Dec 17 Managing IP & LexisNexis Webinar: Patent trolls & damages

Patent trolls & damages
Speakers:
James Nurton, managing editor, Managing IP (moderator)
Eric E. Bensen, intellectual property author and independent
consultant
Bryan W. Butler, IP Counsel, IBM
Charles R. Macedo, Partner, Amster, Rothstein & Ebenstein

Back to Basics:
Using Existing Law to Constrain “Trolls”
Eric E. Bensen
Author & Consultant, www.ericbensen.com
Of Counsel, Vandenburg & Feliu LLP, NY, www.vanfeliu.com

Overview

1. Introduction
a) “Trolls”: Who are We Talking About?
b) “Trolls”: What Problem Do We Seek to Address?
2. Existing Law & “Trolls”
a) Current State of the Law
b) Supreme Court Precedent – Apportionment
3. Conclusion

Introduction
Who are We Talking About?

1.
2.
3.
4.
5.

Trolls
Non-Practicing Entities
Patent Assertion Entities
Patent Monetization Entities
“Trolls”

Introduction
“Trolls” – What Problem Do We Seek to Address?

Question:
If every patent suit involved: (i) valuable patents (ii) being asserted with a good faith basis
to believe infringement has occurred …
… would we be talking about Trolls?

Introduction

The “Troll Problem”: Excessive number of suits where:
1.
2.
3.

Trivial (or worthless) patents are asserted.
Claims are brought in bad faith.
Both.

Introduction

1.
2.
3.

Suits are brought in bad faith.
Both.

Introduction

1.
2.
3.

Suits are brought in bad faith.
Both.

Why do trivial/worthless patents wreak such havoc on industry?

Introduction

Damages awards are too often out of proportion to the value of the patent:

Key Facts

Reasonable Royalty

Some infringing units sold for as little as $97

$96/unit

i4i Ltd. P’ship v. Microsoft, Corp., 598 F.3d 831, 853 (Fed. Cir. 2009)

“Technology Fee” was $5/unit

$50/unit

Monsanto Co. v. Ralph, 383 F.3d 1374, 1384 (Fed. Cir. 2004)

Anticipated profit was $8.00/unit

$31.80/unit

Golight, Inc. v. Wal-Mart Stores, Inc., 355 F.3d 1327, 1338 (Fed. Cir. 2004)

Competitor sold infringing units for $1,295/unit
Powell v. Home Depot U.S.A., Inc., 663 F.3d 1221, 1228 (Fed. Cir. 2011)

$7,736/unit

Existing Law & “Trolls”
Current State of the Law

Today, there are substantial inconsistencies in patent law. E.g.:
1.

Smallest Saleable Unit:
Is the smallest saleable unit containing the patented feature a proper base for a
royalty award (Laserdynamics) or not (Lucent)?

2.

Total Revenues:
Can a patentee “always” use the the total revenues from a product as royalty base
as long as the rate is low enough (Lucent) or not (Uniloc)?

Current State of the Law

Today, there are substantial inconsistencies in patent law. E.g.:
3.

Arbitrary Profit Splitting:
If the 25% Rule is unacceptable because it require an arbitrary division of profits
(Uniloc), why is the analytical method acceptable (Lucent)?

4.

Profit Requirement:
Must an infringer be left with an anticipated profit (Lindemann, Innovatio*) or not
(Monsanto)?

Illustration

Question: Does it make economic sense to bring suit for infringement of a patent
that claims a trivial feature of a smart phone?
Before the right court or panel:
•
•
•
•

The phone, i.e., “smallest saleable unit,” can be the base for a royalty award.
Total revenues can be presented to the jury.
Expert can advocate an arbitrary split of the profits on the phone.
No infringer profit required.

Supreme Court Precedent - Apportionment

Between 1854 and 1915 the Supreme Court decided more than 30 patent damages
cases: Apportionment was required every time.
Basic Rule:
“The patentee . . . must in every case give evidence tending to separate or apportion
the defendant’s profits and the patentee’s damages between the patented feature
and the unpatented features, and such evidence must be reliable and tangible, and
not conjectural or speculative ….”
Garretson v. Clark, 111 U.S. 120, 121 (1884)


Specific Rules:
1.

Patent Claims an Entire Marketable Article:
No apportionment.
Elizabeth v. Pavement Co., 97 U.S. 126, 141-42 (1878)

2.

Patent Claims an Entire Marketable Article, defendant adds an improvement:
Burden initially on defendant to show that improvement had value.
Westinghouse Elec. & Mfr. Co. v. Wagner Elec. & Mfg. Co., 225 U.S. 604, 617 (1912)

3.

Patent claims an improvement or component:
Burden on patentee to show the value contributed by the claimed invention.
Seymour v. McCormick, 57 U.S. 480, 491 (1854)


Specific Rules – Entire Market Value Rule:
“If the improvement is required to adapt the machine to a particular use, and there is
no other way open to the public of supplying the demand for that use, then it is clear
the infringer has by his infringement secured the advantage of a market he would
not otherwise have had, and that the fruits of this advantage are the entire profits he
has made in that market.”
Manufacturing Co. v. Cowing, 105 U.S. 253, 255-56 (1881)


Specific Rules – Reasonable Royalties:
A reasonable royalty is an approximation of market price for a license to the patent.
“[A]s the patent had been kept a close monopoly, there was no established royalty. In
that situation it was permissible to show the value by proving what would have been a
reasonable royalty, considering the nature of the invention, its utility and advantages,
and the extent of the use involved ”
Dowagiac Mfg. Co. v. Minn. Moline Plow Co., 235 U.S. 641, 648 (1915)
See also Suffolk Co. v. Hayden, 70 U.S. 315, 320 (1866)

(A proper reasonable royalty calculation necessarily satisfies the apportionment
requirement.)


In sum:
1. A patentee’s recovery must be based on the value of the invention.
a) A patentee’s recovery may be based on the value of the entire article only where
the entire market value rule is satisfied.
2. Reasonable royalties:
a) Real world licenses for the patent are the best evidence.
b) Otherwise:



Base = Profit attributable to the invention (the apportioned value)
Royalty = Portion of base that a reasonable licensee would pay for a
license
Rembrandt Social Media, L.P. v. Facebook, Inc., 2013 U.S. Dist. LEXIS 171127, **23-24 (E.D. Va. Dec. 3, 2013)


Question: Does it make economic sense to bring suit for infringement of a patent
that claims a trivial feature of a smart phone?

Smart Phone

Federal Circuit

Supreme Court

Royalty Base:

Phone

Patented Feature

Total Revenues:

Admissible

Not Admissible

Arbitrary Profit Split:

Permitted

Not Permitted

Infringer Expected Profit:

Not Required

Required

Conclusion

Consistent application of existing Supreme Court law:
1.

Would reduce the incentive to sue on trivial patent: Trivial Inventions = Trivial
Recovery

Conclusion

Consistent application of existing Supreme Court law:
1.

Would reduce the incentive to sue on trivial patent: Trivial Inventions = Trivial
Recovery

2.

But, without reducing innovation: Substantial Invention = Substantial Recovery

What are “trolls” and what is wrong with
them?
Charles R. Macedo
Partner
Amster, Rothstein & Ebenstein LLP, www.arelaw.com

What are “trolls” and what is wrong with
them?
• Non practicing entities;
• Asserting patents of dubious
quality and suspect validity;
and
• Extracting nuisance payments
based on high cost of litigation

Is our patent system failing and if so
how?
• Efficiency – Patent Litigation Costs Too Much
Median Cost of Defending Patent Infringement Claims by NPE
Less than $1 million at risk

End of discovery
Inclusive, all costs

$1‐$10 million at risk
$10‐$25 million at risk
More than $25 million at risk
0

1
2
3
Median cost in millions

4

Source: AIPLA Report of the Economic Survey 2013

how?
• Predictability – No one knows what the law is, or will
be
Obviousness – Changed by KSR
Patent Eligibility ‐‐ Bilski, Mayo, Myriad and now Alice
Multi Party Actors – Akamai
…..

how?
• Reliable – Courts and PTABs keep coming up with
different decisions
Courts

PTO

Fresenius:
Jury awarded over $14 million
Federal Circuit affirmed

Fresenius:
Reexam found claims invalid

Versata:
Jury awarded $345 million

Versata:
PTAB found not patent‐eligible

how?
• Acceptable – News media and special interests

• Vermont and Nebraska Attorneys General called in to
action in their respective states because of public
reaction to seemingly inappropriate notice letters.
• Vermont passed legislation including a requirement
that senders of “demand letters” post a bond if it is
likely that the patent assertion is being made in bad
faith
• Etc.

how?
• Fair – Many perceived new AIA Post-Issuance
Proceedings as anti-patent owner

Source: USPTO Presentation

Proposed Anti-Troll Legislation
(HR 3309, the Goodlatte Bill)
•

Heightened pleading requirement - Requiring "detailed specificity" as to
"how the terms in each [asserted] claim … correspond to the functionality
of [each] accused instrumentality."

•

Attorney-fees - will be awarded to a prevailing party. The new provision
would require an award of fees "unless the court finds that the position of
the nonprevailing party . . . was substantially justified or that special
circumstances make an award unjust."

•

Discovery - limited until after a ruling on claim construction.

•

Transparency of Ownership - the patentee in an infringement litigation
must disclose anyone with a financial interest and "ultimate parent entity"
of the patentee.

(HR 3309, the Goodlatte Bill) (cont.)
•

Stay for Customer Suits - customer suits would be stayed so long as the
customer agrees to be bound by the results of that case.

•

IP in Bankruptcy - when a foreign company goes bankrupt, its trustee would
no longer have the power to cancel licenses associated with US patent rights.

•

Shrinking Post-Grant-Review Estoppel- changes estoppel against the
petitioner from "any ground that the petitioner raised or reasonably could have
raised during that post-grant review" to only grounds actually raised.

(Other legislation)
• Manufacturing Innovation in America Act of 2013 (H.R. 2605) Tax
deduction carryover for patent development expenditures where profit is
made years later.
• Patent Abuse Reduction Act of 2013 (S. 1013) (Senators Cornyn and
Grassley) Smaller version of Goodlatte's Innovation Act that would focus on
(1) raising pleading requirements (2) limiting discovery costs (especially preclaim-construction); and (3) awarding attorney fees for the prevailing party.
• End Anonymous Patents Act (H.R. 2024) Requirement that the patent
owner regularly update ownership information in the public record, including
the "ultimate parent entity."
• Patent Litigation and Innovation Act of 2013 (H.R. 2639) Includes many
provisions in parallel to the Goodlatte Innovation Act, but also includes a
"sanction for abusive litigation" with mandatory review of each case by the
court to ensure that no Rule 11(b) violations occurred.

NPE Damages Vulnerability Points
Things to Know to Minimize Damages Exposure

©2013 Bryan W. Butler Esq. – Views presented are mine and are not necessarily those of current or
past employers

2 – Step Approach to Damages Mitigation

 1. Gather the facts
 2. Use the facts to Eliminate or Mitigate Exposure
–
–
–
–
–

Enforceability Period
Damages Base (Indirect Infringement & EMVR)
Geographic Base
Damages Theory
Injunction/ITC

past employers

Use Facts to Categorize the Infringement Theory
Type of
Infringement

Statute

Liability and
Requirements

Classic Scenario

Direct
Infringement

(a) . . .whoever without authority makes,
uses, offers to sell, or sells any patented
invention, within the United States or
imports into the United States any
patented invention during the term of the
patent therefor, infringes the patent.

Strict Liability
No Mens Rea

Infringer performs all
steps of a method or sells
product with all elements

Joint Direct
Infringement

Same 271(a)

Strict Liability

One party contracts
another

Induced
Infringement
(Expect PostAkamai Uptick)

(b) Whoever actively induces infringement
of a patent shall be liable as an infringer.

Knowledge requirement

Infringer sells product
used to perform a method

Contributory
Infringement

(c) Whoever . . .a component of a patented
[thing or method], constituting a material
part of the invention, knowing the same to
be especially made or especially adapted
for use in an infringement of such patent,
and not a staple article or commodity of
commerce suitable for substantial
noninfringing use, . . .

Knowledge Requirement
Materiality Requirement
No Non-Infringing use
Non-commodity

Infringer sells a part
which when combined
directly infringes

past employers

Practice Pointer: Categorize Infringing Acts In
Claim Chart
Claim
Element

Smallest
Salable
Component
Practicing

Performed Performed by
by Alleged Others
Infringer

Performed in
U.S. or outside
U.S.

(Preamble)
“A ______
comprising:
Element 1
Element 2
Element 3 . .
.

past employers

Practice Pointer: Assignment Timeline To Limit
Damage and Unenforceability Periods
Date Range
Assignee / Owner
Products Sold &
Marked?
Licensees?
Standards
Organizations Joined

past employers

Now Use Facts to Mitigate Damages
 Limit the Damages Period
 Limit the damages Base
– Use Surveys to Limit the Indirect Infringement Damages
Base
– Use Smallest Salable Unit Logic to Limit the EMVR
Damages Base
– Exclude non-US Sales

 Invoke “Gatekeeper” against un-supportable
theories
 Challenge injunction / ITC

past employers

Mitigate Exposure by Limiting the Damages Period
 Marking / Notice
– Start
• 35 USC §286 gives: 6 Year reach-back from litigation start
• 35 USC §287 takes away: Marking/Notice requirement for damages recovery
• No duty to mark if method claim being asserted BUT see indirect infringement
– Stop
• Damages period ends with patent expiration (expired patent cannot be infringed)
– NPE Vulnerability points
– Prior owner failure to mark
– Licensee failure to mark
– Indirect infringement starts/stop with direct but mens rea still required

 Standards Bodies / License
– Look for prior owners membership in standards bodies
– Licenses for “necessary patents” burden successive owners

past employers

Mitigate Indirect Infringement Base With
Surveys
 Courts Take Three Approaches
– Inherent Infringement Approach
• Appropriate when infringing devices have no utility other than to operate in a
manner infringing method claims

– Survey Approach
• Use customer survey data to apportion between infringing and non-infringing
applications

– Hypothetical Negotiation Approach (New)
– First appeared in Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1333-1334
(Fed. Cir. 2009)
– Based on Georgia-Pacific “The extent to which the infringer has made use of the invention”

• % infringing would be a factor in hypo negotiation

past employers

Mitigate EMVR Base

Convoyed / collateral Sales
– litigation technique

“Claiming the
Environment”
- drafting
technique

Invention =
Inventive
(Novel/NonObvious)
Element

Entire Market Value
Rule – litigation
technique

© 2009 Bryan Butler

LaserDynamics Mitigates EMVR
 Laserdynamics makes “smallest salable unit” the starting point
– Notes that modern products are composed of many components, some
infringing, some not
– General rule:
• damages calculation for “adequate to compensate” starts with “smallest
salable patent practicing unit”,
– citing Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 283,
287-88 (N.D.N.Y. 2009)
– EMVR is narrow exception to general rule
• Patentee must prove patented feature drives demand
• Goes beyond mere importance of feature – rather “entire value” must be
attributable to infringement
– LaserDynamics, Inc. v. Quanta Computer, Inc., 2012 U.S. App. LEXIS
18441, 31-42 (Fed. Cir. Aug. 30, 2012)
– Laserdynamics may be becoming the new standard test
• Versata Software, Inc. v. SAP Am., Inc., 717 F.3d 1255, 1268 (Fed. Cir.
2013)
• SynQor, Inc. v. Artesyn Technologies, Inc., 709 F.3d 1365, (Fed. Cir.
2013)
past employers

Mitigate Exposure by Limiting the Geographic
Damages Base
 271(f)
• Induced infringement outside U.S. is infringing act
• Requirements
• Is accused infringer “supplying”
• Is what is shipped outside the U.S. a “component”
– Answer: Copying outside U.S. is not “supplying”
• Microsoft v. AT&T
 “Border-straddling infringement”
• One or more claim element is practiced outside U.S. – NPE asserting WW damages
• Result depends on if claim is method or apparatus
• Method claims only infringed if each step of a process is performed in the U.S.
• System claims are infringed if all elements are controlled from within the U.S. (“control
point test”)
– NTP v. RIM

past employers
© 2009 Bryan Butler

Historically GP Factor Applications Lacked Rigour

“After careful
consideration of
the
aforementioned
GP/etc. factors”

I/We Conclude

$$$$$$

past employers

“Gatekeeper” Cases Show Increased Rigour
 Expert testimony excluded under FRE 702 / Daubert for failure to connect GP factors to
conclusion
– “. . . mere reference to the Georgia-Pacific factors, cannot change the sow's ear of rank speculation
into a silk purse of reliable expert opinion.”
–

Bowling v. Hasbro, Inc., 2008 U.S. Dist. LEXIS 30043, (D.R.I. Mar. 17, 2008)

 Expert opinion testimony "must be shown to be based on more than the subjective belief or
unsupported speculation of the expert."
–

Hartford Ins. Co. v. Gen. Elec. Co., 526 F. Supp. 2d 250, 252 (D.R.I. 2007).

 Expert testimony excluded which failed to show “sound economic connection between argued
royalty and value of “claimed invention”
– Cornell University v. Hewlett-Packard Co., 2008 U.S. Dist. LEXIS 41848 (N.D.N.Y May 27, 2008)(Rader, J. sitting by
designation)
– IP Innovation L.L.C. & Tech. Licensing Corp. v. Red Hat, 2010 U.S. Dist. LEXIS 28372, 7-8 (E.D. Tex. Mar. 2,
2010)(Rader, J.)

 Award vacated and remanded for trial court’s failure to document rationale for award in the
record
– “in this case we cannot review the court's methodology because the court did not provide an explanation of
how it arrived at the damages award that it entered. As we have explained, "To enable appellate review, a
district court is obligated to explain the basis for the award."
•

Heeling Sports, Ltd. v. US Furong Int'l, Inc., 2009 U.S. App. LEXIS 7182 (Fed. Cir. Apr. 3, 2009) citing Read
Corp. v. Portec, Inc., 970 F.2d 816, 828 (Fed. Cir. 1992).

 Lucent Award remanded for failure to:

– Present evidence of how/why “comparable” licenses for GP#1 were comparable
– Present evidence showing infringing feature was basis of customer demand for EMVR
• Lucent Technologies, Inc. v. Gateway, Inc. --- F.3d ----, 2009 WL 2902044 Fed. Cir. Sept. 11, 2009

 “25% Rule of Thumb” rejected in Uniloc
 Watch out for mis-applications of Lost Profits theories to Hypothetical Negotiation
– “Accelerated Market Entry” for expired patent

past employers

Mitigate Exposure by Minimizing Injunction & ITC
 Good news on injunctions
– NPE’s Fail 4-Part Equitable Test

 Bad news on ITC, Moving Towards Good

past employers

NPE’s Flocking to ITC Since Coaxial Cable Case

http://www.rpxcorp.com/index.cfm?pageid=14&itemid=20

past employers

ITC Scrutinizing NPE Jurisdiction
 Coaxial Cable case opened the door

 Pendulum swinging away from licensing as domestic industry
– Litigation expenses alone, absent successful licensing activity do not satisfy the
requirement.
• John Mezzalingua Assocs. v. ITC, 660 F.3d 1322, 1324-1325 (Fed. Cir. 2011)

– For licensing to be domestic industry
• First, three threshold factors
–
–
–

Investment in licensing relates to exploitation of asserted patent
Investment relates to licensing
Investment occurs in U.S.

• Next, investment not substantial if:
–
–
–
–

Attenuated nexus to asserted patents
Licensing efforts directed to entire portfolio
No evidence of licensing related to exploiting specific asserted patent
Broad patent portfolio with no congruent fit
> In re Certain Multimedia Display and Navigation Devices Inv. No. 337-TA-694 (2011) (“Pioneer”)

past employers

Conclusion
 NPE’s are here to stay, but do have vulnerabilities
– Damages limitation can reduce ROI
• Damages period
• Damages base

– Injunctions no longer an NPE threat, pendulum swinging
away from ITC

past employers

Dec 17 Managing IP & LexisNexis Webinar: Patent trolls & damages

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