Wednesday, December 30, 2009

Patent Marking Outlaws Watch Out! There's a Qui Tam Plaintiff on Your Trail!

As if there were not enough parties trolling through the patent world looking for infringers, the Federal Circuit gave a big Christmas present to parties searching for companies who have intentionally marked their products with a patent number the product is not entitled to. Under this decision, their reward could run into the millions.

A relatively obscure patent statute, 35 U.S.C. § 292, provides that, where a party marks an unpatented article with a patent number with the intent to deceive the public, “any person” may sue that party to recover a statutory penalty of $500 for “each such offence.” Known as a “qui tam” action, a successful plaintiff must split his recovery with the United States government.

This statute, dating back to the late 1800’s was rarely used, since, for the last century, it was understood that an “offense” was committed when the defendant produced a new model – not every time it sold a product.

On December 28, this all changed and this statute became a whole lot less obscure when the Federal Circuit issued its decision in Forest Group v. Bon Tool Company, which started out as a garden variety patent infringement case.

Forest Group owned the ‘515 patent, which covered an improved spring-loaded stilt of the type used in construction and sued Bon Tool for infringement; Bon Tool counterclaimed for a declaratory judgment of invalidity and for false patent marking. In August 2007, Bon Tool successfully moved for summary judgment of non-infringement and the court then held a bench trial on its false patent marking counterclaims .

The court found that since in another case brought by Forest Group, the court had made a non-infringement summary judgment ruling which made it clear that Forest’s own product was not covered by the ‘515 patent. The fact that Forest subsequently placed an order with its supplier for this same product – marked with the ‘515 patent number – showed to the court’s satisfaction that Forest had falsely marked its products with the intent to deceive the public.

Since Forest was held to violate the statute, the only really important issue was the amount of the penalty. Was it to be $500 for each “decision to mark,” as the district court determined? Or was it to be $500 for each sale of an improperly marked article, as Bon Tool requested?

The Federal Circuit examined the long history of the statute, going back to the 1870 Patent Act (which imposed a $100 penalty) through the 1952 Patent Act, which raised the penalty to $500. It looked at every possible rationale the courts have used to impose penalties under this statute over the years It looked at the public policy of the statute. And came to a decision which will empower a new category of trolls – the bounty hunter.

The Federal Circuit noted that, as early as 1910, the First Circuit had decided that “continuous” false marking under the statute would constitute only one offense on the grounds that “it can hardly have been the intent of Congress that penalties should accumulate as fast as a printing press or stamping machine might operate.” This rationale had been applied, the court noted, by a number of district courts since.

Other district courts, the Federal Circuit noted, had imposed what the court called a “creative” time based approach, imposing a penalty per week or per day.

All of these approaches, however, are contrary to the “plain language” of the statute, the Federal Circuit held, which “clearly requires a per article fine.”

This per article approach, contended the Court, was supported by good public policy. The false marking statute was intended to give the public notice of patent rights – false marking “deters innovation and stifles competition in the marketplace by deterring potential competitors from entering the market. The Court’s rationale for applying the penalty to every article was that “the more articles that are falsely marked the greater the chance that competitors will see the falsely marked articles and be deterred from competing. Applying a $500 fine for continuous marking would not, according to the Court, accomplish this public purpose.

The Court recognized the monster it may have created, noting that this decision would create a new “cottage industry” of false marking “trolls” since, under the statute, anybody can bring a false marking claim, whether they have suffered any damages or not. The Court’s only response was to note, in the face of 100 years of contrary precedent, that “this is what the clear language of the statute allows.”

The Court’s only solution for the problems this new “industry” will cause was to note that the statute does not require that the full $500 be imposed per article, but that a court might well impose a penalty of a fraction of a penalty. Cold comfort, obviously, to a target of such bounty hunter litigation who is faced with a threat of a verdict in the hundreds of millions and who will legitimately feel itself extorted into an excessive settlement.

So what can patent owners do in the face of this ruling? The only real solution is to be vigilant – watch closely for expiring patents and make sure that patent numbers are removed immediately. Watch for ambiguous rulings in patent cases you bring which, like this case, may result in a later determination that you “knew” that your product was not covered by a valid patent and that you “must have” intended to deceive the public.

For the new bounty hunters, looking to be the Boba Fett of the patent world – the only suggestion is “good hunting.”

Thursday, December 03, 2009

Perfect Web -- When a patent is so obvious even a caveman could invalidate it

Now, I don't take very seriously the press that the patent system is "broken" and that the PTO is so overburdened that they'll let you patent a peanut butter sandwich. [Oh, wait, they did.]

But I have a hard time believing that a patent this dumb actually made it all the way to the Federal Circuit.

The plaintiff, Perfect Web, managed to get a patent on a bulk email distribution system which had four steps:

1. Match the target profile with a group of target recipients
2. Send the emails
3. Count the emails that were successfully received
4. If you don't get as many successful hits as you want, send out the emails again.

Remember, this is a patent, which would give Perfect Web the right to stop anyone else from doing this and to sue infringers for damages.

On top of everything else, the first three elements were held to be within the prior art, meaning that the patentability of this "invention" rested solely on the fourth element -- if it doesn't work the first time, try again.

Thank God for Judge Ryskamp of the Southern District of Florida, who threw this patent out on summary judgment. Perfect Web, however, appealed to the Federal Circuit.

The Federal Circuit started out its analysis by invoking the "common sense" standard from the Supreme Court's KSR decision, which makes it unnecessary to cite to particular art which would make a patent obvious if the court finds that "ordinary skill and common sense" would have led a person of ordinary skill to develop the claimed invention. The court found that what it described as the "try, try again" element would have been obvious as a matter of common sense, that performing the first three steps more than once was "one of the inferences and creative steps that a person of ordinary skill would employ" and that no expert testimony was necessary to invalidate this patent.

If you are interested in an excellent analysis of this decision in light of KSR from someone whose perspective is different than mine (but who comes to the same conclusion -- that this patent is dumb) go over to IPWatchdog.

The court also rejected Perfect Web's argument that the patent satisfied a "long felt unmet need" because it could not show that the supposed "need" was "long felt" or that the invention even met that need. Indeed, Perfect Web could not show that the invention actually reduced marketing costs, its supposed purpose.
So, I suppose the Federal Circuit comes through again. But it's a shame they had to waste their time on this one.

TS Tech revisited -- I've got a ticket to ride (out of Marshall)

As patent defendants who have been dragged into EDTex courtrooms against their will well know, the Fifth Circuit's recent decision in TS Tech has changed the landscape dramatically. Although the Eastern District judges are still pretty reluctant to let a patent case go if they think there is a good reason to keep it, even those judges know that cases that (1) have no contact whatever to East Texas and (2) clearly belong someplace else should be transferred -- and they have been.

The Federal Circuit has also taken up the cudgel of transfer and, in the recent case of In re Hoffman-La Roche, gave its views as to the weight that should be given to the convenience of the parties -- something that, in our online age, has been given less weight as of late.

In this case, Novartis, a California company, brought suit in the Eastern District of Texas against Fuzeon, a resident of North Carolina, for infringing its patent through its manufacture and sale (through Hoffman-La Roche) of an HIV inhibitor drug. Fuzeon objected, claiming that there were no witnesses within 100 miles of the Eastern District of Texas and that the key documents were all in North Carolina. Novartis argued that the witnesses were spread our all over the country and that, for some of them, Texas would be more convenient. Novartis had also been careful to move 75,000 pages of documents into its attorneys offices in Texas, so that it could claim that most of the important documents were in the jurisdiction.

Judge Folsom took pity on Novartis, holding that the case was inappropriate for transfer because the case was "decentralized" and that the president of Fuzeon could be compelled to come to Texas for trial.

The Federal Circuit gave pretty short shrift to Judge Folsom's decision, however.

First, in a nod to defendants who are in a fix like Fuzeon's, the Federal Circuit indicated that it would be open to writs of mandamus on transfer issues, noting that it would be an "inadequate remedy" for a party in an inappropriate vene to have to wait for judgment to challenge it.

The court noted several factors which, it held, warranted sending the case to North Carolina: (1) the accused drug was developed and tested in North Carolina; (2) the claim "calls into question to work and reputation" of residents of that district; (3) there are four non-party witnesses who live within 100 miles of that district who could be compelled to attend both deposition and trial; (4) the North Carolina docket was less congested.

Two important points the court raised, which should put parties on notice:
  • Shipping documents into the Eastern District in order to "manufacture" venue is not a good idea. The courts see right through it and it just makes them mad.
  • The fact that you can subpoena the defendant's witness for trial does not give you the "absolute subpoena power" referred to in the Fifth Circuit's Volkswagen case -- to have this power, you need to have the ability to subpoena all material party and non-party witnesses for deposition and trial. This was not the case here.
So, all of you defendants looking for a "ticket to ride" out of the Eastern District, you might consider going to the ticket window in Washington DC, if they are not selling them in Marshall.

Wednesday, December 02, 2009

Patent plaintiffs can win the declaratory judgment forum battle far from home

Normally patent holders like to sue their victims in one of two places -- (1) their home town; or (2) beautiful downtown Marshall or Tyler, Texas. They like to pick their forum for either their own convenience or to benefit from the plaintiff friendly (or so it is thought) wilds of East Texas.

Accused infringers, obviously take the other tack -- if they know they are going to be sued anyway, they will often bring a DJ (declaratory judgment) action in their own home district before they can get sued in a place the plaintiff has picked.

This conflict can often result in quite a battle, but in a recent district court decisions from the Northern District of California, the patentholder was able to successfully move the case out of the defendant's chosen forum by proving that there was simply no jurisdiction over them in that district.

In Smugmug, Inc. v. Virtual Photo Store LLC, 2009 WL 3833969 (N.D. Cal. Nov. 16, 2009), before Judge Wilkin, the plaintiff, a resident of the Northern District, brought a declaratory relief action with respect to the patent owned by the defendant (a resident of Chicago) for digital image management.

In response to the defendant's claim that there was, in fact, no jurisdiction over it in the Northern District, Smugmug claimed that there was general jurisdiction over Virtual Photo in California based on (1) Virtual Photo's solicitation of business in California through its website; and (2) because it was the alter ego of its law firm, which allegedly had contacts in California

Smugmug also claimed that there was specific jurisdiction over Virtual Photo because of its extensive patent licensing program in California -- 20 solicitations and 5 licenses, one of which required the licensee to pay ongoing royalties. Indeed, a substantial portion of the defendant's revenue was earned from these California licensees.

The court rejected these arguments, even given the Federal Circuit's decision in Autogenomics, Inc. v. Oxford Gene Tech Ltd., 566 F.3d 1012 (Fed. Cir. 2009) that enforcement activities related to the patent could subject a patentholder to jurisdiction. The court noted that (1) cease and desist letters, by themselves, cannot subject a patentholder to specific jurisdiction; (2) the letters sent to prospective patent licensees were not even cease and desist letters but, rather, "invitations to license."

Surprisingly (at least to me) the court rejected the plaintiff's argument that the defendant's licenses with California companies and its earning of substantial revenue from these licenses on the very patent which was the subject of the lawsuit would not justify jurisdiction. As the court noted, such non-exclusive licenses constituted "commercialization" of the patents, rather than "enforcement activities," which, according to the court, were not sufficient under Autogenomics to justify jurisdiction.

So if you're a defendant who feels threatened by a patent plaintiff and you want to avoid being either home-towned on the other guy's turf or eating lunch at Porky's Smokehouse in Marshall, make sure you check out where you can actually get jurisdiction over your opponent.

Friday, November 13, 2009

What if Microsoft actually did patent Sudo? Is open source safe from patent lawsuits? Should it be?

The big controversy in the Unix/open source community this week arose from a post on Groklaw opining that Microsoft's "rights elevator" patent was a patent on the well-known and much beloved Unix "Sudo" command, which gives a user temporary "godlike" powers.

The horror in that tight-knit group, who make it their business to distrust anything that somes out of Redmond, was palpable. By the end of the week, some of the concern had faded, with many experts stating that there was nothing to fear -- that Sudo was still safe.

Notably, this this not the first time Microsoft has been accused of trying to monopolize something the open source community believes belongs to all -- See the post "Did Microsoft Just Patent Sudo? -- Holy crap I think they did" from 2007.

However, the controversy itself raises three important questions. (1) What would be the impact on the software industry in general and on the open source software industry in particular if Microsoft was able to successfully patent one of the core functions of Unix? (2) Could the open source community "work around" Microsoft in a way that would prevent a Microsoft lawsuit from gaining any traction? (3) What kind of monetary recovery could Microsoft expect if the patent held up and it could prove infringement?

And what effect might a SCOTUS Bilski decision that weakens software patents have on all this?

Frankly, I think if Microsoft is trying to strangle Linux by these tactics, they need better tactics. The open source community has proven that it can adapt very quickly and easily to virtually any attack. If Microsoft were to truly be able to patent something that was core to Unix, I think that there would be a lot of sturm und drang at the beginning, but that the industry would adapt in fairly short order -- and Microsoft would have just bought itself a bunch of new enemies.

If Microsoft were to start bringing lawsuits against open source vendors based on a patent like this, I think it would have pretty tough sledding. The open source industry -- led by companies like Red Hat and organizations like OIN -- has proven itself very adept at finding devastating prior art and making sure it is published. I believe that Microsoft would regret the day it tried to enforce such a patent, as there would be hundreds devoted to invalidating it.

In terms of any financial recovery -- assuming that the patent survived an invalidity attack and was found infringed -- Microsoft's ability to recover damages for any patent attacking open source software would be severely hampered by the very adaptability of open source. If there was an open source alternative to something like Sudo, even if it was not quite as good, Microsoft's recovery would be very limited since, if an infringer could get around the patent easily by switching to another open source alternative, the "reasonable royalty" for the Microsoft patent would be low.

And if the Bilski decision substantially weakens software patents, something like this "Sudo patent" might be thrown right out the window anyway.

Tuesday, November 10, 2009

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.

Tuesday, November 03, 2009

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.

Sunday, November 01, 2009

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.

Friday, October 30, 2009

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."

Thursday, October 29, 2009

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.

Wednesday, October 28, 2009

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.

Sunday, September 20, 2009

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

Wednesday, September 16, 2009

World of Warcraft's Toughest Battleground -- Marshall Texas?

When it purchased two patents covering data-sharing technology in 2002, PalTalk probably didn't think that it would bring the warriors from Halo to their knees and take on everyone from orcs and wizards to WWII snipers. But that is exactly what is happening in Marshall, Texas.

Paltalk owns patents which, it claims, cover the technology which enables players in massive online games to all see the same environment at the same time -- critical to the user's enjoyment of the battle experience and essential for many of the games, like World of Warcraft and Call of Duty where online players fight in teams.

In 2006, Paltalk decided to take on the biggest of the big boys -- Microsoft -- for its XBox Halo games. After a three year struggle, Microsoft settled mid-trial and took a license to the patents -- giving PalTalk virtually unlimited health points and all the weapons and spells it could possibly use to take on the rest of the online gaming industry.

Now Paltalk has sued virtually everyone else in the marketplace -- from Activision's Call of Duty to Blizzard's World of Warcraft -- on the same patents, hoping that these grizzled fighters will see that PalTalk's got the big stick.

With the smash release of the Beatles version of Rock Band, can the assault on Ringo be far behind?

Tuesday, September 15, 2009

Broadcom v. Emulex: The Jilted Suitor Takes His Revenge

After the busted Broadcom-Emulex hostile takeover of a couple of months ago. Emulex probably thought it had seen the last of this aggressive boyfriend. Emulex had said throughout the takeover process that its prospective business in the fibre channel over ethernet (FCOE) world made it a much more attractive prospect than Broadcom thought it was.

Now, Broadcom apparently thinks that, if Broadcom can't have Emulex, then no one else can, either and has sued Emulex for infringing Broadcom's patents on high speed data and storage networking technology.

According to the Wall Street Journal, both Broadcom and Emulex see FCOE as the "next big thing," but, because of a lack of standards, this technology hasn't taken off yet. Emulex, however, has started to get design wins at some of those big customers, including IBM, that Broadcom would like to get.

How do you slow down Emulex and make it less attractive to the other boys? Sue them and make the other suitors think they may get sued, too.

Broadcom is no stranger to using the courts for competitive ends, so this is undoubtedly the right strategy for them.

And, who knows, Emulex might even see that hanging out with Broadcom isn't so bad, after all

Monday, September 14, 2009

Lucent – Microsoft: The Federal Circuit Finally Takes Control of the Patent Damages Debate

Everyone agrees that the way that juries have been awarding damages in patent damages cases has become just about unworkable. Patentholders complain that they are being shortchanged for the value of their innovation. Defendants argue that the so-called “entire market rule” results in unfair windfalls to plaintiffs. Congress has proposed legislation to solve this problem three times since 2004 – with no success whatever. Parties involved in patent litigation and licensing have been left with virtually no direction from either the courts or Congress as to how patent damages should be awarded.

Someone had to be the grownup. And the Federal Circuit finally stepped in and took control.

In throwing out the $358 million jury award to Lucent, the Federal Circuit not only eviscerated the evidence presented by both sides in support of their respective damages cases, it set forth a common-sense structure for economic analysis which can, and should, be applied in every case and which defuses the pointless political wrangling which has tied up patent reform for years.

The damages dispute here arose from a Lucent patent on a “date picker” feature that Lucent claimed was used in Microsoft Outlook (as well as in other Microsoft programs). For the purpose of the damages analysis, there was no dispute that this feature was actually included in the accused Microsoft software (although the court noted that there was “little, if any, direct evidence of infringement) but there was no showing as to how valuable the feature was to the individual user or how often the feature was used. Indeed, neither party seemed to think this fact was particularly relevant to the damages inquiry.

Instead, each party relied almost exclusively on other licenses between Microsoft and other parties, each arguing that the “hypothetical license” between Lucent and Microsoft determining the reasonable royalty was similar to the ones it had selected. On appeal, Lucent’s task was further complicated by having to justify the jury’s verdict, which was based on a “lump sum: license (i.e., a set amount paid up front no matter how many products were sold) even though, at trial, it had relied on quite different licenses with a “running royalty” (i.e. where the licensee has to pay royalties only on the products it sells).

On appeal, the Federal Circuit more or less threw up its hands and told the parties to start over, noting that the evidence presented by both parties had little or no relationship to the actual economic principles underlying patent damages law. In the process, however, the court set out self-evident economic principles that, hopefully, should guide counsel and the courts – and hopefully silence those in Congress who had hoped to legislate basic economic in the courts.

The Federal Circuit concentrated its analysis on two issues – the use of licenses in determining a reasonable royalty and the viability – and proper use – of the “entire market value rule.”

The court noted that, if a party is going to use a royalty contained in an existing license to show what the parties would have agreed to in the “hypothetical negotiation” setting a reasonable royalty, the actual licenses must be for a technology which bears at least some relationship to the technology involved in the litigation. If the technologies are not comparable, the licenses are of little value in determining what the parties would have agreed to in determining the royalty for the technology involved in the lawsuit.

More importantly, the “real world” licenses must be of the same type as the license on which the reasonable royalty will be based or the parties must provide some basis on which the two types of licenses can be compared.

The court noted that the parties variously presented lump sum licenses to justify running royalty rates and used running royalty licenses to justify lump sum verdicts – all without any explanation of how to “convert” from one to the other, or apparently any indication that any such conversion was even necessary. The court explained, however, that there is no problem with a party presenting various types of license agreements to support its damages case – as long as the party explains the how that license agreement values the technology at issue and how to apply that value to the patent involved in the litigation.

The much more important ruling, however, was on the much-maligned “entire market value rule.” This rule is, on its face, fairly simple – if the patented technology is the sole reason consumers buy a certain product, royalties may be awarded based on sales of the entire product. For example, if I had a patent on technology that made bicycles fly, it would be reasonable to assume that the only reason consumers would buy flying bicycles was because of my patented technology (i.e., the “entire market value” of the product would be my patent).

If, however, I had a patent on a bell that was used on a flying bicycle, damages should be based on the value of that particular component to the consumer. For example, if the bell only enabled the seller to raise his price 1% or only 3% of the consumers bought the product because of the bell, the royalty should be adjusted accordingly.

The problem with the “entire market value rule,” however, has been its misapplication by parties, juries and courts and the misunderstanding of the rule by Congress and many commentators. It is thought by some to be “unfair” for a jury to base its royalty on a percentage of an entire product’s sales where the patent only applies to a small component and it is thought by others to be a “ripoff” of the inventor class to do anything else.

However, the Federal Circuit made the common sense observation that the actual royalty amount is the percentage royalty as applied to the royalty base and that there may be good and proper reasons that the parties may want to use the revenues for an overall product to compute royalties under a license for a patent on a component – such as ease of obtaining revenue figures and ease of auditing.

The issue of “allocation” of the value of a component can be handled, as the court noted, by simply adjusting the royalty percentage to reflect the value of the patented technology. It reflected that, for all of Microsoft’s complaints about the size of the royalty base (the price of the computer vs. the price of Windows), it would have had little issue with the result if the base had been left alone but the royalty percentage was 0.1% instead of 8%.

So, perhaps the controversy over “allocation” can now come to an end and the courts can simply handle awarding damages based on the value of a technology in the economically common sense way suggested by the Federal Circuit.