (ii) the probability of litigation success. Whenever the expected value of the patent litigation is greater than the probable litigation cost, PAEs are likely to initiate enforcement actions because they can profit by extracting licensing fees and settlement payments.

Press articles about PAEs often focus on large patent aggregators, like IPNav and Acacia, and their profit motives.21 Nevertheless, monetizing patents is not inherently bad or undesirable. Universities, invent-to-license companies (like Qualcomm), failed startups, and even individual inventors may seek to generate revenue from idle patents. These entities may attempt to capture value or monetize patents through litigation or threatened litigation only after unsuccessfully attempting to commercialize the patented technology. One example is i4i LP, which obtained a $200 million verdict against Microsoft for patent infringement in 2009.22 i4i was not actively trying to commercialize the technology at that time, but i4i had tried unsuccessfully to build a business around the technology, and Microsoft had even expressed interest in it during development of Microsoft Word 2003.23

However, innocent infringers are being caught up in the increased PAE litigation activity. There is no intent requirement for patent infringement, which “may be entirely inadvertent and unintentional and without knowledge of the patent.”24 Companies entirely without notice of patent rights are being held to account for incorporating patented technology in their products accidentally or unknowingly. Where there are some 250,000 active patents that affect smartphones, for example, such innocent infringement is likely to occur.25 This may help to explain the relatively high number of complaints against well-known and reputable technology companies.26

Further, PAE lawsuits tend to happen late in the life of a patent, in the last few years before it expires. One study found that PAE lawsuits typically occur some eight years after patent issuance.27 Another study concluded that PAEs are far more likely to enforce old patents than are practicing entities.28 Passage of time allows damages to accrue, which in turn makes PAE litigation more profitable.

Societal costs incurred because of these PAE suits are believed to be significant.29 Defending these PAE suits arguably increases prices that technology companies must charge consumers, and decreases innovation by reducing funds available for research and development. The fear that PAE suits are harming innovation and U.S. technology companies has spurred several patent reform bills now pending in Congress.30 The Federal Trade Commission (FTC) has agreed to open an investigation into so-called “patent trolls,” although that investigation is ongoing. President Obama has issued executive orders “to protect innovators from frivolous litigation” by patent trolls.31

Proposed Change to § 287(a)

To promote fairness, Congress should harmonize treatment of producing and nonproducing patent owners under § 287(a)32 and legislatively overturn the nearly 80-year-old holding of Wine Railway. Under this measured and targeted patent reform proposal, notice would be required for presuit infringement damages of nonmethod/nonprocess patents:

All patent owners would need to provide actual notice to the alleged infringer of the patent and the allegedly infringing article; or

Producing patent owners (or their authorized licensees) would need to mark substantially all of the patented goods sold.33

Failure to meet at least one of these requirements would prevent recovery of presuit infringement damages, but would not prevent damages recovery for continuing infringement or injunctive relief. Nor would this proposal seek to change the existing rule that method or process patents do not require marking to obtain prenotice damages.34

This proposal is fair. It puts all patent owners on equal footing, treating producing patent owners and nonproducing patent owners alike. Under existing law, PAEs are able to obtain prenotice damages while producing patent owners cannot unless they mark substantially all of their patented goods.

This proposal also avoids a potentially thorny problem—how to define who is a “bad” PAE. There is no need to construct a definition for who are the PAEs subject to a penalty. Instead, the proposed change seeks to encourage desirable conduct (providing prompt notice of suspected patent infringement), and to discourage undesirable conduct (sitting idly while infringement is ongoing or failing to police potential patent infringement).

Amending § 287 in this manner should decrease undesirable PAE suits, without blocking wholesale all attempts to monetize valuable patented technology. Lessening available patent damages should decrease the number of PAE suits. PAE suits may not be economically viable where the value of the technology is waning (e.g., because the patented technology is a minor feature of the product sold or because other alternatives exist). Marginal suits—those with small damages that primarily seek to leverage high patent litigation costs to coerce settlements—would be less likely. On the other hand, suits where the patented technology has significant future value would not be thwarted. Technology forming the core of a product would continue to command significant infringement damages if nonpatented alternatives do not exist.

This change also would encourage prompt filing of lawsuits. Delays in filing suit are currently advantageous to PAEs, who benefit from accrual of prenotice damages. This allows more opportunity for technology companies to fall innocently into the patent trap, as they develop and use technology that they incorrectly believe is not patent protected. The passage of time not only adds to the potential damages, but it may also deny accused infringers access to evidence. Memories fade and documents are disposed of. This can be critically important in patent litigation where it is usually necessary to reconstruct the state of the technology at the time the invention was made (to assess patent invalidity), and at the time of first infringement (to evaluate patent damages). The passage of time makes these reconstructions more difficult and more inexact.

Finally this proposal furthers the goal of deterring infringement. The threat of patent infringement damages cannot deter innocent infringement. Nor is it reasonable to expect technology companies to be aware of all potentially relevant U.S. patents. Each year some 250,000 U.S. patents are issued.35 Monitoring every new patent that might cover some aspect of a technology company’s products would be a gargantuan task. Instead, the patent laws should put the onus on patent owners to provide alleged infringers with notice, which will help to curb innocent infringement.36 Notice will allow reputable companies the opportunity to negotiate with the patent owner, or to change their product to use other technologies. Patent owners likely are aware of who practices in their particular technology niche and how these companies are making their products. This obligation to provide notice is a reasonable quid pro quo for the ability to obtain presuit damages.

Conclusion

Congress should amend the Patent Act to treat all patent owners alike. Under existing law, § 287(a) limits the ability of producing patent owners (those making or selling patented goods) to collect prenotice damages unless actual or constructive notice of the patent is provided to the infringer. Such limitations are not imposed on nonproducing patent owners. Congress should amend § 287(a) to apply these limits to both producing patent owners and nonproducing patent owners. By putting all patent owners on equal footing, this change will help to (i) alleviate the current wave of PAE litigation, and (ii) reduce innocent infringement by encouraging patent owners to police the market for potential infringement and to bring any patent suits earlier.

Endnotes

1. 35 U.S.C. § 287(a).

2. Id.; see also Bed Bath & Beyond, Inc. v. Sears Brands, LLC, No. 08-5839 (SDW)(MCA) (D.N.J. Jun. 4, 2012) (granting partial summary judgment limiting damages to those incurred after date patent owner (Sears) informed plaintiff (Bed Bath & Beyond) of alleged infringement because patent owner failed to mark substantially all patented goods).

3. See, e.g., Amsted Indus. Inc. v. Buckeye Steel Castings Co., 24 F.3d 178, 185 (Fed. Cir. 1994) (“A licensee who makes or sells a patented article does so ‘for or under’ the patentee, thereby limiting the patentee’s damage recovery when the patented article is not marked.”).

4. Section 287 does not preclude recovery of postsuit damages.

5. Nike, Inc. v. Wal-Mart Stores, Inc., 138 F.3d 1437, 1443 (Fed. Cir. 1998) (citations omitted); see also Wine Ry. Appliance Co. v. Enter. Ry. Equip. Co., 297 U.S. 387, 394 (1936).

6. Am. Med. Sys., Inc. v. Med. Eng’g Corp., 6 F.3d 1523, 1538 (Fed. Cir. 1993) (citing Bandag, Inc. v. Gerrard Tire Co., 704 F.2d 1578, 1581 (Fed. Cir. 1983)).

7. See, e.g., Clancy Sys. Int’l, Inc. v. Symbol Techs., Inc., 953 F. Supp. 1170, 1174 (D. Colo. 1997) (holding that failure of unlicensed third party to mark its products, while infringing, is not chargeable to the patentee); Maxwell v. K Mart Corp., 880 F. Supp. 1323, 1337 (D. Minn. 1995) (“The failure to mark by third parties not contractually bound to [the patentee] is, of course, not chargeable to her . . . .”).

8. See, e.g., Enter. Ry. Equip. Co. v. Wine Ry. Appliance Co., 77 F.2d 159 (6th Cir. 1935); Van Meter v. United States, 47 F.2d 192, 196 (2d Cir. 1931); Flat Slab Patents Co. v. Nw. Glass Co., 281 F. 51, 54–55 (8th Cir. 1922); Am. Caramel Co. v. Thomas Mills & Bro., 162 F. 147, 148 (3d Cir. 1907); see also Son v. Pressed Steel Car Co., 21 F.2d 528 (S.D.N.Y. 1927); Churchward Int’l Steel Co. v. Bethlehem Steel Co., 262 F. 438 (E.D. Pa. 1919).

9. Am. Caramel, 162 F. at 148.

10. Flat Slab Patents, 281 F. at 53.

11. 297 U.S. 387 (1936).

12. Id. at 393.

13. The operative statutory language has essentially remained the same. Wine Railway concerned § 4900 of the Patent Act of 1927, which provided “no damages shall be recovered by the plaintiff, except on proof that the defendant was duly notified of the infringement, and continued, after such notice, to make, use, or vend the article so patented.” Similar language is included in § 287 of the Patent Act of 1952, and previously was included in § 13 of the Patent Act of 1861, and § 38 of the Patent Act of 1870.

14. Wine Railway, 297 U.S. at 398.

15. Id.

16. Id. at 395.

17. See, e.g., Colleen Chien, Patent Trolls by the Numbers, PatentlyO (Mar. 14, 2013), http://www.patentlyo.com/patent/ 2013/03/chien-patent-trolls.html (62 percent); Robin Feldman et al., The AIA 500 Expanded: Effects of Patent Monetization Entities 7 (UC Hastings, Research Paper No. 45, 2013) (58.7 percent).

18. See Chien, supra note 17.

19. See Most Pursued Companies, Patent Freedom (Feb. 7, 2014), https://www.patentfreedom.com/about-npes/pursued/.

20. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 396 (2006) (Kennedy, J., concurring).

21. See, e.g., Stephen DeMaura, The Creepy Business of Patent Trolls, Wash. Times, Oct. 9, 2013; David Segal, Has Patent, Will Sue: An Alert to Corporate America, N.Y. Times, July 13, 2013.

22. See i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831, 839 (Fed. Cir. 2010).

23. Id. at 860, 862.

24. Fla. Prepaid Postsecondary Educ. Expense Bd. v. Coll. Sav. Bank, 527 U.S. 627, 645 (1999); see also Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 35 (1997) (holding that neither the doctrine of equivalents nor literal infringement requires a showing of intent to infringe); Mitchell v. Hawley, 83 U.S. (16 Wall.) 544, 550 (1872) (declaring that “innocent” infringement is still infringement).

25. Steve Lohr, A Bull Market in Tech Patents, N.Y. Times, Aug. 16, 2011.

26. See Most Pursued Companies, supra note 19.

27. Michael Risch, Patent Troll Myths, 42 Seton Hall L. Rev. 457 (2012).

28. Brian J. Love, An Empirical Study of Patent Litigation Timing: Could a Patent Term Reduction Decimate Trolls without Harming Innovators?, 161 U. Pa. L. Rev. 1309, 1341 (2013).

29. James E. Bessen et al., The Private and Social Costs of Patent Trolls, Regulation, Winter 2011–2012 (estimating the cost at $29 billion in 2011 alone).

30. U.S. Gov’t Accountability Office, GAO-13-465, Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality (2013); Innovation Act, H.R. 3309, 113th Cong. (2013); Stopping the Offensive Use of Patents (STOP) Act, H.R. 2766, 113th Cong. (2013).

31. Edward Wyatt, Obama Orders Regulators to Root Out “Patent Trolls, N.Y. Times, June 4, 2013.

32. Some may argue that the marking requirements of § 287(a) are unnecessary and should be eliminated altogether. While this would put producing and nonproducing patent owners on equal footing, eliminating patent marking may increase the likelihood of innocent infringement.

33. The second prong does not represent a change in the law—producing patent owners currently must mark “substantially all” patented goods. For example, the Federal Circuit cautioned in Am. Med. Sys., Inc. v. Med. Eng’g Corp., 6 F.3d 1523, 1537 (Fed. Cir. 1993), that “once marking has begun, it must be substantially consistent and continuous in order for the party to avail itself of the constructive notice provisions of the statute.” Cf. Hazeltine Corp. v. Radio Corp. of Am., 20 F. Supp. 668, 671–72 (S.D.N.Y. 1937) (interpreting the predecessor to § 287(a), Revised Statutes § 4900, to require “marking of every patented article sold—subject, of course, to the implied exception of de minimis”).

34. This proposal is intentionally incremental, and would not affect all PAE suits. PAEs asserting method or process patents would not be affected by this change in the law. It is unclear what percentage of PAE litigation is limited to such method or process patents. If the PAE litigation boom persists solely because of method/process patent assertions, the proposed changes to § 287(a) could be extended to those patents as well.

35. U.S. Patent Statistics Chart: Calendar Years 1963–2013, U.S. Pat. & Trademark Off., http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm (last modified Mar. 26, 2014).

36. The risk of encouraging intentional infringement by requiring presuit notice is minimal. There is no evidence of widespread intentional infringement against producing patent owners who fail to properly mark their patented technology. In any case, existing statutory mechanisms can address bad actors. Companies that knowingly and intentionally copy patented technology can be punished through findings of willful infringement, and the imposition of enhanced damages under § 284 (up to three times damages).

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