Wealth of Ideas Newsletter

Election 2008: Which Candidate is Best for “Joe the Inventor”?

Wealth of Ideas Newsletter, November 2008

(11/3/08) With only one day left until the 2008 US Presidential election, the candidates are largely focusing on the “big issues” on the minds of most Americans—namely, the economy, taxes and healthcare. But where do John McCain and Barack Obama stand on vital intellectual property (IP) issues that affect individual inventors, small companies and copyright holders?

Patent reform

Both candidates call for a more streamlined, more transparent process for issuing higher-quality patents to make innovation easier. They both also recognize that there is a need for an affordable alternative to pricey patent litigation when a dispute arises.

But their proposals take very different paths to solving the sticky problems facing IP in America today.

Obama: Allow patent review by citizens

Barack Obama proposes some unusual reforms on his website, such as “opening up the patent process to citizen review.” Obama believes that peer review of patents would improve patent quality and reduce the “uncertainty and wasteful litigation that is currently a significant drag on innovation.”

Obama also advocates authorizing the USPTO to perform “low-cost, timely administrative proceedings to determine patent validity”—though one might wonder how the words “USPTO,” “low-cost” and “timely” can realistically appear in the same sentence.

Although his briefly-sketched ideas offer an intriguing starting point, Obama’s technology platform—which includes only a very brief summary of his ideas on intellectual property—speaks much more at length about other issues, such as providing broadband access for all Americans.

McCain: Fix Patent Office problems at the source

While Obama proposes a vague “peer review” process for patent applications, John McCain would provide concrete solutions to the fundamental problems that are causing the Patent Office to turn out poor-quality patents in the first place. McCain’s technology platform proposes hiring and training more patent examiners to relieve the USPTO of an increased workload that “threatens to undermine the quality of our patent examinations.”

McCain also vows to develop an affordable alternative to costly patent litigation, but is not specific about how he would “provide alternative approaches to resolving patent challenges.”

IP infringement in other countries

Obama pledges “to ensure intellectual property is protected in foreign markets, and promote greater cooperation on international standards that allow our technologies to compete everywhere,” while McCain “will seek international agreements and enforcement efforts that ensure fair rewards to intellectual property.”

Of course, the success of both candidates’ plans is contingent on the willingness of other governments to work with ours for the protection of American patents and copyrights.

So which candidate will be the best for “Joe the Inventor”?

Both campaigns suggest that greater transparency is needed in a complex and expensive patent system. The Annenberg Research Network on International Communication issued a report on the 2008 campaign, comparing the candidates’ platforms on technology issues, and concluded that neither candidate’s platform—as presented on their websites—really goes far enough or is specific enough about how to solve the problems in American IP today.

The next President of the United States will have plenty of time to rectify that problem when the post-election dust settles—and we hope that the solution will be to the benefit of all innovators, including small inventors. But if (as pundits and pollsters overwhelmingly predict) Obama wins and history is a reliable teacher, a Democratic administration plus a Democrat-controlled, possibly filibuster-proof Congress are likely to produce a patent reform similar to the ill-conceived Patent Reform Act of 2007 (which was spearheaded by Democrats).

And that, unquestionably, would be to the detriment of Joe the Inventor.

Newsletter

High-Tech Companies Form "Patent Trust"

Wealth of Ideas Newsletter, August 2008

In late June, a number of high-tech giants announced the formation of a new sort of alliance—a “patent trust” that will allow them to pool their considerable resources to purchase patents that might otherwise be used against them by so-called “patent trolls.”

"Patent troll," of course, is a derogatory term used by these companies to describe inventors and licensing companies that own patents without practicing the patented technology, and frequently assert their patent rights against large corporations.

The companies behind the trust’s formation include such tech giants as Cisco, Google, Verizon and Hewlett Packard. Though membership is “not elite,” according to the trust’s website, the requirements for joining up will keep out all but the largest IT companies: each member pays about $250,000 to join the trust, and then has to pony up an additional $5 million to add to a pool for the purpose of buying patents that the member companies are interested in.

"The trust was formed in reaction to a marked increase in patent assertions and litigation involving high-tech companies by patent holding companies," says the trust's Web site, alliedsecuritytrust.com. “The trust provides opportunities to enhance companies' freedom to sell products by sharing the cost of patent licenses.”

The issue of “patent trolls” is a thorny one, bringing into question what rights patents entail, and is the major reason why big tech companies were lobbying hard for the passage of the patent reform legislation now stalled in the Senate. But in punishing the so-called patent trolls, the rights of small businesses, individual inventors, universities and other patent holders are in serious danger. (See A. Poltorak, "U.S. Can’t Afford to Mar Innovation", The Christian Science Monitor, January 28, 2008; also "Who Needs Patents?", Wealth of Ideas newsletter, March 2008.)

Ultimately, though, this new “patent trust” model could prove to be a positive development for both tech titans and small inventors, helping both to avoid litigation and allowing patent owners to monetize their patents in a way that won’t be demonized as “trolling.”

“Anything that increases liquidity in the IP market is a good thing,” said Alex Poltorak, CEO of General Patent Corporation. And all that without an act of Congress.

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Who Needs Patents?

Wealth of Ideas Newsletter, March 2008

By Alexander Poltorak

Today the Open Source movement is preaching life without patents. Kids are living life without copyrights. There is growing opposition to all forms of intellectual property (IP).

At first glance, they seem to have a point. Take the music industry. In the pre-Internet days, they say, record companies needed to protect their investment in the production, marketing and distribution of records or CDs. Hence, the need for copyright protection. Now, however, when a budding artist with a camcorder can easily record and upload her music onto MySpace or YouTube, who needs CDs, which seem to be going the way of vinyl? And, therefore, who needs copyrights?

The music industry, which sues kids for copying music, is about to face the music itself –it’s on the path to extinction. The new generation believes in copying but does not believe in copyrights.

Besides, the abundance of original music on free sites like YouTube and MySpace shows that artists willing to produce and distribute music without relying on copyright protection aren’t motivated by money. So, why not get rid of copyrights?

Some academics are quick to point out that money is not the only motivator of human behavior. People are driven by the desire to do what they enjoy doing, and to achieve success, peer recognition, or maybe fame. In other words, with or without copyright protection, skilled musicians will continue to compose and perform – because this is what they enjoy doing.

Academics may be right that creative people will always create – because creative people cannot stop creating. And academics may also be right that creative people are not so much motivated by copyright protection and its financial rewards. But this is not the whole story.

First, we want someone to find and bring us new talent, to spare us the agony of listening to lots of atrocious music in hope of finding a needle in a haystack. Second, we want these talented artists to further develop their skills and devote their time to creating art for our enjoyment. Uploading songs on MySpace or YouTube doesn’t pay their rent. This is the new role of the label companies – finding new musicians, investing in them, and enabling them to create. Record companies are the new venture capitalists of the music industry. They no longer invest so much in records (or CDs) – they invest in the artists themselves.

As much as artists need copyright protection, it’s the record companies – the venture capitalists of the music industry – who need it most.

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Patent is Copyright’s twin brother. Both forms of protection are rooted in the same clause of the Constitution. It’s not surprising, therefore, that we see a similar debate over patents.

The Open Source community abhors patents as one of the many evils of capitalism. Again, academics are ready to provide a theoretical foundation for this view: “Who needs patent monopoly?” they ask. Money is not the only motivator of human behavior. Inventors will always invent, with or without patents, for fun or for prestige, just as members of the Open Source community write software code, not for money, but to gain peers’ respect.

As a former academic, I can testify to that. Like all academics, I published scientific papers, for neither money nor monopoly rights. Scientists “do” science because of their intense curiosity, an innate quest for knowledge. They publish their discoveries, not for money, but for respect from their peers and the advancement of the field (not to mention the prospect of tenure). It’s the same with inventors: they, too, continue to invent regardless of patents.

This is not just speculation. In the former Soviet Union, where I was born and educated, inventors didn’t own patents – the State did. Inventors who filed patent applications didn’t get exclusive rights, only a Certificate of Inventorship. Nevertheless, Soviet engineers still invented prolifically – and boasted proudly of their Certificates.

Does this mean we don’t need patents? Of course not! Yes, inventors will always invent, with or without them. A patent is a quid-pro-quo for invention disclosure, not for invention per se. Without patents, companies would keep their inventions as trade secrets instead of disclosing them to the public through patent applications. And without the exchange and cross-pollination of ideas, inventors would spend their time reinventing the proverbial wheel. That’s why the Founding Fathers empowered Congress to grant inventors exclusive rights to their inventions – “To promote the progress of science and useful arts.”

Moreover, as with copyrights, it’s not inventors but investors who most need patents. Without meaningful patent protection, a fledgling start-up would be steamrolled by a larger, better-established competitor. And without meaningful patent protection, no investor in his right mind would invest in a start-up that’s doomed to failure.

One thing the Open Source community is right about is that patents are inextricably linked to capitalism. Only in a capitalist economy—where inventor/entrepreneurs can start a new company in a garage, and where venture capitalists can invest in these garage enterprises in the hope of creating new Apples, Microsofts and Googles – only here, are patents important.

Open Source pundits and copyright-infringing teenagers have it wrong. Though IP may not be necessary for those creative and inventive types who, without its protection, would create and invent anyway, IP is critical for investors. Record companies that bring us fantastic new music, and venture capitalists who bring us new products and cures, cannot do this without the exclusivity afforded by intellectual property laws. Patents are important for inventors, but they are crucial for investors.

The Patent Reform Act of 2007, passed by the House and awaiting a vote in the Senate, is a dire threat to our patent system. The apportionment of damages, post-grant oppositions and the change from the First-to-Invent to the First-to-File regime are a few of the legislative “innovations” that will make patents less valuable, harder to get and almost impossible to enforce. Yes, inventors will still invent, but I fear investors will no longer want to invest in unprotected ideas. This Reform, if it becomes a law, will hurt the venture capital industry and, consequently, will hurt American entrepreneurship and innovation.

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First-to-File vs. First-to-Invent: Who Really Benefits from Changing the U.S. Patent System?

Wealth of Ideas Newsletter, October 2007

The United States patent system is based on a unique "First-to-Invent" doctrine, which means that the inventor who first conceived of the invention and then diligently reduced it to practice by filing a patent application (or actual reduction to practice) is considered the first inventor and is entitled to patent protection.

Almost every other country in the world has a patent system based on the "First-to-File" doctrine, in which the patent is granted to the inventor who is the first to file a patent application, regardless of the date of invention.

For a number of years there have been unsuccessful attempts to change the US patent system from a First-to-Invent to a First-to-File system.

The most recent proposal, embodied in The Patent Reform Act of 2007, which was recently passed by the House of Representatives and is awaiting a vote in the Senate, has gained some traction and deserves close attention. Among other things, the Patent Reform Act of 2007 does away with our time-honored tradition of First-to-Invent and replaces it with the European style First-to-File regime. This article analyzes the pros and cons of the two systems and what it means to American innovators, academia and industry.

First-to-File vs. First-to-Invent Patent Regimes

In order to understand the difference between the two systems, we first need to understand a few basics concepts in patent law. There are three important dates in the process of patenting an invention: the date of conception, the date of actual reduction to practice, and the date of constructive reduction to practice. The date of conception is when the inventor first conceived of the invention in its complete form. The date of actual reduction to practice is when the inventor built a working model or a prototype. The date of constructive reduction to practice is when the inventor filed a patent application.

In the United States, an inventor who diligently worked on reducing his or her invention to practice by building a prototype and/or filing a patent application is entitled to the date of conception as the "priority date," so long as that inventor did not abandon, suppress or conceal the invention. Under these circumstances, the first inventor to conceive of the invention is entitled to a patent.

When two inventors file patent applications on the same invention, there may be an interference hearing before the Board of Appeals and Interferences at the US Patent Office to determine who conceived of the invention first, and whether the inventors have been diligent in reducing their inventions to practice. This is an expensive and involved procedure.

This is, in essence, how the First-to-Invent patent system works. The United States and the Philippines are the only two countries in the world whose patent systems are based on First-to-Invent regime. The rest of the world uses the First-to-File system, which gives priority to the inventor who first files a patent application, regardless of the date of conception.

Among the advantages of the US First-to-Invent system is that it rewards the first inventor, not the winner of the race to the Patent Office.

The only apparent disadvantage of the First-to-Invent system is a costly and lengthy interference proceeding to determine who of the two inventors conceived of the invention first. Indeed, the expense of fighting patent interference may prove prohibitive for a small inventor, leading to abandonment of the patent application. It is not inconceivable that an inventor who was first to conceive of an invention and first to file a patent application may not receive a patent due to prohibitive cost of proving the date of conception. However, such situations are rare and interference proceedings are infrequent. Most patent attorneys involved in patent prosecution go through their entire professional career without ever representing a client in an interference dispute.

The theoretical basis of the First-to-File system stems from the contract theory of patents. Under this theory, a patent is a contract between an inventor and the public which grants the inventor a public franchise (i.e., a patent monopoly) in exchange for public disclosure of the invention. If a patent is a quid pro quo for public disclosure of the invention, then it is not unreasonable to reward with a patent monopoly the first inventor to disclose the invention to the public.

A practical advantage of the First-to-File systems is its utter simplicity. There are no interference disputes - whoever gets the earliest postmark stamp on the patent application gets the patent.

Another advantage of the First-to-File system is that it eliminates so-called "secret prior art," which are inventions for which patent applications have not yet been filed and therefore cannot be found through a prior art search. If they are filed, such patent applications could preclude other inventors from getting a patent (if the date of conception by the first inventor is earlier than the date of conception by the second inventor.) This seldom happens, and the advantage is of marginal value.

Constitution

Some opponents of the First-to-File system raise a constitutional argument. Indeed, the First-to-Invent system is deeply rooted in the US Constitution. Article I, Section 8 of the Constitution states:

"The Congress shall have power...To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries."

The Constitution grants Congress the power to secure exclusive rights, i.e. to grant patents to inventors, not winners of the race to the Patent Office. The inventor is, by definition, the one who invented first. An inventor can hardly be defined as the one who is first to file a patent application. Replacing the first inventor with the first filer, as proposed in the Reform Act of 2007, may not be exactly what the Framers of the Constitution had in mind. Other countries which have First-to-File systems do not have this problem because their patent laws are not rooted in their respective constitutions.

It is instructive that the copyright, another form of intellectual property protection stemming from the same clause in the Constitution, vests with its owner as soon as the creative idea is fixed in a tangible form, not when the copyright is registered.

Quality of Invention Disclosure

Under our patent system, an inventor has sufficient time to perform a thorough search of prior art to determine if the invention is patentable. Having sufficient time to prepare a patent application has positive effect on the quality of the filed application and the breadth of disclosure. Recent research demonstrated that patentees in "First-to-file" countries lag far behind US patentees in patent disclosure breadth. The study shows that US patents have significantly higher page count (indicating breadth of disclosure) and claim count (indicating breadth of protection) than patents originating from the countries with a First-to-File regimei.

Although our system does not require the actual reduction to practice (i.e. building a prototype), it indirectly encourages this by giving the inventor time to reduce the invention to practice before filing a patent application. This results in a better patent application and a fuller disclosure.

US patent law also requires disclosure of the "best mode," i.e. the best way to practice the invention. Needless to say, building a prototype or otherwise further developing the invention allows the inventor to experiment with and contemplate upon the best way to practice the invention, thus leading to a meaningful best mode disclosure1.

An inventor who has written a novel idea in her notebook is not concerned about discussing her idea with others because she has a record of the conceived idea - the evidence is in her notebook (even if someone copies the idea and files the application first). Under a First-to-File regime, inventors would be justifiably hesitant to discuss their ideas with others for fear of being beat in the race to the patent office. This could stifle development of an invention that might have benefited from the cross-pollination of ideas. Such concerns may slow down research and development collaboration, and the exchange of ideas vital to technological progress.

A First-to-File system, however, necessarily leads to a race to the patent office, which leads to half-baked patent applications. Such a system clearly discourages inventors from taking the time to build a working prototype. Moreover, it is hard to imagine how an inventor could disclose the best mode if never given the chance to practice it! In countries where disclosure of best mode is not a requirement, this is not a problem. In the US, however, best mode disclosure is required.

Effect on Small and Independent Inventors

Another unique feature of the American patent system is the "Grace Period." The twelve-month Grace Period afforded by US patent law allows an inventor to file a patent application within one year after (a) public disclosure of the invention or (b) first sale of the patented product. Under the First-to-Invent regime, there is no necessity for the inventor to rush a patent application to the Patent Office. The inventor can take his time to figure out a marketing plan and business model, and decided whether or not it is prudent to invest in preparing and prosecuting a patent application. Although a proposed change to First-to-File regime does not eliminate the Grace Period, as a practical matter, such regimes would set off a race to the Patent Office, any grace period notwithstanding. A First-to-Invent system, therefore, is very important to small businesses and independent inventors who need to take their financial resources into consideration.

Under the First-to-File regime, large corporations with well-established invention disclosure procedures, patent committees and armies of in-house attorneys will always beat a lone inventor in the race to the Patent Office, thus placing small and independent inventors at a severe disadvantage.

Effect on Universities

Universities derive significant income from technology transfer and patent licensing. However, academic realities put different pressures on university professors and researchers. Operating under the academic mantra "publish or perish," scientists are more concerned with presenting their results at conferences and publishing them in peer-reviewed journals. After all, their academic career depends upon it. Patenting the results is usually an afterthought.

Under our current First-to-Invent regime, there is no necessity for a researcher to rush a patent application to the Patent Office. The grace period afforded by the US patent system allows researchers to present their discoveries at scientific conferences and publish them in professional journals, and still have twelve months (from the date of the earliest disclosure) to file patent applications. A First-to-Invent regime is, therefore, very important to American universities. Without a grace period, previously published results may no longer be patentable. A change from the First-to-Invent to the First-to-File regime may have the unintended consequence of a sharp decline in university patents, ultimately resulting in a decline of technology transfer revenues.

Harmonization of Patent Law

The proponents of the change from First-to-Invent to First-to-File argue that it is important for the US to harmonize its patent laws with the rest of the world. Harmonization may be a noble goal but needs be approached with caution.

The US patent system is one of the first and most developed patent systems in the world. Historically, the US was the first (and the only) country to recognize the vital importance of intellectual property protection in its Constitution. The US continues to lead the way as the first country to recognize the patentability of software and business methods. The superiority of the US patent system is widely recognized throughout the world. This begs the question, is it wise to change our superior and time-tested patent system to conform to the arguably inferior patent systems of other countries in the name of harmonization? What about other countries harmonizing their patent laws with ours by, for example, adopting our twelve-month grace period that leads to fuller invention disclosures and more mature patent applications?

The United States is undoubtedly the most inventive country in the world. It is the world leader in many fields, including science, hi-tech and biotechnology. In the US, we create original and innovative products, which are copied and sold back to us as counterfeit goods by foreign infringers. Should we really rush to harmonize our patent laws with those countries that routinely infringe our patents? Shouldn't the Congress be asking who is going to benefit from such harmonization?

The answer is clear – it is not to the benefit of American inventors, American manufacturers or American universities; the change will only benefit foreign businesses trying to compete with American businesses in the American market. Is the role of the US Congress to help foreign competitors put American manufacturers out of business?

Conclusion

In the final analysis, a First-to-Invent vs. First-to-File debate cannot be considered outside of the context of the complete patent reform proposal. In a fair and balanced patent reform, goals of patent law harmonization would be balanced with the interests and concerns of universities, small businesses and independent inventors. In such a scenario, one may be inclined to consider the relative pros and cons of both systems.

The proposed Patent Reform Act of 2007, however, is so consistently and unmistakably biased in favor of large corporations that the purported motivation for the proposed change to a First-to-File system must be viewed with deep suspicion.

Our founding fathers had the foresight to afford first inventors, not first filers, the exclusive rights to their inventions. This Constitutional right is the basis of our Patent System – one of the oldest and the best patent systems in the world, a system that has served our county well for over two centuries. Before we tinker with the system, perhaps we should give some deference to the framers of the Constitution who, after all, were the first to invent our First-to-Invent patent system.

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Patent Office Abandons Invention Disclosure Program

Wealth of Ideas Newsletter, November 2006

The US Patent and Trademark Office (USPTO) has announced plans to discontinue its Invention Disclosure Program (the IDP).

The IDP was initiated to address the need to establish the date of conception for an invention. Prior to the IDP, inventors would mail their invention disclosures to themselves in a self-addressed envelope, which was kept sealed until the need arose to prove the date of conception. Under the IDP, an invention disclosure is active for up to two years. If a patent application referencing the invention disclosure is filed within two years, the disclosure becomes a permanent part of the prosecution history (aka the file wrapper). If not, the disclosure is destroyed.

The USPTO came to the conclusion that this program was no longer needed. Firstly, many inventors misunderstood the program, believing that filing an invention disclosure gave them some sort of legal protection or patent pending status, which it did not. Second, an inventor can file a provisional patent application instead of an invention disclosure, which would indeed give the invention a patent pending status.

Unfortunately, many inventors also misunderstand the purpose of a provisional patent application. While a provisional patent application does have its place, when an inventor uses it to postpone the filing of a utility patent application, they do themselves a disservice. They think they can simply convert the provisional application into a utility application within the allowed one year time frame, and add claims. While it is true that a provisional application need not have claims, the claims requested in a utility application may be limited in scope by the rudimentary support found in the originally filed provisional application. Many patent attorneys draft patent applications by first crafting claims and then going back to the specifications to provide necessary support for the claims. This cannot be accomplished with a provisional application, which is often filed pro se (by the inventor), and which often provides insufficient information which may narrow the claims.

With termination of the IDP, some inventors may consider filing a provisional application instead. However, in order to be effective, a provisional application must include a complete description of the invention. Preferably, it should be drafted by a competent patent attorney.

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The First Victim of eBay

Wealth of Ideas Newsletter, June 2006

When the Supreme Court earlier this year ruled in favor of eBay, there was still some hope left.

After all, Justice Thomas wrote for the unanimous court: "some patent holders, such as university researchers or self-made inventors… may be able to satisfy the traditional four-factor test, and we see no basis for categorically denying them the opportunity to do so" (See A. Poltorak, "Supreme Court Chooses the Middle Ground in the eBay Case").

Moreover, Chief Justice Roberts in his concurring opinion appealed to judges to respect the long tradition of granting injunctive relief upon a finding of infringement. He 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." Alas, all hope was dashed in the first post-eBay decision out of the Eastern District of Texas in z4 Technologies, Inc. v. Microsoft.

The Jury in this case ruled in favor of z4, finding Microsoft to have willfully infringed z4's patents. The Court, however, declined to grant a permanent injunction to z4. In its decision, Judge Davis relied on the traditional four-factor equity test:

1. Irreparable injury. z4 is a patent holding company. As such, it does not make or sell any products, instead relying on patent licensing as its business model. Because the patent holder does not practice its invention, the Court decided that the Irreparable Injury factor weighed in favor of the infringer, Microsoft:
"In the absence of a permanent injunction against Microsoft, z4 will not suffer lost profits, the loss of brand name recognition or the loss of market share because of Microsoft's continued sale of the infringing products. These are the type of injuries that are often incalculable and irreparable… z4 can be compensated for any harm it suffers in the way of future infringement at the hands of Microsoft by calculating a reasonable royalty for Microsoft's continued use of the product activation technology."

2. Remedies Available at Law. This equity test seeks to determine if money is a sufficient remedy. In weighing this factor, the Court relied on the dicta (concurring opinion) of Justice Kennedy:
Justice Kennedy specifically mentioned the situation where a "patented invention is but a small component of the product the companies seek to produce" and states that in such a situation, "legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest."…
Although dicta, even when expressed by a Supreme Court justice, has no precedential power, the words of Justice Kennedy struck a chord with the Texas Court, which chose to adopt this rationale.

3. Balance of Hardships. The Court decided this factor also in favor of Microsoft, which, if enjoined from selling MS Office, would have to rewrite parts of the code, which, it successfully argued, would not be easy.

4. Public Interest. The Court decided that the interest of the public would be best served by allowing Microsoft to continue to sell its very popular Office software:
"It is likely that any minor disruption to the distribution of the products in question could occur and would have an effect on the public due to the public's undisputed and enormous reliance on these products."

The infringing product's commercial success used to inure to the benefit of the patent owner, at least as a secondary indicia of patent validity. Now, it seems, the commercial success of the infringing product helps the infringer avoid a permanent injunction. The moral: if you want to infringe with impunity, infringe big!

It is interesting to note that, as we have predicted in the previous article (see ibid.), the Court advised z4 to immediately refile the case, which would proceed straight to hearing in damages to address continuing infringement by Microsoft.

As the first post-eBay case, this decision will undoubtedly influence future decisions in the direction of denying permanent injunction to small inventors and other non-practicing entities. Welcome to the brave new world of infringements galore.

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Supreme Court Chooses the Middle Ground in the eBay Case

Wealth of Ideas Newsletter, May 2006

A landmark decision of the Supreme Court in the eBay case has left many inventors and patent owners disappointed, as the Supreme Court sided with eBay and set aside the Appellate Court's prior decision. A closer reading of the decision, however, seems to indicate a balanced approach that gave both sides something to brag about.

By way of background, petitioner eBay is a popular online auction site. Respondent MercExchange LLC owns patents for an electronic exchange. eBay sought to license the patent from MercExchange, but negotiations failed. MercExchange sued eBay and its affiliate, Half.com, for infringement, alleging that eBay's fixed-price "Buy-it-Now" feature infringed its patent.

A jury in the Eastern District of Virginia found that the patent was valid, and that eBay and Half.com had willfully infringed it. They awarded MercExchange damages in the amount of $35 million. Following the jury verdict, the judge denied MercExchange's motion for a permanent injunction. The Court of Appeals for the Federal Circuit (CAFC) reversed that ruling, applying its "general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances." The Supreme Court said that the District Court and the Federal Circuit both erred by departing from the four-factor test in opposite directions. The Supreme Court set aside the CAFC's ruling and remanded the case to the District Court.

Four-Factor Equitable Test Applies to Patent Cases

An injunction is equitable relief. It is granted by the courts when monetary damages and other remedies available at law are not sufficient to compensate for the injury. The courts have long applied a four-factor test to the question of equitable injunctive relief:

1. irreparable injury;
2. whether remedies such as monetary damages are adequate;
3. the balance of hardships between the patent owner and infringer; and
4. whether a permanent injunction would disserve the public interest.

District courts have discretion in granting or denying injunctive relief. Any abuse of such equitable discretion may be appealed to and reviewed by the CAFC. The Supreme Court held that these well-established principles apply equally to patent cases. The Supreme Court cited its earlier decision in Weinberger v. Romero-Barcelo, in which it held that, "a major departure from the long tradition of equity practice should not be lightly implied." The Justices found nothing in the Patent Act that warranted such a departure. To the contrary, the published unanimous opinion written by Justice Thomas cites the Patent Act that "expressly provides that injunctions 'may' issue 'in accordance with the principles of equity.' 35 U. S. C. §283."

Property Rights of Patents are "subject to" the Rest of the Statute

The Supreme Court's decision addressed the question of property rights of a patent. The Court recognized that "the Patent Act declares that 'patents shall have the attributes of personal property,' §261, including 'the right to exclude others from making, using, offering for sale, or selling the invention,' §154(a)(1)." The Supreme Court disagreed with the Court of Appeals, however, in that "this statutory right to exclude alone justifies its general rule in favor of permanent injunctive relief." The Supreme Court observed that "the creation of a right is distinct from the provision of remedies for violations of that right." Justices Thomas observed that, 'The Patent Act itself indicates that patents shall have the attributes of personal property '[s]ubject to the provisions of this title,' 35 U. S. C. §261, including, presumably, the provision that injunctive relief 'may' issue only 'in accordance with the principles of equity,' §283." Thus, relying on the language of the Patent Act, the Supreme Court made a distinction between the right to exclude (the property right) and permanent injunction as the remedy for its violation. Although patents do have the attributes of personal property, that does not trump the four-factor test.

The Decision

In its decision, the Supreme Court scolded both the District Court and the Court of Appeals for taking extreme positions and erring in opposite directions.

Although the District applied the four-factor test, its holding would have excluded from the injunctive relief remedy "a broad swath of cases." In a victory for independent inventors, universities and patent holding companies, the Supreme Court rejected the notion that either not practicing the patented invention or granting a license under the patent would automatically disqualify a patent owner from seeking a permanent injunction.

The Supreme Court rejected the District Court's conclusion that "a 'plaintiff's willingness to license its patents' and 'its lack of commercial activity in practicing the patents' would be sufficient to establish that the patent holder would not suff er irreparable harm if an injunction did not issue." Justice Thomas wrote for the unanimous Court: "some patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves. Such patent holders may be able to satisfy the traditional four-factor test, and we see no basis for categorically denying them the opportunity to do so." The Court cited its earlier opinion in Continental Paper Bag Co. v. Eastern Paper Bag Co., (1908), "which rejected the contention that a court of equity has no jurisdiction to grant injunctive relief to a patent holder who has unreasonably declined to use the patent."

In the opinion of the Supreme Court, the Court of Appeals went to the other extreme when it enunciated a general rule "that a permanent injunction will issue once infringement and validity have been adjudged."

According to the Supreme Court, the CAFC did not properly apply the four-factor equity test in this case and, therefore, it vacated the CAFC's decision and remanded the case to the District Court for fact-finding to determine if the four-factor test was satisfied by the plaintiff.

The Supreme Court did not take a position on whether or not permanent injunction is warranted in the eBay case or any other specific patent case. It only concluded that "the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards."

What this means for patent owners

This long-anticipated decision - that many inventors and patent owners had been awaiting with bated breath - will likely have a limited effect on the outcome of patent cases. Firstly, only a very small percentage of patent cases ever reaches trial. Historically, only three to four percent of filed cases are tried - most are settled or resolved on motion.

Based on the analogy with the copyright law drawn by the Supreme Court, one can anticipate that, like copyright cases, most patent cases will result in a permanent injunction, once infringement is established.

Moreover, even if an injunction is not granted, in the absence of a compulsory license, the prevailing patent owner can file a subsequent case in which the issues of validity and infringement will be likely res judicata. Such a case will likely proceed quickly to a hearing in damages and a likely finding of willful infringement.

On the other hand, the law may develop in a different direction if some judges take to heart the dicta in the concurring opinion of Justice Kennedy and deny injunction to non-practicing entities, to owners of business method patents, and in those cases where the patented invention is but a small component of a larger system.

Although most non-practicing patent owners, such as patent holding companies, independent inventors and universities, do not wish to enjoin the infringer from practicing their invention, which would deny them income from royalty payments if these infringers were to license their patents, the threat of injunction is what often brought the infringers to the negotiating table. Two things could be said with certainty to follow from this Supreme Court decision: it will promote litigiousness as the alleged infringers, emboldened by now less likely prospect of injunction, will become more recalcitrant; and, secondly, it will drive down settlement amounts since the risk factors in the equation have now changed.

Conclusion

In its decision, the Supreme Court took the middle ground and, to some extent, gave something to both sides. eBay and its supporters can brag that they won, and win they did - there will be no automatic injunction in patent cases. The universities and independent inventors can also celebrate that the threat of eliminating a remedy of injunctive relief for non-practicing entities has passed. All inventors are now equal… although some may still be more equal than the others.

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Different Types of Patent Infringement

Wealth of Ideas Newsletter, April 2006

Your patent is infringed - but by whom? Patent litigation can only be successful if you know whom to sue. There are different types of infringement, and the direct infringer isn't always the one to sue.

Direct infringement is, of course, making, using, offering to sell, selling or importing into the US an infringing product during the life of the patent without a license from the patent holder.

Indirect patent infringement takes two forms: contributory infringement or inducement to infringe a patent. Patent law states that "whoever actively induces infringement of a patent shall be liable as an infringer" (35 U.S.C. § 271(b)). In other words, a company does not have to infringe a patent directly in order to be sued for patent infringement.

Induced infringement is that which enables the direct infringer to practice the patented intention. This type of infringement can take the form of helping the direct infringer to assemble the patented product; providing instructions that detail how to produce the patented invention; preparing instructions for consumer use; or licensing plans or a process which enable the licensee to produce the patented product or process. The test for induced infringement is whether the inducer has demonstrated active aiding and abetting of the direct infringer's infringing activities.

A contributory infringer is one who "offers to sell or sells within the United States or imports into the United States a component of a patented machine, manufacture, combination or composition, or a material or apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially made or especially adapted for use in an infringement of such patent, and not a staple article of commerce suitable for substantial noninfringing use" (35 U.S.C. § 271(c)).

Bringing a successful case against a contributory infringer requires that the plaintiff prove that the defendant sold, offered to sell, or imported a component of a patent apparatus, or a material or apparatus for use in practicing a patented process; that the defendant had knowledge of the patent; and that the component in question has no substantial noninfringing use and constitutes a significant part of the patented invention.

It may seem easier to sue the direct infringer than to attempt to prove indirect infringement, but often, the direct infringers are the numerous end users or consumers who use a product or kit to produce the infringing product themselves, blissfully unaware of the patent(s) they infringe in the process. Suing end-users may be impossible and financially unfeasible, so it may make more sense to bring a lawsuit against those who knowingly induce or contribute to the infringement.

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The Patent Reform Act of 2005: Continuation Applications and "Submarine Patents"

Wealth of Ideas Newsletter, February 2006

In last October’s feature article, we briefly described some of the proposed changes to the patent system contained in H.R. 2795, or "the Patent Reform Act of 2005". One such proposed change would allow the Director of the USPTO to place limits on the scope of continuation applications in order to deal with the problem of "submarine patents." This month we'll discuss continuation applications and submarine patents.

A continuation application has the same filing date as an earlier patent application, and also shares the same specification and at least one of the same inventors as the earlier application. The new application may feature additional claims, as long as they are supported by the original specifications.

Why does the current system need to change, in the eyes of Congress? Most likely, it’s because continuation applications allow for the possibility of so-called “submarine patents”. A submarine patent is one which is kept from issuing for a long time as the inventor files a succession of continuation applications based on the original application and with new claims developed from the inventor’s knowledge of current technology in the patent’s field. Then, when the patent finally issues, it has ready-made “infringers."

One name in intellectual property that has become inextricably linked with submarine patents is Jerome Lemelson, who was one of the most prolific, and controversial, individual inventors in U.S. history. To his credit, Lemelson had over 500 patents to his name and was known as a generous philanthropist.

However, Lemelson and the foundation that bear his name are also known for their practice of keeping patent applications from the 1950s pending through continuation applications until the patents finally issued between 1970 and 1994; changing these patent applications substantially to keep up with current technology; and enforcing the resulting “submarine patents” through widespread litigation.

Patent law has since changed, and now that a patent's 20-year term begins on the filing date, the problem of submarine patents has been much reduced. There are three measures already in place to prevent the abuse of continuation applications:

For one, whereas patents were formerly valid for 17 years from the date of issuance, now they are valid for 20 years from the date of filing.

Second, patent applications are published 18 months from the filing date, unless the inventor waives his right to file a foreign application. Having patent applications publicly available also makes them less likely to surprise unwitting infringers later on.

Third, the Court of Appeals for the Federal Circuit ruled against the Lemelson estate in 2005 based on the doctrine of laches, due to the patents' "pattern of unjustifiably delayed prosecution".

These three reforms have nearly eliminated submarine patents as a significant threat to any given industry.

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eBay, MercExchange and the Supreme Court

Wealth of Ideas Newsletter, December 2005

The "world's largest yard sale" is about to go to the Supreme Court, which decided on November 28 to hear the patent infringement case between eBay and the small patent holding company MercExchange.

The case as it stands concerns eBay's "Buy It Now" feature and fixed-price auctions, which MercExchange claims infringes its patents on using networked computers to create an online market or auction. The Supreme Court is to decide whether or not to uphold the permanent injunction issued against eBay in March by the U.S. Court of Appeals for the Federal Circuit (CAFC).

Besides the fact that this is a sensational case because of the household name involved - eBay, where millions of people buy anything and everything from auto parts to antiques - the case stunned the patent world as it has the potential to upend the precedent of a district court issuing a permanent injunction whenever there is a finding of infringement in a patent lawsuit. Basically, eBay wants the decision of whether to issue injunctive relief to be decided on a case-by-case basis. eBay's petition to the Supreme Court asked that the four-part "injunctive relief test"1 be applied to patent cases instead of simply automatically applying such relief.

No one expected the Supreme Court to grant eBay a Writ of Certiorari (a decision by the Supreme Court to hear an appeal from a lower court). Although the law as it currently stands states that the courts "may" grant a permanent injunction, such injunction was almost automatic save for the cases where public health or safety was concerned, or when national security or other extraordinary circumstances were an issue.

The whole dispute goes back to a court case in 2003, when eBay was sued in a Norfolk, VA court by Thomas G. Woolston, a lone inventor, former soldier and ex-CIA employee, who had patented a method of making online bids using credit cards (and who founded MercExchange). The jury sided with Woolston and ordered eBay to pay $29.5 million in past damages (later reduced to $25 million by the CAFC).

The District court in Virginia is still slated to rule on an important issue of the MercExchange patent case: the auction patent, which may cover eBay's core auction business in its entirety. (That patent was thrown out on summary judgment in the original case, but that decision was overturned by the appeals court and remanded for trial.)

And the $25 million already awarded to MercExchange might look like a drop in the bucket if the permanent injunction order is reinstated and halts 35% of eBay's business model, forcing eBay to take a license on MercExchange's terms (although eBay may have already found a work-around that allows it to continue business as usual without infringing MercExchange's patents). No matter what happens, it looks like eBay is in for an expensive fight.

Add to the mix the fact that MercExchange's patents are in reexamination in the Patent Office, and you have the makings of a very interesting year ahead for both eBay and MercExchange - and the patent landscape as a whole.

Editorial Comment:

An attempt to deny permanent injunction to patent holders who do not practice their own inventions is the subject of a massive lobbying campaign spearheaded by Microsoft and eBay and supported by a few other companies who perceive themselves as targets of patent infringement lawsuits. This campaign resulted in the introduction of the Patent Reform Act of 2005, which initially attempted to strike down permanent injunctive relief for holders of "paper" patents. It was widely perceived as unconstitutional, because the US Constitution guarantees the patentees an "exclusive right to their inventions," i.e. an injunctive relief. Consequently, the latest draft of the patent reform bill dropped this proposed change.

An attempt to resurrect this issue at the Supreme Court threatens to, in effect, create a compulsory license, which does not exist in the US and has been abandoned in most industrial countries. This is nothing short of an assault at the very heart of the US patent system. If the Supreme Court takes away the injunctive relief from patent holders, not only it will significantly diminish their property rights (already diminished due to the Supreme Court's decision in the Festo case, all but eliminating the doctrine of equivalents) but it will also promote patent litigation as the defendants will be in no worse position if they litigate and lose than if they settle out of court.

Footnotes:

1. The four factors of this test are:

1. Will the plaintiff suffer irreparable harm from the court's failure to grant an injunction? MercExchange's failure to move for a preliminary injunction suggested to the CAFC that the plaintiff would not suffer such irreparable harm from the lack of a permanent injunction.
2. Does an adequate remedy exist in the form of damages? The CAFC cited MercExchange's willingness to settle for monetary damages as proof that this requirement was satisfied.
3. Would the injunction be in the public interest? The court found that public interest weighed equally in favor of both parties - MercExchange because of the need to preserve the integrity of the patent system, and eBay because the patentee does not practice its inventions, so a permanent injunction would not benefit the public.
4. In whose favor does the balance of hardships tip? The CAFC found that the balance weighed slightly in eBay's favor, given that "[w]hile it is important to respect the rights of the patent holder, in this case, the plaintiff exists solely to license its patents or to sue to enforce them, and not to develop or commercialize them".

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