Wealth of Ideas Newsletter

Indigestion from the eBay Ruling: How Do You Spell Relief?

Wealth of Ideas Newsletter, September 2009

Did the landmark Supreme Court decision in the eBay v. MercExchange case make it more difficult for patent owners to get injunctive relief in patent infringement cases? Without a doubt! And it mostly depends on who you are – and more specifically, what you do with the patent you own.

A Brief History of the eBay Case

The legal saga began when MercExchange, LLC sued eBay Inc. for infringement of its patent related to eBay’s “Buy it Now” feature. In 2003, a Virginia jury in the US District Court for the Eastern District of Virginia found eBay guilty of willful patent infringement, but the court did not grant a permanent injunction to MercExchange – a move which would have forced eBay to stop offering the popular “Buy it Now” service to its sellers, unless it took a license under the patents-in-suit. The District Court ruled that since MercExchange did not practice its invention it was not entitled to injunctive relief.

MercExchange appealed the verdict to the Court of Appeals for the Federal Circuit (CAFC), which hears appeals on patent cases, and the CAFC reversed the District Court – granting MercExchange an injunction and citing the “general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.” The practice of granting permanent injunction upon finding of infringement has been consistently applied by courts for well over 100 years.

eBay appealed to the Supreme Court, which granted certiorari. The Supreme Court reversed the CAFC’s ruling – taking away MercExchange’s permanent injunction.
Moreover, the Supreme Court stated in dicta that just as the District Court erred in creating a general rule that an entity not practicing its invention cannot be entitled to injunctive relief, so too the CAFC erred in enunciating another general rule that a permanent injunction is automatic upon finding of infringement (see A. Poltorak, “Supreme Court Chooses the Middle Ground in the eBay Case”).

The Supreme Court ruled that any plaintiff seeking injunctive relief must satisfy the “four-factor test” and prove that:

  1. the patent owner has suffered an irreparable injury;
  2. the remedies available at law, such as monetary damages, are inadequate to compensate for its injury;
  3. a remedy in equity is warranted after considering the balance of hardships between the patent owner and the alleged infringer; and
  4. the public interest would not be disserved by an injunction. eBay, 126 S. Ct. at 1839.

The Aftermath of eBay

Originally, the status of the plaintiff as a practicing entity or non-practicing entity (NPE) was not supposed to be a factor in the patent owner’s rights. (NPE, or “non-practicing entity,” is the term used by the courts to describe patent owners that do not practice their patents. A “market participant” is a patent owner that does practice its patent.)

Indeed, prior to eBay, the Federal Circuit often cited the Supreme Court’s ruling in Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908) as the basis for a patent owner's right to exclusive use of his invention – and thus an injunction: "It is his absolute property ...'his title is exclusive ... he is neither bound to use his discovery himself or permit others to use it.'" (The opinion quotes Heaton Peninsular Co. v. Eureka Specialty Co., 77 F. 288, 294 (1896).)

In his concurring opinion Chief Justice Roberts, joined by Justices Scalia and Ginsburg, wrote, “From at least the early 19th century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases.” Urging judges to apply the four-factor test in this historical context, he further quoted Justice J. Holmes who wrote, “a page of history is worth a volume of logic.”

Unfortunately, this admonition fell on deaf ears. Since the eBay case and the emphasis on the four-factor test, it has in fact become almost impossible for NPEs to obtain injunctive relief – even after their patents have been found valid and infringed. A study published by attorneys with the Morrison & Foerster law firm in April 2008 found that in almost 90% of the post-eBay cases they documented, practicing entities were still able to obtain a permanent injunction.

And NPEs? According to Morrison and Foerster’s findings, the only NPE that was granted an injunction was a research institution whose ability to raise funds for further research through licensing patents would be compromised without injunctive relief. It seems as if judges have forgotten that a patent is a quid-pro-quo for an invention’s disclosure, not for the practice of the invention. They also seem to have forgotten that by its very definition, a patent is the right to exclude others from practicing the patented invention. How can one exclude others without an injunction? Don’t hold your breath waiting for an answer.

Compulsory Licensing for NPEs?

Although injunctive relief is likely not in the stars for an NPE these days, NPEs are still winning patent cases and licensing their patents. But now, in many cases, the court is the one setting the terms of the license – whether the parties agree or not, and whether or not the patent owner even wanted to license the patent. This practice is called “compulsory licensing.”

Is compulsory licensing such a bad thing for the patent holder? Definitely, for at least these reasons:

  1. Finding of patent infringement without an injunction means that the infringement will continue with the court’s blessing – whether the patent owner likes it or not.
  2. Knowing that a permanent injunction is no longer a credible threat, the infringer has little incentive to settle with the patent owner because at the end of the litigation, the infringer is in no worse of a situation than at the beginning – win, lose or draw. If the worst outcome is having to pay the same royalty rate as what the patent owner is asking for, why settle? Why not roll the dice? A threat of permanent injunction is no longer a valuable bargaining chip in the hands of the patent owner.
  3. Royalty rates set by courts in compulsory licenses are often significantly lower than those that could have been negotiated by a patent owner after obtaining a permanent injunction. Because a permanent injunction could mean having to totally redesign the infringing product or stop sales altogether, the infringer often agrees to a much higher royalty rate than the court would impose.

However, in some cases, permanent injunctions have been replaced with higher royalties imposed by the court on the infringer. And patent owners are usually happy about that.

The courts have got it all wrong. (See A. Poltorak, “On Patent Trolls and Injunctive Relief.”) Intellectual property is property, after all, and ownership comes with certain property rights that should not be dependent on whether the patent is practiced by its owner. And the legacy of eBay is a loss of those rights for IP.

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Chinese Companies Getting Savvy to the Power of US Patents

Wealth of Ideas Newsletter, August 2009

The “cheap Chinese knockoff” is a stereotype that isn’t going away anytime soon, and with cheap labor and often questionable quality control practices, the reputation of Chinese goods is unlikely to improve unless major changes are made.

But Chinese manufacturers are beginning to turn from imitation to innovation. They’re applying for United States patents in droves – and, in an interesting twist, they’re starting to sue each other and the US retailers that sell the infringer’s products in US courts.

Case in point: Changzhou Asian Endergonic Electronic Technology Co., based in Changzhou, China, is suing US retail giants Best Buy, Wal-Mart, Target, Office Depot, Radio Shack, Staples and TomTom for selling products that the company alleges infringe its patent on dashboard mounts for navigation devices.

Changzhou Asian is also suing the Chinese manufacturer of the allegedly infringing product, known as Nav-Mat mounts, in China. Another interesting twist is that the lawsuit against Best Buy, Wal-Mart et al. was filed in the Eastern District of Texas, the most popular jurisdiction for patent infringement lawsuits. The venue that was once feared by foreigners is now their venue of choice…when they are plaintiffs, that is.

Chinese patent applications rise dramatically

Hurt, as everyone else, by the world financial crisis, Chinese companies are trying to move past their reputation as the world’s sweatshop – primarily producing cheap clothing, shoes, toys and electronics – to a world-class company like Japan’s Sony or South Korea’s Samsung. And some of the most innovative Chinese high-tech companies are beginning to wake up to the need for patent protection now that they find their own intellectual property infringed.

One such Chinese company is Huawei Technologies Ltd, which has filed over 1,100 US patent applications and has over 100 issued US patents. By 2005, Huawei’s total patent applications had reached 8,000 in 20 countries. In 2008, Huawei filed more patent applications than any other company in the world, with 1,797 applications filed under the Patent Cooperation Treaty (PCT) in 2008 alone.

Meanwhile, overall filings of US patent applications by residents of mainland China reached 5,129 in 2008. The number of patents issued to residents of mainland China have more than tripled, from 551 in 2004 to 1,684 in 2008.

And in 2008, mainland China and Hong Kong (largely self-governing, but a territory of China nonetheless) had a combined total of 2,422 issued US patents. That puts Chinese residents in seventh place in terms of US patents issued to residents of foreign countries last year.

Clearly, the Chinese are on track to become an IP powerhouse – and they’re increasingly adept at using the US patent system to their advantage.

Implications of a more innovative China

Chad Nydegger, Changzhou Asian’s attorney, commented on their patent infringement case. "My client's view is [that] China is starting to emerge as a first-world country,” Nydegger said. “There's been a significant influx of technology, and they are starting to make improvements. They are becoming innovators, not just copiers."

If that proves true and Chinese companies become a leader not just in technology, but also in US patent filings and patent infringement lawsuits, the implications could be staggering for the US Patent Office – which is already overworked, undermanned and underfunded. (Just ask David Kappos, confirmed on August 7 by the Senate as Director of the Patent Office amid high hopes that he can run the USPTO as efficiently as he ran the IP department of IBM.)

Will we see a surge in Chinese companies suing other Chinese companies as well as American retailers in the US? Only time will tell, but much depends on the outcome of the Changzhou Asian lawsuit. In the meantime, we, at General Patent, are taking lessons in Mandarin.

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The Best Part of Waking Up: a Lawsuit in Your Cup

Wealth of Ideas Newsletter, July 2009

Who but a patent attorney would look for a lawsuit under the lid of his morning cup of coffee? That’s exactly what Washington, DC-area attorney Matthew Pequignot did – and he found that the patents marked on his Solo cup lid had expired almost 20 years earlier.

Although the expired patent numbers were probably the result of old cup-lid molds that were never updated rather than an actual intent to deceive, Pequignot took legal action – on behalf of the government!

Qui Tam Statutes: Suing for the King

The patent law code, 35 U.S.C., in section § 292, addresses the issue of false marking: for example, marking products with patent numbers that don’t cover that product or marking with patents that are expired. That law also states that “Any person may sue for the penalty, in which event one-half shall go to the person suing and the other to the use of the United States.”

A law that allows an individual to sue another party on behalf of the government is known as a “qui tam” law. Qui tam is an abbreviation for the Latin "qui tam pro domino rege quam pro sic ipso in hoc parte sequitur," meaning, “who as well for the king as for himself sues in this matter.”

Pequignot used this law as the basis for suing Solo Cup in 2007 for marking the cup lid in question with two expired patents, U.S. Patent No. RE28,797, entitled "Lid," and U.S. Patent No. 4,589,569, entitled "Lid for Drinking Cup," and for including the phrase "This product may be covered by one or more U.S. or foreign pending or issued patents.”

Damages of up to $500 per violation – which could be defined as every single article so marked – are possible; and, as mentioned above, the person who brings suit under this qui tam statute gets to keep half of it.

Archaic, but Constitutional

Lest this sound like an almost cartoonish, clichéd example of a lawyer going after easy money, Pequignot wants the public to know that false marking is not uncommon and can be done intentionally to dissuade competitors from manufacturing similar products, for example. While this may be true, one suspects that the attorney – if successful – won’t turn down his portion of the damages award as a matter of principle.

Though he still has some legal hurdles to clear, Pequignot was so emboldened by his ability to file the Solo suit, that he filed another suit against Gillette (a Procter & Gamble company) for false marking on his razor.

Both Solo and Gillette are fighting back. Solo Cup tried to argue that it was unconstitutional for a private citizen to have the right to sue on behalf of the government, but U.S. District Court Judge Leonie Brinkema ruled in March 2009 that the law is constitutional and Pequignot can proceed with his case. And Gillette’s attorneys argued that the case should be dismissed because Pequignot could not prove that the razor manufacturer acted with intent to deceive.

More Qui Tam False Marking Suits on the Way?

Will we see a tidal wave of these “false marking” qui tam lawsuits? A few more have been filed in the wake of Pequignot’s Solo Cup suit. However, Raymond E. Stauffer, a New York patent attorney who attempted to sue Brooks Brothers over the expired patents on his bow tie, was unsuccessful – the judge ruled that Stauffer failed to prove that the government had suffered harm from the improperly marked neckwear.

And even the judge who allowed Pequignot’s Solo lawsuit to proceed seems to have done so begrudgingly. Regarding 35 U.S.C. § 292, the law that allows individuals to sue companies like Solo and Gillette on the government’s behalf without having to prove that they personally suffered any injury from the false marking, Judge Brinkema wrote in her ruling that "It is likely an accident of history that (the law) survives as one of the few remaining qui tam statutes in American law."

It remains to be seen how these cases will play out in courts. In the meantime, if you find a product marked with an expired patent number (hint: a number that starts with the digit “4”), drop us a line. In true Robin Hood spirit, we pledge to give our half to the poor.

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Obama’s USPTO Director Nominee Supports Patent Reform

David J. Kappos Enjoys Wide Support from Big Tech to Big Biomed

Wealth of Ideas Newsletter, June 2009

On June 18, President Obama ended months of anxious speculation when he nominated David J. Kappos to be the Director of the United States Patent and Trademark Office (USPTO). The response by the IP community to the nomination has been generally positive.

As a veteran of the patent system and the manager of IBM’s patent portfolio for many years, Kappos, in the past, has been vocal about patent reform. But will he be too busy trying to rescue the USPTO from collapsing under its own weight to push for those reforms? This month we take a look at David Kappos’ nomination, what he brings to the USPTO, and industry response to the nomination.

Kappos’ Background

To say that Kappos comes from corporate America is an understatement. He has managed IBM’s patent portfolio for years, and IBM is one of the top recipients of US patents – in 2008 alone, IBM had 4,169 patents issued. At the same time, however, IBM has embraced open source technology and Kappos understands the concerns of the open source movement. In fact, he testified before the Senate that patents and other IP can sometimes get in the way of collaboration and open standards.

Stance on Patent Reform

Not surprisingly (for an IBM executive), Kappos has been a strong supporter of a patent reform. With a belief in the power of patents and open source at the same time, what sort of patent reform does Kappos advocate?

  • A post-grant review (one year after a patent is granted), which would allow comments from others in the patent’s field of technology about why the patent should not have been allowed.
  • Pre-issuance submissions of information (after the patent application is made public) by third parties questioning the novelty of the invention or offering evidence of why the patent shouldn’t be issued.
  • Enhanced inter partes reexaminations to allow third parties yet another way to challenge “bad” or weak patents.
  • Different standards of royalty-based damages and other restrictions aimed at reducing patent litigation.

It is only to be expected that Mr. Kappos will chime in very soon in support of the Patent Reform Act of 2009.

No Time for Criticism

Critics say that Kappos is an “IBM lifer” who is “big high tech personified,” but also grudgingly admit that he has the management experience that the USPTO so desperately needs right now. Just consider the job awaiting the next USPTO director: 9,000 employees, over 751,000 patent applications awaiting review and an average application-filing-to-approval time of almost three years.

Kappos’ nomination has thus received the support of both “big tech” and the biomedical industry, which have butted heads many times over aspects of patent reform.

“We urge the Senate to move quickly to consider Mr. Kappos’ nomination,” said Jim Greenwood, the President and CEO of BIO (the Biotechnology Industry Organization), in a brief statement on June 19. “The USPTO needs a confirmed leader as soon as possible.”

“It would be difficult to envision a new USPTO director who understands the U.S. and global patent system better than Dave Kappos,” wrote Microsoft’s Deputy General Counsel, Horatio Gutierrez, in a blog post, also on June 19.

If Microsoft likes Mr. Kappos’ nomination as the next Director of the USPTO, small and independent inventors need to be worried.

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Senate Amendments to the Patent Reform Act of 2009: What’s Changed?

Wealth of Ideas Newsletter, May 2009

On April 2, 2009, the Senate Judiciary Committee met to continue discussions of the Patent Reform Act of 2009 (Senate bill S.515). The Committee changed several sections, including those on damages, willfulness, inequitable conduct, best mode, post-grant review, interlocutory appeals and venue. Here’s a quick rundown of some of the major amendments to the Senate version of the bill as reported out of the Senate Judiciary Committee:

Damages: The amended bill replaces the controversial apportionment of damages provision with a compromise “Gate Keeper” provision giving trial judges a greater role in determining damages. The amendment states that the only evidence to be permitted for consideration shall be that which relates to the “determination of damages that is relevant to the methodologies and factors that the Court determines may be considered in making damages determination.” What this means: This change would lead to a sort of “gatekeeper” role for the judge, who would have to decide which evidence is admissible. Critics say that it will further erode the role of a jury in patent cases and will also lead to limitations on the amount of damages that can be awarded in patent infringement cases.

Willfulness: This part of the bill was modified to take into consideration three factors: (1) evidence that there was “reasonable reliance” on the advice of counsel; (2) evidence that the infringer had “sought to modify its conduct to avoid infringement once it had discovered the patent”; and (3) evidence that the infringer had a “good faith belief” that the patent was invalid or unenforceable during the period that they knowingly infringed. What this means: In In re Seagate Technology, LLC (August 20, 2007), the Federal Circuit Court of Appeals made it harder for a patent owner to prove willful infringement. This amendment to the Patent Reform Act seeks to “tighten the willfulness provision in Section 4 to ensure that it is in line with the Federal Circuit’s decision in Seagate,” according to Senator Patrick Leahy’s website – and that would, of course, also have an effect on the determination of damages. Needless to say, raising the bar for proving willfulness only serves to obviate the concern of future infringers.

Change of venue: The amendment made to this section allows a district court to transfer any civil action arising under any Act of Congress relating to patents upon a showing that the transferral of venue “is more convenient than the original venue.” What this means: This change is designed to prevent plaintiffs from “forum-shopping” for the venue that’s most likely to give them the outcome they desire. Instead, under this amendment, a civil action for patent infringement would be required to be filed where the defendant either has its offices, is incorporated, or has committed a “substantial portion of the acts of infringement” and “has a regular and established physical facility which it controls” – unless no venue is available that meets those first three requirements. Eastern District of Texas no more!

Best Mode: The failure to disclose the best mode shall not be a basis for canceling or holding a patent claim invalid or unenforceable. What this means: While the bill would keep the requirement that the specification section of a patent application must disclose the “best mode” of carrying out the invention, the best mode requirement would no longer be grounds for invalidating a patent.

Conclusion: Critics of the Patent Reform Act mainly point to two major problems. First, the proposed changes to the patent system mostly provide relief to corporate patent infringers and do not benefit inventors enough. Second, instead of helping make the process of obtaining a patent easier, the proposed amendments to patent law would actually burden the already-overloaded USPTO even more.

Despite the new administration and its promises of change, the latest iteration of the Patent Reform Act appears to be simply codifying recent precedential decisions, such as In re Seagate.

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Flash of Genius Was a Dark Victory

Wealth of Ideas Newsletter, April 2009

Patent law doesn’t often make for riveting drama. But in the case of inventor Robert Kearns, one man’s David-versus-Goliath battle against the big automakers is also the tragic story of how his efforts to enforce his patent also brought about a mental breakdown and the end of his marriage.

His story is profiled in the 2008 film "Flash of Genius," recently released on DVD, as well as the book, Gadget Nation: A Journey Through the Eccentric World of Invention.

Robert Kearns was a colorful character whose accomplishments include being a talented violinist, a teenage intelligence officer during World War II, and the inventor of a comb that dispensed hair tonic (his first invention). But Kearns is best known for inventing the intermittent windshield wiper for use in mist or light rain – and for fighting the big carmakers for decades.

Kearns filed his first patent for the intermittent wiper in 1964, then offered licenses to the “Big Three” automakers, but was turned down (although Ford led him to believe that he would be on their development team). However, beginning in 1969, all of them were soon installing intermittent wipers in their cars.

Robert Kearns was shocked. According to the Washington Post’s obituary of Kearns after his death in 2005, all Kearns really wanted to do was to run a factory with his six kids and build the wiper motors he’d invented – which he would then sell to the automakers. More than a settlement, more than acknowledgement that he’d invented the intermittent wiper, Kearns wanted a lucrative, ongoing licensing deal and a chance to be the carmakers’ exclusive supplier of wiper motors. But they had already found suppliers and weren’t interested in changing their arrangement.

In 1978, Kearns filed a patent infringement lawsuit against Ford Motor Company. The lawsuit dragged on for 12 years and cost Kearns his marriage, his job and, at times, his mental health. His fight netted him $30 million, but the victory was bittersweet.

The “Flash of Genius” Test
The name of the film comes from the Flash of Genius Test (or Doctrine), a patentability test used by US Federal Courts from 1941 to 1952. To pass this test (and therefore be deemed patentable), the idea for an invention had to enter the inventor’s mind in a “flash of genius” and not as a result of tinkering. Kearns claimed that the idea for the intermittent wiper came to him while driving in the rain. The combination of the rain and the movement of the wipers made it difficult for Kearns to see the road, especially since his vision in his left eye had been somewhat impaired when it was hit with a champagne cork on his wedding night.

Kearns’ Legacy
Despite his dogged, decades-long battle against the big car companies – which cost him his marriage and was the cause of bitter feelings among his children – Kearns was surrounded by most of his loved ones, even his ex-wife Phyllis, when the verdict against Ford Motor Company came down in his favor.

At Robert Kearns’ funeral, a light mist was falling – requiring every car in the funeral procession to use Kearns’ invention.

What’s the Lesson?
Contingency patent enforcement was next to nonexistent when Kearns filed his first patent infringement lawsuit back in 1978, so it is likely that he could not find an attorney to represent him on a contingency basis. Unable to finance massive legal fees and disbursements himself, he tried the case on his own – which is never the safest or smartest strategy for an inventor to choose.

The good news for the patent owners of today who face infringement of their patents by large corporations is that the contingency patent enforcement model does exist – linking patent owners with the experienced patent attorneys and IP experts who can help them prevail, at no upfront cost. And that means today’s patent owners do not have to face the hardships and personal sacrifices that Kearns went through decades ago to enforce his patents.

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Patent Reform that Will Damage Innovation

Wealth of Ideas Newsletter, March 2009

The Patent Reform Act of 2009 was recently introduced in Congress, and the Senate Judiciary Committee has already conducted hearings on the bill. Unfortunately, the title of the bill is very misleading. Reform connotes an improvement, modernization, changing something for the better.

In fact, there is nothing progressive about the “reform” in this bill. It will improve nothing. Instead of strengthening and modernizing our patent system for the 21st Century, this legislation will stifle innovation, weaken patent protection, and ultimately result in job loss and loss of competitiveness for our great country in the global economy. Should this Bill pass, great we’ll be no more!

Few liberties ever disappear overnight. They are chipped away at over time, and that is exactly what the Patent Reform Act of 2009 and its proponents are trying to do.

History of the Bill
The Patent Reform Act of 2009 is virtually identical to the Patent Reform Act of 2007 that passed in the House of Representatives but failed to win approval in the Senate. Now that the Democrats have a larger majority in the Senate, they regurgitated this ill-conceived bill in the hopes of quick passage.

The bill was introduced by Senators Leahy and Hatch on Thursday, March 5, and the very next week, on Tuesday, March 10, they were already holding hearings! Not surprisingly, not a single representative of independent inventors, small business or universities was invited to testify. Last week, March 26, the Judicial Subcommittee already adopted in a hurry the first amendment to the Bill.

How This Bill Weakens Patents
This proposed legislation, rather than actually reform anything, will deform and weaken the current patent system. The legislation has several faults, but here are just three of its main failings.
1. Apportionment of Damages: Apportioning damages will diminish what patent owners receive when their patents are infringed. Facing small award settlements, large corporate infringers and offshore counterfeiters will actually be encouraged to infringe patents because even if they get caught, what they end up paying the patent owner will be a fraction of what the patent owner really deserves for his (or her or its) patent! Apportionment of damages will devalue patents en mass.
2. Post-Grant Opposition: Under the proposed Bill, patents will be subject to post-grant opposition. Within 12 months of issuance, a third party would be able to oppose issuance of the patent and file a cancellation petition based on any ground of invalidity. What it means is that an infringer can forever tie a patent in endless reexamination proceedings, which will become so expensive that no independent inventor could afford them.
3. First-to-File: The U.S. Patent system has always been based on a “first-to-invent” basis. Whoever first created the patented invention is awarded the patent, not who got to the Patent Office first. A first-to-file system will substantially favor large corporations and will work against small businesses and individual inventors!

For more detailed list of proposed changes see Alex Poltorak’s blog post on the Patent Reform Act of 2009.

What Patent Reform Should Be
1. Injunctive Relief: Congress should clarify and reaffirm the Constitutional right of inventors to exclude others from unauthorized practice of patented inventions, i.e., the right to obtain a permanent injunction that the Supreme Court put in limbo in the Ebay decision.
2. Business Method Patents: The Congress should clarify the status of business method patents which have been all but disallowed by the recent decision by the Courts of Appeals for the Federal Circuit in Re Bilski.
3. Stronger Protection: Patent reform should make it more expensive – and, therefore, more painful – for businesses to infringe patents, and willful patent infringement should be criminalized as is willful infringement of copyright.

A Broad Coalition for Real Patent Reform
Fortunately, we do not stand alone in our opposition to the Patent Reform Act of 2009. It is rare that groups representing both Corporate America and the labor movement agree on anything, but this proposed legislation will so weaken American industry that both groups are unified in their opposition!

Here are just five organizations that are opposed to this legislation with links to each group’s statement.
• Pharmaceutical: The Pharmaceutical Research and Manufacturers of America (PhRMA) is opposed to this legislation.
• Biotech: The Biotechnology Industry Organization (BIO) is also opposed.
• High-Tech Sector: The Innovation Alliance, a trade group of high-tech companies such as QualComm and Dolby, has joined the opposition to the Patent Reform Act of 2009.
• Manufacturing Sector: The Coalition for 21st Century Patent Reform, an association of large manufacturers that includes 3M, GE and Exxon-Mobil, is opposed to this proposed legislation.
• Labor Unions: The Executive Committee of America’s largest union, the AFL-CIO, just met, voted and announced their opposition to the Patent Reform Act of 2009!
• Other Groups: The Business and Industry Council (USBIC) is a coalition of 28 business, social and religious groups that have joined in opposition to this pending legislation!

The World Will Not End
If this legislation passes, the world as we know it will not end. It will not be like Frank Valli's song “The Sun Won’t Shine Anymore.” The earth will continue to spin on its axis, inventions will be created, new patents will be issued, and life will continue. But should this legislation be adopted, it will be yet another significant weakening of a patent system already weakened by an over-active judiciary. Someone has to draw a line in the sand, and we and the organizations in the previous paragraph are drawing that line. And we hope you will join us!

Action and Not Just Words
General Patent Corporation’s founder and CEO, Alexander Poltorak, founded a non-profit association, American Innovators for Patent Reform (AIPR), and we invite you to join and put your voice forward in favor of true patent reform, not a weakening of the patent system disguised as patent reform.

The coalitions that have announced their opposition to the Patent Reform Act of 2009 − PhRMA, BIO, Innovation Alliance, The Coalition for 21st Patent Reform, the AFL-CIO and the Business and Industry Council − represent specific industries and interests, while AIPR represents inventors, engineers and researchers, small business owners and entrepreneurs, patent agents and patent attorneys, and other IP professionals who cannot afford to join one of these other groups.

In fact, membership in AIPR is free for a limited period, and you simply join online. Once you join, we will let you know what you can do to join the fight to re-establish the strong patent system envisioned by the Founding Fathers.

Patent Reform that’s Really Reform
We are not automatically opposed to all patent-related legislation. An example of patent reform legislation that is really reform is H.R. 628. The House of Representatives passed this bill, sponsored by Rep. Darrell Issa (R - California), by a lopsided vote of 409 to 7.

The bill establishes a pilot program for increasing the number of patent-experienced judges in U.S. district courts, and it requires the Administrative Office of the U.S. Courts to designate at least six district courts to participate in the program.

We applaud Congressman Issa for this legislative initiative that will strengthen our patent system. The Senate version of the bill, S. 299, is awaiting consideration.

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Financing Patent Infringement Litigation

Wealth of Ideas Newsletter, February 2009

Patent infringement litigation is expensive. In medieval times, war was called the sport of kings. Today, patent litigation is the sport of corporate CEOs.

That is not news to an independent inventor or a small patent owner whose patent has been infringed and who is seeking justice and compensation. There is good news, however, for these inventors and patent owners: There are several ways to finance patent litigation.

After anti-trust litigation, patent litigation is the most expensive. It can easily cost millions of dollars to prosecute a patent infringement lawsuit. Plaintiffs in patent infringement lawsuits can be individuals or small businesses with limited financial resources, while the defendants are often large corporations that can easily afford to spend millions of dollars to defend themselves.

Two main components make up the overall cost of a patent infringement lawsuit: Legal fees and disbursements. Legal fees are what the attorneys that represent you charge for their time, and legal fees can run into the millions of dollars. Disbursements are out-of-pocket expenses that go to pay for filing fees, court reporters, travel expenses, video depositions, discovery expenses, trial demonstratives, expert witnesses and jury consultants. These can also run to one million dollars or more.

Several litigation financing options are available to an inventor or a patent owner who believes his patent has been infringed.

Patent Enforcement Firm: Considering all the options, working with a patent enforcement firm offers the most benefits for several reasons. General Patent Corporation (GPC), for example, works on a 100% contingency basis. That means that if GPC accepts you as a client, the company covers ALL fees and costs involved in the litigation. General Patent is not a law firm, so it will retain a law firm to actually try the case. It will, however, underwrite all legal fees and out-of-pocket expenses related to the lawsuit(s). If the plaintiff/patent owner has to be deposed or testify in court, GPC will even cover travel costs to and from depositions and trial.

Patent enforcement firms recoup their expenses and earn their fees from the proceeds of the settlements or judgments that result from the lawsuit and share in license fees and royalty payments obtained by them through licensing of the patent. General Patent’s arrangement is a 50/50 split of all net recoveries. Should the patent enforcement firm fail to secure a settlement for the patent owner, however, they are out the money they invested in the case and the patent owner owes the patent enforcement firm nothing! GPC underwrites all expenses and assumes all risk in enforcing your patent!

The second advantage of using a patent enforcement firm is that the company manages the entire process. General Patent keeps you informed as the case progresses, and handles all the details, including selecting and engaging a law firm or several firms if that is required, retaining local counsel, and assisting with the selection of expert witnesses, jury consultants and other experts as may be necessary to effectively litigate the lawsuit. General Patent has attorneys on staff that coordinate the outside litigation counsel and contribute to litigation strategy and tactical decisions.

The third advantage of partnering with a patent enforcement firm is that it may reduce your liability and the chances of counterclaims by the defendant. If you are an NPE (non-practicing entity) – that is, you own the patent but do not use it to produce a product or service − GPC will transfer your patent to a separate LLC (limited liability company) which will act as the plaintiff. The defendant is then less likely to file a counterclaim and come after your personal or business assets. Such counterclaims are not always made by defendants, but when they are, having that layer of protection from liability is very comforting.

Contingency Law Firm: The inventor and patent owner must understand that patent attorneys are not necessarily patent litigators. Patent attorneys (and patent agents who are not lawyers) are admitted to practice before the US Patent and Trademark Office (USPTO), and they help inventors file and prosecute patent applications. Most of them do not try patent infringement cases. For that you need a patent litigator.

Until recently, very few law firms would even consider taking patent infringement cases on a contingency basis. The plaintiff simply had to come up with the money to cover the attorneys’ fees and expenses up front, Today, however, there are a IP litigation firms that will take a patent infringement case on a full, partial or hybrid contingency basis. Hybrid representation means that you will be paying reduced hourly fees (say 50% of the hourly fees billed on a monthly basis) plus, at the end, the firm will get a smaller contingency fee or “success fee,” say 15% or 20%.

In partial contingency, the client covers out-of-pocket litigation expenses, while the attorneys take their fees on a contingency basis. However, litigation expenses can quickly run into hundreds of thousands of dollars and can easily exceed a million dollars, making patent infringement litigation too expensive for many patent owners. Patent law firms that represent clients on a contingency basis, but require them to front the expenses, usually charge 33% as their contingency fee.

There are a few patent litigators who will take a patent infringement case on full contingency, agreeing to take both their fees out of the settlement or judgment as well as to bankroll all litigation expenses and be reimbursed for them out of the proceeds of the litigation. In this arrangement, contingency fees can run to 40% or higher. Some law firms will put into the retainer agreement that they are advancing money on behalf of their client and the client is ultimately responsible for this investment. That means, in the event you lose, you are on the hook for hundreds of thousands or, perhaps, even millions of dollars. Although law firms usually refrain from enforcing this debt against their clients, one never knows what a law firm may choose to do in the future when it is within their legal rights to collect this money from you – their client.

Even if a law firm promises to front the expenses, they are often reluctant to do so. It is one thing for a partner who spearheads the case to invest his own time. It is quite another thing for him to gamble with cash that belongs to all partners in the law firm. Once his law firm has spent its first hundred thousand dollars, your attorney may twist your arm to accept the first settlement offer that’s put on the table by the defendant.

Unlike a patent enforcement firm like General Patent that provides a seamless, comprehensive, turnkey package of services that requires no expense and no management of the process on the part of the plaintiff, this is not the case when you hire a law firm to litigate your patent infringement claim. A law firm may have a conflict of interest with one or more of the infringers, so you may end up having to hire more than one law firm in order to pursue all of the infringers of your patent. In this case, you will need to make sure these law firms coordinate their activities so none of them takes a conflicting position.

Also, when you select a law firm to litigate your case, you are the plaintiff, you still own the patent, and that creates potential liabilities for you and/or your business down the road. If you run a business, you may be counter-sued for the alleged infringement of the defendant’s patents. If you are an individual, you may be countersued for antitrust violations, patent misuse, fraud and/or attorney fees. However frivolous these claims may be, you will still have to defend yourself against counter claims and that means hiring defense attorneys and more legal fees for you. This is precisely why defendants file such bogus claims: To intimidate the patent owner, to spend him into the ground, and to wear him out until he goes away.

IP Litigation Financing: The third option is to find a law firm that will take your patent infringement case on a fee-only contingency basis, and then find a litigation finance company that will loan you funds to cover your out-of-pocket expenses. A litigation finance company will analyze your claim, they will probably require that you pay a due diligence fee to examine your case and, if they like the case, they may loan you funds. Litigation financing (also referred to as “lawsuit funding” or “pre-settlement funding”) is done on a non-recourse basis. So, in a sense, it is also contingency funding, because the lawsuit funding company is paid back from the proceeds of any settlements, and only if you reach a settlement or win the case. Some litigation financing companies will require that you pay the due diligence fees up front in cash, but others will roll it into the advance.

There are some downsides to using a litigation finance company, however, to fund your lawsuit. First of all, lawsuit funding companies will generally not fund a case unless the attorney or law firm litigating the case has taken it on a contingency basis. The logic here is that if the attorney does not have enough faith in the case to take it on a contingency basis, the lawsuit funding company will not risk its capital either. The problem, of course, is you might find an attorney to take your patent infringement lawsuit on a fee-only contingency, but NOT be able to find a lawsuit funding company to provide litigation financing, and you end up having to abandon the case because you cannot cover the litigation expenses!

Moreover, most litigation finance companies will not advance you more than one or two hundred thousand dollars at a time. Once you run out of this money (and that will happen very quickly) you will be standing at the doors of the litigation finance company hat in hand again and again. They may (and often do) stop funding after the first or the second round if their risk assessment of the case changes. If that happens, you cannot proceed with your litigation.

There are also two other factors to consider: Lawsuit funding is very expensive. The fees (effectively, the interest rate, although lawsuit funding companies do not use that term) lawsuit funders charge run about 5% per month or 60% on an annual basis. If your case runs for two or three years, the litigation financing costs will eat up an increasingly larger and larger portion – even possibly all – of the settlement, although most litigation financing companies do cap fees once the case has run for three or three-and-a-half years. Second, some lawsuit funding companies will not provide litigation financing until there has been a Markman hearing, and that often occurs well into the process, so you will have to cover all litigation expenses yourself up to that point. In some jurisdictions, such as the Eastern District of Texas − which is a popular forum for patent litigation − the Markman hearing takes place after the discovery is complete, when you could already be a million dollars or more into disbursements.

Options to Consider: If you’ve already engaged a patent litigation law firm to represent you on a fee-only contingency basis, and you now need cash to cover litigation expenses, finding a lawsuit funding company to finance your litigation expenses is your only option. If, however, you are at the beginning of the patent enforcement process, partnering with a patent enforcement firm like General Patent is the total-package-of-services turnkey solution that provides the greatest benefits.

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Business Method Patents and the Bilski Case

Wealth of Ideas Newsletter, January 2009

Every once in a while, a case comes along that changes the world of intellectual property in a profound way. State Street Bank v. Signature Financial Group, decided in 1998, opened the floodgates to a slew of business method patents - including patents that were the object of some of the biggest and most hotly debated patent cases (such as Amazon's "one click" patent and many others related to doing business online).

Ten years later, the Bilski decision may have undone a lot of what State Street had wrought.

To recap the case: Two inventors, Bernard Bilski and Rand Warsaw, had developed a hedging strategy for use in commodities trading, and attempted to patent it about a decade ago. The patent application was not on a computer program or any other piece of technology – just a method by which commodity sellers could use hedge contracts to reduce the risk that a commodity's wholesale price might change. The USPTO rejected their application. Bilski and Warsaw appealed that decision and, in October 2008, the Court of Appeals for the Federal Circuit (the CAFC, which hears patent appeals) upheld the USPTO's ruling on the grounds that the method was not patentable. The CAFC's ruling defined patentability in a newer, stricter way, one that prevents patents in which all the steps take place inside the human mind. Patentability is now limited to inventions that are 1) tied to a particular machine or 2) transform an "article" into a different state or thing.

Ramifications

The critics of the State Street decision see the Bilski decision as correcting a wrong. But business method patents are nothing new. In fact, as early as in the 1892 Patent Office granted U.S. Patent 467,872 for Means for Securing Travelers Against Loss by Accident. Nor have business method patents gone forever; it is still possible to obtain a business method patent—there is even a section of the USPTO website devoted to helping inventors obtain business method patents. It’s just going to be a lot harder to prove that a given business method deserves a patent. And whether that’s good news or bad news is an issue that many in the patent world are still debating.

The concern that the Bilski decision causes for many inventors attempting to patent software (and the more abstract business methods) is the requirement that the method "must be tied to a particular machine or apparatus." Most computers, with their ability to run several programs at once without being dedicated to any of them, are not considered a "particular machine." Indeed, the "machine-or-transformation test" is one that 9 out of 12 of the justices agreed was problematic in the age of the Internet. (But they denied Bilski a patent all the same.)

For the overworked and understaffed Patent Office, the idea of fewer business method and software patents might just be a welcome change. But if it goes too far and takes away the patent rights of inventors who hold existing business method and software patents, the Bilski decision might set a dangerous precedent. And for companies like Microsoft whose fortunes are built on software (not hardware) patents, Bilski is a frightening specter. As one blogger commented, the day of the Bilski decision was "a good day for Open Source."

So where do we go from here?

Bilski and Warsaw just asked the Supreme Court to review this decision. Whether or not the Supremes will agree to hear the case remains to be seen. In the meantime, it's going to be much more difficult to obtain a business method or software patent from here on out, and even harder to enforce them. GPC will cover the breaking news on the Bilski case in our Wealth of Ideas blog as well as this newsletter.

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Patent Reform and the President-Elect: A Closer Look

Wealth of Ideas Newsletter, December 2008

In our pre-election issue of Wealth of Ideas (November 2008), we compared technology platforms of both John McCain and Barack Obama with regard to their ideas on patent reform and patent protection—both here in the US and around the world.

Now that Obama has emerged victorious and his cabinet is almost completely filled, what more do we know about his plans for patent reform?

Obama’s transition website – www.change.gov – features his technology policy unchanged from his campaign website, www.barackobama.com. No new clues there.

But we do know that Obama has chosen Reed Hundt, who was President Clinton’s FCC Chair from 1993 through 1997, to work on his agency review team in charge of international trade and economics agencies. Hundt had some interesting ideas about the US patent system and patent reform, as put forth in an editorial he wrote for Forbes.com in January 2006. Some of the highlights from that article (all quotes are Hundt’s, emphasis ours):

• “We should slash the number of patents granted each year by 90%. In 2004 the U.S. Patent &Trademark Office issued 165,000 patents. Sixteen thousand is more like an optimal number. This should be easy to accomplish because most technology should not be patentable.”

• “We need to spend more money on the system. The budget of the U.S. Patent & Trademark Office is $1.5 billion. That [budget] ought to be tripled to $4.5 billion.

• “We should introduce an element of privatization into this public system. Firms ought to be able to pay for fast-track patent approval and for the ability to challenge a patent after it's been issued. Currently it can cost hundreds of thousands of dollars to file and prosecute a patent application. For a set dollar amount--say, $500,000--a firm ought to be able to buy a guarantee that its patent application will be reviewed and accepted or rejected within one year. The average application now takes 29 months to be processed.”

Hundt is correct that many worthless patents are issued every year (though there will be fewer in the wake of the landmark Bilski decision,, which put a stop to business method patents not related to a device). He’s also right that the USPTO is overworked, overwhelmed and understaffed, and that the process of getting a patent is lengthy and arduous. But we see a lot here that should trouble both inventors and taxpayers.

Hundt’s editorial was written in 2006, before the nation’s economic woes began in earnest – but how much can we realistically increase the USPTO budget? Where will the money come from? And if the number of patents is decreased by 90%, do we still have to triple the budget?

More troubling for small businesses and inventors are Hundt’s ideas on introducing a dramatically low cap on patent issuance and allowing big companies to pay for preferential treatment and “fast-track patent approval.” Is this a “change we can believe in?”

Obama takes office on January 20, 2009, and he and the 111th Congress will doubtless have several economic fires to put out before moving on to something as complex as patent reform. We will continue to monitor the issues and report on patent reform developments here in Wealth of Ideas and also on our Wealth of Ideas Blog.

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