Dec 17 Managing IP & LexisNexis Webinar: Patent trolls & damages

Patent trolls & damages

Speakers:James Nurton, managing editor, Managing IP (moderator)Eric E. Bensen, intellectual property author and independent consultantBryan W. Butler, IP Counsel, IBMCharles R. Macedo, Partner, Amster, Rothstein & Ebenstein

Back to Basics: Using Existing Law to Constrain “Trolls”

Eric E. BensenAuthor & Consultant, www.ericbensen.com

Of Counsel, Vandenburg & Feliu LLP, NY, www.vanfeliu.com

Overview

1. Introductiona) “Trolls”: Who are We Talking About?b) “Trolls”: What Problem Do We Seek to Address?

2. Existing Law & “Trolls”a) Current State of the Lawb) Supreme Court Precedent – Apportionment

3. Conclusion

IntroductionWho are We Talking About?

1. Trolls2. Non-Practicing Entities3. Patent Assertion Entities4. Patent Monetization Entities5. “Trolls”

Introduction“Trolls” – What Problem Do We Seek to Address?

Question:

If every patent suit involved: (i) valuable patents (ii) being asserted with a good faith basis to believe infringement has occurred …

… would we be talking about Trolls?


The “Troll Problem”: Excessive number of suits where:

1. Trivial (or worthless) patents are asserted.2. Claims are brought in bad faith.3. Both.



1. Trivial (or worthless) patents are asserted.2. Suits are brought in bad faith.3. Both.



1. Trivial (or worthless) patents are asserted.2. Suits are brought in bad faith.3. Both.

Why do trivial/worthless patents wreak such havoc on industry?


Damages awards are too often out of proportion to the value of the patent:

Key Facts Reasonable Royalty

Some infringing units sold for as little as $97i4i Ltd. P’ship v. Microsoft, Corp., 598 F.3d 831, 853 (Fed. Cir. 2009)

$96/unit

“Technology Fee” was $5/unitMonsanto Co. v. Ralph, 383 F.3d 1374, 1384 (Fed. Cir. 2004)

$50/unit

Anticipated profit was $8.00/unitGolight, Inc. v. Wal-Mart Stores, Inc., 355 F.3d 1327, 1338 (Fed. Cir. 2004)

$31.80/unit

Competitor sold infringing units for $1,295/unitPowell v. Home Depot U.S.A., Inc., 663 F.3d 1221, 1228 (Fed. Cir. 2011)

$7,736/unit

Existing Law & “Trolls”Current State of the Law

Today, there are substantial inconsistencies in patent law. E.g.:

1. Smallest Saleable Unit:

Is the smallest saleable unit containing the patented feature a proper base for a royalty award (Laserdynamics) or not (Lucent)?

2. Total Revenues:

Can a patentee “always” use the the total revenues from a product as royalty base as long as the rate is low enough (Lucent) or not (Uniloc)?

Existing Law & “Trolls”Current State of the Law

Today, there are substantial inconsistencies in patent law. E.g.:

3. Arbitrary Profit Splitting:

If the 25% Rule is unacceptable because it require an arbitrary division of profits (Uniloc), why is the analytical method acceptable (Lucent)?

4. Profit Requirement:

Must an infringer be left with an anticipated profit (Lindemann, Innovatio*) or not (Monsanto)?

Existing Law & “Trolls”Illustration

Question: Does it make economic sense to bring suit for infringement of a patent that claims a trivial feature of a smart phone?

Before the right court or panel:

• The phone, i.e., “smallest saleable unit,” can be the base for a royalty award.• Total revenues can be presented to the jury.• Expert can advocate an arbitrary split of the profits on the phone.• No infringer profit required.

Existing Law & “Trolls”Supreme Court Precedent - Apportionment

Between 1854 and 1915 the Supreme Court decided more than 30 patent damages cases: Apportionment was required every time.

Basic Rule:

“The patentee . . . must in every case give evidence tending to separate or apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative ….”

Garretson v. Clark, 111 U.S. 120, 121 (1884)


Specific Rules:

1. Patent Claims an Entire Marketable Article:

No apportionment.Elizabeth v. Pavement Co., 97 U.S. 126, 141-42 (1878)

2. Patent Claims an Entire Marketable Article, defendant adds an improvement:

Burden initially on defendant to show that improvement had value.Westinghouse Elec. & Mfr. Co. v. Wagner Elec. & Mfg. Co., 225 U.S. 604, 617 (1912)

3. Patent claims an improvement or component:

Burden on patentee to show the value contributed by the claimed invention.Seymour v. McCormick, 57 U.S. 480, 491 (1854)


Specific Rules – Entire Market Value Rule:

“If the improvement is required to adapt the machine to a particular use, and there is no other way open to the public of supplying the demand for that use, then it is clear the infringer has by his infringement secured the advantage of a market he would not otherwise have had, and that the fruits of this advantage are the entire profits he has made in that market.”

Manufacturing Co. v. Cowing, 105 U.S. 253, 255-56 (1881)


Specific Rules – Reasonable Royalties:

A reasonable royalty is an approximation of market price for a license to the patent.

“[A]s the patent had been kept a close monopoly, there was no established royalty. In that situation it was permissible to show the value by proving what would have been a reasonable royalty, considering the nature of the invention, its utility and advantages, and the extent of the use involved ”

Dowagiac Mfg. Co. v. Minn. Moline Plow Co., 235 U.S. 641, 648 (1915) See also Suffolk Co. v. Hayden, 70 U.S. 315, 320 (1866)

(A proper reasonable royalty calculation necessarily satisfies the apportionment requirement.)


In sum:

1. A patentee’s recovery must be based on the value of the invention.

a) A patentee’s recovery may be based on the value of the entire article only where the entire market value rule is satisfied.

2. Reasonable royalties:

a) Real world licenses for the patent are the best evidence.

b) Otherwise:

Base = Profit attributable to the invention (the apportioned value) Royalty = Portion of base that a reasonable licensee would pay for a

licenseRembrandt Social Media, L.P. v. Facebook, Inc., 2013 U.S. Dist. LEXIS 171127, **23-24 (E.D. Va. Dec. 3, 2013)


Question: Does it make economic sense to bring suit for infringement of a patent that claims a trivial feature of a smart phone?

Smart Phone Federal Circuit Supreme Court

Royalty Base: Phone Patented Feature

Total Revenues: Admissible Not Admissible

Arbitrary Profit Split: Permitted Not Permitted

Infringer Expected Profit: Not Required Required

Conclusion

Consistent application of existing Supreme Court law:

1. Would reduce the incentive to sue on trivial patent: Trivial Inventions = Trivial Recovery

Conclusion

Consistent application of existing Supreme Court law:

1. Would reduce the incentive to sue on trivial patent: Trivial Inventions = Trivial Recovery

2. But, without reducing innovation: Substantial Invention = Substantial Recovery

What are “trolls” and what is wrong with them?

Charles R. Macedo Partner

Amster, Rothstein & Ebenstein LLP, www.arelaw.com

What are “trolls” and what is wrong with them?

• Non practicing entities; • Asserting patents of dubious

quality and suspect validity; and

• Extracting nuisance payments based on high cost of litigation

Is our patent system failing and if so how?

• Efficiency – Patent Litigation Costs Too Much

0 1 2 3 4

Less than $1 million at risk

$1‐$10 million at risk

$10‐$25 million at risk

More than $25 million at risk

End of discoveryInclusive, all costs

Source: AIPLA Report of the Economic Survey 2013

Median cost in millions

Median Cost of Defending Patent Infringement Claims by NPE


• Predictability – No one knows what the law is, or will be

Obviousness – Changed by KSRPatent Eligibility ‐‐ Bilski, Mayo, Myriad and now AliceMulti Party Actors – Akamai…..


• Reliable – Courts and PTABs keep coming up with different decisions

Courts PTO

Fresenius:Jury awarded over $14 millionFederal Circuit affirmed

Fresenius:Reexam found claims invalid

Versata:Jury awarded $345 million

Versata:PTAB found not patent‐eligible


• Acceptable – News media and special interests

• Vermont and Nebraska Attorneys General called in to action in their respective states because of public reaction to seemingly inappropriate notice letters.

• Vermont passed legislation including a requirement that senders of “demand letters” post a bond if it is likely that the patent assertion is being made in bad faith

• Etc.


• Fair – Many perceived new AIA Post-Issuance Proceedings as anti-patent owner

Source: USPTO Presentation

Proposed Anti-Troll Legislation (HR 3309, the Goodlatte Bill)

• Heightened pleading requirement - Requiring "detailed specificity" as to "how the terms in each [asserted] claim … correspond to the functionality of [each] accused instrumentality."

• Attorney-fees - will be awarded to a prevailing party. The new provision would require an award of fees "unless the court finds that the position of the nonprevailing party . . . was substantially justified or that special circumstances make an award unjust."

• Discovery - limited until after a ruling on claim construction.

• Transparency of Ownership - the patentee in an infringement litigation must disclose anyone with a financial interest and "ultimate parent entity" of the patentee.

Proposed Anti-Troll Legislation (HR 3309, the Goodlatte Bill) (cont.)

• Stay for Customer Suits - customer suits would be stayed so long as the customer agrees to be bound by the results of that case.

• IP in Bankruptcy - when a foreign company goes bankrupt, its trustee would no longer have the power to cancel licenses associated with US patent rights.

• Shrinking Post-Grant-Review Estoppel- changes estoppel against the petitioner from "any ground that the petitioner raised or reasonably could have raised during that post-grant review" to only grounds actually raised.

Proposed Anti-Troll Legislation (Other legislation)• Manufacturing Innovation in America Act of 2013 (H.R. 2605) Tax

deduction carryover for patent development expenditures where profit is made years later.

• Patent Abuse Reduction Act of 2013 (S. 1013) (Senators Cornyn and Grassley) Smaller version of Goodlatte's Innovation Act that would focus on (1) raising pleading requirements (2) limiting discovery costs (especially pre-claim-construction); and (3) awarding attorney fees for the prevailing party.

• End Anonymous Patents Act (H.R. 2024) Requirement that the patent owner regularly update ownership information in the public record, including the "ultimate parent entity."

• Patent Litigation and Innovation Act of 2013 (H.R. 2639) Includes many provisions in parallel to the Goodlatte Innovation Act, but also includes a "sanction for abusive litigation" with mandatory review of each case by the court to ensure that no Rule 11(b) violations occurred.

NPE Damages Vulnerability Points

Things to Know to Minimize Damages Exposure

©2013 Bryan W. Butler Esq. – Views presented are mine and are not necessarily those of current or past employers

2 – Step Approach to Damages Mitigation

1. Gather the facts 2. Use the facts to Eliminate or Mitigate Exposure

– Enforceability Period– Damages Base (Indirect Infringement & EMVR)– Geographic Base– Damages Theory– Injunction/ITC


Use Facts to Categorize the Infringement TheoryType of Infringement

Statute Liability and Requirements

Classic Scenario

Direct Infringement

(a) . . .whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.

Strict LiabilityNo Mens Rea

Infringer performs all steps of a method or sells product with all elements

Joint Direct Infringement

Same 271(a) Strict Liability One party contracts another

Induced Infringement(Expect Post-Akamai Uptick)

(b) Whoever actively induces infringement of a patent shall be liable as an infringer.

Knowledge requirement Infringer sells product used to perform a method

Contributory Infringement

(c) Whoever . . .a component of a patented [thing or method], 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 or commodity of commerce suitable for substantial noninfringing use, . . .

Knowledge RequirementMateriality RequirementNo Non-Infringing useNon-commodity

Infringer sells a part which when combined directly infringes


Practice Pointer: Categorize Infringing Acts In Claim Chart

Claim Element

Smallest Salable Component Practicing

Performed by Alleged Infringer

Performed by Others

Performed in U.S. or outside U.S.

(Preamble) “A ______ comprising:Element 1Element 2Element 3 . . .


Practice Pointer: Assignment Timeline To Limit Damage and Unenforceability Periods

Date RangeAssignee / OwnerProducts Sold & Marked?Licensees?Standards Organizations Joined


Now Use Facts to Mitigate Damages Limit the Damages Period Limit the damages Base

– Use Surveys to Limit the Indirect Infringement Damages Base

– Use Smallest Salable Unit Logic to Limit the EMVR Damages Base

– Exclude non-US Sales Invoke “Gatekeeper” against un-supportable

theories Challenge injunction / ITC


Mitigate Exposure by Limiting the Damages Period Marking / Notice

– Start• 35 USC §286 gives: 6 Year reach-back from litigation start• 35 USC §287 takes away: Marking/Notice requirement for damages recovery• No duty to mark if method claim being asserted BUT see indirect infringement

– Stop• Damages period ends with patent expiration (expired patent cannot be infringed)

– NPE Vulnerability points– Prior owner failure to mark– Licensee failure to mark– Indirect infringement starts/stop with direct but mens rea still required

Standards Bodies / License– Look for prior owners membership in standards bodies– Licenses for “necessary patents” burden successive owners


Mitigate Indirect Infringement Base With Surveys

Courts Take Three Approaches– Inherent Infringement Approach

• Appropriate when infringing devices have no utility other than to operate in a manner infringing method claims

– Survey Approach• Use customer survey data to apportion between infringing and non-infringing

applications– Hypothetical Negotiation Approach (New)

– First appeared in Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1333-1334 (Fed. Cir. 2009)

– Based on Georgia-Pacific “The extent to which the infringer has made use of the invention”• % infringing would be a factor in hypo negotiation


Mitigate EMVR Base

Invention = Inventive

(Novel/Non-Obvious)Element

“Claiming the Environment”

- drafting technique

Entire Market Value Rule – litigation

technique

Convoyed / collateral Sales – litigation technique

© 2009 Bryan Butler

LaserDynamics Mitigates EMVR Laserdynamics makes “smallest salable unit” the starting point

– Notes that modern products are composed of many components, some infringing, some not

– General rule: • damages calculation for “adequate to compensate” starts with “smallest

salable patent practicing unit”, – citing Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 283,

287-88 (N.D.N.Y. 2009)– EMVR is narrow exception to general rule

• Patentee must prove patented feature drives demand• Goes beyond mere importance of feature – rather “entire value” must be

attributable to infringement– LaserDynamics, Inc. v. Quanta Computer, Inc., 2012 U.S. App. LEXIS

18441, 31-42 (Fed. Cir. Aug. 30, 2012)– Laserdynamics may be becoming the new standard test

• Versata Software, Inc. v. SAP Am., Inc., 717 F.3d 1255, 1268 (Fed. Cir. 2013)

• SynQor, Inc. v. Artesyn Technologies, Inc., 709 F.3d 1365, (Fed. Cir. 2013)


Mitigate Exposure by Limiting the Geographic Damages Base

271(f)• Induced infringement outside U.S. is infringing act• Requirements

• Is accused infringer “supplying”• Is what is shipped outside the U.S. a “component”

– Answer: Copying outside U.S. is not “supplying” • Microsoft v. AT&T

“Border-straddling infringement”• One or more claim element is practiced outside U.S. – NPE asserting WW damages• Result depends on if claim is method or apparatus

• Method claims only infringed if each step of a process is performed in the U.S. • System claims are infringed if all elements are controlled from within the U.S. (“control

point test”)– NTP v. RIM

© 2009 Bryan Butler


Historically GP Factor Applications Lacked Rigour

“After careful consideration of

the aforementioned GP/etc. factors” $$$$$$

I/We Conclude


“Gatekeeper” Cases Show Increased Rigour Expert testimony excluded under FRE 702 / Daubert for failure to connect GP factors to

conclusion– “. . . mere reference to the Georgia-Pacific factors, cannot change the sow's ear of rank speculation

into a silk purse of reliable expert opinion.” – Bowling v. Hasbro, Inc., 2008 U.S. Dist. LEXIS 30043, (D.R.I. Mar. 17, 2008)

Expert opinion testimony "must be shown to be based on more than the subjective belief or unsupported speculation of the expert." – Hartford Ins. Co. v. Gen. Elec. Co., 526 F. Supp. 2d 250, 252 (D.R.I. 2007).

Expert testimony excluded which failed to show “sound economic connection between argued royalty and value of “claimed invention”– Cornell University v. Hewlett-Packard Co., 2008 U.S. Dist. LEXIS 41848 (N.D.N.Y May 27, 2008)(Rader, J. sitting by

designation)– IP Innovation L.L.C. & Tech. Licensing Corp. v. Red Hat, 2010 U.S. Dist. LEXIS 28372, 7-8 (E.D. Tex. Mar. 2,

2010)(Rader, J.)

Award vacated and remanded for trial court’s failure to document rationale for award in the record– “in this case we cannot review the court's methodology because the court did not provide an explanation of

how it arrived at the damages award that it entered. As we have explained, "To enable appellate review, a district court is obligated to explain the basis for the award." • Heeling Sports, Ltd. v. US Furong Int'l, Inc., 2009 U.S. App. LEXIS 7182 (Fed. Cir. Apr. 3, 2009) citing Read

Corp. v. Portec, Inc., 970 F.2d 816, 828 (Fed. Cir. 1992). Lucent Award remanded for failure to:

– Present evidence of how/why “comparable” licenses for GP#1 were comparable– Present evidence showing infringing feature was basis of customer demand for EMVR

• Lucent Technologies, Inc. v. Gateway, Inc. --- F.3d ----, 2009 WL 2902044 Fed. Cir. Sept. 11, 2009 “25% Rule of Thumb” rejected in Uniloc Watch out for mis-applications of Lost Profits theories to Hypothetical Negotiation

– “Accelerated Market Entry” for expired patent


Mitigate Exposure by Minimizing Injunction & ITC

Good news on injunctions– NPE’s Fail 4-Part Equitable Test Bad news on ITC, Moving Towards Good


NPE’s Flocking to ITC Since Coaxial Cable Case

http://www.rpxcorp.com/index.cfm?pageid=14&itemid=20


ITC Scrutinizing NPE Jurisdiction Coaxial Cable case opened the door Pendulum swinging away from licensing as domestic industry

– Litigation expenses alone, absent successful licensing activity do not satisfy the requirement.• John Mezzalingua Assocs. v. ITC, 660 F.3d 1322, 1324-1325 (Fed. Cir. 2011)

– For licensing to be domestic industry• First, three threshold factors

– Investment in licensing relates to exploitation of asserted patent– Investment relates to licensing– Investment occurs in U.S.

• Next, investment not substantial if: – Attenuated nexus to asserted patents– Licensing efforts directed to entire portfolio– No evidence of licensing related to exploiting specific asserted patent – Broad patent portfolio with no congruent fit

> In re Certain Multimedia Display and Navigation Devices Inv. No. 337-TA-694 (2011) (“Pioneer”)


Conclusion

NPE’s are here to stay, but do have vulnerabilities– Damages limitation can reduce ROI

• Damages period• Damages base

– Injunctions no longer an NPE threat, pendulum swinging away from ITC


Patent trolls & damages

Speakers:James Nurton, managing editor, Managing IP (moderator)Eric E. Bensen, intellectual property author and independent consultantBryan W. Butler, IP Counsel, IBMCharles R. Macedo, Partner, Amster, Rothstein & Ebenstein

Dec 17 Managing IP & LexisNexis Webinar: Patent trolls & damages

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Transcript of Dec 17 Managing IP & LexisNexis Webinar: Patent trolls & damages