Could Bilski Eliminate Damages for Method Claims Covered by Open Source Software? Maybe!

If you've found this article, I don't have to give you a primer on Bilski. By the time the SCOTUS is through, we should have a much better idea of the metes and bounds of what kinds of intangible intellectual property is patentable.

Given the tart comments by the various justices at the hearing on the viability of busines method claims -- from Justice Scalia's speculation about the availability of "horse whisperer" patents in the 1840's to Justice Breyer's wishing he could get a patent on his technique of teaching antitrust law to sleepy law students -- it appears that there will be a drastic narrowing of the scope of allowable business method patents that do not involve computers.

Now, in the courts, you don't really see the kind of business method patents you see in Bilski -- hedging risk in commodities trading. So, if the Bilski ruling does nothing more than strike down those types of patents, it may have little effect on big time patent litigation.

However, if some, like Red Hat, have their way and software patents are substantially weakened -- or even eliminated -- this could have a huge effect on the damages a plaintiff might be able to get for infringement of a method claim. Especially if that method is normally performed by software. Especially if that method can be performed by open source software.

For the most part, damages are awarded in patent cases based on what the jury finds to be a "reasonable royalty." That royalty is determined by looking at how much the infringer would have paid to license the plaintiff's patent if the parties had met and negotiated when the infringer started using the plaintiff's technology.

The more valuable the patented technology was to the infringer, the more he would have paid for the right to use it -- and the higher the "reasonable royalty."

If, however, the infringer didn't really need the plaintiff's technology or it didn't give him much economic benefit, the infringer would not have paid very much to license the patent and the "reasonable royalty" would be quite low.

One big reason that the infringer might not have put much value on the patented technology, is if he could have acquired that same -- or similar -- technology (which did not infringe) from some other source for less, or even for free; thsi is known as a "non-infringing alternative." If -- as in the Red Bend v. Google case recently filed -- the defendant could convincingly argue that he could replace the patented techology with free open source software, the "reasonable royalty" may well be minimal -- or even zero.

Now what does this have to do with Bilski?

If the Supreme Court weakens or elminates software patent protection, this will dramatically increase the viability of free open source software, as companies like Red Hat will largely be able to operate without the constant danger of being sued by a software patent plaintiff. The open source industry will no doubt take full advantage to increase their "market share." Tux the Linux Penguin will have a party!

So what happens to your damages case if you own a patent and are suing on a non-software method claim that can be implemented in software? And what if a similar function is performed in a non-infringing way in some piece of open source software that came out of the post-Bilski flood of open source? And what if the infringer could just pop that open source module into its product and perform the same function as claimed in your patent without losing a sale?

As Tux would say -- You're fragged and you go home with nothing.

Think this can't happen? Watch the skies for the Bilski decision and wait.

TSMC v. SMIC: When Chip Foundries Go to the Dark Side

Chinese chip foundry SMIC, who paid $175M a few years ago to settle a claim of trade secret theft from its Taiwanese rival TSMC still couldn't keep its hands out of the cookie jar and is now looking at over $1B in damages for continuing to steal its trade secrets.

SMIC evidently hung its hat on trying to prove that the technology it stole wasn't really a trade secret. For 63 out of the 65 claimed trade secrets, the jury didn't buy it.

More to come on how damages will be calculated in this case -- the jury will consider this phase of the case starting Thursday -- but the usual method is to look at how the defendant was unjustly enriched.

Big win for Keker. Big big loss for Wilson, Sonsini (for those of you keeping score on the law firm side), who really needs to find better clients.

More to come as we get more information.

Nokia v. Apple -- FRAND and the Standards Wars

Erica Ogg over at CNET explained what is really going on on the business side in the big Nokia/Apple patent blowout -- The biggest handset maker, fallen on hard times, competes in the courtroom with the up-and-comer, seeking to add $6-12 per phone to Apple's costs

But, when the parties actually get to court, what is this case really going to be about and how will it get resolved? For the answer, you have to look at the history of how the imposition of technical standards throws a big monkey wrench into both patent litigation and antitrust law.

After Teddy Roosevelt got through with the "trusts" which strangled the economy in the late 19th Century, it became illegal for competitors to get together to fix the prices of the goods they sold -- in fact you can go to jail for it. In fact, the Justice Department doesn't like competitors getting together to do much of anything.

This applies equally to licensing of patents -- competitors can't get together to set the rates at which they will license their patents.

However, this posed a problem for some industries in which the products of all companies have to work in the same way -- all electronic appliances have to use the same shape plug, for example.

In the present high-tech world, where many different types of computers have to equally work over the Internet, having a set of common standards has been critical.

And in the communications field, where every phone has to be able to talk to every other phone, without standardization, you could only talk to phones made by the same company that made your phone -- totally unacceptable.

So, there are various US and international bodies who come up with standards (like 3G) that will enable everyone to talk to everyone else. These standards are constructed from the patents submitted by the various industry leaders.

Sometimes, these patents are licensed in one portfolio with the blessing of the antitrust authorities (like the well-known MPEG-LA group).

But in many cases, like this one, the various contributors to the standard claim that their patents are "essential" to the standard -- i.e., that if your product practices the standard, you must be infringing their patent.

The determination that patents are "essential," however, is not made by the standards group -- but is simply declared unilaterally, by each company. The deal the companies make with the standards group (to get the group to include their patents in the standard) is that they will license the patents to all comers at Fair, Reasonable And Non-Discriminatory rates (known as FRAND.

As with the decision as to whether a patent is "essential," the determination that the rate offered by the patentholder is "fair" and "reasonable," is made unilaterally and usually secretly.

So, what is really going on between Apple and Nokia in the lawsuit and how might it be resolved?

Personally, I disagree with Jason Schultz, quoted in Ogg's article, that Apple will try to show that Nokia does not own the patents or that the patents are invalid -- proving either is too hard and there are simply too many of them.

I believe that Apple's strategy will be two-fold: (1) To show that the Nokia patents asserted in the lawsuit are not really "essential" to the GSM, 3G or WiFi standards; and (2) to show that the rates demanded by Nokia are neither "fair" nor "reasonable" and that the patents are relatively insignificant to the standards. Under a recent Federal appeals court decision (Lucent v. Gateway), the lower courts are instructed to limit a plaintiff's recovery of damages to the value the patent actually has.

It's obvious that Apple doesn't have as high an opinion of these patents as Nokia does.

Showing that Nokia may not have real confidence in either the value of its patents or its ability to compete with Apple in the marketplace, it is also trying to recover damages for Apple's appropriation of Nokia's market share.

The Lazy Patent Licensee, Lady Duff and Tom Waits -- If You Take a License, You Need to Get Out There and Sell!

The First Circuit came down with an opinion yesterday [Sonoran v. PerkinElmer, if you're keep ing score], which should give pause to companies which may take a patent license with an ongoing royalty obligation.

The Sonoran case involved a sale of Sonoran's "computer to plate printing technology" business to PerkinElmer -- a deal which was made because Sonoran could not make a go of the business on its own. The deal was that PerkinElmer would pay $3.5 million for the company's assets (which was to go to pay off creditors), but would also give the company a cut of the sales of future units which used the technology. There was no "best efforts" clause in the contract and PerkinElmer had no specified duty to sell these units in the future.

As so often happens, PerkinElmer also failed at this venture and, as you might expect, was sued by Sonoran and its shareholders for not using its "best efforts" to promote the sales of machines which used Sonoran's technology. PerkinElmer objected, saying that under the contract, it had no such duty to Sonoran.

The First Circuit disagreed, holding that Massachusetts law (which applied here) applied the so-called "Lady Duff rule" (created by Justice Cardozo in 1917 in the Wood v. Lady Duff Gordon case), cited in the Sonoran case. The court held that, under the "implied covenant of good faith and fair dealing," which, in Massachusetts, is implied in every contract, PerkinElmer had a duty to promote the sale of machines which used Sonoran's technology, even though the written contract imposed no such duty. The First Circuit sent the case back down to the lower court to decide whether PerkinElmer had actually violated that duty.

Thus, it could very well be argued that, under the Lady Duff Rule, a licensee of a patent who had agreed to a running royalty might actually have an implied duty to actually practice that patent -- especially if that license was exclusive.

Does this rule also apply in California? Yes!

The California courts have recognized this same rule in the context of the long-standing California "implied covenant of good faith and fair dealing" rule.

This came up in a case involving the singer Tom Waits. [Third Story Music, Inc. v. Waits 41 Cal.App.4th 798, 48 Cal.Rptr.2d 747 (1995), if you're interested in the cite]. In that case, Waits had evidently sold the rights to some of his music to the plaintiff music company, which had licensed back the right to promote the music to Waits and Warner Bros. Third Story later claimed that Waits and Warner were not promoting the music Third Story owned, preferring to promote Waits' later music (for which Waits and Warner presumably made more money)

The court recognized the Lady Duff rule and held that there was an implied duty on the part of Waits and Warner to promote the music owned by Third Story, but held that that duty had been satisfied by a set royalty the parties had agreed to. The court noted that the royalty was pretty low -- especially for a major recording artist like Waits -- but noted that Third Story had agreed to it and that they really had nothing to complain about.

Presumably, this would also apply to patent licensing agreements , but would be subject to the same constraints as the Waits court imposed -- if you actually agree to accept a certain amount of money, you may not be in a position to complain if it gets paid.

So, lazy patent licensee who thinks that the language of the contract will protect him, remember the words of Tom Waits: "The large print giveth and the small print taketh away."

Boring rich patent troll sues Apple for infringement of digital camera patent -- World (other than Apple) yawns

St. Clair Intellectual Property Consultants (apparently two lawyers who bought a patent covering digital cameras selectively storing pictures in different formats) has now sued Apple, after having sued just about every digital camera manufacturer in the world.

In the troll world these guys are pretty well behaved (they tend to sue in small groups and in Delaware) and have made hundreds of millions of dollars off their original $100K investment.

Red Bend v. Google Chrome -- No Damages?

Matt Asay over at CNet had an interesting idea in terms of the ability of patent plaintiff's ability to collect damages over Google's use of open source software. He opined that under the proposed patent reform act, plaintiffs would be unable to collect damages for patent infringement because, under the proposed legislation, damages would be calculated based on the difference between using the infringing technology and using the next best non-infringing substitute. He theorized that this might be the reason that Google was supporting patent reform.

In my view, however, this same result would occur even under current law. Currently, damages are calculated (or are supposed to be) based on a "hypothetical negotiation" between the patentholder and the infringer. Damages are supposed to be awarded based on what the parties would have licensed the patent for in that negotiation. If, in the Red Bend situation, Google could have replaced the Red Bend compression algorithm with another open source algorithm at no cost (other than the cost of changing the algorithm), it would have paid very little to Red bend to license the patented algorithm -- in fact, in that situation, the patent would be virtually worthless. The damages awarded for the infringement of a worthless patent which is easily worked around are very low -- even under current law.

Thus, if Google does its damages analysis right, it should be able to get out of this case cheaply.

And, if open source software provides lots of low cost or free substitutes, the same should apply across the board.

Second Life: First Enters the Serpent, then the Serpent's Lawyers

Now I must admit that I have not been keeping track of Second Life. I wasn't really interested in having an avatar with a fox head or flying to virtual Obama rallies. And I thought it had really jumped the shark right about the time Dwight Shrute from The Office created a doppelganger avatar because "my life was so great that I literally wanted a second one."

So I thought I'd seen everything.

Until I saw the trademark infringement lawsuit by the Second Life sex toys vendor against Linden Labs (who runs Second Life) for allowing some other Second Life sex toys vendor to "infringe" its brand.

Eros LLC purveyor of the "SexGen" brand of virtual beds, rugs, sofas and, apparently even a coffin for avatars to have virtual sex in or on or under, claims that its customers are being confused by the proliferation of "knockoff" SexGen products which "do not function in the ways they expect SexGen products to function."

Whether or not this case is covered by the DCMA (most people think it is), the concept of trademark and copyright infringement totally within a virtual world is something truly innovative.

But letting lawyers into Second Life -- or any other virtual world, for that matter, is something that should bear a lot of thinking