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Bill in the House Would Make Losing Patent Owners Pay Some Litigation Costs

Reps. Peter DeFazio (D-OR) and Jason Chaffetz (R-UT), have introduced the “Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act.” The bill, if passed, would award attorney’s fees and costs to the winning putative infringer if the judge finds that the patent owner “did not have a reasonable likelihood of succeeding…” The bill is limited to patents related to computer hardware and software.

There are a few things I want to point out. First, despite the statement (reported by arstechnica.com) from Rep. Chaffetz that “A single lawsuit, which may easily cost over $1 million if it goes to trial, can spell the end of a tech startup and the jobs that it could have created,” this bill will likely not affect cases that go to trial. While not congruent with the standard for summary judgement or a Rule 12(b)(6) motion, I don’t think many cases that make it to trial would fit the standard set out in the SHIELD Act.

Second, the bill does not address the situation of an accused infringer who loses a case in which they did not have a reasonable likelihood of succeeding. This puts a disincentive on patent owners, especially small business patent owners (many of whom are technology startups), who would otherwise want to defend their intellectual property. At the same time, it encourages infringers to drag their feet, avoid settlement, and force the patent owner to rack up legal fees even if the infringer has a strong feeling they may lose on summary judgement.

Many technology startups chose to use patents to protect their ideas. Those patents are only useful if they can be enforced and this one-sided legislation will make it harder for small businesses to do so. It may also impact their value to potential suitors who may chose to emulate the technology rather than acquire it.

A better approach would be to impose a “loser pays” system across all patent cases (or even all cases brought in federal court). Whatever is done, it should be done across the board to apply to all technology areas.

As the bill stands, I doubt it will impact the behavior of patent trolls. Defendants will still settle because the mere hope of recovering their defense costs won’t offset the potential downside of not settling. The suits that will be deterred are those brought by innovative startups who now will have to fear paying the accused infringer’s costs should the startup lose. Those costs could break a small company and the fear of paying them will keep small businesses from asserting valid patents.

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Apple v. Samsung: Independent Development is Not a Defense

There has been a lot of coverage of the Apple v. Samsung case going on. I’ve posted on the value of design patents that this litigation highlights. One topic is that of the public release of excluded evidence by Samsung’s lawyers. Some tech blogs have taken issue with the ruling saying Samsung should be able to show evidence that the design was their own idea.

This misses a critical point. Independent development is not a defense to patent infringement. Even if you never saw the design or the patent you are accused of infringing, that will not protect you. This is true even in you came up with the idea first.

Unless an earlier developed design fits into a statutory category of prior art (such as a printed publication, patent, article for sale, etc.) then its existence is irrelevant to validity and infringement. This surprises some people and it is different than other areas of intellectual property law.

For example, trade secret law protects against misappropriation; copyright law protects from copying. In these areas, a defendant can avoid liability by demonstrating independent development. I’m sure the attorney’s for Samsung were well aware of this, and it will be interesting to see what Judge Koh does in response to the public statements and release of evidence that was deemed irrelevant.

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Apple v. Samsung: The Power of Design Patents

Design patents are often maligned as limited in their usefulness. Many clients want to obtain one or more utility patents for their new products but don’t think of the potential power of design patents. In the United States, design patents are used to protect the aesthetic aspects of a product. That may sound narrow or easy for competitors to design around, but that may not always be the case.

Apple’s design patents for the iPhone are an extreme example of the potential power of design patents. It should be noted that nearly 80% of Apple’s damages claim is based on design patent infringement.

Like any other patent, Apple can (and has) also assert infringement in the International Trade Commission. The result of a finding of infringement in the ITC is not damages, but rather an exclusion order that is enforced by customs who prevent the infringing devices from being imported. In the electronics (and many other industries) where production is done offshore, this is a heavy hammer to wield that effectively excludes the infringing products from one of the larges consumer markets in the world.

Because ITC proceedings are streamlined, they are considerably less expensive than litigation. This makes them available to a broader range of patent owners, including smaller companies.

Update —

The Federal Circuit has again held that patent licensing companies can utilize the ITC. There is a requirement that their be potential damage to “domestic industry” and licensing satisfies that requirement.

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In Response to Hyperbole: Apple and the “Andriod Killer” Patent

There has been a lot of discussion of a patent issued to Apple last week. U.S. Patent 8,223,134, issued to Apple on July 17, 2012, and has been called everything from an “Android Killer” to something all other smartphone makers should fear. This patent relates to the the user interface of various iOS devices. However, many people don’t realize how the exclusionary power of a patent is defined. Only the claims, those numbered paragraphs at the end of the patent, define what is protected.

Some have characterized the claims of the ‘134 patent a overly broad, but take a look at the broadest device claim:

A portable multifunction device, comprising:

a touch screen display;

one or more processors;

memory; and

one or more programs,

wherein the one or more programs are stored in the memory and configured to be executed by the one or more processors,

the one or more programs including instructions for: displaying a portion of an electronic document on the touch screen display, wherein the displayed portion of the electronic document has a vertical position in the electronic document;

displaying a vertical bar on top of the displayed portion of the electronic document, the vertical bar displayed proximate to a vertical edge of the displayed portion of the electronic document,

wherein: the vertical bar has a vertical position on top of the displayed portion of the electronic document that corresponds to the vertical position in the electronic document of the displayed portion of the electronic document; and

the vertical bar is not a scroll bar;

detecting a movement of an object in a direction on the displayed portion of the electronic document;

in response to detecting the movement: scrolling the electronic document displayed on the touch screen display in the direction of movement of the object so that a new portion of the electronic document is displayed,

moving the vertical bar to a new vertical position such that the new vertical position corresponds to the vertical position in the electronic document of the displayed new portion of the electronic document, and

maintaining the vertical bar proximate to the vertical edge of the displayed portion of the electronic document; and

in response to a predetermined condition being met, ceasing to display the vertical bar while continuing to display the displayed portion of the electronic document, wherein the displayed portion of the electronic document has a vertical extent that is less than a vertical extent of the electronic document.

The claims are actually fairly narrowly tailored to cover the iPhone and other devices non-scroll bar on list and document displays. The vertical bar must not be a scroll bar; it mus be imposed over the image being displayed; it must change its position as the image is moved vertically by the user (who must be moving the image via natural scrolling); the vertical bar must stop being displayed, i.e., after a preset time with no movement on the screen. All of these conditions must be met by another device’s UI before it can infringe this claim. Omitting any of them will avoid literal infringement.

I realize it’s not as exciting as claiming that the patent will shut down all competition in smartphones, but it won’t.

I personally think this shows the value of patents in this area. What Apple has done with these claims is to provide itself with some protection against direct copying of these features of its UI. Other companies still have a lot of room to develop competing systems and devices, even better ones. These patents help prevent knockoffs from eliminating the incentive to create while still leaving the door open to new competition. In the end, consumers win.

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Reverse Payments in Generic Pharma Litigation Held Presumtively Anti-Competitive

The Third Circuit has held that reverse payments in settlement of Orange Book litigation are presumptively illegal.

Reverse payments in settlements of pharmaceutical patent cases have been controversial for some time. Under the Hatch-Waxman Act, a generic manufacturer can get approval for the generic form of a name-brand drub using a streamlined process that relies on data originally submitted by the name-brand manufacturer. The generic manufacturer makes a certification to the FDA that their product doesn’t infringe the patent claims that supposedly cover the drug either because the patent in invalid or the generic version falls outside the scope of the patent claims. The making of the certification itself is an act of patent infringement that can prompt a lawsuit. These patents are listed in the FDA’s Orange Book and these types of cases are often referred to as “Orange Book litigation.”

The goal of Hatch-Waxman was to streamline the approval process for generic drugs and increase their availability on the market. The generic manufacturer could piggyback on the name-brand’s data and avoid costly studies, and the name-brand could bring an immediate suit to defend its patents without waiting for the generic to enter the market. However, the unique situation this created also lead to a new form of settlement that includes a “reverse payment” to the accused infringer.

Reverse payments are those from the patent holder, to the infringer, made in exchange for the infringer’s agreement to not enter the market. The idea of reverse payments can be unsettling because of the apparent anti-competitive effects. Some view the arrangements as a way for a brand-name manufacturer to keep a lock on the market without having to defend the validity of its patent in court. Logically, the reverse payment would only be made if the expected profits resulting from maintaining its position as the only provider of a drug exceeds the size of the reverse payment.

However, there is a less cynical view of the reverse payment arrangement. Consider a piece of property to which doesn’t have a clean title. For example, a neighbor may claim an easement, or allege adverse possession of a part of the property. The property owner may choose to pay the neighbor (also a putative trespasser) in exchange for the neighbor abandoning its claim to any of the property.

In the case of Orange Book litigation, the patent owner has a piece of property, but its meets and bounds may be in question. The accused infringer may claim the patent is invalid or that their formulation isn’t covered by the claims. This is akin to a cloud on the title. The patent owner has a strong incentive to clean the title by removing the challenges to validity and scope. This can be done through litigation, however, litigation always carries the risk of loss. Settlements, including reverse payment arrangements, can be a reasonable way for the parties to price the risk of litigation.

This doesn’t mean that reverse payments can’t be abused. This is a result of the way Hatch-Waxman excludes third party generic manufactures from the market for the drug to give the first generic an incentive to initiate the process. A patent owner can collude with the generic manufacturer to create a prohibition on third party generic manufactures when the parties both believe the patent to be either invalid or not infringed. However, when such an arrangement should be illegal can be difficult to determine.

Since there is always a risk that a patent will be held invalid or its claims not infringed, the patent owner will always have some concern about it. How certain must the patent owner be that the patent is invalid or not infringed? 50%? 80%? 90%? Should the likelihood of invalidity or non-infringement be measure subjectively from the patent owners perspective, or objectively? At what point would you simply be forced to litigate all of the issues to know if the settlement is legal?

To deal with this, courts have generally applied a “scope of the patent” test. The test looks to see if the agreement extends the exclusive rights of the patent owner beyond what they are entitled to under the patent. Of course, the point of a settlement is to avoid litigating the issues of validity and infringement, and in the review, these are generally assumed.  The result is that no reverse payment arrangements have been found to be antitrust violations under the test.

Enter the Third Circuit. This week in In Re: K-Dur Antitrust Litigation, the court held that reverse payment settlements between a patent holder and generic pharmaceutical manufacturer are presumptively anti-competitive. This presumption can be overcome by showing that either the payment was not for the purpose of delaying market entry by the generic manufacturer or that the agreement offers some pro-competitive benefit.

This analysis is called a “quick-look rule of reason analysis” and is familiar to antitrust scholars and practitioners. However, it could have significant affects on the generic/name-brand dichotomy in the pharmaceutical industry. In any event, this creates a very clear circuit split involving mutually exclusive antitrust tests for reverse payment settlements and sets up an interesting opportunity for the Supreme Court to weigh in on the issue.

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Google Books Copyright Infringement Suit Will Go Forward

…At least for now.  Judge Denny Chin of the U.S. District Court for the Southern District of New York issued an opinion denying Google’s motion to dismiss the suit and granting a motion to certify the class of plaintiffs.  Google had been sued for copyright infringement for making complete, digital copies of books for the Google Books project.  The copyrights are owned by authors and photographers who are members of the Authors Guild and the American Society of Media Photographers.

Google has scanned 12 million books and given digital copies to libraries while making the text available for search on Google Books.

Two previous attempts to settle the case had been unsuccessful when objections from some of the copyright holders and the Justice Department resulted in the court not approving the proposed settlements.  When the settlements fell apart, Google filed a Motion to Dismiss the suit and the plaintiffs filed a Motion for Class Certification.  The two motions are intertwined as Google’s motion attempted to dismiss the case because the associations don’t have standing to sue on behalf of their members, while the associations were trying have the judge approve class action status for “[a]ll persons residing in the United States who hold a United States copyright interest in one or more Books reproduced by Google as part of its Library Project….”  The court dismissed Google’s motion, allowing the associations to remain as plaintiffs, and granted the motion to certify the class.

Two things that are interesting are that this will simplify the case going forward and judge Chin does not appear sympathetic to a “fair use” defense by Google.

The case will be simplified because the associations will be able to act on behalf of their members.  This means the individual association members will not need to directly participate.  The creation of a class action will also simplify things, eventually.  The certification of the class, while opposed by Google, may actually make an eventual settlement easier to administer.  Imagine the letters you’ve received offering to pay you a portion of a class action settlement being sent to the all the copyright holders.

Judge Chin also appears less than sympathetic to a potential “fair use” defense by Google.  To allow the associations to have standing, the participation of the individual members must not be critical.  Google asserted that a “fair use” defense would require each copyright holder to participate to determine if the copying was allowable.  On its face, the argument makes sense because many of the points of analysis of “fair use” require a review of the nature of the copyrighted work. Judge Chin, however, dismissed the argument noting “the sweeping and undiscriminating nature of Google’s unauthorized copying….”

Given that Google is now faced with a plaintiff class including all affected copyright holders in the United States, and a strong indication from Judge Chin that a “fair use” defense is a nonstarter, a new round of settlement negotiations may be around the corner.  Of course, Judge Chin’s opinion can be appealed to the Court of Appeals for the Second Circuit.