A Proposed Amendment to 35 U.S.C. 271

This paper proposes amending 35 U.S.C. 271 Infringement of Patent with elements drawn from § 2-403 of UCC Article 2, Sale of Goods, and with elements of the Patent Exhaustion Doctrine.  This amendment, if enacted, would prevent patent trolls from proceeding against Bona Fide Purchasers for Value with respect to certain specific infringements, in order to strengthen consumer confidence in the marketplace, by ensuring that vendors can deliver the products that they sell, free of threats of patent infringement litigation against such innocent buyers.

Discussion

President Obama and various members of Congress have recently expressed concern with regard to the effects that the operations of Non-Practicing Entities (NPEs) (aka Patent Assertion Entities (PAEs) or Patent Trolls) have had on commerce in the United States. [1]  In this regard, the President recently announced five Executive Actions, and put forth seven recommendations for action by Congress. [2]  With apologies to the President, the authors believe that none of the Executive Actions, or the recommendations to Congress, hit the mark.  This paper offers an alternative, a suggested amendment to 35 U.S.C. 271 Infringement of Patent (hereinafter § 271), that while not a complete disarming of Patent Trolls, nevertheless substantially limits the weapons that they currently wield.

“Patent troll is a pejorative term used for a person or company that enforces its patents against one or more alleged infringers in a manner considered unduly aggressive or opportunistic, often with no intention to manufacture or market the product.  A related, less pejorative expression is non-practicing entity (NPE) which describes a patent owner who does not manufacture or use the patented invention.” [3]  The authors of this paper readily acknowledge that patent licensing, per se, is a perfectly acceptable tool available to the patentee, or assignee of a patent. [4]  Rather, we assert that the methods usually employed by NPEs, and the selection of their targets, are the problem, as will be discussed below.

We begin, as we must, with the Constitutional underpinnings of the U.S. Patent Law, Article 1, §8, Cl. 8:  “The Congress shall have the power . . . To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

The clear intent of the framers is that the purpose of the patent law is to “promote the progress of science and the useful arts.”  It is the opinion of the authors that NPEs do not promote the progress of science and the useful arts, and therefore should not be afforded the full rights and protections of the patent law that Congress has rightly given to those who do.

A patentee may exclude others from making, using, selling, offering to sell, or importing, the subject matter of the patent. [5]  In this way, the interest of the patentee is served in that the infringer must cease the infringing activities, by simply stopping the performing of those activities, by taking a license from the patentee, or by “designing-around” the patent claims.  If the infringer chooses to design around the patent claims, then he produces a new, and possibly patentable, item.  That is, the act of designing-around promotes the arts and sciences, as intended by the framers.

Note that the above-given scenario achieves the desired outcome best when the patent is asserted against a source manufacturer, a competitor of the patentee.  While asserting the patent against a consumer, down the chain from a source manufacturer, may cause indirect pressure on the source manufacturer to take a license, it also has far reaching negative consequences.

Foremost among these negative consequences is a deterioration of confidence in our commerce system.  If a consumer, such as a small business, cannot purchase goods without risk of being confronted by a patent troll, then the consumer cannot rely on getting good title in the marketplace.  Moreover, a small business that is the target of such a patent assertion, has few options, either take a license, or fight the assertion in court, and neither option is a good one.  Licenses rates offered by NPEs are usually not reasonable, since NPEs often set the rate just below the cost of litigation.  And, it has been rightly said that patent litigation is the “sport of kings.”  A single patent law suit can easily cost the defendant $2.67M, even if the defendant wins. [6]  “Winning,” in this case, is used in the Pyrrhic sense. [7]

[Patent-Litigation]

The authors are most concerned with an erosion of consumers’ faith that vendors in the marketplace can deliver good title to the products they are providing.  Courts and legislators have faced similar challenges in the past and have responded with creative solutions in the form of limitations of enforcement rights.  One such limitation on a patentee’s rights is the Exhaustion Doctrine, an affirmative defense that may be raised in Court, and which is similar to the First Sale Doctrine of Copyright Law.  Basically, the Exhaustion Doctrine holds that a patentee’s exclusive rights in a particular patented article are exhausted upon an authorized sale of the patented article to a third party.  For example, under this doctrine, a manufacturer of flashlights may freely incorporate a patented Light Emitting Diode (LED), obtained through an authorized sale, in his product and may freely transfer that product to consumers, without need of any further permission from the patentee.

Unfortunately, NPEs have been known to avoid the Exhaustion Doctrine by deliberately deciding not to license manufacturers who may infringe their patents, and to proceed instead against the customers of those manufacturers who incorporate the patented article into further manufactured goods.  Since the NPE did not sell the patented article, they are not bound by the Exhaustion Doctrine.  Such a ploy is permitted under the patent law, and greatly increases the number of potential targets for the NPE.

A further example of legislative efforts to bolster confidence in the marketplace is set forth in § 2-403 of UCC Article 2, Sale of Goods.  § 2-403 states that a good faith purchaser of goods for value obtains all rights in the goods, if purchased from a merchant of goods of that kind, and the goods were entrusted to that merchant by the rightful owner.

Detailed Proposal

With the foregoing in mind, the authors submit the following modification of § 271 as a potentially effective tool which operates to divest NPEs of a portion of their power under the current patent law, while continuing to protect inventors against infringement by competitors.  In short, our proposed amendment to § 271 incorporates the spirit of the Exhaustion Doctrine of protecting downstream purchasers, coupled with the UCC Article 2 § 2-403 notion of protecting a bona fide purchaser for value from title challenges.

Our proposal would provide good title, free of most patent claims, to a Bona Fide Purchaser for Value (BFPV) of goods from a dealer of goods of that kind.  Specifically, the BFPV may use, offer for sale, and sell the infringing goods, but may not make or import such infringing goods.  Returning to our flashlight example, the manufacturer may use, offer to sell, and sell flashlights that contain the infringing LED, but he may not make or import the LED.  It should be noted that the using and selling is still an infringement by the BFPV, but no recovery is allowed for that “innocent” infringement.

It is believed that the proposed amendment to § 271 will prevent NPEs from asserting their patent claims against innocent purchasers of patented articles.  That is, adoption and passage of this measure will remove their downstream targets.

Reasonably, the purchaser must be a BFPV, and must have obtained the goods from a dealer of goods of that kind.  The subject proposed amendment defines “dealer” to include the commonly understood meaning of “merchant,” but also expands that definition to include a manufacturer of the goods, so long as the manufacturer normally produces goods of that kind.  Note also that the definition of “goods” includes software.  Thus, a BFPV of a computer program may use it, without fear of recovery for infringement of any method claims associated with that software.

In the case in which a BFPV is a downstream manufacturer of a product incorporating an infringing patented component, the proposed amendment would allow such a BFPV to use all infringing components currently in his inventory, but only when such articles were purchased before receiving actual knowledge of the infringing nature of the goods.  The proposed amendment to § 271 explicitly defines “using” to include the meaning “to incorporate the Goods into a product.”  The BFPV manufacturer would then be freed of an immediate need to either take a license, or shut down his manufacturing line.  The manufacturer might then have some time to redesign its product to use a non-infringing component, if available.  Advantageously, under the proposed amendment, a downstream company that innocently purchases infringing Goods, cannot be threatened with an infringement action, or worse, a claim of willful infringement for continuing to use them from inventory.

35 U.S.C. § 287(a) allows recovery against an infringer for past damages, if the patented article were properly marked.  Recovery for past damages is also allowed where the patentee produces no product, and therefore cannot mark.  However, under the proposed amendment to § 271, an infringement action against a BPFV for using, offering to sell, or selling, is not permitted at all.  Therefore, it necessarily follows that liability for past damages cannot be pursued against such a BPFV.  This result makes sense because patent marking under the provisions of § 287(a) does not convey knowledge of patent infringement, but rather conveys only the fact that the goods are subject to a patent.  In fact, a patent marking on purchased goods implies just the opposite, that the goods were produced by the patentee or by a licensee.  NPEs, on the other hand, tend not to mark because they produce no goods.  Clearly, the absence of patent marking on a purchased product conveys no information at all.  Thus, since patent marking does not convey to a BPFV “actual knowledge of the infringing nature of the goods,” it simply does not matter whether the purchased product is marked, or not.

It is the authors’ opinion that such an amendment to § 271, is in closer concert with the patents clause of the U.S. Constitution, than is the current version.  As noted above, applying the full weight of § 271 to a competitor who is making unauthorized use of a patented invention, or to an importer who performs an unauthorized importation of the patented invention, promotes the advance of science, in many cases, by closing off that avenue, and forcing the infringer to design around (i.e., create a new invention), or take a license.  Such license fees provide additional revenue that the patentee may use as he sees fit, perhaps in a greater expenditure of R&D funding.  In contrast, it is difficult to see how applying the full weight of § 271 against a downstream manufacturer of a different product that incorporates the patented article, or against an end-user, would advance the development of science.

[Varsity-1]

The current, unamended, text of § 271 includes paragraphs (a) through (i), and no changes need be made to any of these paragraphs.  The simplicity of the proposed amendment is shown by the minimal required amount of additional text to be added to § 271.  The proposed additional text is as follows. [8]

(j) No recovery for patent infringement may be had from a Bona Fide Purchaser for Value of Goods embodying a patented invention, or used to perform a patented method, for using, offering to sell, or selling the Goods, where the Bona Fide Purchaser for Value purchased the Goods from a Dealer of Goods of that kind in the ordinary course of business.

(k) No recovery for patent infringement may be had from a Bona Fide Purchaser for Value of Goods embodying a patented invention, or used to perform a patented method, for using, offering to sell, or selling the Goods from inventory, where the inventory was purchased before the Bona Fide Purchaser for Value received actual knowledge of the infringing nature of the Goods.

(l) For purposes of this section, the following definitions apply:

(1) “Goods” shall mean an article, an apparatus, or software, employing or used to perform any claim of a patent.

(2) “Goods of that kind” shall mean merchandise similar in nature to the Goods.

(3) “Dealer” shall mean, (i) a manufacturer of Goods embodying the invention, so long as the manufacturer normally produces Goods of that kind, or (ii) its ordinary meaning of commercial supplier, merchant, or business, so long as the Dealer regularly sells Goods of that kind.

(4) “Bona Fide Purchaser for Value” shall mean a purchaser who does not have actual knowledge of the infringing nature of the Goods at the time of the purchase. 

(5) “Using” shall mean (i) incorporating the Goods into a product, or (ii) its ordinary meanings of operating or employing for a purpose.

A student of UCC Article 2 may object that § 2-403 relies upon the concept of “entrustment” for support, wherein the goods in question must have been entrusted to a merchant of goods of that kind.  As a substitute for “entrustment”, the authors hold that two distinct pillars are available to support the proposed amendment to § 271, and those pillars are: (1) public policy in promoting confidence in the marketplace, and (2) the patentee’s voluntary participation in the patent system.  The first pillar should be self-evident, but it also clearly falls under the Commerce Clause. [9]  With regard to the second pillar, we simply point out that the patentee has voluntarily chosen to participate in the patent system, thereby implicitly agreeing to be bound by the patent laws and rules promulgated by Congress and the USPTO.

There is one final item for consideration:  there are some claims that can only be infringed by an end-user.  The goods, in this case, must be such that, when operated by the end user, that use will infringe.  For example, a method claim for software might not be infringed by an unauthorized manufacturer or seller, but will likely be infringed by the end-user of the software.  The authors have addressed this concern by shielding the BFPV against any recovery for an infringement, while leaving open causes of action for Contributory Infringement and Inducement to Infringe, as applied against the Dealer.  “Dealer”, in this sense, includes the unauthorized manufacturer or importer of the goods.

If our proposed amendment to § 271 is enacted, a patentee’s enforcement rights will be restricted to those who produce or import infringing goods, and will be exhausted with respect to BFPVs, who only use, offer to sell, or sell the infringing goods.  In the case of an end-user who buys directly from a foreign unauthorized manufacturer, that end-user would become liable for infringement for the act of importing, still actionable under the proposed amendment.  The authors are also aware that the proposed amendment, if enacted, would apply to patentees who are source manufacturers, as well as to NPEs.  However, we also recognize that source manufacturers are most often only interested in applying their patents against competitors to protect their products in the marketplace.

As noted at the beginning of this paper, the proposed amendment to § 271 does not completely disarm NPEs, but rather merely deprives them of some particularly dangerous weapons.  NPEs may still assert claims against source manufacturers and importers, but those targets have detailed knowledge of their products, and are thus in a much better position to defend their products against specious assertions than are downstream consumers.  And, consumers can, once again, have confidence in our commerce system, knowing that vendors in the marketplace can deliver good title to the products they are providing.

Conclusion

The amendment of 35 U.S.C. 271 Infringement of Patent, as described above, would, if enacted, prevent NPEs from proceeding against Bona Fide Purchasers for Value with respect to certain specific infringements.  With a single stroke, this legislation would strengthen consumer confidence in the marketplace by shielding innocent buyers of goods from threats of patent infringement litigation.

For a printable version of the proposed amendment see this PDF —> Suggested Amendments to: 35 U.S.C. 271.

About the Authors

Thomas F. Lenihan is the Chief Intellectual Property Counsel of a Test & Measurement group including Fluke Corporation, Tektronix Corporation, Fluke Networks, Tektronix Communications, Arbor Networks, and VSS Monitoring, and their subsidiaries.  Mr. Lenihan has held this position since January 2011 and is based in Beaverton, OR.  Prior to this position, he was with Tektronix for thirteen years, serving as IP Counsel and then Chief IP Counsel, and with the GE and RCA Licensing Management Operation in Princeton NJ for thirteen years, as an IP attorney and Senior IP attorney. He is a 1988 graduate of Seton Hall Law School, magna cum laude, and 1981 graduate of La Salle University in Philadelphia with a BSc. degree in Electronic Physics.  He is admitted to practice in Oregon and is a Registered Patent Attorney.

Michael A. Nelson is the Intellectual Property Counsel for Tektronix Corporation, where he is responsible for IP legal matters for Tektronix and its subsidiaries.  Mr. Nelson has held this position since July 2013 and is based in Beaverton, Oregon. Prior to this position, Mr. Nelson served as an IP Attorney for Tektronix, and before that, as an Electrical Engineer.  Mr. Nelson has been with Tektronix since 1997. He is a 2009 graduate of Lewis & Clark Law School, a 2002 graduate of Portland State University with an M.S. degree in Electrical Engineering, and a 1998 graduate of Oregon State University with a B.S. degree in Electrical Engineering.  He is admitted to practice in Oregon, and is a Registered Patent Attorney.
Disclaimer

The opinions expressed by the authors do not necessarily reflect the opinions of their respective employers.