by Lee Gesmer | Jan 12, 2008 | Antitrust, Courts, Patents
When I was a new lawyer, working at Howrey in Washington, D.C, the firm ‘s client, Litton Industries, was sanctioned in the amount of $10 million for discovery misconduct – the failure to produce relevant documents during discovery. But for the sanction, Litton would have been entitled to an award of its costs and attorneys fees in the litigation, which it had won. I suspect, however, that Litton (and Howrey) took this with good graces – Litton had been awarded $277 million in damages. See Litton Systems, Inc. v. AT&T, 91 F.R.D. 574 (S.D. N.Y 1981), aff’d, 700 F.2d 785 (2nd Cir. 1983).
Ironically, the documents in question (which were produced very late but before trial) were ruled inadmissible at trial, and therefore the defendant suffered no prejudice as a result of the late production.
Even though I was not involved in this case while at Howrey, this painful episode for the firm and the lawyers directly involved left a lasting memory upon my young and impressionable mind, and I recalled it as I read about the pickle in which a group of California lawyers have found themselves in the patent case Qualcomm v. Broadcom.
In the Qualcomm case a key issue was whether Qualcomm, which accused Broadcom of patent infringement, had participated in the Joint Video Team (“JVT”), a standards-setting body. Broadcom aggresively sought discovery from Qualcomm on its involvement in JVT, under the theory that had Qualcomm participated in this process, it would have been barred from suing companies which used the Qualcomm technology that was adopted as part of the standard.
Qualcomm denied participation throughout discovery, but Broadcom had a few documents which gave it reason to believe that Qualcomm had participated in JVT. However, while preparing one of their witnesses during trial Qualcomm’s attorneys searched the witnesses’ laptop computer for the first time, and discovered 21 emails that contradicted Qualcomm’s position in the case, but which had not been produced. Even then the Qualcomm lawyers tried to avoid producing these documents (questioning this witness in such a way that she would not disclose their existence), and only on cross-examination of the witness by Broadcom did the truth begin to emerge. To make a long story short, Qualcomm’s case disintegrated during trial, and after trial (which Qualcomm lost), Qualcomm performed a search of its employee’s email archives, only to discover that there were more than 46,000 documents, totalling over 300,000 pages, that Qualcomm had failed to produce.
One can only imagine the feelings of Qualcomm’s outside counsel as this problem was uncovered and the full extent of the problem emerged. At first they tried to coverup the nondisclosure, and when they finally admitted the true facts the lawyers knew that this problem would be pinned on them as well as on their client. Lawyers are responsible, to some extent, for their client’s failure to provide discovery, and the ball and chain fell heavily on Qualcomm’s outside counsel. In fact, the judge found that Qualcomm had intentionally withheld the documents, that this could not have occurred without assistance or deliberate ignorance by its outside attorneys, and that significant sanctions were appropriate. The outside lawyers were hamstrung in their ability to defend their actions, since Qualcomm would not waive the attorney-client privilege.
The judge ordered Qualcomm to pay more than $8.5 million to Broadcom, which amount represented Broadcom’s attorney’s fees and expenses. He also referred several of the Qualcomm lawyers to the California State Bar, for possible sanctions for ethical violations.
What does this case say to lawyers representing clients in the future? In today’s business environment every comany has electronic evidence. In the “old days” a lawyer had only to search her clients’ file cabinets and warehouses to find relevant evidence. In fact, in the Litton/AT&T case discussed above, the hidden evidence was sitting in the desk drawer of an AT&T employee during the entire case. Now, an outside lawyer knows that failing to properly review a client’s electronic files can result not only in financial sanctions against the client, but in serious sanctions against the lawyer as well. This case emphasizes the reality that lawyers must carefully oversee their clients’ electronic discovery, that they cannot rely exclusively on their clients’ assurances, and that they must be alert to any inconsistencies or hints that full production of evidence may not be taking place.
by Lee Gesmer | Nov 15, 2007 | Miscellaneous, Patents
Investments by angel groups have become too complicated. As groups get more aggressive in pursuing profits, and seek more protection against downside risk, their deals have become as complex as venture capital deals. This complexity costs time and money, reducing the benefit to both investors and companies. By streamlining the transaction structure, angel groups could simplify negotiations, shorten the time it takes to do a deal, reduce transaction costs, put more money to work building new companies and ultimately improve their own returns.
Click here to continue reading this article, by my partner Bill Contente, which was published in the November 9, 2007 issue of the Boston Business Journal.
And, as long as I’m shamelessly showing off all the brilliant people I’ve been able to surround myself with, here is an article recently published by my partner Andy Updegrove in the October 26, 2007 issue of Mass High Tech:
How often have you heard it said that “patents foster innovation?” That phrase rings true in pharmaceuticals, where investment requirements are enormous and failure common. But does it also apply in areas such as software? Does it really take the promise of a legal monopoly to motivate a typical founder or CTO to innovate? And what about the advantages patents give big companies over emerging ones, simply because the former can credibly threaten expensive patent litigation while the latter cannot?
Click here to continue reading Measuring the Value of Software Patents Versus Innovation.
by Lee Gesmer | Nov 14, 2007 | Courts, Patents
This quote, attributed to General Phillip Sheridan in 1868, describes how many patent defendants feel about Texas, and particularly Marshall, Texas, which has become a patent litigation black hole, sucking in unwilling defendants from around the nation.
A blog, titled the Patent Troll Tracker, closely follows events in Marshall. Here is an abbreviated excerpt from a recent post concerning patent litigation in Marshall:
This is really the year of the patent troll. Last year, approximately 6,000 defendants were sued nationwide in about 2,800 patent cases. This year, the 6,000th defendant was sued sometime in early October. With the number of cases up nationwide probably 5% over last year, we’re still projected for at least a 30% increase in the number of defendants sued. More on that data in a later post.
Why? It’s because of the numerous multi-defendant patent litigation cases being brought by non-practicing entities and patent trolls in the Eastern District of Texas. . . .
Think about it. When else in our nation’s history have we experienced a 30+% increase in the number of patent claims in one year?
Now think about why we are currently experiencing this extreme uptick in patent litigation. It’s simple: patents, at least in the eyes of the market, are overvalued right now. Damages are being awarded in patent cases without basis in reality, and out of proportion to the actual value of the invention. . . . Settlements are being squeezed by plaintiffs filing primarily in plaintiff-friendly jurisdictions like the Eastern District of Texas, where, despite the efforts of some to paint it to the contrary, the juries typically side with the patentee, and the judges rarely grant summary judgment, and when they do, it’s on the eve of trial. . . .
Do you want more evidence that the Eastern District of Texas is fueling this large increase? Right now, there have been over 1,250 defendants sued in the district through the first 10 months of 2007 . . . . Extrapolating, there will likely be 1,500 defendants sued in the Eastern District of Texas this year. That’s as many as were sued in all of 1990, in the entire United States.
by Lee Gesmer | Oct 15, 2007 | Patents
Patent Law. Patent lawyers and their clients spend a lot of time worrying about willfulnesss. If a patent is infringed and the infringement is “willful,” the consequences can include treble damages and liability for the patent owner’s attorneys fees. The idea of paying the other side’s legal fees can be a terrifying prospect for most patent infringement defendants. Think of it as writing a blank check to your opponent’s lawyers.
To avoid this fate, a lot of time and money is spent before the fact on “clearance opinions”, that is, an opinion of a patent lawyer that a particular item or process does not infringe pending or issued patents. A good opinion (meaning an opinion by competent counsel, who is given all relevant information, and who conducts the analysis in advance of any legal claim or threat) is often viewed as an insurance policy when it comes to wilfullness. After all, if reputable counsel has told you that your product doesn’t infringe a patent, what more could you possibly do to establish that you have not willfully infringed?
Of course, many infringement actions are brought against defendants who have not bothered to obtain such an opinion (either due to cost concerns or ignorance), in which case the risk of willfulness can be a major factor in the risk analysis of the lawsuit.
But just what is “willfulness”? Until just a few years ago, merely failing to obtain a legal opinion gave rise to an inference of willfulness. However, that presumption was eliminated by the Federal Circuit (the specialized appeals court that reviews all patent cases decided by the district courts) in 2004 in the case of Knorr-Bremse Systeme Fuer Nutzfahrzeuge Gmbh v. Dana Corporation.
Most recently, in August 2007, the Federal Circuit went a step farther in its en banc decision in In re Seagate Technology, LLC. In this case the court created a two part test for willfulness:
first, a patent owner must prove “by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. . . . The state of mind of the accused infringer is not relevant to this objective inquiry. And second, the patent owner must prove that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer.”
This presents a tough standard for a plaintiff claiming willful infringement. One might even read it to say that unless the alleged infringer knew of the patent it allegedly infringed, it hasn’t met the standard. Ignorance (at least sincere ignorance, rather than willful ignorance) is bliss. And, this standard is only the most recent move in a trend dating back at least 15 years in which the Federal Circuit has made it increasingly difficult for patent holders to establish willfulness.
The precise application of this “objective” standard will have to be worked out case-by-case by the trial courts and future decisions of the Federal Circuit, but it is clear that the pendulum continues to swing in the direction of safety for infringers in the realm of willfulness, just as it it does in other, more substantive, areas of patent law.
by Lee Gesmer | Oct 19, 2006 | Courts, Patents, Trademark
I’ve been meaning to post some statistics reported by Price Waterhouse Coopers at the MCLE 9th Annual Intellectual Property Conference earlier this year. PWC has done a rigorous study of patent and trademark cases in the Federal District Courts and at the Court of Appeals for the Federal Circuit (CAFC) over the last 25 years. A few highlights and trends:
- In 2005, 4% of patent cases and 1.5% of trademark cases went through trial. (Presumably the balance were resolved via settlement or summary judgment).
- Juries award more damages in patent cases than bench trials. On the other hand, bench trials are more popular in trademark cases.
- The CAFC is a tough court: only 30% of damage awards are affirmed by the CAFC.
- Patent damage awards far exceed trademark damage awards.
- Patent awards’ fastest growth has been in the computer business services and electronics components sectors.
- Reasonable royalties (rather than lost profits) has become the most frequent measure of damages awarded in patent cases. (This may reflect the fact that more plaintiffs are nonpracticing inventors (sometimes referred to as “patent trolls“).
by Lee Gesmer | Sep 21, 2006 | Patents, Technology
Patents. Over the last 20 years the conventional wisdom has been that patents are inimical to software innovation in the U.S. Many prominent software developers and industry luminaries have argued this position.
Here is a link to a paper by Professor Robert Merges of the University of California Law School at Berkeley arguing the contrary view: that software patents have had a negligible impact, if any, on innovation in the industry. Here is the abstract:
In the late 1980s and early 1990s, people in the software industry often said that the coming of patents would spell doom, particularly for small companies. The entry of new firms – the seabed of growth in the industry – would dry up, and only large, bureaucratic and decidedly non-innovative firms would remain. This paper concludes that these predictions were wrong. New firm entry remains robust, despite the presence of patents (and, in some cases, perhaps because of them). Successful incumbent firms have adjusted to the advent of patents by learning to put a reasonable amount of effort into the acquisition of patents and the building of patent portfolios. Patent data on incumbent firms shows that several well-accepted measures of “patent effort” correlate closely with indicators of market success such as revenue and employee growth. Whatever the effect of patents on the software industry, this paper concludes, they have not killed it.
Here is a link to the paper.
by Lee Gesmer | May 16, 2006 | Patents
Patents. “Patent trolls” or “patent litigation firms” — companies which buy patents not to produce a product or service, but solely to enforce them in the courts — must be quaking under their bridges this morning. In yesterday’s decision in eBay v. MercExchange the Supreme Court appears to have bought the anti-troll argument whole hog, giving the federal trial courts the discretion to enjoin a patent infringer, and to include in its decision factors such as whether a patent holder practices the patent, is a self-made inventor or university researcher (factors favoring an injunction) or instead has purchased the patent from the inventor to obtain license fees (a factor disfavoring an injunction).
Before this case there was a more-or-less presumptive rule that a patent owner successful in proving infringement was entitled to stop continued use by the defendant, regardless of the identity of the patent owner. The eBay decision abolishes that rule; instead, the courts have been instructed to apply the traditional four-factor test for permanent injunctions, which weighs various equitable factors.
This decision will make it much more difficult for a patent litigation firm to obtain a permanent injunction against an infringer, especially in cases where the threat of an injunction is used as a holdup device by patent holders who exploit the leverage they have when a patent covers only one component that is part of a multi-component product. As the concurring opinion by Justice Kennedy, Stevens, Souter and Breyer stated:
In cases now arising trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. . . . For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. . . . When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.
Not only do these four justices accept the argument that patent litigation firms may be treated differently from “legitimate” inventors, but they take a swipe at “business method” patents as well:
In addition conjunctive relief may have different consequences for the burgeoning number of patents over business methods, which were not of much economic and legal significance in earlier times. The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test.
The majority opinion, written by Justice Thomas, is careful to urge protection for university researchers and self-made inventors, implicitly distinguishing them from patent litigation firms.
To sum up, patent litigation firms are in a far weaker position to negotiate lucrative settlements based on the threat of an injunction today than they were only 24 hours ago. Unfortunately, the decision comes too late for Research in Motion, the maker of Blackberry cell phones and email devices which, under threat of an injunction, settled a patent infringement case in March for over $600 million. Had the eBay decision arrived ten weeks earlier, RIM almost certainly would have saved a substantial amount of money on that settlement.
The full decision is here [link].
by Lee Gesmer | May 15, 2006 | Patents
In what comes as something of a surprise decision, the Supreme Court today ruled in favor of eBay in eBay v. MercExchange, holding that judges do not have to automatically enjoin companies from using patents that they have been shown to have violated. This decision shifts the balance of power in patent litigation away from patent enforcers in favor of defenders. The decision comes as a surprise because, based on comments by the Justices during oral argument, it appeared that the Justices were leaning in the opposite direction.
A link to the decision is [here].
An article discussing this case that I wrote for the April 28, 2006 issue of the Boston Business Journal while the case was pending is linked [here].
by Lee Gesmer | May 5, 2006 | Patents
Patents. I wrote an article under the above title [link] which was published in the Boston Business Journal on April 28, 2006.
by Lee Gesmer | Mar 31, 2006 | Patents
Patents. Here is a summary of the oral argument before the Supreme Court earlier this week, in the eBay v. MercExchange case, discussed earlier in this blog. [link]
The summary of oral argument (which apparently gave no clear clues to the outcome) is on the excellent SCOTUSblog [link].
UPDATE (April 18, 2006):
Here is a link to the transcript of oral argument before the Supreme Court [link]
The argument contains a humorous exchange between Carter Phillips, counsel for eBay, and Justice Kennedy:
Phillips: [references “patent trolls” in his argument]
Justice Kennedy: Well, is — is the troll the scary thing under the bridge, or is it a fishing technique? I– I want —
(laughter)
by Lee Gesmer | Mar 22, 2006 | Patents
Patents. On Wednesday, March 29, 2006, the Supreme Court of the United States (SCOTUS) will hear oral argument in eBay v. MercExchange. The issue is whether the owner of a patent (in this case MercExchange) has the right to enjoin (or stop) an infringer (eBay) from selling an infringing product or service – in this case eBay’s popular “Buy It Now” (or, to eBay aficionados, “BIN”) purchase feature.
A jury has already found that eBay infringed MercExchange’s patent on this technology, and MercExchange is attempting to invoke the general rule that a successful patent plaintiff can shut down an infringing product, pending appeal. It was just this threat — the threat of a shut down — that led to Research in Motion paying a $612.5 million settlement to NTP in February. eBay is asking SCOTUS to modify the traditional rule and permit it to continue to use this service pending appeal. In patent circles this is a very big deal, and the outcome is expected to be a “landmark case.”
For an interesting discussion of the patent policy issues underlying this dispute see the article by Sam Williams in the MIT Enterprise Technology Review [link].
For a primer on software injunctions, and links to many of the briefs filed in the case, see this article in the “Patently O” patent blog [link].
by Lee Gesmer | Mar 20, 2006 | Antitrust, Patents
Patents, Antitrust. Suppose that you live in a small farming community, Village 1, that relies entirely on its own members for food supplies. I have the only farm that grows corn. Whenever you come to me to purchase corn I tell you that I will only sell you my corn if you also buy a pound of cauliflower for every pound of corn you purchase. Cauliflower is plentiful, and you don’t want to buy my cauliflower (in fact you don’t even like this vegetable), but since you (and your fellow citizens) need corn you have no choice.
Assume that you move to a new community, Village 2. You still need corn, but you discover that there are several purveyors of corn in your new town. You go to the closest of these, and you discover, to your dismay, that this farmer also insists that if you buy his corn, you must also buy his cauliflower. Before purchasing you check around, and learn that the other corn vendors do not require that you purchase cauliflower as a condition to purchasing corn, and you happily proceed to do business only with them in the future. You later learn, to your satisfaction, that the corn farmer that you first encountered in Village 2 has gone out of business.
Thie simple example illustrates one of the more complex and vexing doctrines of U.S. antitrust law, the doctrine of tying arrangements. At its most simple, this intimidating term means that if you want to buy one product from me, you have to buy another that you may not want at all.
In antitrust parlance, corn is the “tying product,” and cauliflower the “tied product.” The product you don’t want (cauliflower) is “tied” to the product you do want (corn).
In Village 1 the corn farmer had what antitrust types call “market power” – in fact, he had a monopoly. If you wanted corn, you had to get it from him, and because he had a monopoly in corn he had the power to force you to buy his cauliflower as well. U.S antitrust law has long held this practice to be illegal per se, meaning there is no legal justification that would excuse it.
In Village 2, the first corn farmer had no market power at all. Because he foolishly insisted that a purchase of corn be accompanied by a purchase of cauliflower, he was soon out of business. In cases where the seller has no market power in the tying product, anitrust law has almost always found that a tying arrangement is permitted. After all, since the purchaser has the option to go to other sellers, how can the seller who lacks market power harm competition?
All of this seems intuitive and makes perfect sense, but lawyers being what they are nothing is ever this simple. What is the market? In the market, what is market power, and how do you measure it? How much is too much? Are there situations where there is a justification for requiring people who want product A to also buy product B (such as safety or cost efficiencies)? Are products A and B so closely related that they aren’t really separate products at all, but actually one product? These questions, to name just a few, have occupied the minds of judges, lawyers and economists for over one hundred years, and have resulted in enough pages of briefs, decisions and legal and economic treatises to reach from here to Pluto (well, not quite, but you get my point).
The most recent twist on the law of tying arrangements is the Supreme Court’s March 1, 2006 decision in Illinois Tool Works v. Independent Ink, Inc.
In this case the Supreme Court considered the question of whether one who holds a patent in Product A (remember, this is the “tying product” – the one you want) should be presumed to have market power simply by virtue of holding that patent. After all, once you obtain a patent you have a government-granted monopoly in products that incorporate the patent, don’t you? How could there be any doubt that the patent holder has market power?
This argument was accepted for over 40 years [link]. However, the prevailing winds at the all-powerful academic institutions and federal agencies (the antitrust division of the U.S. DOJ and Federal Trade Commission) that influence antitrust policy have shifted, and the Supreme Court decided to catch up with current economic thinking and put an end to the “patent-equals-market-power” presumption. In Illinois Tools the Court reversed this 40 year line of precedents, holding that one challenging a tying arrangement must show power in the relevant market, rather than relying on a mere presumption of power based on patent ownership.
Does this decision make good economic sense? In today’s environment, it probably does. Not only are most patents of little or no value, but in a 21st century economy there often are non infringing alternatives to the patented product that serve as substitutes, robbing the patent holder of market power. The Supreme Court has joined the Justice Department and the Federal Trade Commission [link] in concluding that it is implausible to presume that the owner of a patent possesses market power merely by virtue of the patent. However, because patents have become such an important part of the economy, the case is highly significant, and can be expected to have broad application.
