Dr. Dobb's Sourcebook January/February 1997
Bet-your-company patent infringement lawsuits are expensive and time consuming, and they play havoc with marketing efforts. A particularly pesky kind of infringement lawsuit involves "submarine" patents that emerge after secret and relentless efforts in the Patent Office. In some cases, they emerge quickly, but are not enforced for many years. Owners of submarine patents often contend that the patents are sufficiently broad to embrace an entire industry.
In recent years, submarine patents have involved a variety of technologies related to software. These include compression and encryption algorithms, networks, and microprocessor architecture.
One of the more recent gladiators in the submarine arena is E-data Corp. In 1994, E-data purchased a 1985 patent entitled "System for Reproducing Information in Material Objects at a Point of Sale." After dusting it off and giving it a fresh coat of paint, E-data surprised 44 companies with a lawsuit for patent infringement. These companies included Apogee, Broderbund, CompuServe, McGraw-Hill, Waldenbooks, and others. E-data contends that this patent broadly embraces network technology used to sell software, including selling via the Internet.
One of the first cries heard in submarine warfare is that it's unfair to assert a patent against an industry that developed around a technology no one had any reason to suspect was protected by a patent. For battling a submarine patent infringement case, there are four recognized legal defenses that might apply:
All damages for infringements (that is, the manufacture, use or sale of the patented invention) occurring more than six years before the lawsuit is filed are barred in the United States by the "statute of limitations." But this is only a partial defense. It does not bar damages for infringements occurring within the six-year period, nor does it bar the issuance of an injunction, an order that can effectively close a business down.
The right to all damages (but not an injunction) can be lost if the patent owner is guilty of laches: an "unreasonable delay" in enforcement, coupled with prejudice to the infringer due to the delay. There is a presumption of laches (which can be rebutted) if the delay in bringing suit is more than six years. In the E-data case, the patent was issued ten years before the lawsuits were filed. Laches is, therefore, likely to be a significant problem with many of the infringement charges.
Many submarine patents, however, are enforced promptly after they are issued by the Patent Office. Because a patent cannot be enforced until it is actually issued, it is difficult to extend the defense of laches to reach a patent that was delayed in the Patent Office for many years, as long as it is enforced promptly after it issues. Notwithstanding, there has been at least one recent case that supports the application of this defense to delays in the Patent Office.
The right to all relief (damages and an injunction) will be barred by the defense estoppel. An estoppel usually requires the infringer to be mislead (by some affirmative act of the patent owner) into believing that he would not be sued. Mere silence or delay is usually not enough.
A patent will not be enforced if there was "inequitable conduct" in its procurement. Usually, this defense is based on an allegation that the inventor concealed pertinent prior art from the Patent Office. However, some creative defendants are trying to extend this doctrine to reach efforts by an inventor to deliberately delay issuance of his patent. The problem with this theory is that it seeks to invalidate a patent because of a course of conduct, each step of which was lawful.
Until a clear precedent about the fairness of submarine patent suits is issued, a company would be unwise to ignore an infringement allegation simply because it seems to be untimely.
The owner of a patent can sue all alleged infringers at the same time. Delays in enforcing the patent can also have adverse consequences, including enhancement of the defenses discussed earlier and the establishment of a reputation for being "all talk, no action." The prospect of a quick settlement with a few of the defendants is also often a strong incentive.
There is another side to this coin. Suing an entire industry (or even several companies) at once often precipitates an extraordinary amount of return fire. The time and expense needed to handle this response can often be overwhelming, risking defeat of even a meritorious claim.
Widespread accusations of infringement are also difficult to assert with credibility. A careful product analysis is usually required for each accusation of infringement. Wildly making dozens of accusations without having performed this analysis for each exposes the patent holder to several dangers. The court might become hostile to the patent. If a clearly unmeritorious allegation of infringement is made, the patent owner might be found guilty of "misusing" his patent, leading to the loss of other clearly meritorious claims. A broad variety of other sanctions are also available, including having to pay the attorney fees of the other side. Accusing many different products of infringing a single patent also often forces the patent owner to broadly interrupt his patent, increasing the risk that the patent will be invalidated by the prior art.
A company charged with infringement should never simply ask one of its programmers to compare the patent to the company's product and to report the findings. Unless schooled in patent law, there is little chance that the programmer's conclusion will be accurate. Worse, his report is likely to contain statements that could prove extremely damaging in the event of a lawsuit.
Because of the complexity of the infringement question, the law requires a company charged with infringement to obtain competent legal advice before continuing to make or sell its product. If this advice is not obtained, the company can be ordered to pay triple the amount of damages and the other side's attorney fees if it loses the lawsuit.
It is also inadvisable for the company to write a letter responding to the charge of infringement. As with the programmer's report, such letters can cause an embarrassing situation if a lawsuit is filed. Such a letter should be authored by competent patent counsel.
This is not to say that the company should, like an ostrich, stick its head in the sand. There is no substitute for a personal understanding of the issues by management. For more information in this area, see my column "Determining Software Patent Infringement" (Dr. Dobb's Sourcebook, January/February 1996).
With submarine patents, many companies are usually charged with infringement at the same time. Forming a coalition can be helpful. It can reduce expenses and provide an efficient mechanism for sharing important information.
Some patent holders claim that defense coalitions violate the antitrust laws. Generally, efforts to save money and share information do not constitute a violation. But it would be risky to agree as a group not to take a license or to otherwise bind members to a particular course of conduct.
Ultimately, each company accused of infringement will have to decide whether to take a license or risk being sued. Among the factors to consider are:
There is no such thing as a "standard" patent license. Like a software program, there are infinite variations. Generally, however, licenses are structured to require either a single lump-sum payment (either all at once or in installments) or that a percentage of sales be paid as a royalty.
The lump-sum approach has the advantage of being simple, but shifts the risk of product success to the accused infringer. Royalties, on the other hand, require the company to open its books and records to the patent owner, but ensures that the company does not pay for more than what it uses.
In the submarine patent wars, basing a license on a royalty stream has an additional advantage. Under the law, a patent owner usually has no obligation to return money just because a court later declares his patent to be invalid in another case. On the other hand, if the license is based on a stream of royalty payments, the licensed company might have the right to stop making payments the moment the patent is declared invalid. By basing the license upon a stream of royalties, therefore, the licensed company potentially gains the ability to have its cake and eat it, too. The company can avoid the problems of a lawsuit, and at the same time, preserve the opportunity to enjoy many of its benefits if such a lawsuit is fought and won by another company.
But not all defenses can be preserved by the royalty stream approach. For example, the defense of noninfringement will probably be lost forever, even if the identical product is found to not infringe in a later case. The license agreement could be written to preserve these defenses. For example, a company may claim that it does not infringe a patent because its software is missing a particular component. The patent owner, on the other hand, may claim that such a component is not required for there to be an infringement. These same positions may also be taken in disputes with other companies. The license agreement in such a situation could incorporate a term excusing the company from making further royalty payments if the court in another case determines that the disputed component is required for there to be an infringement. As an inducement for such a term, the license could provide that a higher royalty rate will be paid if the patent owner prevails on this issue in later litigation. (To avoid an unfair result, such a clause should also include language describing the nature of the other litigation, to ensure that a sham or collusive lawsuit does not unfairly result in an enhanced royalty payment obligation.)
When a company has a credible defense and there is real doubt about an imminent lawsuit, it may be best to pass on a license. In most cases, the cost of a license does not go up just because a lawsuit is filed. All of the motivations for the patent owner to license are usually still present. Indeed, the adverse consequences of a court defeat often provides an even greater motivation.
Instead of taking a license or waiting, a company accused of infringement can file its own lawsuit against the patent owner. The lawsuit would seek a "declaratory judgment" that the company does not infringe, that the patent is invalid, or that there is some other defense.
A good candidate for a declaratory judgment action is a company that is about to invest a great deal of money in a new technology accused of infringement. It might be years before the patent owner files suit. The company may not want to risk the accumulation of damages over such a long period of time.
Filing an action for a declaratory judgment, however, almost guarantees a counterclaim for patent infringement, thus injecting a company into the very lawsuit it probably wanted to avoid. Thus, as a practical matter, few companies file a declaratory judgment action for this reason.
There are other circumstances where an action for declaratory judgment is useful. One is where the company's customers are being threatened with a suit. In many cases, the company can file an action for a declaratory judgment and then seek an order prohibiting the patent owner from threatening its customers.
When a lawsuit by the patent owner seems imminent, a declaratory judgment action is sometimes filed as a means of forcing the dispute to be litigated in a court of the company's choosing, and not the patent owner's choosing. This approach is not always successful, and disputes over "venue" often waste a lot of money.
Redesigning the software will not relieve the company of its obligation to pay damages for past infringement. But redesigning can eliminate the prospect of future infringements and thus make it less attractive for the patent owner to bring suit.
During the process of obtaining the patent, the inventor is often called upon to justify issuance of a patent by distinguishing his invention from the prior art. Typically, he does so by explaining what his invention is and is not. These explanations are usually contained in written documents that are placed in the "file wrapper" of the case.
A careful analysis of the patent and these statements often illuminate a safe pathway for a design change. And there is nothing wrong with designing around a patent. The principal purpose of the patent system is to promote the progress of technology. Avoiding a charge of infringement by designing around the patent often produces an advancement in the art and thus is recognized as a fair alternative.
Inventions can often be broken into pieces and patented separately. When these pieces are contained in a single application, "divisionals" of the application can be filed, each one of which can mature into a separate patent. Divisionals can be filed at any time up until the day the patent actually issues.
An emerging strategy for submarine patent owners is to file a divisional at the moment the original application is about to issue as a patent. Once the original application issues, enforcement efforts are initiated. While this patent is being battled by infringers, the patent owner molds his divisional application (which the Patent Office examines in secrecy) to avoid the problems surfacing in the ongoing lawsuit over the issued patent. If claims enforcing the issued patent fail, a divisional patent can sometimes be secured later, providing the basis for a brand new round of infringement allegations. Before the divisional application issues, moreover, a new divisional can be filed, allowing the process to repeat.
I am currently engaged in a legal dispute involving exactly such activity. Although it is easy to call this procedure unfair, it is far from clear that it will be ruled unlawful.
Submarine patents are here to stay. They are also growing in number, particularly in the software industry. Coupled with the increasing respect that software patents are receiving in court, a submarine patent infringement claim should be treated with care.
DDJ