Vol. 77, No. 4, April 2004

Meet the Patent Enforcers

by Derek C. Stettner

our company or client may have no patents, so you may think you have little or no need to concern yourself with patent matters. The activities of some patent holding companies and law firms, however, are making patents the concern of more and more entities. In the past, most patent disputes involved competitors, each making and selling products containing proprietary technology in the same market. Today, some patent owners have found that enforcing patents against retailers and end users can yield millions of dollars in payments.

In many instances, end users and retailers have no involvement in creating the technology that is alleged to infringe, do not know the details of how the technology or products they use or sell work, and lack the technical or legal savvy to defend against patent infringement claims. In addition, many end users and retailers have found that they do not enjoy warranties or indemnities concerning infringement. Even when they do enjoy noninfringement warranties or intellectual property indemnities, end users and retailers still may have to spend time and money to defend against patent infringement claims or to settle those claims.

When first presented with this upside-down scenario, many defendants are confounded. Regardless, use of this relatively new patent enforcement model is likely to grow. Buoyed by the successful licensing and enforcement programs of Jerome Lemelson¹ and others, patent enforcers see many possibilities for generating revenue. As a consequence, more entities will have to concern themselves with patent issues.

How We Got Here

Until about 20 years ago, most companies did not try to broadly license or enforce their patent portfolios. In most cases, companies were building security fences around their products and services to help prevent or, when legally possible, to stop competitors from competing.

In general, many of the patents obtained in the past covered products or processes that actually were introduced into the market. However, the U.S. and most foreign countries do not require an inventor who obtains a patent to actually build or implement his or her invention. An inventor need only create a design. Patents issued on designs are sometimes referred to as "paper patents," because the inventor never builds a prototype before filing the patent application and may never actually build a product or implement a process embodying the invention. In some cases, the inventor may never intend to start a business selling products or services that implement the patented technology. The issuance of paper patents can result in situations in which inventors "invent patents" rather than "patent inventions." For little effort beyond creating a preliminary design and filing a patent application, an inventor may obtain patent rights. As a result, even though the patent system is based on the premise that a patentee obtain exclusive rights in exchange for making an invention public and free to all once the patent expires, there are instances when the inventor may not have contributed all that much to the accumulated knowledge of humankind.²

For the most part, the issuance of paper patents is not a problem. Many paper patents contain viable designs and contribute to the art. Further, most inventors obtain protection only for what they have contributed to the field. If the contribution is small, the patent is usually narrow. Also, most inventions never achieve commercial importance. Thus, the patents that cover them are not significant. However, some patents are broad enough to cover widely used technology. A large number of companies may be required to obtain a license to such patents or stop using certain technology to avoid liability. Further, some patents are issued in error. Since all patents are presumed valid, erroneous patents cannot be ignored. Companies often may have to spend time and money obtaining formal opinions regarding the invalidity of such patents or in defending against infringement allegations.

The patent owner is granted certain rights. The patent statute states that "[e]xcept as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention ... infringes the patent."³ There is no requirement that the patent owner actually make or provide a product or service embodying the invention (known as "practicing" the invention or patent). Nor is there any requirement that the infringer make the infringing device. In simple terms, a plaintiff must prove just two things: ownership of the asserted patent and that the allegedly infringing device or process (regardless of who made or designed it) is covered by at least one claim⁴ in the patent.

As noted, until recently, most patent lawsuits involved a plaintiff company that actively made and sold a patented invention suing a competitor that actively made and sold a product or service that, it was believed, infringed the patent. Retailers and end users were rarely sued, even though their activities may have constituted infringement under the applicable law. Often, the patent owner would not sue an end user or retailer because maintaining good relationships with end users and retailers was important. Regardless of their legal status as an infringer, the end users and retailers were often purchasing products and services from the patent owner.

Most patent owners also did not aggressively enforce or license their patents in the past. This started to change in the late 1980s. Companies such as IBM, AT&T, National Semiconductor, and others began to successfully license their patent portfolios on a relatively large scale. These activities began to demonstrate the potential value of patents. Other events, including infringement lawsuits in which judges awarded millions of dollars in damages and issued injunctions that had enormous impacts on defendants, let the business world know the power of patents.⁵ By the 1990s, Jerome Lemelson had started an enforcement campaign against hundreds of companies, asserting that his patents covered such basic and ubiquitous technology as bar coding. Most of the companies settled with Lemelson. Regardless of the merits of any particular case, taking a license or entering a settlement often was cheaper than litigating the matter. Settlement also assured a defendant that it would be able to continue an ongoing business activity important to its commercial success. As his enforcement activities continued, people soon noticed how much money Lemelson collected.

Knowing that patent lawsuits can be very expensive and have devastating effects (for example, imposition of an injunction) on a losing defendant, and having seen the success of other enforcement efforts, some individuals started companies with the sole or main purpose of finding patents of broad (or purportedly broad) applicability and then enforcing them against alleged infringers. Often, these entities seek out end users and retailers to take licenses, rather than seek out the companies that manufacture the allegedly infringing products. One reason this is done, apparently, is to avoid the "first sale doctrine."

Under the first sale doctrine, the first sale of an item under the patent owner's authority exhausts the patent owner's rights, so that the purchaser is free to sell or dispose of the item without further authority from or payment to the patent owner. If no manufacturer of the allegedly infringing products is authorized to make them, then none of the buyers is authorized to purchase them. Thus, a situation that may arise involves a patent enforcer, who owns a patent but neither makes nor provides any products or services, and who most likely has no intention to do so, seeking enforcement against sellers or users of a technology. The patent enforcer seeks recourse against an alleged infringer who purchased the product or service from someone else and likely has little, if any, in-depth knowledge about how the product works and little technical expertise in the relevant field. The consequence is that the classic patent infringement lawsuit scenario is turned on its head: instead of competitor versus competitor, it is patent owner versus end user or retailer.

There are other consequences of this enforcement technique. First, since the patent enforcers don't manufacture or provide any products or services, they generally are not interested in a cross-licensing arrangement, in which the defendant licenses its patent(s) in exchange for a license to the plaintiff's patent(s). Second, long-term business relationships and other commercial considerations are not always important to the patent enforcers, because they generally are not, other than by enforcing their patents, participants in the marketplace.

Although the classic patent enforcement model has changed, this may have some benefits. It has long been said that the patent system is skewed in favor of large companies that have huge patent portfolios and the money to pay lawyers to enforce their patents. It has been assumed that individual inventors have little or no chance of enforcing patent rights. Since the law firms that work for patent enforcers may work on a contingency basis, they do offer individuals a mechanism to enforce their patents and a greater chance at reaping a reward for their inventive efforts. According to one attorney, "It's like Robin Hood. We take from the rich and give to the poor."⁶

However, at least some people believe that patent enforcers are taking advantage of the patent system, especially in cases in which paper patents are involved and there is a refusal to deal with the manufacturers of the products involved. Peter Detkin, Intel assistant general counsel, was quoted as saying, "We were sued for libel for use of the term 'patent extortionists,' so I came up with 'patent trolls.' A patent troll is somebody who tries to make money off a patent that they are not practicing, and have no intention of practicing, and in most cases never practiced."⁷

No matter what feelings people have on the subject, it appears that patent enforcers are here to stay. That means that your company or your client, as an end user or retailer of some product or service, might get a letter asserting that a particular product or service infringes a patent.

Who Are the Patent Enforcers

Numerous companies enforce their patents, including companies like IBM, Intel, and so on. When possible, it may be wise to actively search for and research entities that may be instituting enforcement campaigns in technology areas that are of interest to you or your clients. With the help of a law librarian or patent attorney it should be possible to identify entities that are instituting enforcement campaigns.

Enforcer Tactics and Suggestions for Responding

What appears to be the most common enforcement technique is to send licensing letters to or file lawsuits against end users and resellers of an allegedly covered product or service. Sometimes the first parties to receive these letters or complaints are companies that either cannot or do not wish to defend a patent lawsuit. These companies also may not wish to risk having any kind of injunction issued against them. Thus, they generally will settle any claim or take a license as quickly as possible. After a first round of settlements, patent enforcers may continue against other companies. Supported by the monies collected during earlier rounds, patent enforcers may take more aggressive actions, such as filing lawsuits without sending any warning letters. In any event, successive rounds of licensing arrangements are completed until the patent enforcer is satisfied or until one or more defendants successfully prove that the asserted patent is invalid or not infringed (although a noninfringement verdict for one defendant does not guarantee that other entities will be found to have not infringed).

In many cases, a patent enforcer will first send a letter explaining its position and offering a license, sometimes on financial terms that are lower than the cost of litigating an infringement case and, in some situations, considerably lower. For example, a patent lawsuit from beginning to a jury verdict might cost several million dollars. Licenses sometimes may be purchased for tens of thousand of dollars. Even purchasing a license for several hundred thousand dollars may be a very good result in some circumstances. But taking a license to avoid litigation expenses is not the only option for end users and retailers.

End users and retailers, despite often having no involvement with the design or production of the product or process at issue, still should review many of the same issues present in a classic patent infringement situation. First, check whether in fact anyone in the company was involved in the design or manufacture of the product or process at issue. If so, the company may face a situation that resembles the classic patent infringement scenario.

Next, in most cases, regardless of the answer to the first inquiry, a review of purchase contracts for warranties or indemnities regarding intellectual property should be conducted. It may come as a surprise that many manufacturers disclaim any warranties of noninfringement and that many do not provide an indemnification against patent or other intellectual property claims. Where possible (and hopefully before an infringement claim is received), negotiate warranties, indemnification provisions, or both as a part of your purchase agreements. Many sellers may rightfully balk at broad noninfringement warranties, in light of the difficulty of ensuring that a product does not infringe intellectual property rights, but many companies are willing to include indemnification provisions in their contracts. As always, an indemnity is only as strong as the financial position of the company providing it. In some circumstances, guaranties, escrows, insurance, or a combination of these items may be necessary to ensure that the indemnity will be worth something if a dispute arises.

Of course, if a claim is made against you or your client and you have a contractual warranty or indemnity, take timely action to ensure that you comply with any conditions of the warranty or indemnity obligations of the seller.

In addition, review with a qualified patent attorney the need to obtain a competent opinion regarding whether your activities actually infringe the asserted patent and whether the patent is invalid. Obtaining such an opinion will not stop the other side from pursuing its claims, but the opinion will likely be critical in protecting a company against enhanced damages that can be imposed on an entity found to have willfully infringed a patent.⁸ Obtaining a competent opinion can be costly, particularly when multiple patents are being asserted, and this is another cost that patent enforcers may factor into the settlement equation. However, if you are certain that there is no infringement, sometimes a well-written explanation of your position will result in the patent enforcer dropping the matter or settling on more favorable terms.

You should also review your own insurance policies to see what coverage you have against infringement claims. In some cases, obtaining new or additional insurance may be a viable option.

A practice that may help an entity guard against a patent lawsuit is to increase or begin a patent procurement program. Generally, if an entity procures a patent on a specific technology, no one else can obtain a patent on the same technology. In addition, maintaining a cache or record of old products and a library of literature that relates to your business may be extremely helpful in attempting to invalidate a patent. Although not always effective, a letter explaining that a patent is invalid because it covers products, services, or technologies that were known before the patent was filed can have the same impact as a letter explaining a noninfringement position. In fact, the two issues (noninfringement and validity) often are addressed in a single letter.

Several other responses can be made to a patent enforcer. In some instances, defendants have formed alliances to share the costs and burdens of defending a patent lawsuit. Such alliances can be effective, but need careful evaluation, because they may compromise the individual rights of a participating entity.

In some instances, it may be possible to influence the actions of government agencies. Again, careful planning must be done to ensure that such influence is made within the bounds of the law, but the Federal Trade Commission may investigate the conduct of entities enforcing their patents⁹ and the U.S. Patent and Trademark Office may reexamine patents that are being enforced.¹⁰ Thus, in some circumstances it may be appropriate to consider seeking relief from less common sources.

In addition to the above responses, at least one company has filed a lawsuit. Rockwell Automation Inc. filed a lawsuit against a company called Solaia Technology LLC.¹¹ Solaia never sued Rockwell for patent infringement but rather alleged that Rockwell's customers infringed Solaia's patent by using Rockwell's products in certain systems. As a consequence, Rockwell filed a complaint that, among other things, asserts that Solaia conspired to harm Rockwell's relationships with its customers.¹²

Conclusion

For many companies there is no simple answer as to how to respond. In some cases, and when it is believed that a strong defense position is available, it may be appropriate to fight a claim, even though the cost of defending exceeds the cost of settlement. The reason for spending the extra money is to avoid obtaining a reputation as a company that always settles the complaints made against it. Regardless of the ultimate decision on how to respond, the increased level of patent enforcement will require many entities not accustomed to handling patent issues to deal with them head-on.

Endnotes

¹Jerome Lemelson was a prolific inventor who was issued more than 500 patents on a variety of technologies, including fax machines and bar coding. He and a foundation bearing his name successfully enforced numerous patents against some of the world's largest companies. The exact amount of royalties collected is unknown to the author, but the foundation is known to already have given $70 million "to programs related to invention in the U.S." It is reported that Lemelson's attorney collected some $400 million in fees. Brenda Sandburg, You May Not Have a Choice. Trolling for Dollars, Recorder, July 30, 2001. Lemelson's patent procurement strategies were criticized as creating "submarine patents," because many of his applications were pending for decades, during which time whole industries were sometimes built around a technology later alleged to be covered by one or more of Lemelson's patents.

²By way of background, the patent system is based on a quid pro quo exchange. Inventors generally are entitled to do whatever they please with their inventions, including maintaining them in secret. To motivate inventors to make their inventions public, the government offers exclusive rights in exchange for the inventor describing the invention in a patent. Thus, if an inventor properly describes the invention in a patent application and meets the statutory requirements of having a useful, novel, and nonobvious invention, the inventor or his or her successors are granted rights for a limited time to, among other things, exclude others from making, using, or selling the invention covered by the patent. 35 U.S.C. § 271. The limited period of exclusivity is generally seen as time for an inventor to enjoy competition-free activity in the market, recoup his or her investment, and make a profit. For the most part, despite flaws, the patent system has worked and continues to work well. It is often credited, at least in part, for the technological leadership that the U.S. enjoys in many fields. See Gordon V. Smith & Russell L. Parr, Valuation of Intellectual Property and Intangible Assets 6-7 (John Wiley & Sons, Inc. 2d ed. 1994) .

³35 U.S.C. § 271 (emphasis added).

⁴A "claim" is a paragraph at the end of a patent that describes in words the invention that the patent owner is claiming exclusive rights to. 37 C.F.R. § 1.75. A patent can have numerous claims. Id. A claim is analogous to a deed to real estate and sets out the metes and bounds of the intellectual property of the patent owner.

⁵See, e.g., Polaroid v. Eastman Kodak Co., 16 U.S.P.Q.2d 1481 (D. Mass. 1990) (district court awarded more than $900 million in damages and interest to Polaroid).

⁶Quote of Ray Niro, Niro, Scavone, Haller & Niro, in Brenda Sandburg, You May Not Have a Choice. Trolling for Dollars, Recorder, July 30, 2001.

⁷Quote of Peter Detkin, in Sandburg, supra n.6.

⁸See 35 U.S.C. § 284 (allowing for treble damages).

⁹See Mike Magee, Rambus Facing Antitrust Case, Inquirer, June 19, 2002.

¹⁰See, e.g., Reexamination No. 90/006,170 (Reexamination of U.S. Patent No. 6,215,754 for High Capacity Compact Disk Player, owned by TechSearch LLC) <>.

¹¹Brenda Sandburg, Law Firm Sued Over "Sham" Patent Suits, N.Y. Law., Dec. 20, 2002.

¹²Id.

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