Patent Trolls: Cultivating A Growing Distaste Among Attorneys General In The U.S.

The term “patent troll” is nothing new. Patent trolls (also referred to as “patent assertion entities” (PAEs) or “non-practicing entities” (NPEs)) are patent holders that generate revenue by sending demand letters to claimed infringers in an attempt to produce licensing opportunities. In order to be considered a patent troll the entity must not actually practice the patent themselves, instead relying on the threat of litigation as a revenue stream. 

 

Image by Stuart Miles

Much has been made of patent trolls and their practices. An article recently published on JDSupra detailed several individual efforts undertaken by legal officials in a number of American states to curb the practices of patent trolls within their respective jurisdictions. To give a few examples:

•        In New York, Attorney General Eric Shneiderman investigated MPHJ Technology, an alleged patent troll. The investigation concluded with a settlement under which MPHJ agreed do desist from hundreds of threatened law suits against businesses in that state. Known as the “scanner troll”, MPJH claimed a patent on a process for scanning and emailing electronic documents. It sent demand letters asking businesses for $1,000 per employee to avoid having suit filed against them for patent infringement. The Attorney General of Vermont, Bill Sorrell has also taken up against MPHJ.
•        The Oregon State Senate introduced a bill that would amend the State’s Unlawful Trade Practice Act to allow individuals to sue supposed patent trolls for sending a demand letter without identifying the patents at issue or how it was infringed.
•          In early 2014, The Wisconsin State Legislature passed a bill that actually makes sending a demand letter a crime in certain instances. The bill requires that any demand letter relating to the assertion of patent rights must contain the patent’s registration number and a copy of the patent itself as well as the legal theory under which the complaining party asserts that the responding party infringed. The Law also prohibits a demand letter from containing “false, misleading, or deceptive information.” It enables the Attorney General to seek injunctions against alleged trolls and fine them up to “$50,000 for each violation or three times the aggregate amount of actual damages and costs and attorney fees awarded by the court, whichever is greater.”

These are but a few examples of actions taken by legislators and attorneys general in the U.S. against alleged patent trolls. The Wisconsin law is particularly ferocious, notwithstanding the fact that “misleading” and “deceptive” mean exactly the same thing. 

In addition to individual state efforts, the National Association of Attorneys General (NAAG) sent a letter to the U.S. Senate in February 2014 signed by 42 state attorneys general calling for a bi-partisan legislative amendment to the patent law aimed at addressing patent trolls. The only States that did not participate were California, Delaware, Georgia, Montana, North Dakota, Ohio, Oklahoma, South Dakota, and West Virginia.

In a 2006 case styled Ebay Inc. v. MercExchange, L.L.C., the U.S. Supreme Court had to decide whether injunctions should issue as a matter of course in patent infringement law suits. The Court found this not to be the case. Overturning the Court of Appeals for the Federal Circuit’s (CAFC) ruling that “the general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances”, the Supreme Court held 8-0 (Justice Alito did not participate) that because the injunction is an equitable remedy, the legal test for obtaining one and the equitable factors apply. 

This is relevant because the Plaintiff at trial, MercExchange, was an alleged patent troll. The District Court for the Fourth Circuit ruled that MercExchange was not entitled to an injunction because it does not practice the patent. The CAFC overturned. Without endorsing the District Court’s reasons, the Supreme Court disabused us of the notion that injunctions should issue (almost) as a matter of course- a point I incidentally found myself squarely on the other side of when I argued for exactly that interpretation in a Canadian IP moot completion in 2012. 

One of the concurrences in that case penned by Justice Kennedy (joined by Souter, Breyer and Stevens) pointed out that granting injunctions in cases where a non-practicing entity sues a company engaging in commerce may run counter to the public interest. They noted that often money damages are more fitting. If that is the case, the injunction is inappropriate as it should only be granted when there is no sufficient remedy at law. 

It will be interesting to see if the U.S. Congress acts on the recommendations of the NAAG. There has been no sign of movement on this matter and no indication that there will be any in the near future. As noted above, however, individual states are not waiting for the Federal government to join the party.

Gotta Catch ‘Em All: Nintendo Pulls The Plug On 3D Printed Pokémon Planters

Claudia Ng is obviously a big fan of Pokémon. So much so that she decided to design 3D printed planters in the shape of her “personal favourite starter Pokémon”, Bulbasaur. She posted and offered these ceramic planters for sale on Shapeways, an online marketplace for 3D printed items. According to a GameZone post, the original Shapeways page featuring the planters was pulled when the website got a takedown request from Nintendo saying that the planters infringed its copyright. Much like YouTube and Facebook, Shapeways has a copyright content policy and takedown procedure (outlined here) which allows copyright holders to address these issues quickly and effectively.

 

The adorable side of copyright infringement

According to Ms. Ng, Nintendo asked that the page be taken down and for all monies generated from products already shipped by Shapeways. It is unclear whether Nintendo will pursue any formal copyright infringement proceedings against Ms. Ng or the Shapeways website. Its recourse against the latter may be significantly curtailed depending on the forum of a potential suit. This is because many countries, including the U.S. and Canada, have enacted provisions in their respective copyright laws limiting the liability of internet intermediaries or ISPs.

3D printing technology promises to hold many challenges to IP rights holders. These challenges will extend beyond the copyright space to touch patents and trademarks as well. On the bright side, rights holders should be encouraged by Shapeways’ response to this claim and hope that other players in the 3D printing market follow suit. 

From the perspective of someone looking to create and sell content on these sites, takedown policies will always be a looming nuisance. There will invariably be frivolous claims and false claims of infringement made out of malice. It may sometimes prove difficult (and costly) to discern legitimate from illegitimate copyright claims. One need only look at YouTube’s copyright policy to get a notion of the major machinery involved in implementing a fair copyright takedown system.

 Google has developed a highly advanced ContentID system whereby rights holders may submit reference files to YouTube of their copyright protected audio and audiovisual works. YouTube compares all videos uploaded to its service to the content stored in this reference database to weed out infringing uploads. YouTube has created a manual copyright claim process for those uploads that are missed by this system. Instead of each claim resulting in an automatic takedown, the policy allows for a time period during which the uploader may make a “counter-claim”. The original claimant may also withdraw an erroneous claim during this period. 

Google has the funds and manpower to do this; smaller websites may not. Since national laws, such as the ISP safe harbour provisions in the American DMCA, often require that qualifying ISPs have a robust takedown procedure, websites like Shapeways are more likely to favour caution and adopt a policy of “when in doubt, take it down”. The hope is that this reality does not have a chilling effect on the productivity enabled by the exciting new technology that is 3D printing and the innovative services growing around it.

US Supreme Court Affirms Burden Of Proof Always On Patentee, Even When Another Party Asks For Declaratory Judgement Of Non-infringement

On January 22, 2014, the US Supreme Court issued a ruling in Medtronic Inc. v. Mirowski Family Ventures LLC sure to garner the interest of the US patent bar. A unanimous Court found that the burden of proving infringement of a patent lies with the patentee; even when the latter is a defendant in a declaratory judgement action for non-infringement initiated by another party. 

The Petitioner Medtronic designs and manufactures medical devices. The Respondent Mirowski owns certain patents relating to “implantable heart stimulators”. The Petitioner and Respondent entered into a license agreement by which the Petitioner would have the right to practice the Respondent’s patents in exchange for royalty payments. 

Image by Stuart Miles

The license contained provisions under which the Respondent could challenge whether certain products manufactured by the Petitioner embodied the patent. The Respondent did make such a challenge; the Petitioner disagreed. 

Upon the breakdown of negotiations, the Petitioner brought an action for declaratory judgement in the Federal District Court in Delaware, asking the Court to declare the disputed products as not infringing the Respondent’s patents. The Trial Judge granted the motion placing the burden of proving infringement on the Patentee, the Defendant in that proceeding. 

This holding was reversed on appeal by Court of Appeal for the Federal Circuit following its own reasoning in MedImmune, Inc.v. Genentech, Inc., 549 U. S. 118, 129. In that case, the CAFC found that specifically in the case of a license, when a licensee brings a claim under the Declaratory Judgement Act, it has the burden of proving non-infringement. 

Writing for a unanimous Court, Justice Breyer reversed the CAFC, agreeing with the Trial Judge that the burden of proving infringement should lie with the patentee in these circumstances. The Court’s ruling in this case effectively overturns the CAFC’s holding in MedImmune. 

The burden of proof in a regular infringement action lies with the patentee. Justice Breyer found that it would be consistent for that burden to remain with the patentee even when they are not responsible for initiating proceedings. 

The declaratory judgement mechanism is a procedural one. The Court made clear that the substantive law, including which party has the burden of proof and persuasion, should remain unchanged from a full-length proceeding. 

Justice Breyer pointed out another potential (and more practical) issue with forcing the Petitioner to prove non-infringement. He gives the following example:

Suppose the evidence is inconclusive, and an alleged infringer loses his declaratory judgment action because he failed to prove noninfringement [sic]. The alleged infringer, or others, might continue to engage in the same allegedly infringing behavior, leaving it to the patentee to bring an infringement action. If the burden shifts, the patentee might lose that action because, the evidence being inconclusive, he failed to prove infringement.

Justice Breyer therefore found that in addition to there being no legal reason to shift the burden away from the patentee, it is also in the best interest of the administration of justice to maintain consistency across long and short-form infringement proceedings. 

In oral argument back in November of 2013, Justice Kennedy asked counsel for the Petitioner, Mr. Seth P. Waxman, if his argument required that a claim of infringement be made by the licensor in the first place (as was the case here). The Court chose not to address this in its judgement. 

It would appear, however, that since Federal Courts do not have jurisdiction to hear hypothetical cases (See Muskrat v. United States, 219 U.S. 346,362 (1911)) the action would likely have been thrown out for want of jurisdiction. Article III of the US Constitution restricts the Federal Courts to hearing “cases and controversies”. The Petitioner would therefore likely have been precluded from seeking an advisory opinion had the Respondent not made allegations of infringement in the first place.

USTR disapproves of ITC decision on Apple import ban

Bellow is an excerpt from an article I published on the Canadian Intellectual Property Blog (CIPB) regarding the USTR's overturning an ITC decision to prohibit Apple Inc. from importing its phones and tablets that infringe a Samsung Electronics Co. Patent.

On June 4^th, 2013, the International Trade Commission (ITC) issued a ruling prohibiting Apple Inc. (Apple) from importing its iPhone 3G, iPhone 3Gs, iPhone 4, iPad and iPad 2 because they infringe a patent owned by Samsung Electronics Co. (Samsung). On August 3^rd, the United States Trade Representative (USTR), in a rare interventionist move, disapproved of the ITC’s ruling allowing Apple to continue its importation of the infringing products. 

Under § 1337 of the Tariff Act, the ITC may issue an exclusion order (injunctive type relief) against an entity that imports a patent infringing product. In deciding whether to grant the exclusion order, the ITC must consider the effects of the order on US trade and commerce. If the ITC believes that the public interest would not be best served by the issuance of the exclusion order, it has the discretion to refuse it. 

Samsung’s patent is what is known as a “standard-essential patent” (SEP). These patents cover inventions that must be incorporated into a given device if they are to meet some applicable technical standard. SEPs have the potential to give vertically integrated patent holders an advantage over their competitors whom, for all intents and purposes must license the technology from them. 

Please find the full article here

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...

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.