Recently Costco Wholesale prevailed, once again, in its ongoing copyright litigation with Omega. After the United States Supreme Court deadlocked on whether the first sale doctrine authorized the reselling of lawfully purchased products abroad by Costco the case returned to the Eastern District of California for further proceedings. On November 9, 2011, Costco again prevailed, again on summary judgment, but this time thanks to the copyright misuse defense. With copyright misuse being successfully used as a defense I thought it would be worthwhile to explore misuse defenses in general, which I believe are an under utilized defense and one of the places courts should be looking to stomp out the abuses that we all know are prevalent in the intellectual property litigation arena. it is worth taking a moment to revisit the basics of patent misuse. With misuse defenses historically being closely associated with Antitrust theory yesterday we published Antitrust Law Basics, promising to follow up and with discussion of patent misuse.
The term “patent misuse” refers to specific types of prohibited behavior engaged in by the owner of the patent rights. Patent misuse is an affirmative defense that recognizes that it is possible for a patent owner to abuse the exclusive right enjoyed as a result of the issuance of a patent. As an affirmative defense, patent misuse cannot be used as a sword, but can only be used by an alleged infringer if and when the patent owner seeks to enforce the exclusive right of the patent in a patent infringement suit.
Once a patent infringement suit is initiated, the alleged infringer, in order to successfully rely upon the patent misuse defense, must “show that the patentee has impermissibly broadened the ‘physical or temporal scope’ of the patent grant with anticompetitive effect.” If the alleged infringer can demonstrate that the patent owner did engaged in prohibited behavior, the patent will be unenforceable despite the fact that it is valid. In this respect, patent misuse is similar to the doctrine of inequitable conduct, which also works to make an entire patent unenforceable.
The taint placed upon the patent by misuse, however, does not necessarily require the patent be held unenforceable for all time. Patent misuse merely prevents the owner of the patent from recovering for infringement for the duration of the misuse. In this respect, patent misuse is dissimilar to inequitable conduct. To be sure, inequitable conduct may find itself at the foundation of the underlying patent misuse defense, but inequitable conduct is unlike patent misuse in that once it has been determined that there was inequitable conduct during the prosecution of the patent, the patent is irretrievably unenforceable.
Over the years courts have identified several prohibited practices that constitute per se patent misuse, including: (1) tying agreements, where the patent owner requires in the license agreement that the licensee of the patent also purchase a separable, staple good;and (2) arrangements that allow the patent owner to effectively extends the term of the patent, thereby requiring royalty payments after the patent term has expired. In 1988, however, Congress enacted legislation that insulates certain behavior of the patent owner, thereby making it impossible for patent misuse to apply. The behavior Congress sought to legitimize and take from the reach of a patent misuse defense were the refusal to license and tying arrangements in the absence of market power. While at first glance these actions may seem anticompetitive and deserving of the mantle of patent misuse, this safe harbor provided for by Congress recognizes the essence of a patent, which is the right to exclude.
Generally speaking, there are two separate types of prohibited activity that can lead to a finding of patent misuse. First, if a patent owner engages in conduct that violates the antitrust laws, and the antitrust violation is sufficiently related to the patent in question in the infringement action, the patent owner will be unable to seek redress and the patent will be unenforceable as a result of patent misuse. The second type of patent misuse occurs when the patent owner seeks to extend the exclusive rights beyond those guaranteed by the patent grant. This extension of rights theory is sometimes referred to as the “extension of the monopoly” doctrine, and will come into play when the patent owner engages in conduct that impermissibly broadens the physical or temporal scope of the patent rights granted. Calling this form of patent misuse an extension of the monopoly, however, is dangerous because it perpetuates a myth; namely that a patent is a monopoly. Chief Judge Markey, the first Chief Judge of the Court of Appeals for the Federal Circuit, time and time again reprimanded scholars, attorneys and fellow judges for characterizing a patent grant as a conference of a monopoly. In Carl Schenck, A.G. v. Nortron Corp., Judge Markey stated:
Nortron begins its file wrapper estoppel argument with “Patents are an exception to the general rule against monopolies…”A patent, under the statute, is property. 35 U.S.C. § 261. Nowhere in any statute is a patent described as a monopoly. The patent right is but the right to exclude others, the very definition of “property.” That the property right represented by a patent, like other property rights, may be used in a scheme violative of antitrust laws creates no “conflict” between laws establishing any of those property rights and the antitrust laws. The antitrust laws, enacted long after the original patent laws, deal with appropriation of what should belong to others. A valid patent gives the public what it did not earlier have. Patents are valid or invalid under the statute, 35 U.S.C. It is but an obfuscation to refer to a patent as “the patent monopoly” or to describe a patent as an “exception to the general rule against monopolies.” That description, moreover, is irrelevant when considering patent questions, including the question of estoppel predicated on prosecution history.
It is a simple truth that a monopoly can only exist if there is an existing market. To characterize a patent as a monopoly without first questioning whether there is a market for the patent is to put the cart before the horse. To be sure, those patents that are litigated are litigated because there is money at stake and, therefore, a likely market. Nevertheless, there are undoubtedly a large number of patents that could never possibly have any market and could never be considered to yield a monopoly. It does no good to perpetuate the myth that all patents are monopolies. It is simply not true.
Nevertheless, it is important to understand that if the patent owner’s conduct does rise to the level of an antitrust violation, it will constitute patent misuse. A patent owner who brings an infringement suit, however, may be subject to antitrust liability for the anticompetitive effects of the suit if and only if the alleged infringer is able to prove: (1) that the asserted patent was obtained through knowing and willful fraud; or (2) that the infringement suit was a mere sham.
In order to determine if a patent was obtained through knowing and willful fraud one may be tempted to look for inequitable conduct. The knowing and willful fraud that will rise to the level of an antitrust violation is conduct that is far more severe than inequitable conduct. This type of fraud is known as Walker Process fraud. Consistent with the Supreme Court’s analysis in Walker Process, as well as Justice Harlan’s concurring opinion, the Federal Circuit and its predecessor, the CCPA, has distinguished inequitable conduct from Walker Process fraud, explaining that inequitable conduct is a broader, more inclusive concept than the common law fraud needed to support a Walker Process fraud counterclaim. In Norton v. Curtiss, the CCPA distinguished inequitable conduct from Walker Process fraud by explaining that:
[T]he concept of “fraud” has most often been used by the courts, in general, to refer to a type of conduct so reprehensible that it could alone form the basis of an actionable wrong (e.g., the common law action for deceit.)…. Because severe penalties are usually meted out to the party found guilty of such conduct, technical fraud is generally held not to exist unless the following indispensable elements are found to be present: (1) a representation of a material fact, (2) the falsity of that representation, (3) the intent to deceive or, at least, a state of mind so reckless as to the consequences that it is held to be the equivalent of intent (scienter), (4) a justifiable reliance upon the misrepresentation by the party deceived which induces him to act thereon, and (5) injury to the party deceived as a result of his reliance on the misrepresentation.
Inequitable conduct is indeed a lesser offense than common law fraud and will not support antitrust liability. The net result of this is that it is exceedingly difficult to demonstrate patent misuse under a theory that relies upon the knowing and willful enforcement of an otherwise invalid patent.
If the alleged infringer is not able to prove Walker Process fraud they may attempt to demonstrate that the infringement suit was a mere sham. In order to demonstrate that the litigation is a mere sham, the alleged infringer will need to show that the lawsuit is objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. If an objective litigant could possibly conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit cannot be considered a sham. It will likewise be necessary for the alleged infringer to demonstrate that the litigation was brought for no reason other than attempting to directly interfere with the business relationships of a competitor. Given this strict, unforgiving requiement, it is easy to see how difficult, if not impossible, it is to demonstrate sham litigation.
Courts, however, have never required the defendant raising the patent misuse defense to first establish that an antitrust violation has occurred. Such a prerequisite is not envisioned by the defense. In Morton Salt Co. v. Suppinger Co., the Supreme Court stressed that:
It is the adverse effect upon the public interest of a successful infringement suit in conjunction with the patentee’s course of conduct which disqualifies him to maintain the suit, regardless of whether the particular defendant has suffered from the misuse of the patent…. It is unnecessary to decide whether respondent has violated the Clayton Act, for we conclude that in any event the maintenance of the present suit to restrain petitioner’s manufacture or sale of the alleged infringing machine is contrary to public policy.
The Supreme Court has echoed this understanding on several other occasions, explaining each time that the condemnation of patent misuse does not depend upon the showing of an antitrust violation in the first instance.
Similarly, the alleged infringer who is seeking to rely upon the defense of misuse does not need to establish standing in the antitrust sense. This is true because the true focus of the misuse inquiry is not personal in nature, but rather revolves around the harm to the public interest created by the enforcement of patents tainted by loathsome conduct. The patent misuse doctrine, as an extension of the equitable doctrine of unclean hands, allows a court of equity to refuse to lend its support to enforce of a patent that has been misused.
Patent misuse arose as an equitable defense available to the accused infringer, from the desire to restrain practices that did not in themselves violate any law, but that drew anticompetitive strength from the patent right, and thus were deemed to be contrary to public policy. This aspect of the patent misuse defense differs significantly from the justifications upon which antitrust laws are founded. Antitrust laws seek to level the playing field by freeing the market from “unfair” competition. In so doing, the antitrust laws work to increase competition, thereby allowing free market economics to rule corporate behavior.
The patent grant, however, gives to the patent owner the right to exclude all others from making, using, selling and importing. By its very nature the patent grant provides a framework through which a patent owner can frustrate a free and competitive market. Therefore, the question with respect to patent misuse cannot be whether the free market competition has been curtailed in a manner that is “unfair,” but rather whether public policy forbids the patent owner from engaging in conduct that stretches the granted patent rights beyond what has been intended.
When an action alleged to constitute patent misuse is neither per se patent misuse, nor specifically excluded from being misuse by 35 U.S.C. § 271(d), a court must determine if that practice is “reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims.” If the alleged action is reasonably within the patent grant, the practice cannot have the effect of broadening the scope of the patent claims and is not patent misuse. If, on the other hand, the practice has the effect of extending the patent owners exclusive rights, and does so with an anticompetitive effect, the conduct must then be analyzed in accordance with what is known as the “rule of reason.”
Under the rule of reason, “the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.” The rule of reason, therefore, seeks to determine whether the challenged action is one that promotes competition or one that suppresses competition. As the Supreme Court has explained, “the true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.” When rule of reason analysis is engaged, however, it makes disposition of the case on summary judgment difficult, which in turn ensures a long, expensive trial.
I have long advocated for greater use of the patent misuse defense because it seems exceptionally clear to me that some of the bad actors in the patent enforcement market, those who many call patent trolls, engage in extortion-like tactics. They bring a lawsuit seeking to collect tens or hundreds of millions of dollars, or more, yet they offer licenses to settle the matter on the order of a few thousand dollars. Even those who think they don’t infringe will face hundreds of thousands of dollars in legal fees at a minimum, frequently well into the millions of dollars. This leads many, if not most, to simply pay the small license fee. I don’t see any other way to characterize this other than as patent misuse. The Federal Circuit has even acknowledge such activities bear the indicia of extortion. See Indicia of Extortion – Federal Circuit Slams Patent Troll.
The need to have robust enforcement rights is essential if patents are actually a property right, which of course they are. Attempts to curtail patent rights are, in my humble opinion, wholly unjustified. But those who seek to over enforce rights and bully defendants do real harm to the patent system as a whole and need to be stopped. Thankfully, Judges are people too, and they get offended by what they perceive as bad behavior by litigants. Patent misuse and copyright misuse may become increasingly important tools for warding off what in lay terms is sham litigation.
Patent misuse, copyright misuse, prohibitions against sham litigation and particular Antitrust related matters are extremely complex, so this article and the series so far have only scratched the surface. Look for additional articles in the coming weeks and months that will explore more specific particulars to drill down on the concepts discussed here. For more information please see:
- Antitrust law articles on IPWatchdog.com
- Copyright misuse articles on IPWatchdog.com
- Patent misuse articles on IPWatchdog.com