ePlus v. Lawson Software -- ResQNet Doesn't Let You Pick and Choose

As the ResQNet decision continues to roll on through the world of patent damages, the scope of how and when to use settlement agreements to calculate a reasonable royalty is becoming, if anything, even more confusing.

In January, Judge Payne of the Eastern District of Virginia was presented with a plaintiff's expert who picked just the settlement licenses he liked as part of his reasonable royalty analysis -- and was confronted with a Daubert motion to exclude all of his testimony.

In this case, the plaintiff's expert had five settlement agreements that had previously been entered into by the plaintiff as part of the data he could use to make a determination under Georgia-Pacific factor 1 -- whether there was an established royalty.

Three of those agreements, with Verian, SciQuest and Perfect Commerce, were entered into shortly after the patent litigation began and were for relatively low amounts. The plaintiff's expert chose not to rely on them.

Instead, the plaintiff's expert relied on two other agreements, one of which (Ariba) was entered into after a jury returned a verdict of infringement and the other (SAP) was reached after a hung jury mistrial. Both of these settlements were for substantial amounts (10-20 times the amount of the other settlements). These were the settlements the plaintiff's expert chose to use, converting these two lump sum amounts to a running royalty.

On the Daubert challenge, the court hammered the plaintiff's expert.

First, the court condemned the plaintiff's choosing only to rely on the high value settlements, while ignoring the low ones -- no reason, the court noted, was given for this picking and choosing of data.

The court also criticized the expert's using the later (post-verdict) settlements at all, since they were entered into well after the date of the hypothetical negotiation. The court also noted that these licensing agreements contained extensive cross-licensing provisions which made them quite different than the hypothetical license being constructed for the litigation.

Finally, the court criticized the use of lump-sum licenses as a basis for determining a "running" reasonable royalty -- especially without a rigorous economic analysis as to how to convert one to the other (which the court found lacking here).

Finding that the plaintiff's damages expert's opinion was without sufficient economic basis, the court excluded it.

Note -- at trial, ePlus later got a verdict of infringement, but -- because its damages expert's testimony had been excluded -- no damages.

Sanofi-Aventis v. Glenmark -- After Uniloc, Where Does an Expert Start the Reasonable Royalty Analysis?

In Uniloc, the Federal Circuit struck down the disfavored 25% "rule of thumb" (which held that, as a "starting place" an expert could start his or her reasonable royalty analysis by presuming that the plaintiff would take 25% of the infringer's profits on the infringing product). This rule had been kicking around for years, surviving almost universal condemnation from the academic community, by sheer inertia, until the Federal Circuit finally put it out of its misery, holding that using it would get a quick Daubert exclusion.

But where is an expert to start the Georgia-Pacific analysis (i.e. a staring point from which the factors could be applied, plus and minus) without walking into the same trap?

In Sanofi, the expert presumed that the parties would have split the profits 50-50 and was met with an objection that this analysis was just as arbitrary as the "25% rule" struck down in Uniloc. The Court noted the problems the Federal Circuit had with the 25% rule: 1) "it fails to account for the unique relationship between the patent and the accused product," 2) "it fails to account for the unique relationship between the parties," and 3) "the rule is essentially arbitrary and does not fit within the model of the hypothetical negotiation within which it is based."

In this case, however, the court noted that the expert had relied on game theory to come up with his 50-50 split and that he had considered "the facts of the case, specifically the relationship between the parties and their relative bargaining power, the relationship between the patent and the accused product, the standard profit margins in the industry, and the presumed validity of the patent."

Thus, even after Uniloc, an expert can pick a "starting point" for his or her reasonable royalty analysis, but must be careful to have a rational, economically sound, basis for it.

LaserDynamics v. Quanta -- Limits to Grain Processing's Non-Infringing Alternative

In this case, LaserDynamics sued Quanta for infringing a patent for automatically determining the type os disk being used in a optical disk drive.

In the first trial, LaserDynamics received a verdict of $52 million, but could not hold on to it. Quanta filed and won a remittitur motion after which the court gave LaserDynamics a choice -- take $6.2 million or a new damages trial. LaserDynamics took the new trial.

In the new trial, Quanta's damages expert argued that the reasonable royalty would be relatively modest because Quanta had available to it an "acceptable non-infringing alternative," which would consequently have lowered the amount it would have licensed the patent for. The issue for the Court was whether the alternative was "available" to Quanta at the time of infringement under the Federal Circuit's decision in Grain Processing [which, although originally only applicable to lost profits analyses, has been used as part of a reasonable royalty analysis]

The LaserDynamics Court applied the Grain Processing test -- (1) could the defendant have readily obtained all of the material needed to implement the non-infringing alternative; (2) was the non-infringing alternative well known in the field at the time of infringement; and (3) did the defendant had all of the necessary equipment, know-how, and experience to use the non-infringing alternative.

The Court found that Quanta's expert had not shown that (1) the purported alternative was even on the market; or (2) even if it was on the Market, Quanta could have used it. The Court therefore excluded all of Quanta's damages expert's opinions to the extent they relied on an "acceptable non-infinging alternative" analysis.

Lear Automotive v. Johnson Controls -- Live or Die by the Survey?

Although the Federal Circuit has stated repeatedly that surveys -- when done properly -- can provide valuable evidence for patent damages analysis, litigants must be careful of how they use them, lest their opponents turn the tables on them.

In Lear Automotive v. Johnson Controls, the patent involved garage door openers and the programming of such units -- the issue being whether users programmed one or two buttons (the latter infringing, while the former did not).

Johnson Controls' damages expert relied on a survey provided him by the company which polled customers as to how they used the allegedly infringing units. He opined, based on that survey, that the infringing use was not very popular with consumers and that, in the hypothetical negotiation, JCI would have only agreed to a "modest" royalty rate.

Lear, however, had a quite different problem. To show direct infringement (which would support its claim for inducement against JCI) it had to show that at least one consumer used the allegedly infringing item in an infringing manner -- programming more than one button. however, it had no direct evidence than any consumer had done so. Thus, it turned to JCI's survey, arguing that this survey, which showed that a modest percentage of users programmed more than one button, nevertheless satisfied its burden, at least circumstantially, that one user employed this feature.

JCI was put in the position of arguing that the very evident it had submitted and on which its expert relied was inadmissible hearsay and was too unreliable to support Lear's claim of infringement. The court disagreed, finding that the survey data was admissible under the "adoption by use" doctrine and allowed Lear to use the survey to prove infringement.

So, although surveys can be useful for a defendant trying to show that a patent is not valuable, that defendant needs to look over his shoulder to make sure it can't be turned against him.

The Continuing Saga of ResQNet -- How Discoverable are Patent Settlement Negotiations?

Since the Federal Circuit's decision in ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), holding that "litigation based" settlement agreements were at least potentially relevant to the determination of a reasonable royalty, there has been a substantial amount of controversy in the district courts as to how to apply it, or whether the issue could even be ignored altogether.

Since ResQNet represented a stark reversal of decades of authority holding that licenses entered into as settlement of actual or threatened litigation were somehow so "tainted" that they could not be used in any way in determining a reasonable royalty, there has been an understandable resistance to suddenly allowing parties to use these agreements at trial -- especially where sensitive settlement negotiations may be revealed. Indeed, defendants have started asking for -- any in some cases receiving -- discovery of settlement negotiations between plaintiffs in their own cases involving the very patents they were sued on.

This issue arose recently in two decisions by Magistrate Ashman of the Northern District of Illinois in MSTG, INC. v. AT&T Mobility LLC.

MSTG is what could broadly be described as a "patent troll" in the sense that it makes no products and its income is derived solely from licensing its patents (which are products of the research arm of the South Korean government). In discovery, it produced licenses for three of the patents-in-suit. AT&T, however, requested that it also produce documents relating to the settlement negotiations for those licenses. Judge Ashman held, however, that although ReQNet made the license agreements themselves relevant, AT&T had failed to show that ResQNet required the disclosure.

Now here's where it gets interesting.

Not to be dissuaded, AT&T moved for reconsideration -- and won.

AT&T's argument was that, because MSTG's expert stated that the prior license agreements should not be used as part of the hypothetical negotiation analysis because the rate was too heavily discounted, the actual settlement negotiations which led up to that agreement were relevant because they might show why the parties agreed on that rate. The court agreed.

This decision makes it clear that any settlement negotiations may be subject to discovery and that and plaintiffs in multi-defendant cases need to be extremely careful that their negotiations do not come back to bite them later, since they may not be able to hide behind carefully crafted agreements.

MasterObjects sues Google and Amazon on Instant Search Patent -- If It's Instant, What Took You So Long?

This week, a Netherlands company called MasterObjects (not a troll -- they actually appear to have a product) finally got around to suing Amazon.com and Google for infringing their patent on "instant search" -- the function which annoyingly "guesses" what your search is going to be while you are still typing it in.

It's no big surprise that companies go after Google and Amazon for patent infringement -- they're big targets that can well afford to pay for that license you wanted. What's surprising is that they didn't choose to go after Apple and eBay, who also employ the same function (as the Techcrunch article on teh subject pointed out). They also waited almost nine months since their patent issued to bring suit. And, when they did sue, they filed in the Northern District of California -- instead of the fashionable Eastern District of Texas.

I'm sure that this delay is mostly explained by (finally) busted license negotiations, but you wouldn't think it would take almost a year to figure out that Amazon and Google aren't handing out bags of gold and they aren't very afraid of your threats of injunction.

Or maybe the Dutch are just too polite to play smashmouth patent litigation with the rest of us. Join the party, boys -- dutch treat!

Why Is the WSJ Being So Fair to Patent Marking Bounty Hunters? And How Did They Know What Qui Tam Means?

I'll answer the second question first -- the WSJ Law Blog author, Ashby Jones, is a fellow University of Michigan law grad and therefore is awesomely smart and knows his latin.

The first question is more interesting. Plaintiffs have increasingly taken advantage of the Federal Circuit's 2009 decision in Forest Group v. Bon Tool, which changed the law to make the $500 penalty for false patent marking apply to each falsely marked product sold (a recovery which is split 50/50 with the government). As the WSJ notes, such suits have, in fact, "picked up steam." And such suits would, in fact, be a big threat to the banking industry if the case referenced in the article actually gets anywhere.

However, I thought, given the danger to the WSJ's prime readership, there would have been more coverage of the efforts to cut these cases down to size. In addition to the legislative effort he mentions, the present Congress' attempt to pass "patent reform" (a bipartisan effort that has, nonetheless failed in the last three Congresses) would give standing to bring a false marking case only to those who have suffered a "competitive injury" by the false marking -- i.e., nobody.

Given there is really no special interest other than a few law firms interested in the viability of false marking cases, I think this provision would have a more than decent shot at passage. So Ashby, throw us a line over here!

Kodak Loses its ITC Action Against Apple and RIM -- Having a Bad "Kodak Moment"

Kodak, who has been surviving on its IP portfolio since the film business crashed and burned (Paul Simon, where are your product placement songs now?) suffered a big loss today as an administrative law judge at the International Trade Commission held that the patent it had asserted against Apple and RIM -- for previewing a low-resolution image -- was held invalid and not infringed. Although the same patent had been upheld by a different ALJ in Kodak's previous ITC action against LG and Samsung, enabling Kodak to reach agreements totaling $864 million, the market certainly recognized, driving Kodak stock down almost 9% that, even when you've got 1000 digital camera patents, that IP litigation for profit is a risky business.

Gradient Enterprises v. Skype: The Geek's Revenge?

Last week was a bad week for Skype, it's true. A full day outage caused angry worldwide anguish ("What do you mean, my free international telephone system isn't working!?!?"). And they were sued for patent infringement by a company no one ever heard of by the name of Gradient Enterprises.

Although Gradient suffered the standard condemnation by the usual suspects (TechCrunch, who labelled it an "obnoxious troll," I'm looking at you), the truth is a lot more obscure than that.

The first clue is the venue -- the Northern District of New York. Doesn't this troll know that the epicenter of the patent world is Marshall Texas?

The second clue is its almost complete lack of any presence online. Even tiny trolls can be found with a little digging.

The truth appears to be that Gradient appears to be the creation of the inventor of the patent, Kristeps Johnson, a proud resident of Rochester, NY, where the complaint was filed. He appears to be a talented computer engineer, known for developing something known as Sysjail, which enables computer processes to be put in "jail" so that they can only access part of the file system.

So, it may be true that Mr. Johnson is seeking to hold up Skype for millions of dollars for infringing what looks to be a pretty broad patent, but an "obnoxious troll" he is not.

Infoblox figures out how to skin a Bluecat

On Monday, one of the largest companies in the network infrastructure field, Infoblox, sued one of its smaller competitors, Bluecat Networks .for infringing its "Domain Name Service Server" patent. Evidently, Bluecat has been competing with Infoblox in the IP address management system field in a way that Infoblox found threatening. Infoblox was ready and wasted no time in bringing this suit -- the patent was only issued in October.

The rise of the non-profit troll -- Excelsior!

Now, anyone who's been around patent litigation for even a few years gets used to Marshall, Texas being the center of the universe (check out Bodacious Bar B Que -- you'll thank me) and get's used to patent trolls from all over California setting up a shell company in Longview or Tyler to sue a bunch of Taiwanese and Korean electronics companies on another WiFi or smartphone patent. That's old hat these days.

But I must admit that the two cases brought the other day by a troll called Azure Networks against Nokia, H-P and the usual suspects surprised me. Named as a co-plaintiff (and, evidently the owner of the patent) is the non-profit Tri-County Excelsior Foundation, described as a "supporting organization" to a very worthy charity -- CASA of Harrison County (which helps abused kids). I don't know whether this is part of Azure's owner's tax planning strategy, a fundraising mechanism for CASA or both, but I did find this pretty unusual.

China comes to Tennessee to attack California spas

In what has to be one of the odder patent lawsuits (or at least the one with the most exotic name) filed in the District of Tennessee, Zhongshan Rising Dragon Trading Company has sued Jacuzzi, the famous spa manufacturer, for infringing its patent (for which it is the exclusive licensee) for a jet barrel for a spa jet.

Although you certainly wouldn't know it from the name, Zhongshan (a Chinese spa manufacturer) is engaging in blatant "hometowning" -- with its US warehouse located in Sweetwater, Tennessee. Here's hoping that the Chinese pick up a little US litigation culture and learn that, sometimes the best way to break into a market is to sue your competitors.

But, by the way guys, if you're going to do business in Tennessee, you might think of renaming your US subsidiary "Bob's Screaming Eagle" instead. Just sayin'.

Battle of the Golf Bags-- Party at Club Glove!

Today, two of the titans of golf bag manufacturing -- West Coast Trends (maker of the "Club Glove Last Bag," evidently used by most professional golfers) and Ogio International (who makes golf bags which, according to the company's website, can be strapped to a motorcyclist's back) -- have faced off in the Eastern District of Texas in a patent infringement lawsuit brought by West Coast. The patent, obtained in 2003 by West Coast's founder Jeffrey Herold, apparently enables to bag to resist wear, while still remaining flexible.

In a real departure for the Eastern District, the plaintiff is actually a company that makes and sells a product covered by its patent who has sued a competitor (and every retailer who sells its products) for the purpose of obtaining a competitive advantage by (a) holding a (supposedly) broad patent and (b) suing its competitor for infringement. Since around here, this is what we think patents are for -- we applaud you, Club Glove!

Apple's "Sexting" Patent: Parental Protection or Tool of Tyranny?

Apple has gotten a lot of publicity over the last few days for a patent which many have applauded as supposedly enabling parents to prevent "sexting" by their children. This patent, US. Patent No 7,814,163 enables a user to "control the content of text-based messages sent to or from an administered device." In some embodiments, a message will be blocked if it contains "forbidden content" and in other embodiments the "objectionable content" will simply be removed.

Although Apple sells this technology in the patent by promoting the embodiments which allow parental control of a smartphone or which enable parents to help their children learn Spanish, John Dvorak, writing in PC Magazine, points out the darker side of this patent - the real potential for this technology to be used as a tool of political oppression.

Although one can certainly see this technology being used in a business setting -- with companies using their "administrator" privileges to block or censor text messages and emails -- this is at least understandable. If you don't want your emails censored, don't use your company's BlackBerry. A company may very well have a valid business reason for censoring communications on company-owned devices -- from combatting corporate espionage to preventing an HR disaster from "sexting" by adults who should know better.

However, once a country like Iran, China or Saudi Arabia decides that it wants to use a "super-administrator" privilege to simply block all political communications it does not like, this just becomes another way for such authoritarian regimes to shut down one of the few ways insurgents have to get their word out. As Dvorak notes, in many such countries, enabling "administrator control" by the government will quickly become a condition for selling these mobile devices at all.

What is tragic here, of course, is that this represents yet another surrender by a company who wants to be thought of as "cool" to the tyrants of the world just to make a buck [see, of course Google's capitulation to China]. In this case, Apple is not just knuckling under to pressure it is inventing a tool for governments to silence dissent. But, just look at the market for iPhones!

To bring it home, if this technology were widely available today, would you be able to text the phrase "Liu Xiaobo" in China? I think you know the answer to that one.

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!