Microsoft's Strategic Alliance in the Smartphone Wars

Preparing for the entry of Windows 7 Phone into the marketplace next week, Microsoft showed that it is more interested in protecting itself from the plethora of lawsuits in the smartphone market than taking an ideological stand against patent trolls. Microsoft this week licensed from a subsidiary of noted NPE Acacia Research a portfolio of patents which included smartphone patents from Palm and Palmsource.

Now, what does this mean for the smartphone wars? It may mean that the players may find it more useful to form strategic alliances with third parties who can help them. We may see more patent trolls making their money by licensing before suing rather than after.

Laserdynamics v. Quanta -- The Continuing Slow Death of the Entire Market Value Rule

Last September in Lucent v. Gateway, the Federal Circuit finally took control of the law of patent damages by, with one hand, upholding the entire market value rule and, with the other hand, killing it. Former Chief Judge Michel made it clear that, before the courts were going to allow damages for infringement of a patent covering a small component or feature of a larger product to be based on the revenues for the sale of the entire product, the plaintiff had to prove that the patented technology was the reason that customers bought the product in the first place, i.e. that the "entire market value" of the product was the patented technology.

The Lucent decision has had a pretty good run since last September -- although it has mainly come up in decisions where new Chief Judge Rader has taken the district court bench.

However, last week, Judge Ward of the normally plaintiff-friendly Eastern District of Texas applied the new strict standard to cut Laserdynamics' $52 million award down to a mere $6 million.

In this case, the patent covered an optical disk reading method enabling a computer to identify an inserted disk and find the appropriate software to read or play it. The plaintiff’s expert testified the royalty should be 6% on stand-alone disk drives ($1.69/disk drive) and 2% on assembled computers containing the disk drive ($17.20/computer), using the entire market value rule. The jury’s verdict of $52 million was based on this analysis

Judge Ward held that the application of the entire market value rule was improper and ruled that the price of the finished computer should not be included in the verdict. He held that Laserdynamics had presented no evidence that its patented method drove the demand for QCI’s finished computers and noted that “the claimed invention embodied in the disc-drive is but one relatively small component of the entire assembled computer."

Ward further observed that “there is nothing in the record that shows the demand for QCI’s assembled computers was in any way driven by LaserDynamics’ disc-discrimination method patent” and that LaserDynamics “did not carry its evidentiary burden of proving that anyone purchased [the assembled computer] because of the patented method.”

Indeed, LaserDynamics pointed to no evidence that Quanta sold more of the assembled computers because it included drives practicing LaserDynamics’ patent.

So, if your patent covers the bell on the bicycle instead of the bicycle itself and you can't show that customers are streaming into the shop asking for your special bell, don't think you will get any sympathy from the bench. Because if a plaintiff can't cut a break in EDTex, it isn't going to happen anywhere.

Dow "Bags" a $62M Verdict From Nova Chemicals -- But Will it Hold Up on Appeal?

Dow Chemicals convinced a Delaware jury today to award it $61.7 million in damages in its patent infringement lawsuit against rival Nova Chemicals in a lawsuit which involved Dow's patents for super-strong thin-film plastics used in grocery bags.

As readers here know, I applaud any damages award in patent infringement cases between competitors. In fact, $57.5 million of the award was for profits Dow claimed it lost because of Nova's sales of competing plastic products.

However, there is some reason to think that the Dow lost profits award may not hold up on appeal -- or even on a challenge in the District Court.

In order to obtain an award of lost profits, a plaintiff must satisfy the so-called Panduit test -- which requires the plaintiff to prove that there were no non-infringing alternatives to the infringing product. The theory behind this requirement is that, to be awarded lost profits, a plaintiff must show that, if the infringer's customer did not buy the infringing product, it would have bought the plaintiff's product instead -- thus, the infringement caused the sale to be "lost." [If the "alternative" is also infringing -- even if sold by another company -- it does not "count"]

According to Nova, in presenting its damages case, Dow did not properly consider the existence of alternatives to the infringing Nova product which Nova's customers could have selected. Dow's own expert, in fact, conceded that Exxon made a non-infringing alternative and that, in fact Nova also sold an alternative product which Dow admitted did not infringe.

Dow also based its claim that it would have captured 80% of Nova's sales of its infringing product, not on rigorous market research, but on the testimony of "enthusiastic" Dow salesmen -- not the kind of solid economic data the Federal Circuit demands.

It remains to be seen whether the economic testimony supporting this verdict will hold up at the Federal Circuit or whether the District Court itself may strike down the award.

Though Dow seems to think it has this verdict in the bag, it might want to check for holes in the bottom.

Marketing and Enforcing Your Intellectual Property – An Inventor’s Manifesto

It is truthfully said that a piece of property, whether tangible or intangible, is only worth what someone will pay for it. However, if potential customers do not know the piece of property exists or how good it is, or how they can use it to their best advantage, the piece of property is still worthless.

Likewise, if a piece of property can be stolen or misappropriated by anyone without payment to the owner, that property is equally worthless – no one will pay for something they can get for free, without fear that anyone will pursue them for payment.

This principle is as true for patents and other forms of intellectual property as for a piece of land or a car – perhaps even more so. An inventor might have the best idea in the world and think that, as a result the world will come to his door with bags of gold for the right to use his invention, but as he will quickly discover, until he markets his invention – just like any other product – no one will pay him for his fantastic invention. And, until he decides to enforce his patent rights, the world will rip him off with impunity.

Far too many inventors spend years developing their inventions and thousands of dollars applying for patents without aggressively pursuing the next step – marketing their invention like they were selling a product. Far too many patent owners look helplessly on while large companies use their inventions without paying the “reasonable royalty” the U.S. Congress mandates.

The only solution is for inventors, the companies and universities that employ them to take action to ensure that their rights are fully protected and theat they get all the compensation they are entitled to for their invention.

Accordingly, I propose the following principles for this inventor manifesto:

1. Every invention must be protected from those who would steal it.

It is the job of the inventor and his employer to make sure that every available form of intellectual property protection is employed to ensure that no one uses the invention without payment. If you don’t know how to protect your invention – whether it’s a patent, trade secret or copyright – find out and get it done. If it was worth putting the time into developing, it’s worth spending the money to protect.

2. Every invention must be marketed like Apple

If no one knows about your great idea, no one will buy it or license it – simple as that. If the invention is not being used exclusively to support the inventor’s company monopoly in its product, it is the job of the inventor or his company to find the very best home for that invention -- someone who can utilize that idea for the greatest possible product. Being shy about promoting yourself or your great idea betrays the hard work you put into developing this idea in the first place and deprives the marketplace of the use of your great idea. Steve Jobs isn’t shy about finding the best possible market for Apple’s innovations – you should have the same enthusiasm for yours.

3. Intellectual property rights must be decisively enforced

Intellectual property rights – particularly patent rights – give the owner a monopoly on their use. However, those rights are worthless if they are not enforced. You may need to hire a lawyer to inform those who are using your patent that they are in violation of your sole rights and that they must “cease and desist” immediately. You may need to sue these infringers to protect your rights in your invention. You must be prepared to do this – and do it firmly and decisively – if you take your invention seriously and are willing to stick up for your rights in that invention.

Infringers and their flacks in the media will call you a “patent troll” and claim that you are “abusing the system” by asserting your legal right to stop infringers from stealing your invention and to be compensated for their infringement. Ignore them. These epithets should be reserved for those companies who scoop up other people’s patents for the sole purpose of bringing a lawsuit – people who have contributed nothing to the economy. The true innovators should proudly assert their patent rights against those who would appropriate them without compensation.

Patent owners who are not willing to let their years of work go to waste and be freely appropriated by their competitors and other sharks in the marketplace must sign on to and dedicate themselves to following this manifesto.

Hasbro v. Buzz Bee: Nerf Wars and Super-Soaker Nausicaans

In a patent litigation development that I applaud, Hasbro sued two of its competitors -- Buzz Bee Toys and Lanyard Toys -- for what appears to be flat out copying of its Nerf-N-Strike and Super Soaker products. Whatever the merits of the patent claims, I have to look kindly on a competitor using its patents the way they were intended to be used -- to exclude a competitor from a market that the patent holder has legitimately monopolized. Hasbro is actually using its patents to protect its very profitable market segment and is punishing companies who are competing without expending the time and effort necessary to develop their own products.

Is Hasbro being a bully by using its patents to beat up on its smaller rivals? I don't think so. If you believe that patents have any economic worth, their primary utility is to enable a company to protect its competitive place in the market and that the damages caused by the infringement of a patent by a competitor are competitive injuries. This is how we know how much a patent is really worth -- by how much infringement of that patent harms the competitive position of the patentholder. It is this kind of patent lawsuit -- between competitors -- which validates the patent system in the first place. If a patentholder cannot use its patent to maintain the competitive position it gained by its patented innovation in the first place, I do not see much point in the patent system at all.

So, bravo, Hasbro -- just don't put these weapons into the wrong hands!

Microsoft vs. Salesforce.com: Troll, Alley Thug or Patent Warrior?

Microsoft doesn't sue people very often for patent infringement -- at least not unless someone else sues them first.

Thus, it was quite an event when Microsoft chose to honor Salesforce.com with a patent lawsuit this week. Although the complaint alleges infringement of nine patents from to , what is really going on is that Microsoft has decided to use the hammer of patent litigation to achieve competitive ends, rather than simply throwing its weight around in the marketplace.

Although a lot of press on this case chooses not to focus on the particular patents involved and to concentrate on the particular market segment Microsoft is attempting to muscle into [customer relationship management] and noting that this shows that Microsoft is serious about something called "Dynamics, CRM and cloud computing" [a really good article on this subject is available here and here], this post chooses to focus on neither.

What is kind of exciting is that Microsoft has chosen, at long last, to actually use its patents to compete in the marketplace. Apparently Salesforce.com and Microsoft are hot competitors in the CRM marketplace and Microsoft is using this lawsuit to boost its presence in this market, to show that its product is innovative (and that Salesforce's is not). Microsoft is also using this lawsuit to create doubt in the marketplace about Salesforce's product and perhaps give Salesforce's customers pause before they deal with the company. Microsoft is using this lawsuit to trumpet its competitive position in the CRM and cloud computing marketplace and to show everyone else that it means business.

Not surprisingly, Salesforce.com's stock immediately dropped 5%.

Now, why is this a good thing? Maybe not a good thing for Salesforce.com (who knows whether they are infringing Microsoft's patents or not), but for the patent world? To answer this question, we have to look at what has happened to patent litigation lately

It is no mystery that in the past few years, patent litigation has largely been taken over by patent trolls -- companies that make no products and whose only economic interest in the patents they own is to sue. They create nothing and are nothing but an economic drain -- rewarding nobody other than the lawyers who litigate their case and the hotel and restaurant owners of Marshall and Tyler, Texas. These patents have no economic utility and are employed for no useful purpose.

Microsoft, whatever you may think of its competitive tactics, is actually using the patents it is suing on and is actually competing in the marketplace with the party it is suing. In doing so, it is using the patents for their proper purpose -- to exclude others from practicing the patented technology -- rather than simply to extort a license which no one really wants.

Salesforce.com's CEO, Mark Benioff, obviously also in a fighting mood, called Microsoft a "patent troll" and an "alley thug" for bringing this lawsuit. Whether or not you think that Microsoft is a "thug," (I think you'd get a lot of Microsoft's vanquished competitors to sign on to that description) there is no question that it is not a patent troll -- since Microsoft -- unlike the trolls, actually participates in the marketplace with its technology and uses its patents as a competitive weapon. For this, Microsoft should be congratulated.

So, three cheers for Microsoft -- patent warrior!

Turn Your Intellectual Property Into a Competitive Weapon

“When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully." – Samuel Johnson

The meltdown in the financial markets, the drying up of credit and the scarcity of investment capital makes it paramount that companies, particularly in the technology sector, “concentrate their minds” on immediately deploying their most valuable assets – their intellectual property.

A technology company’s patent and trade secret portfolio is the image that the company has of itself. These technological assets are what make their products prized in the marketplace. They are the product of millions of dollars and years of work spent on research and development. They are the most valuable assets the company has – and they are right at hand.

A technology company executive must ask him or herself -- How much is my patent portfolio worth? Have the R&D expenses and the lawyers’ fees been worth the investment? Can I get some competitive advantage – or, even better, some cold, hard cash, for my patents -- or are they just going to decorate the walls of the company headquarters?

Any rational businessperson will ask these questions -- and one more: How can I make the most money possible from my patent portfolio, whether through licensing or, if necessary, a lawsuit? Here are some suggestions of ways a company can maximize the value of its intellectual property portfolio and the return on that investment:

• Concentrate on features your competitors need Contrary to what many think, a patent does not give the inventor “ownership” of an idea – just the right to exclude others from using the invention. The value of a patent, then, is what someone will pay to not be prevented from using the patent. The damages a patent infringer will be required to pay is directly related to how much that infringer needs that patent to stay in business. Thus, if you choose to wield your critical patent against your competitors, make sure that they know that you could easily shut them down and make them pay well for any license. The latest court decisions make it clear that the risk an infringer runs from using your patent is directly related to the value that patent has to that infringer.
• Focus on features that are virtually impossible to design around A corollary to the first rule is to make it difficult, if not impossible, for an infringer to “design around” your patent. If a competitor can easily and cheaply gain the same competitive advantage by tweaking your invention in a way that does not infringe, your patent is virtually worthless. Make sure your engineers and patent attorneys anticipate these loopholes.
• Make your patent part of a standard Making sure your patent is part of an industry standard is, obviously, easier said than done. However, the effect of the inclusion of your patent in such a standard can be a goldmine, as anyone who wants to practice the standard has to license your patent or else be barred from the market altogether. If possible, establish your own standard (Blu-ray, for example). Be careful, however, about properly disclosing your patents or “pooling” your patents with others who may be part of the standard -- the FTC has been known to cast a very dim eye on such practices.
• Make a possible injunction devastating Many economists have decried the effect of “patent holdup” – where a patent is given a value far in excess of its intrinsic worth because of the threat of an injunction. If you can bar your competitors from selling their products because of your patent on one specific feature that cannot be removed or avoided, the amount you can demand for a license (or as damages in a lawsuit) can skyrocket.
• Act like a troll Although so-called “patent trolls” have gotten a lot of bad publicity, especially in the technology sector, you may notice that many of them are quite successful in exacting quite substantial monetary returns from their patents. They pursue a profit-maximizing strategy which includes identification of vulnerable, profitable targets, relentless pursuit of those targets for possible licensing and a willingness to sue whenever necessary to exert maximum pressure. Indeed, if you actually use your patent in your product, you are in an even more powerful position than a troll. Although the courts have recently made it harder for companies who do not practice the patents they assert to get an injunction, an infringer’s competitor, on the other hand, has very little trouble obtaining this devastating relief from the court.

For the next few years, your company may be in survival mode. It may need to use whatever tools it has at its disposal to bring in cash and disrupt the activities of its rivals. Your IP portfolio – assets you have already paid for – may be the best and most effective weapon you have to weather the storm.

So, Why Doesn't Conan Own Pimpbot 5000?

In the war between Conan O'Brien and NBC, the real orphans may not be Conan, his staff or even the viewers -- but may be an innocent bear, a dog and a robot, who may never have a home.

NBC is apparantly taking a hard line as to the characters created by Conan and his writers over the years and may try to prevent him from taking those characters to another show. Whether or not this is a good idea [what's NBC going to do with these puppets after he's gone -- give them to Brian Willliams?], how can NBC do this? Aren't these characters Conan's property if he and his production company created them?

Apparantly, this represents a failure of drafting of Conan's initial contract. Since the shows were broadcast on NBC, unless Conan had specifically reserved the right to ownership of these characters, they would revert to NBC on Conan's departure. The fate of Triumph the Insult Comic Dog, who was originated by writer Robert Smigel, is less clear.

This is not the first time such has dispute has arisen because of a departing NBC host, however.

In 1993, NBC attorneys tried to prevent David Letterman from taking intellectual property originated on "Late Night" to CBS. Letterman solved the problem by simply renaming bits "Viewer Mail" became "CBS Mailbag" and Larry "Bud" Melman began referring to himself by his real name, Calvert DeForest.

So this dispute may end up with an embarrassing bear in some NBC exec's closet or Conan may have to pay to bail him out.

However, it works out, it shows that you've got to read that contract carefully before you sign it!

Patent Owners Can Use Recent Patent Damages Allocation Rulings to Maximize Their Return

Most of the efforts to “reform” the patent damages laws in the past few years have been designed to reduce the recovery patent owners can receive. The courts and Congress seem to believe that patentholders are engaged in a game in which they somehow trick juries into giving them much more than their patent is worth.

The present stick these reformers are using to reduce plaintiff’s damages awards is “damages allocation” and their strategy is to eviscerate what is known as the “entire market value rule.” This question boils down to one issue: how should infringement damages be awarded when a patent only covers a component of a larger product?

Many patentholders, in the press and before Congress, argue that there should be no such limits, arguing that, otherwise, the patentholder is not being properly compensated.

I believe, however, that this view is not politically viable, either in the courts or the Congress and will eventually lead to even more draconian measures being taken to reduce damage awards and the risk to technology companies.

However, the courts may have solved the allocation “problem” in a way which benefits patent owners by enabling them to receive full value for the value of the patent to each individual infringer and maximize a patentholder’s leverage in negotiations with prospective licensees.

The issue can be demonstrated by an example from the software industry.

Say you are a small software developer who has invented (and patented) a word processing program feature that enables the user to change the color of the font on a selected passage with just a keystroke, rather than laboriously highlighting the text and using the menu.

In Microsoft’s last version of Word, the company implemented this feature, along with 1200 other changes, some of which were intended to provide new functions to the user and others that, behind the scenes, made the software work more efficiently.

Assume further that the latest version of Word is held to infringe this patent and that the product sold 300 million copies with a retail price was $100.

What is the most equitable way of awarding damages in this situation that fully compensates the inventor for the value of his invention and still makes economic sense?

Clearly, the best way would be to determine the “value” of the patented feature to Microsoft and its customers. The more valuable Microsoft would have considered the feature to be to the users of Word, the more Microsoft would have paid the patentholder to be permitted to use it.

The parties could have determined the value (or the popularity) of this feature in a number of ways. They could have looked at Microsoft’s advertising and marketing literature to see if Microsoft highlighted the “color changing” feature as a way of selling its product. They could look at reviews of the product to see if the press thought that the feature was valuable or would be popular with consumers. They could commission consumer surveys to determine the importance Word customers gave to this feature and whether the presence or absence of this feature made any difference to their buying decision or to the price they would have paid to buy the product.

If including the patented feature increased Microsoft’s profits on Word by 2%, there would be a solid basis to argue that Microsoft would have paid a royalty representing half of those profits to the patentholder. Such a result would be equitable, sensible and would make complete economic sense.

Nobody does this.

Nobody.

This year, however the courts took a big step in solving the allocation problem in two cases – one involving Cornell University’s case against H-P and the other pitting Lucent against Microsoft.

The patent in the Cornell case claimed technology that covered an “instruction reorder buffer,” which was part of a computer processor, which , in turn, was part of a CPU module that, combined with other components, became a “CPU brick.” Sets of CPU bricks were , in turn, incorporated into a “cell board,” which was then inserted into H-P’s server.

Judge Rader, future Chief Judge of the Federal Circuit, sitting by designation, became frustrated with Cornell’s insistence that damages be based on the price of the server when Cornell made no effort to show how valuable the buffer was to H-P or its consumers or any reason why Cornell should be able to collect damages on the entire H-P product instead of the component alone. Judge Rader threw out the expert’s testimony and, on his own, based Cornell’s damages award on the “hypothetical revenues” of the processor – a speculative figure, given that the processor had never been sold alone.

Thus, Cornell’s initial $900 million damages claim was reduced to $54 million.

The Lucent v. Gateway case presented allocation issues even more severe than those in the Cornell case. The patent covered a method for entering information into fields without using a keyboard. The "date-picker" calendar tool in Microsoft Outlook was held to infringe this patent and Lucent was awarded $357 million in damages.

In striking down the award, the Federal Circuit court set a theme that provides the rationale for the entire opinion on damages – the critical importance of consumer choice and the consequent value of the patented technology to the parties to the license agreement.

Most important was Judge Michel’s discussion of the entire market value rule. Like Judge Rader in Cornell, Judge Michel took particular offense at the results-oriented testimony of Lucent’s damages expert. Initially, Lucent had taken the position that the proper royalty base for Outlook’s date-picking feature was the entire price of the computer in which it was installed -- $1000 on average – employing a royalty rate of 1%.

Once that royalty base was struck down, Lucent’s damages expert changed his focus, testifying that the proper royalty base was, instead, the market value of Outlook, but increased the royalty rate to 8%, unsurprisingly, reaching exactly the same total royalty amount he had come up with in the first place.

To Judge Michel’s obvious irritation, Lucent’s expert could not provide any economic justification for choosing the larger royalty base, the smaller royalty base or either royalty rate. He could not explain the importance of the date-picking feature to Microsoft or its customers or even its importance to the functioning of Outlook .

The court put the focus of the reasonable royalty analysis where it should be – on the actual value of the patented feature to Microsoft and its customers and how often they use that feature. As the court made clear, “the damages award ought to be correlated, in some respect, to the extent the infringing method is used by consumers.”

Judge Michel, instead, applied an economically realistic approach that could actually be employed by courts and juries. He noted that, in the real world of licensing, the parties do not lock themselves into preconceived notions of what royalty rates “ought to be” and then construct complicated scenarios to calculate hypothetical revenues for the patented feature to determine the proper royalty vase to apply this royalty rate to.

Instead, they just take the royalty base for which figures are most easily obtained and which are easiest to verify – the revenues for the “entire commercial embodiment” -- and simply adjust the royalty rate to reflect the actual value of the patented feature. As the court noted, “sophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price. There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.”

How does this help patent owners who are trying to get a fair return from an infringer?

When attempting to license his patent every patentholder must focus on is the value of his patent to each individual licensee. He must not only “sell” the value of his patent to that target, but must develop a convincing case that, because of this particular target’s use of the patent owner’s particular technology that the licensee is particularly at risk. The patent owner must do its research and determine how the prospective licensee actually uses its technology and the extent to which consumer demand is based on this use.

In sum, every patent owner, when licensing its patent or suing an infringer, must make sure that when damages are “allocated,” those damages are allocated to the patent owner’s technology. In that way, patent holders can use the Cornell and Lucent opinions to make sure that they receive the highest possible return for their technology.

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.”

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.

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.

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.

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.