Move over Patent Trolls, Efficient Infringement has arrived on the Hill

By Chris Gallagher & Gene Quinn
October 25, 2016

Washington dc, capital city of the united states. national capitol building.November 8th is fast approaching and it seems inevitable that Secretary Clinton will prevail and become our next President and no one in the know believes she and President Obama share the same view of patents. Clinton is not particularly close with the same Silicon Valley cabal as Obama, and instead finds her support coming from Wall Street and Hollywood, where property rights matter. This means the patent troll meme is now history. The current meme that matters is one of “efficient infringement.”

Nervous down ballot candidates are listening, and show increasing concerns with whether patent reform has gone too far and is harming America’s innovation future. This is a good thing, but there is still no short “elevator speech” explaining the permanent harm HR 9 (and its next-session successors) will inflict on the commercialization of patented products and therapies. Until recently, the patent troll meme forced pro-patent advocates to explain patent law complexity to Hill lawmakers, almost exclusively from a defensive posture.

Now troll abuses have been judicially curbed by: (1) new requirements for pleadings; (2) new district court discretion to address abusive patent enforcement by cost shifting; and (3) the threat of state and federal fines based on new initiatives defining abusive trolling as an unfair and deceptive practice. Perhaps most importantly, the recent FTC Patent Assertion Entity (PAE) case “study” characterized past Hill references to “patent trolls” by anti-patent lobbyists as “unhelpful” (case study. p.17). Thanks to this, pro-patent advocates no longer need to offer a seminar on arcane patent litigation in order to prevail in the debate. Simply put, there is nothing to see here. The courts have addressed the problems to the extent there were problems to be addressed, and even the FTC found that the use of the term “patent troll” was unhelpful because it was prejudicial and unwarranted to lump all patent owners together as if simply owning a patent somehow makes you a villain.

But now, after quickly dispatching with the patent troll meme as much ado about nothing, we can, should and must now unleash a more simplified counter attack by referencing a commonly deployed patent abuse known as “efficient infringement.” This deliberate disdain for patent property is the business model driving mega-tech IT incumbents to continually pressure Congress to enact measure such as HR 9 and S.1137.

Efficient infringement is a cold-hearted business calculation whereby businesses decide it will be cheaper to steal patented technology than to license it and pay a fair royalty to the innovator. Large entities realize there are a certain number of patent owners that are just simply not going to assert their patents for one reason or another, frequently because they don’t have the money to do so. Then there is another group of those that will assert their patents but will not win. The calculation progresses to realize that there is a small group of those who are likely to assert and prevail, thanks to all the hurdles put in place (i.e., patent eligibility challenges, the PTAB, etc.). The calculation further recognizes that even if a patent owner prevails a permanent injunction is virtually impossible to obtain as the result of the Supreme Court’s decision in eBay v. MerchExchange, and damages are likely to be minimal thanks to a continual judicial erosion in damages available to victorious patent owners who hold valid patent rights that have been adjudicated to be infringed.

This cold-hearted business approach to stealing intellectual property resonates when it is conveyed properly. Here is a simple script for research universities to use when they communicate with candidates’ pre-election and Staffers and those who prevail after the election. These arguments are easily adaptable to all pro-patent advocates.

 

Universities

Commercialization of federally-funded scientific research is critical to successfully conducting our university research and regional economic development missions. We do not develop, make and market our scientific discoveries into products. To move our basic science into publicly beneficial products and therapies, we must attract private sector investment to conduct applied research, product refinement, development and distribution. We monetize promising discoveries not because we expect or financially rely on future royalties. We commercialize them through technology transfer because to qualify for future federal grants we must demonstrate continuing capacity to commercialize. Federal scientific research grants strengthen our research program’s overall quality. They help attract high-quality students and faculty. Like anchor tenants in a shopping mall, they help structurally support our entire research mission by increasing our research program’s productivity and public benefit. Commercialization’s importance to us cannot be understated. Yet it has never been more threatened.

Prudent private investment requires predictably profitable return on investment (ROI). Risky early stage investment must be protected by reliable patents and assured control of future final product pricing. Private investor commercialization often costs three times our expenditures in new scientific discoveries. It may produce no ROI for ten years or more. Yet as the bridge between public funding and citizen availability, commercialization’s public private partnerships are the crucial connection between early stage basic research discoveries and eventual public enjoyment of its benefits. Private sector commercialization partnerships convert basic science into public benefit. Congress assumes commercialization’s continued viability when it annually appropriates more than $130 billion dollars funding scientific R&D, but commercialization is now increasingly avoided because patent reliability has been weakened. Costly patent property protection by enforcement is effectively denied to lesser-resourced patent holders.

Pending measures like HR 9 are designed to make patent enforcement less likely. Early stage commercialization’s purposes and value are substantially diminished as the result of efficient infringement. In certain business circumstances those who are unafraid to trample on the rights of others are virtually compelled to deliberately infringe, especially when patent enforcement proceedings are increasingly unaffordable for lesser-resourced patent holders and available remedies are increasingly less available.  In short, why commercialize when you can plagiarize?

A hypothetical may help explain

Assume you are a university. One of your material science researchers discovers a new material and structure for a battery strong enough to run a smart phone without recharge for a month. It is impervious to liquid submersion, high impact shock, and is inflammable. You code-name the new technology “Gizmo”. After retaining the best available legal firm, you patent Gizmo, then selectively shop it to several hardware manufacturers. They say ”don’t call us, we’ll call you”. One year later, one of them deploys its own version of Gizmo’s battery technology, infringing your patent. The alleged infringer ignores your notification. To obtain its attention your university must bring suit. The litigation costs of that “best available legal firm” become research budget busters. But failing to sue may encourage similar infringements, and if you don’t sue those who did take a license will wonder why they are paying and may simply stop paying. Failure to act risks angering your researchers and scientists. The publicity is not consistent with your public mission, but because your research commercialization program must retain its strong reputation and there is no other way to protect your patented technology from those who would engage in deliberate, cold-hearted efficient infringement, unfortunately you are forced to bring suit.

Now assume you are a high-tech hardware CEO. Your company is aware of the Gizmo technology. Rivals are aware as well, or will soon discover it themselves. Infringement soon is more economically efficient in a fast-developing market than plodding through commercialization’s licensing negotiations. Your company is well-resourced with cash reserves. It maintains strong, branding, marketing and distribution channels. It is full-time staffed with well-qualified licensing and law departments able to delay and deter patent enforcement for years, perhaps decades if necessary. Market timing bottom-line realities dictate beating rivals in cutthroat competitive markets. Distribution will not be enjoined while this technology remains relevant, so there is no risk to infringing but great reward since infringing will allow you to enter the marketplace early while the patent still exists and establish your own market share many years, perhaps a decade, sooner than you otherwise could when patents were a meaningful right. In a Moore’s Law driven hardware market, Gizmo infringement is compelled. You can delay patent enforcement infringement findings by stalling and/or triggering inter partes review (IPR) and court proceedings. If the patent holder doesn’t falter by attrition and if you are found guilty of infringement, your company can still appeal. And any damages awarded must be “reasonable”.

Conclusion

In short, why NOT infringe when:

  1. The AIA’s IPR and court proceedings are available to ensure delay and postpone patent holder infringement damages, if any.
  1. Congress may enact infringement protection “insurance” with measures like HR 9 and S. 1137 to further shield your shareholders from damages and/or punish the few patent holders who could afford to bring suit.
  1. As a well-resourced incumbent, you can simultaneously stall disruptive technology, time your own Gizmo technology release, keep a smaller start-up from getting started, and prevent a strong competitor from beating you to market.
  1. Why risk licensing Gizmo’s unproven new technology ten years earlier when your quarterly bottom line, asset investment reserves and maintaining your incumbency in cutthroat global markets dictate otherwise?

In these common circumstances, business efficiency economically compels efficient infringement. Like abusive patent trolling it must be judicially curbed, not legislatively encouraged.

Efficient infringement is driving mega-tech-promoted patent litigation reform. HR 9 and its assured successors will, if enacted, further shield infringers from the consequences of their cold-hearted business calculations and will further deter patent enforcement by punishing patent holders who risked all to innovate. That is how and why efficient infringement undermines the R&D objectives of the Congress and our nation’s innovation ecosystem. 

The Author

Chris Gallagher

Chris Gallagher is President of IP Strategic.com and a perennial selection to The Best Lawyers in America. Having spent years as one of the most influential and highly regarded advocates in the New Hampshire Legislature and state administrative agencies, Chris is now focused primarily on federal policies in Washington, DC. Chris has been involved in nearly every substantial New Hampshire economic regulatory initiative over the last 25 years. He has served as general counsel for the New Hampshire Bankers Association and has represented New Hampshire utilities, hospitals, insurers, aggregate manufacturers and numerous other entities. This experience provides him with a uniquely respected voice on Capitol Hill, enabling him to communicate effectively with members whose federal decision-making must reflect and respect the complexities of their home-state constituents.

A frequent speaker and commentator in local and national media on policy issues, regarding financial services, privacy, business and government, Chris has testified on financial services issues before U.S. House and Senate Committees and has been a panelist in Capitol Hill briefings on intellectual property issues. He can be reached at chris@ipstrategic.com

Chris Gallagher

Gene Quinn is a Patent Attorney and Editor and President & CEO ofIPWatchdog, Inc.. Gene founded IPWatchdog.com in 1999. Gene is also a principal lecturer in the PLI Patent Bar Review Course and Of Counsel to the law firm of Berenato & White, LLC. 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 18 Comments comments.

  1. Curious October 25, 2016 12:29 pm

    Great article. I just hope it doesn’t get forwarded by inside counsel at the “mega-tech IT incumbents” who are already practicing “efficient infringement” to their buddies at other tech companies as an explanation as to why efficient infringement should be part of “best practices” for any tech company.

    The US patent system has come a long way. It used to be a way for small-time inventors to get a foothold in the marketplace. Now, it is a ‘sport of kings’ only to be used by the extremely well-heeled goliaths in the tech industry. Let’s hope the new administration changes the tone on Capital Hill from the current ‘let’s find new ways to protect infringers’ to ‘let’s return our patent system to a system that recognizes that inventors are good and infringrs are bad — unlike the current system that does the opposite.”

  2. Anon October 25, 2016 1:06 pm

    Some of Mrs. Clinton’s largest backers are a different set of well-established anti-patent forces (Big Banks).

    Given the outsized impact of well-monied “voices” on the Hill (thanks at least in part to Citizen’s United), and the established money “whisperings” into the likely next-President, I would say it would be overly optimistic to see any immediate improvement in the system.

  3. Pat Brown October 25, 2016 5:43 pm

    It will be interesting to see…

  4. Marc Sedam October 26, 2016 6:59 am

    Chris/Gene

    Nice article but way too long. How about this for simplicity.

    “Infringement is the legal definition for when one person uses another person’s IP without permission. By claiming efficient infringement as a strategy companies are taking the view that it’s in their best interests strategically to simply take an idea rather than collaborate with it’s owner and work out how to share the benefits. Efficient infringement is stealing. Stealing is wrong. Efficient infringement is wrong.”

    OR

    “Patents are real property rights which means by law they’re basically treated the same as other property rights like real estate. To allow efficient infringement as acceptable means that it’s perfectly acceptable for a potential tenant to simply move in to an apartment would like to use but won’t pay for, then leave it up to the landlord to prove they deserve to be paid rent.”

    Keep it simple and in language most legislators understand.

  5. Gene Quinn October 26, 2016 9:03 am

    Marc-

    I think I like the second formulation better than the first formulation.

    The longer form explanations are OK if you can get a sit down with Staffers who are interested in giving you a little time and want to try and understand. But there absolutely needs to be an elevator pitch. I think much of what you have here is very, very good.

    I keep coming back to what Ashley Keller told me during a recent webinar. The problem isn’t efficient infringement. The problem is that those who choose efficient infringement don’t have to pay. I think weaving that together with your landlord/tenant example could cut work.

    Thoughts anyone? Keep them rolling in please.

    -Gene

  6. Suggestion October 26, 2016 10:23 am

    Why not call it what it is?

    ***Deliberate Infringement***

    Why not focus on the effect versus the method itself?

  7. Curious October 26, 2016 10:51 am

    Keep it simple and in language most legislators understand.
    That may be the elevator pitch, but if you want people (in the legislature) to advocate for you, you need to get deep into the details.

  8. IPdude October 26, 2016 11:59 am

    Likely more to do with which special interest group lobbies best versus a compelling elevator pitch. Big Pharma and Hollywood vs Google and Apple. Reason and the law doesn’t seem to be something even SCOTUS is adhering to. It’s politics. But sure, we need a good marketing pitch for the cause.

  9. Paulanne Chelf October 26, 2016 12:01 pm

    Mr. Gallagher, thank you for an excellent article. I have one minor suggestion. In your “Gizmo” example, you describe your battery as inflammable. My old Webster’s says that means easily inflamed, and inflame is defined as “to set on fire”. I think you want nonflammable.

  10. Gene Quinn October 26, 2016 12:30 pm

    Suggestion-

    I hear what you are saying, but I think the story of “efficient infringement” is going to resonate because it is sinister. There is no moral high ground, just cold-hearted business calculations that defeat the purpose of the patent system and increasingly the national interest. Individuals and small entities innovate (as a general rule). Those with the size to engage in efficient infringement are merely using their size to continue their dominance.

    This may be about deliberate infringement, but I think it also may be about much more — arrogance and the knowledge that because of their size, available funds and changes in the law they’ve been able to obtain they can simply make the business decision to ignore property rights without any serious, legitimate worry. To me that goes beyond deliberate infringement and exposes the motivations for their assault on the patent system for the past 10 years.

    -Gene

  11. Marc Sedam October 26, 2016 1:53 pm

    I’ve worked a lot with state and local government around IP and the NPE problem and can tell you that the long-form responses may work for the wonks on staff that *want* to know but have limited use to the actual legislators that need to know. You need to give them media soundbites they can memorize and reproduce simply. The reason “patent trolls” worked so well is in two words you can tell (1) what they use, and (2) you think they’re bad without calling them a really bad name. It’s amazing it took almost five years for courts to say the term itself is prejudicial, which seems both obvious and useful (ha ha).

    I used the landlord/squatter analogy to a group of 125 people up here in New Hampshire who had, let’s say, limited exposure to the nuances of patent law but most of whom understood what a patent troll was. In 10 minutes the room understood what I meant, understood it didn’t at all seem fair, and many were swayed to my side of the argument…including staffers of one of our Senators. I also gave testimony to a state’s committee who was investigating the NPE issue. I told them upfront that I thought the term “patent troll” was a pejorative and that in no other civilized business relationship are you permitted to insult your opponent as a starting point. Trust me, the simple stuff works.

    We do ourselves a favor by saving the policy discussions for the backrooms and the quick and understandable soundbites to get the point across. Gene, happy to do a guest post on the topic if you’d like.

    Marc

  12. Curious October 26, 2016 2:23 pm

    I have to run out shortly, but I wanted to get this out there for discussion. One thing we should be doing is taking ownership of the term “efficient infringement” and make sure that it is part of our rebuttal to the anti-patent crowd. Out of curiosity, I googled the term “efficient infringement” (both with and without the quotes). IPWatchdog appears to be the first real hit — a good thing IMHO. People who want to know about efficient infringement should be directed to this website.

    However, what I found very curious was that our buddy, Matt Levy (of the Computer and Communications Industry Association — aka the cabal of major patent infringers), had his article on efficient infringement (basically a denial that it happens) posted “above the line.” I’m not sure whether this was a paid advertisement for the search term “efficient infringement” or something else, but it appears the other side knows how to play the public relations game better than we do.

    Anyway, where appropriate, I try to include the phrase “efficient infringement” into my comments for the purpose of increasing awareness and helping the page rank of Gene’s articles as to this keyword.

  13. Jonathan Olson October 26, 2016 6:44 pm

    An “efficient breach” of contract is one in which breaching parties argue “everyone would be better off” if the breach could continue. See https://en.wikipedia.org/wiki/Efficient_breach. Lawyers know this argument is bunk. “Efficient infringement” is a good name because it saves lawyers and legislators from having to start their evaluation from scratch. Another context worthy of comparison is the statutory damages available for copyright infringement, which are a helpful way of creating certainty (by reducing the necessity to dispute damages).

  14. Lost In Norway October 27, 2016 1:52 am

    Marc,

    I like your sound bite for effective infringement and plan to steal it as much as possible!

  15. Simon Smith October 27, 2016 4:36 am

    Good reading. When you see what Australia is doing and completely disregarding entire patents without investigating them because they see one word “computer”, and the Australian Full Federal Court are too incompetent to understand the dynamics and placement of a computer function and what it means then no wonder. I don’t endorse it at all. Innovation experts are running from Australia as the courts are so backwards. When it ultimately doesn’t come to a question of law but a bench of High Court judges who sit down and decide on the law of the world depending on which side of the bed they woke up, or when they want to have their next donut, it doesn’t give much faith. What deserves to be ‘real’ and ‘heard’ on ‘fact’ and what deserves to stay ‘wrong at law’ is in the hands of a guess. So there are wrongs on both sides really.

  16. Chris Gallagher October 28, 2016 1:45 pm

    Chris Gallagher
    I much appreciate the attention our piece attracted. My friend Marc Sedam’s “effective” infringement is excellent but “efficient infringement’ is how our anti-patent proponents refer to their own practice.Better I think to haunt them with their own words. As for its length I agree it is too long for legislative transmission. But we were trying to create a common meme for IP Watchdog reader use to counter our opponent’s patent troll meme. Creating it takes longer than communicating it .

  17. David Stein October 29, 2016 12:48 pm

    This is one of the best pieces of news I’ve read all year. Thanks for the article!

  18. staff October 31, 2016 4:53 pm

    ‘Silicon Valley cabal’

    We think cabal is a good term to use when describing the alliance of large multinationals to gut the American patent system and legalize theft of their small competitors’ technologies. But the cabal extends beyond tech. They truly are a cabal of infringers (thieves).

    For our position and the changes we advocate (the rest of the truth) to truly reform the patent system, or to join our effort, please visit us at https://aminventorsforjustice.wordpress.com/category/our-position/
    or, contact us at aifj@mail.com