If patent laws were correctly calibrated to spur innovation the efficient infringer would pay

By Gene Quinn
October 16, 2016

“So efficient infringement existence, in and of itself, is not the concern for me. The concern is it is now legally possible, I think in many circumstances, for someone to not only be an efficient infringer but also to get away with infringing and never paying…”

ashley-keller

Ashley Keller

Patents have become increasingly weak over the last decade, first as the result of victorious patent owners losing the right to a permanent injunction when they have prevailed in a patent infringement action (see eBay v. MercExchange).  The patent death squad that is the Patent Trial and Appeal Board (PTAB) at the United States Patent and Trademark Office (USPTO) has mightily contributed to the degrading of patents as a meaningful asset, and so too has the recent line of patent eligibility cases coming from the Supreme Court. There has also been an erosion in the available damages a patent owner can realistically expect, and it has become much easier for patent claims to be found to be obviousness.  The last decade has been difficult for patent owners. Challenging issued patents has become much like shooting fish in a barrel really.

Because the tide has so significantly turned against patent owners and in favor of infringers it is no great surprise that infringement has escalated. Why would anyone choose to do anything other than infringe when there are so many obstacles facing the patent owner and it is so easy to challenge patents. Factor in the disproportionate power held by infringers who frequently choose to simply fight a war of attrition against patent owners, and infringing as a business model makes a lot of sense. Even more sense given that the patent laws practically encourage infringement and make it difficult if not impossible for patent owners to recover anything.

During a recent webinar on the current state of patent valuation Ashley Keller, co-founder and Managing Director of Gerchen Keller, and I discussed the phenomenon of efficient infringement. At one point during the webinar I asked Ashley about his thoughts on what the AIA has done to patent valuations, which lead us into a discussion of efficient infringement as the conversation turned to IPR and how easy it has become to challenge patents as a means to defend a patent litigation.

Efficient infringement is when a decision is made to infringe regardless (or in spite of) the presence of patents and whether the underlying activity will constitute patent infringement. Rather than seek out or take an offered patent license, it is determined that it would be better, cheaper and certainly more expedient to simply infringe.

What follows is our conversation on efficient infringement. To hear the entire webinar CLICK HERE.

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QUINN: Ashley, can you give us your thoughts on what the AIA has done to patent owners and patent valuations?

KELLER: Yeah, so there’s a longer version of this but the short version is I think the AIA has overall harmed patent valuations because while the theory behind it was noble and potentially good, in practice it has led to the invalidation of a lot of claims, some of which perhaps deserved to be invalidated but I would posit, just based on my anecdotal observations and review of the statistics a lot of other claims where I’m not so sure they deserved to be invalidated. So a fair amount of innovation has been cancelled out by the AIA and it has also made it very inexpensive for defendants to work that cancelling out of these inventions because of the time and expenditure necessary to pursue an IPR is significantly less oftentimes than the time and expenditure necessary to defend patent litigation.

QUINN: Yeah. I agree. I think the AIA has been awful. I think the PTAB has been awful for patent value and you don’t have to take my word for it, you can just take their word for it. They viewed their job as coming in and invalidating patents. So they have not been, at least early on, we can talk about whether over the last year this is true but at least early on they were not an honest broker by any stretch of the imagination. I don’t think that they were neutral judges. I think they were on a mission to get rid of patents and that was heard loud and clear throughout the industry. That’s why you see three, three-and-a-half times the number of IPRs than was predicted and now yet another avenue for the efficient infringer to avoid having to pay. And let me get your thoughts on that, Ashley. Like when I say efficient infringer is that me like taking a metal claw and running it down a chalkboard to you?

KELLER: Not quite. I’m a student of the Chicago school so I understand the Holmesean analogy and the fact that sometimes when you’re making business decisions it makes sense to breach a contract or to infringe a patent. But — and here’s the critical but — the efficient infringer, just like the efficient breacher of a contract, which is the Holmesean analogy, is supposed to have pay. So, yeah, it might be efficient to infringe a patent — and, listen, I have some sympathy to this. If you’re Apple and you’re making the iPhone, which has so many component parts and there are probably thousands, if not tens of thousands of patents, that potentially cover all of those components, it really would be a Herculean effort for you to go out and try and search the world for every possible patent that your invention practices. So it doesn’t make you a bad guy, particularly because patent infringement is a strict liability tort to necessarily go out and say, hey, I’m gonna deliver value to the marketplace by selling this product and if I infringe a patent someone can sue me for it but I’m gonna infringe anyway because I can’t efficiently go out and conduct my daily business affairs looking for patents that I might infringe. I would spend my entire life looking for patents and not actually making things. So it’s not a chalkboard-scratching event for me. However, when you do infringe a patent, even if it was efficient for you to do so, the upshot should be you have to pay. You have to pay a reasonable royalty associated with that infringement so that the innovator who came up with the innovation can also be compensated for the research and development that they did to generate that innovation in the first place. So efficient infringement existence, in and of itself, is not the concern for me. The concern is it is now legally possible, I think in many circumstances, for someone to not only be an efficient infringer but also to get away with infringing and never paying and that is problematic from a societal perspective because it will dramatically reduce the returns to R&D and society will lose out on the advancement of technology that R&D inevitably produces.

QUINN: Yeah, I guess. The problem that I have with efficient infringement, because to me it is like a fingers on the chalkboard kind of thing, is it is all based on a calculation. If I infringe — there’s a certain number of patent owners that are just simply not going to come after me for one reason or another. Frequently they don’t have the money to come after me. We’re much bigger, whatever. And then out of those that are going to come after me there’s another group of those that are just not going to win and I’m going to prevail. And so then that group of those who are likely to win keeps getting smaller and smaller and smaller because of all of these changes, you know, now you can challenge it for patent eligibility, even if you do win you can’t get an injunction, which is a huge problem. You can get IPRed at the PTAB. The patent owner has to win everywhere and keep fighting and as soon as the challenger wins the case is over. And so it seems to me we’re now dealing with efficient infringement on steroids. So to some extent, from a business perspective, like from a pure economics, number bean-counter perspective, you’d be a fool not to engage in efficient infringement because what’s the risk of you paying? Almost nothing it seems.

KELLER: Yeah, so there’s a lot there. And I guess what I would say is this goes back to what I was describing before about having clear rules of the road so that everybody knows what the guideposts are gonna be for whether someone has to pay in a patent infringement suit. If the rules of the road were correctly calibrated to spur innovation on the one hand while on the other hand ensuring that consumers have access to goods at marginal cost, which is the quid pro quo or the tension between the patent system and the competition system, right? If those rules were properly calibrated it wouldn’t be like scratching a chalkboard for me to have efficient infringement because to the extent that the analysis done is, I’ve evaluated these rules and this person doesn’t deserve to prevail against me because I might infringe the patent but it’s invalid, then I wouldn’t have a problem, right? If the district courts were properly invaliding the invalid patents and confirming the validity of the valid ones and the same at the PTAB then the infringer would evaluate that and say to the extent I can tell that this is a true innovation and I’m gonna have to pay for it they would pay for it and you could avoid this sort of game where they’re trying to go into multiple fora and ultimately prevail. So what I think you’re really driving at is the rules of the road are not properly calibrated at this point. They’re not clear, number one, but they might not also be properly calibrated to spur the optimal amount of R&D and things that deserve to have patent protection are going down, either in district court or in the PTAB or both. And the consequence of that is certainly negative for society. I think another issue that is inherent in what you said is that US litigation is extremely expensive and so an efficient infringer can say even though I infringed this patent it’s not that I didn’t find the patent in the first place and my sort of Apple sob story where Apple can’t spend its entire life looking at patents but they found a patent, they know they infringe it and they decide to do it anyway because the patent holder is a small company or an individual inventor and can’t afford the high priced counsel that will be necessary to engage in three years of litigation, yeah, that’s another problem as well, that the well-heeled, big incumbent player can afford to beat people into submission and to not getting compensated for their innovations because they’ve got a lot of money to throw at lawyers and the small guy doesn’t. That’s a legitimate concern as well.

The Author

Gene Quinn

Gene Quinn is a Patent Attorney and Editor and founder of IPWatchdog.com. Gene is also a principal lecturer in the PLI Patent Bar Review Course and an attorney with Widerman Malek. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 9 Comments comments.

  1. JNG October 16, 2016 12:53 pm

    Mr. Keller makes some good points, in that the potential universe of patents to consider is too large to evaluate. That is why a few years back I proposed a system that would be fair to all, namely, a reciprocal “registration” system. Patent owners would have to declare patents as in play if you will for licensing/enforcement in specific product classes. Conversely, merchants /suppliers would have to register their products in the same classes. We could use the existing Trademark/patent classes as a starting point. A grace period – allowance would be built in to let people “register” after seeing something in the database.

    Simple example: a patent owner would not be entitled to any damages for any period prior to registration of the patent. To solve the bootstrap problem, entities registering within the first N (12?) months would not be subject to the limit.

    Similarly, going forward, if a merchant registered their product, and had not been sued before to that date, they would enjoy immunity from any sales prior to the registration. Of course the rules can be tweaked, but the overall idea is to incentivize both entities to remove the uncertainty in the current marketplace. Knowing which patents are in play would go a long ways to letting companies know how to assess the IP risks.

    FWIW, I proposed this plan to lawyers at the EFF a few years back, and they of course rejected it out of hand because it would require them to acknowledge that there is such a thing as…. valid patent rights. But I was gratified that it forced them to reveal themselves for what they are, namely, servants of big interests, and not defenders of any “public” interest.

  2. Paul F. Morgan October 17, 2016 10:11 am

    Yes, patent sale valuations seem to be down, but there are many factors involved, including Alice 101 decisions.
    However, this article is missing something very important and positive for patent owners. No infringement should be “efficient” if the patent owner can recover a proper award of double or treble infringement damages – the infringer would be selling at a loss. In Halo v. Pulse this June the Supreme Court made that very much easier for patent owners. This opinion replaces the Federal Circuit’s strict Seagate test for enhanced patent damages with a test that is easier for patent owners to meet. It relies extensively on the Court’s recent Octane and Highmark decisions, which also created an easier standard to receive attorney fees in exceptional patent cases [a number of patent owners have since received such attorney fee awards] the Supreme Court:

    Eliminated Seagate’s objective recklessness test (that avoided an accused infringer’s subjective belief) and focused on a subjective basis for enhancing damages with an infringer’s egregious conduct in the particular circumstances of the case,
    Lowered the patent owner’s burden of proof from the “clear and convincing evidence” standard to the lower “preponderance of the evidence” standard generally applied to infringement.
    Adopted a simple “abuse of discretion” standard of review that requires the Federal Circuit to defer more to the district court’s decision whether to enhance damages.
    Furthermore, while the Sup. Ct. eBay decision removing automatic injunctions for all infringements applies to NPE PAEs it does not apply to product competitors.

  3. Anon October 17, 2016 11:35 am

    Paul Morgan,

    I think you overstate the effect of treble damages.

    Loss leaders are an “ancient concept.”

    There can easily be seen where even treble damages (if even ever obtained) make for efficient infringement.

    The pain should be commensurate with what it takes to stop the efficiency – be that treble, 50X, or even total profits.

  4. Chris Gallagher October 17, 2016 11:39 am

    Chris Gallagher
    Perhaps the most efficient way to resolve Apple’s multi-patent problem after Halo Electronics is to enable District Courts to more flexibly consider damages for willfulness where there is evidence of an infringement occurring within the framework of a pattern or practice of “efficient infringement”. Inevitably in Apple’s competitive market if any one participant is practicing “efficient infringement” every participant is compelled to follow suit. Applying Ashley Keller’s Holmesean analysis, reasonable royalties damages paid later actually encourage such infringement. Enabling judicial exercise of Halo’s willful damage award authority would increase efficient infringement’s financial risk and would thus deter its inevitable widespread practice.

  5. Anon October 17, 2016 12:04 pm

    Chris,

    In other words, if I may paraphrase you: the course selected by Congress regarding total profits IS fair.

  6. Paul F. Morgan October 17, 2016 12:22 pm

    Chris, yes a pattern of ignoring patent threats by a defendant does seem like it ought to be a factor in a Halo Electronics willfulness analysis. But I do not think there is support for your premise that everyone in a given industry follows a practice of willful infringement if any one of them does. There have been numerous patent suits in recent years against multiple defendants on the same patented product feature. The fast majority of defendants settled well before trial. Only a few defendants have developed a reputation for regularly fighting all the way through trial and appeal [Apple, NewEgg and a few others]. Also many [if not most, these days] patent suits are brought on patents that the defendant was not noticed on before suit and was not aware of before suit.* The usual explanation for that is patent owner fear of a declaratory judgement suit being brought in a district court less favorable to the patent owner. However, how validly significant is that refusal to attempt licensing before suing a normal defendant now that a PTO IPR is vastly cheaper, faster and more effective than a D.J. suit?

    *There is no legal obligation to do expensive product infringement clearance studies of thousands of patent claims before launching a new product unless the the defendant is copying a novel or patent-marked feature of a competitive product. Just as there is no legal obligation to do a prior art search before filing a patent application.

  7. angry dude October 17, 2016 9:38 pm

    Anon @ 3
    “The pain should be commensurate with what it takes to stop the efficiency – be that treble, 50X, or even total profits”

    Boo-ha-ha… “total profits” :):):)

    you don’t have to be Trump to easily show zero profits or, even better, substantial losses from any business activity, patents or not

    The only way to stop the efficiency is injunction (it also allows easy determination of fair and reasonable royalties)

  8. Anon October 18, 2016 6:42 am

    Upon reflection, I agree with you angry dude.

    Returning the power of injunction also most closely approximates the patent right itself.

  9. Chris Gallagher October 18, 2016 9:16 am

    Fair point Paul. As the old bromide states ,”All general statements are false, including this one” but Gene’s blackboard scrape reaction is justified despite Ashley Keller’s elegant, but inapposite reference to Holmes’ circumstantial breach of contract. Patents confer exclusivity. Infringement robs patent owners of their exclusivity, which in many markets defines the patent subject matter’s useful value. Contracts are mutual commitments voluntarily and selectively made between recognized parties. Efficient infringement more resembles the thievery by more efficient strangers that characterizes involuntary, compulsory, non-exclusive licensing. If courts are to restore to patent holders their pre-infringement status quo, immediate injunctive relief is normally the better solution. But since injunction is rarely available,courts need more Halo flexibility to “let the punishment fit the crime”, which may depend on the marketing power of the infringer. Contracting parties choose their partners. prudent non-inclusive licensing takes into account the licensee’s competitive market strength. Infringement may destroy a patent’s value simply by erasing exclusivity. Sharing certain markets with established incumbents like Apple not only cancels exclusivity, it can preclude a patent holder from any patent use at all.