Tuesday, June 28, 2011

A look at the US Supreme Court's decision in Microsoft v. i4i

In 2009, a Canadian software development company out of Toronto named i4i Inc. won a $290 million law suit against Microsoft for wilfully infringing its patents.  The company developed a new form of document encoding known as XML (Extensible Markup Language). The versatility of the .xml extension lead to its integration into a number of software applications, including Microsoft Office. Microsoft, however, did not license the XML code.   

The Eastern District Court of Texas ruled in favor of i4i stating that a party accused of patent infringement, when asserting the invalidity of a patent, must convince the court of the invalidity by “clear and convincing evidence”.  This is a particularly high burden of proof and one not easily met.  

Photo by Darren Robertson
Microsoft fought the District Court’s interpretation in appeal but the outcome was the same.  Both the Court of Appeals for the Federal Circuit and the United States Supreme Court affirmed the trial judge’s decision and rejected Microsoft’s arguments demanding a lowering of the burden of proof and upheld the trial court’s ruling.

Justice Sotomayor wrote for a unanimous court (8-0 – Justice Thomas concurring. Chief Justice Roberts recused himself because he owns Microsoft stock) in saying that §282 of the American Patent Act of 1952 clearly states that a patent, once issued “shall be presumed valid”.  This places the burden of invalidating the patent on the other party. According to Sotomayor, it has long been settled law that the party alleging invalidity must prove it by clear and convincing evidence.  She cites a 1984 decision rendered by Judge Rich, one of the principal drafters of the 1952 Patent Act, supporting the clear and convincing standard.  In the 30 plus years since the aforementioned decision, the CAFC has never varied their opinion. 

Microsoft’s invalidity defense was twofold: First, they attempted to apply §102(b) of the Act that prohibits the issuing of patents when:

“the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country, more than one year prior to the date of the application for patent in the United States”

This provision, known as the “on-sale bar”, says that a patent that has been used or sold or has been disclosed in a publication more than one year before the patent is applied for is not patentable under the law. Microsoft claimed that the entirety of the XML patent was disclosed in a previously released i4i product called “S4”.  The Court, however, rejected this defence after hearing from two expert witnesses (the two principal inventors of the XML patent).

Microsoft’s second argument relied on the fact that when the XML patent was being examined, the United States Patent and Trademark Office (USPTO) didn’t have the S4 patent to compare it to.   Relying on a recent decision, Microsoft asserted that when it is brought to light that the PTO didn’t have all relevant information during examination, the strength of their examination is greatly diminished.  Microsoft ultimately asserted that this lowered level of deference for the PTO should concordantly lower the standard of proof incumbent on a party alleging invalidity. 

Both of these arguments were utterly rejected by the Supreme Court who said that the “hybrid” burden of proof system Microsoft proposes has no precedent and no founding in law.  

Though the decision in this case turned primarily on statutory interpretation and the intention of Congress in enacting the law, Microsoft tried as hard as possible to make it seem that the issue at hand was the prior disclosure of the patent and the incomplete analysis of the PTO. 

Many IP professionals are skeptical of the value of this decision.  Surely had the ruling gone the other way, this case would be of paramount importance as it would be reversing a 35 year old interpretation that has thus far remained unchallenged.  Though some may question the importance of this decision outright, I am of the belief that the Supreme Court’s verdict affirms at least two points.

First, that the courts still show a high degree of deference towards the USPTO and therefore should continue to exercise judicial restraint in overturning its rulings.

Second, that smaller companies are capable of defeating behemoths like Microsoft when the law is in their favor.  Doubtless Microsoft fielded an expert team of attorneys who managed to conjure up and elucidate arguments that could have overturned a solid precedent.  Add to that the fact that a long list of tech giants such as Facebook, Google, Apple, Verizon etc. rallied behind Microsoft in support and you have a true David v. Goliath victory in favour of the Canadian i4i Inc. 

In my humble opinion, I think this case is most interesting for its rallying cry effect on smaller businesses than its actual implications on the legal framework of the US Patent system. As damaging as a $290 million verdict is, one would posit that if anyone could absorb such a loss it would be a company on the scale and magnitude of Microsoft. Though this decision surely is a blow to the tech giant, I don’t think too many people are (or should be) balling their eyes out for them right now...except Chief Justice Roberts that is...

Monday, June 13, 2011

Inside the Protect IP Act

Early last month, United States Congress introduced a Bill entitled “Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act of 2011”, also known as the “Protect IP Act”.  The stated goal of the legislation is quite simple: to protect the economic interests of American intellectual property owners from theft and piracy online. 

Shortly after the Bill was tabled, Senator Ron Wyden (D-Oregon) exercised his power to put a temporary hold on the Bill.  In his estimation, the Act, as worded would have the undesired effects of limiting free speech and negatively impacting e-commerce. In a press release on the issue Wyden said: 

"At the expense of legitimate commerce, [the bill's] prescription takes an overreaching approach to policing the Internet when a more balanced and targeted approach would be more effective. The collateral damage of this approach is speech, innovation and the very integrity of the Internet."

The senator’s appraisal of the Bill is quite accurate.  As written, the Protect IP Act gives power to the Attorney General as well as private IP rights holders to not only sue owners and operators of American based websites, but to execute what is known as an In Rem action- essentially an action against property without involving the owner- against web sites where the owner is not American or cannot be located.  

Many critics of the Bill including The Electronic Frontier Foundation (EFF) warn that allowing individual IP owners to execute actions In Rem will limit the ability of site owners to defend themselves before a judgement is rendered. EFF points out that this is ostensibly an offence to due process. 

The Bill vests plaintiffs with the powers of restraining orders, preliminary-injunctions and injunctions to enforce their rights against non-domestic domain owners so long as their service is being used by Americans and that the service “harms holders of United States intellectual property rights.”

One of the tools the Protect IP Act would provide rights holders is the ability to prevent what the Bill calls Domain Name System (DNS) servers (such as Internet service providers) from allowing access to infringing web sites.  In other words, access to websites being attacked in a law suit under this law would be restricted at the ISP level. This will obviously put an additional strain on ISP’s; one the government won’t reimburse them for.  
EFF also warns that the definition of DNS in the law is too broad and could easily be interpreted to cover things like personal and corporate e-mail clients, routers and even operating systems.  It should be noted that such interpretations, if ever made, would be left to the courts.  That being said, powerful IP rights holders tend to hire pretty good lawyers.

Two other major groups are affected by the legislation: online financial transaction providers (most notably PayPal) and online advertising services.

E-commerce providers would be forced to cease all payments and transfers of funds being made to or by American customers located in the US upon being presented with an order to do so. Online ad companies would be forced to immediately stop doing business with any site listed in the order. The Bill says this must be done “expeditiously”, once again, at the cost of the service provider.

 I share Senator Wyden’s feelings on the Bill in that even though the cause may be noble, the legislation may produce broad and overarching undesirable effects.

First, the targets of this Act are stated as being entities “dedicated to infringing activities”. Though the U.S  Supreme Court has rendered decisions on the subject (See: Sony Corp. of America v. Universal City Studios, Inc.; A&M Records, Inc. v. Napster, Inc.; MGM Studios, Inc. v. Grokster, Ltd.), the introduction of this law would likely cause a flare up in the debate on what is and what isn’t “dedicated to infringing activities”.

Second, the fact that any IP owner can go and get a judgement In Rem against a website so long as they complete “due diligence” in attempting to identify the domain owner is a little farfetched.  If nothing else, it certain disrupts due process and what most legal systems refer to as Audi Alterem Partem, a principal of fundamental justice essentially meaning the right to plead ones case and make arguments against the other party’s assertions. What if the web site owner is out of the country or otherwise indisposed when the plaintiff is supposedly trying his best to locate them? 

Third, it’s my belief that this Bill may ultimately come to cover not only the use infringing material at the front end or service level of the site (eg. Streaming of pirated TV shows or movies) but the coding level as well. 
For example, a company that owns patents or copyrights on a web player or its supporting software that believes their player is being used by a site would be able to avail themselves to the remedies afforded by the Act.  It wouldn’t technically matter if the content being played on the players is infringing if the alleged use of the player on the website infringes someone’s software patent or copyright.

Finally, and perhaps most importantly to the average American, I fear that the additional economic burden sustained by ISP’s and e-commerce providers may ultimately be transferred onto the backs of consumers.  It would be unreasonable to assume that these corporations, in an act of benevolence, would bear these additional costs that do nothing but subtract from their bottom line.

It remains to be seen if Congress will scrap the Bill, re-tool it or carry on with the Bill in its current form.  Though the US (and Canada for that matter) may require new and up to date legislation that addresses the reality of online pirating, one can only hope that the final product will attempt the achievement of its goals with more finesse than the currently tabled version of the Protect IP Act.

Friday, June 3, 2011

Google being sued for misappropriation of trade secrets and unfair competition after sharking PayPal (EBay) employees

In a complaint filed on May 26th with the Superior Court of California (County of Santa Clara), PayPal brought suit against Google for trade mark misappropriation and unfair competition with reference to their mobile payment systems.  

Image by Idea Go
PayPal is also suing their former VP of Platform, Mobil and New ventures Osama Bedier, and former PayPal Senior VP of North America and Global Production Stephanie Tilenius (both currently with Google) as well as 50 unnamed “John Does” whom PayPal believe to be involved in one way or another with the fraudulent actions that allegedly transpired. 

Though it remains unknown to many, Google actually has its own online payment service- Google Checkout.  Created in 2006, Google Checkout was created as a tool to compete directly with the already popular PayPal service.  

Unfortunately for them it didn’t seem to take off.  The service was not even an item on Google’s 2010 Annual Report (compared with PayPal’s posted earnings of $3.4 billion in the same year).  As a result,
With Google’s Android taking up 30% of the smartphone retail market and the recently evidenced failure of their Checkout service, the company chose to commence negotiations with PayPal to have them engineer and produce the mobile payment solutions for the Android line.

According to the complaint, on October 26th 2010, PayPal and Google had a deal inked and ready to sign- except it never was.  Osama Bedier, through the influence of former PayPal employee (already working for Google) Stephanie Tilenius, left PayPal- while representing the company at the negotiation table- to take a similar position at Google.  Along with him he took all of his knowledge of PayPal’s trade secrets as well as physical information he allegedly e-mailed to a non PayPal e-mail account. 

PayPal also alleges that prior to Bedier’s departure, he was briefed on an analysis undertaken by PayPal of the weaknesses in Google’s system.  As if that weren’t enough, Bedier is also accused of actively recruiting other Google employees after his departure.  He even e-mailed Tilenius before his departure inquiring into the possibility of some PayPal people joining him on “day one” at Google. 

Google has yet to file a defense though they did release a statement saying that:

"Silicon Valley was built on the ability of individuals to use their knowledge and expertise to seek better employment opportunities, an idea recognized by both California law and public policy. We respect trade secrets, and will defend ourselves against these claims."
  PayPal is seeking injunctive relief in order to prevent the further misappropriation of their trade secrets as well as compensatory and punitive damages from Google, Bedier, Tilenius and the “doe’s”. 

Seems the Google strategy of “If you can’t beat them buy them” will have to cede way to PayPal’s “Sue them all (even if we don’t know their names) and let the courts sort them out”.  People seem to have a funny way of doing business in Silicon Valley.