« Copyright Enforcer | Main | Copyrights stopping YouTube guitar lessons? »

Patent Trolls or Patent Holding Companies? Damages or Injunctions?

EBay, Inc. v. MercExchange, L.L.C was a disappointing case for many interested parties, because the decision was so narrowly drawn that there was not an outright win for either side. [1] The Supreme Court held that when determining whether to issue a permanent injunction, a court must apply the traditional four-factor injunction test based in the principles of equity. It rejected the Federal Circuit’s presumption that cases in which the patent is found to be valid and infringed should result in a permanent injunction. On the other hand, it also rejected the District Court’s reasoning that a firm’s willingness to license technology negates the irreparable harm element. It was unwilling to affirm either side’s desire to establish a general rule.

Although the decision was unanimous, Chief Justice Roberts’s concurrence suggested that the court also consider the reasons behind the long tradition of granting injunctions when assessing the four factor test, particularly the difficulty of exercising the right to exclude with only damages. On the other hand, Justice Kennedy noted the changing times, recognizing that when the patented invention is just a small component of the product the defendant is seeking to produce, an injunction can have tremendous public consequences and also overly compensate the patent holder. The narrow decision and divided reasoning demonstrate the controversial nature regarding patent injunctions as a remedy.

At the core of this controversy are a collection of patent holding companies, inventors, patent owners, and sometimes, technology transfer offices who have been dubbed “patent trolls.” These “patent troll” companies and individuals share a few common characteristics: (1) they have no significant assets except patents, (2) are not developing technologies and products based upon these patents, and (3) are threatening or undergoing patent infringement lawsuits. These patent trolls develop their extensive patent portfolio in numerous ways: they are the original owner or inventor, they purchased the technology from patent owner, they purchased patents on the cheap at the auctions of bankrupt companies or as some opponents of patent trolls say, they are the creative genius of a few entrepreneurial scientists and informed patent lawyers who seek to exploit the system.

The increasing presence of such patent trolls has certainly caused a dilemma in whether to support injunctions or damages as the appropriate remedy to such patent infringement cases. Perhaps the Supreme Court has avoided an outright rule because the controversy arises from the patent system itself, a tension between (1) the goal of the patent system: “to promote progress of science and useful arts” [2] and (2) the purpose behind the patent system: to benefit society with technological advances and artistic developments.

The patent holding companies do not directly benefit society because they are not producing products themselves but rather seeking to license their technology or enjoin other companies such Research in Motion from providing useful services such as the Blackberries. [3] However, patent holding companies do arguably promote the progress of science and useful arts, through the incentive system so strongly advocated by Jefferson. Many proponents of the holding companies note that without such companies, small inventors do not have the clout or resources to face and challenge large companies who infringe upon their patents. The patents of small inventors are effectively worthless if companies do not recognize their existence and appropriately license. Thus, the legally created incentive to invent is eliminated for small inventors, who the government historically has made an aim to protect. By banding together or selling their rights to litigious holding companies, individuals and small companies can deal with large companies on a more level playing field to establish licenses and receive monetary compensation for their innovative contributions.

Critics of these patent holding companies argue that granting injunctions [4] gives these patent trolls too much leverage in licensing negotiations and drives up the cost of operations. In a normal patent infringement case where both companies are developing related products, the companies will negotiate cross-licenses or license its technology at a reasonable price knowing that it may have to license other technology from its competitor in the future. However, because patent trolls do not develop products, they never have to worry about infringing other patents. Thus, there is no incentive to maintain good relations and settle upon a fair price. Rather, the incentive is to engage in years of litigation, a crippling personnel and financial burden on all but the largest companies, with as many companies as possible regardless of the merit of the infringement claim, since most companies would opt to settle rather than avoid the huge burdens of litigation. The recent $60 million settlement between Burst.com and Microsoft indicates the magnitude of money at stake. [5]

Yet, if courts award damages [6] instead of injunctions, it effectively creates a compulsory license similar to the British system. [7] This practice would drastically cut the bargaining power of the patent owner, discourage settlements, and increase the number of trials. Moreover, instability and uncertainty, which discourage investment and investors, would be introduced since damages are now decided on a case-by-case basis at the mercy of the judges and juries. Most importantly, it removes the power of deciding to what extent the patent owner should be rewarded and the infringer punished from the players themselves, and burdens the justice system, which is less equipped to understand the market, with this decision.

Proponents of the patent holding companies find support in injunctions in the property right to exclude. Furthermore, they argue that infringers have plenty of notice to settle or agree to a license or develop non-infringing technology. [8] Either way, proponents say that the settlements are not outrageous but rather an indication of the market value of the patent. Infringers will not agree to pay for use of the technology, unless it is sufficiently important and valuable. Lastly, these MercExchange supporters argue that it is unlikely that the small company is the victim in an injunction-based remedy system. Patent holding companies will tend to challenge large companies, just as tort plaintiffs go after defendants who have deep pockets. Rather, the small companies are more likely to benefit under an injunction-based remedy since they can better protect their own technology and assert their demands when negotiating licenses with larger companies.

So what are some possible solutions to this current battle? My personal opinion is to keep the four-factor injunctions test as prescribed by principles of equity and reaffirmed by eBay v. MercExchange. There is great merit in encouraging companies to develop their own solutions and determine the appropriate value for the infringed technology. Moreover, companies found to infringe have a significant amount of time and notice prior to the injunction, from the initial cease and desist letters through the extensive litigation process until the final decision. However, the present state is insufficient. Numerous fantastic suggestions are addressed in the hearings by the House Committee on the Judiciary Subcommittee on Courts, the Internet, and Intellectual Property, particularly in the testimony by Edward Reines [9] and Nathan Myhrvold.

Beyond improving the quality of approved patents and response time, I am a proponent of limiting the use of doctrine of equivalents, so that patents are limited in scope to precisely what their owners had prescribed. In this day and age, DOE is unnecessary as it is common practice to file numerous patents on the same invention, to file continuations, and make modifications which allow lawyers to fix any holes in their patent coverage or expand its scope. If a new use is developed for an invention, inventors can patent the new use. Removing DOE will improve notice for all potentially infringing companies as well as limit the number of potential infringers, thereby reducing litigation. DOE will also encourage settlement since infringement cases are more clear. Large companies are also more likely to invest in developing technologies that circumvent those that are patented since the boundaries of infringement are better defined.

Secondly, I support a more centralized system of tech transfers such that when companies (often those that are bankrupt) wish to auction off some or all of their patent portfolios, companies that have relevant technologies have an opportunity to acquire these patents. The system could be as simple as a eBay-like auction. This suggestion would alleviate or minimize market failures resulting from information costs about available patents. With this centralized tech transfer system, opponents of patent trolls no longer have a legitimate complaint about trolls acquiring random technology at bargain prices since all companies are on notice of the available patents and can now drive up the demand and price for that piece of technology. If they are found to infringe a patent they could have purchased in the patent, it is their own fault for not having the foresight.

Overall, I think the patent system should hold patent holders and companies dealing with intellectual property more accountable for their actions, whether through their writing and structuring of claims or their strategies in acquiring and disposing patents.

[1] EBay, Inc. v. MercExchange, L.L.C . 126 S.Ct. 1837 (2006).
[2] U.S. Constitution, Article I, Section 8.
[3] Research In Motion, Ltd. v. NTP, Inc. 126 S.Ct. 1174 (2006). See also DataTreasury Corp. v. First Data Corp. 243 F.Supp.2d 591 (N.D.Tex. 2003)(seeking to enjoin commercial banks from using the check imaging technology).
[4] 35 U.S.C. 29 § 283
[5] Underdog Or Patent Troll?: How Burst.com went from making software to suing tech giants http://www.businessweek.com/magazine/content/06_17/b3981070.htm
[6] 35 U.S.C. 29 § 284
[7] Patents Act 1977, Section 48
[8] “Patent Quality and Improvement”: Testimony of Nathan Myhrvold for the House Subcommittee on the Courts, the Internet, and Intellectual Property, Committee on the Judiciary, House of Representatives, on April 28, 2005
[9] “Patent Trolls: Fact or Fiction”: Testimony of Edward R. Reines for the House Subcommittee on the Courts, the Internet, and Intellectual Property, Committee on the Judiciary, House of Representatives, on April 28, 2005

Posted by at April 3, 2007 10:58 AM in Commentary Posts