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Category Archives: Patent

Work For Hire – Eligible Works

One commonly misunderstood aspect of IP law is the limited scope of work for hire. The broad concept of work for hire is that one can hire another person to create something, and the hiring party will own the copyright. What many layman and attorneys either do not realize or forget, however, is that unless the work is created by an employee as part of their job (the subject of my next post on this topic), only certain types of works can ever qualify as works for hire, and the list does not include many of the types of works most businesses typically hire outside personnel to create.

Most fundamentally, work for hire is strictly a creature of copyright law. It cannot ever apply to patents. If a business wants to own an invention, it needs to get an assignment.

Even with the respect to copyright, the class of eligible works is small. The list comes right from the definition of work made for hire in the Copyright Law. Here it is.

A “work made for hire” is— (1) a work prepared by an employee within the scope of his or her employment; or (2) a work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.

As one can see, the list does not include many things a business might hire someone outside to create, such as: software; advertising copy; a jingle or theme song; or a drawing or logo. Moreover, for even the permissible classes of works to qualify as works made for hire, there must be a written agreement.

When your business hires an outside source to create material for it, one should always be wary when someone proposes that the parties just execute a work for hire agreement. One must ask, can the work actually qualify as work made for hire? If not, you’ll need an assignment. Consider the type of work involved and if an assignment is required, get it.

In my next post I will discuss what it means to for a work to be prepared by an employee “within the scope of his or her employment.”

Injunctions in Patent Cases – Still Usually the Right Thing to Do

Notwithstanding a series of cases that seemed to tip the scales against enjoining infringers from continuing to infringe, the patentee’s right to enjoin infringing conduct remains not only alive and well, but presumptive.  That is the teaching of the Federal Circuit in the recent case of Edwards Lifesciences v. Corevalve.

In eBay v. MercExchange, the Supreme Court reminded us that injunctions in patent cases were not to be granted automatically, but rather subject to principles of equity.  Several subsequent cases seemed to further tilt the pendulum toward the infringer, notably ActiveVideo Networks, Inc. v. Verizon Communications, in which the Federal Circuit vacated a permanent injunction after a jury verdict of infringement.

In Edwards Lifesciences, the Federal Circuit seems to have righted the ship.  The Court explained:

A patentee’s right to exclude is a fundamental tenet of patent law.  The innovation incentive of the patent is grounded on the market exclusivity whereby the inventor profits from his invention. Absent adverse equitable considerations, the winner of a judgment of validity and infringement may normally expect to regain the exclusivity that was lost with the infringement…The Court in eBay did not hold that there is a presumption against exclusivity on successful infringement litigation.  The Court did not cancel 35 U.S.C. §154, which states that “Every patent shall contain . . . a grant . . . of the right to exclude others from making, using, offering for sale, or selling the invention,” nor did the Court overrule Article I section 8 of the Constitution, which grants Congress the power to “secur[e] for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” The Court held that equitable aspects should always be considered, stating: “We hold only that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.” eBay, 547 U.S. at 394. Statutory and historical as well as commercial considerations impinge on every equitable determination.  Precedent illustrates the variety of equitable considerations, and responsive equitable remedy in patent cases: for example, the grant of a royalty-bearing license instead of imposing an injunction in situations where the patentee would experience no competitive injury, or where there is an overriding public interest in continued provision of the infringing product.

This is as it should be.  The most fundamental of intellectual property rights, like other property rights, is the right to exclude.  It is only in un-ordinary circumstances that the patentee’s right yield to some other equitable consideration.  What remains questionable in my mind is whether such circumstances should include a case like ActiveVideo v. Verizon.  By refusing the injunction and imposing a license fee, doesn’t the court substitute its wisdom as to the appropriate fee for that of the parties, who would likely negotiate a license if the injunction were granted?

The Latest From the Federal Circuit on Injunctions, Sunset Royalties, and Future Royalty Rates

Even if you win your patent infringement case, you still may not get an injunction prohibiting ongoing infringement.  In a case decided last month by the Federal Circuit, ActiveVideo v. Verizon, a jury found that Verizon infringed ActiveVideo’s method patents pertaining to video-on-demand technology, but the Federal Circuit held that the district court erred by imposing a permanent injunction prohibiting Verizon from future infringement.  This is a stark example of the impact of the Supreme Court’s 2006 ruling in Ebay v. MercExchange that injunctions should not automatically issue in patent infringement cases, and worthy of analysis.  Also worthy of scrutiny is what Federal Circuit wrote concerning the appropriate royalty Verizon should be required to pay for future use.

I.               Injunction

There are four elements courts must consider when deciding whether to impose an injunction after liability has been established:  (1) whether the harm to the patent owner is irreparable; (2) whether the harm is compensable with money damages; (3) the balance of the hardships on each of the parties depending on whether the court issues the injunction; and (4) the public interest.

A.             Irreparable Harm/Efficacy of Money Damages

The Court determined that the injury suffered by ActiveVideo as a result of Verizon’s infringement would be compensable by money damages, and would not be irreparable.  The following chart depicting the manner in which the court weighed facts pertaining to irreparable injury.

Factors Favoring Irreparable Harm Factors Weighing Against Irreparable Injury Non-Factors
The parties are not direct competitors Litigation costs – the Federal Circuit held that litigation costs cannot constitute irreparable harm
License non-exclusive – ActiveVideo could maintain its existing license to Cablevision and also license Verzion Loss of market share by ActiveVideo’s licensee Cablevision – the Federal Circuit held that if Verizon takes a customer away from ActiveVideo’s licensee Cablevision, the only harm ActiveVideo suffers is loss of a license fee from Verizon
Ease of quantifying a license fee – Cablevision paid ActiveVideo 17 cents a month per subscriber, Verizon could be required to pay monthly per subscriber also Loss of business opportunity or brand recognition could constitute irreparable injury, but neither was proven
Verizon is able to pay the license fee – the Federal Circuit distinguished the Bosch v. Pylon Mfg. case, in which the Federal Circuit held that the fact that the defendant might not be able to pay a license fee contributed to irreparable injury
No evidence of damage to ActiveVideo’s brand name because Cablevision markets its service using the “io” name, not the Activevision name, so retail customers are unlikely to associate Activision with the service
Verizon’s service increases demand for VOD overall and therefore increases opportunities for ActiveVideo
No evidence of price erosion
ActiveVideo sought to broadly license its patents, including to Verizon
ActiveVideo wiling to extend sunset licensing period

B.             Balance of Hardships

The Federal Circuit held that the balance of hardships favored the infringer.  It analyzed the factors as follows.

Factors Favoring Patent Owner Factors Favoring Infringer Non-factors
Sunset licensing fee alone would generate, in one month, 70% of what patent owner earned in its entire 23 year history Patent owner’s small size
Patent owner would only suffer if not compensated

C.            Public Interest

The Federal Circuit upheld the district court’s finding that the public interest in enforcing the patent owner’s right to exclude outweighed the interest the infringer’s customers may have in maintaining their access to entertainment.  But the court held that the public interest factor could not outweigh the other two, explaining:

If the general public interest in upholding patent rights alone was sufficient to mandate injunctive relief when none of the other three factors support injunctive relief, then we would be back to the general rule that a patentee should always receive an injunction against infringement. But the Supreme Court rejected the idea that there is a general rule that courts should issue permanent injunctions against patent infringement. eBay, 547 U.S. at 393-94. We vacate the grant of a permanent injunction in this case and remand for the district court to consider an appropriate ongoing royalty rate for future infringement by Verizon.

II.             Sunset Royalties

A sunset royalty is, as its name implies, a royalty an infringer must pay while it phases out its infringing product.  The district court imposed a sunset royalty far greater than the amount paid by ActiveMedia’s licensee, Cablevision.  The Federal Circuit upheld the higher royalty amount, explaining:

The district court accepted ActiveVideo’s expert testimony that Verizon received an incremental profit of $6.86 per FiOS-TV subscriber per month. The court analyzed the respective bargaining positions of the parties post-verdict, and concluded that “it would have been reasonable for the parties to make an agreement whereby Verizon would receive 60% of the profits and ActiveVideo would receive 40% of the profits.”  This results in the $2.74 per subscriber per month royalty. The district court rejected Verizon’s suggestion that it should pay the same rate as Cablevision. The district court found that after the patent is held not invalid and infringed by Verizon, ActiveVideo is in a much better bargaining position with Verizon than it was with Cablevision in 2009. Based on the fact that Verizon may be able to design around, but does not know precisely how effective such a design around might be, the court discounted the profit split from the 50/50 to 60/40 (in favor of Verizon).

This may seem high, and while it is likely true that Verizon would not have agreed to that amount prior to litigation, Verizon has been adjudicated to infringe and the patent has been held not invalid after a substantial challenge by Verizon. See Paice [LLC v. Toyota Motor Corp.], 504 F.3d at 1317 (Rader, J., concurring) (“[P]re-suit and post-judgment acts of infringement are distinct, and may warrant different royalty rates given the change in the parties’ legal relationship and other factors.”); Amado [v. Microsoft], 517 F.3d at 1362 (“Prior to judgment, liability for infringement, as well as the validity of the patent, is uncertain, and damages are determined in the context of that uncertainty. Once a judgment of validity and infringement has been entered, however, the calculus is markedly different because different economic factors are involved.”). The district court is correct; there has been a substantial shift in the bargaining position of the parties. See Amado, 517 F.3d at 1362 (“There is a fundamental difference, however, between a reasonable royalty for pre-verdict infringement and damages for post-verdict infringement.”). We reject Verizon’s argument that the district court erred in concluding that the jury verdict placed ActiveVideo in a stronger bargaining position.

III.           Future Royalties

Because the Federal Circuit vacated the injunction, it now becomes necessary for the district court to fix a royalty for the infringer to pay going forward.  The court offered the following comparison of sunset and ongoing royalties, and guidance for the district court on remand:

We held in Amado that an assessment of prospective damages for ongoing infringement should “take into account the change in the parties’ bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability.” Amado, 517 F.3d at 1362. And, although Amado dealt with the imposition of royalty damages while an injunction was stayed during appeal, this holding applies with equal force in the ongoing royalty context.  Though we vacate the district court’s injunction, we see no error in its post-verdict royalty calculation. The district court, on remand, should determine an appropriate ongoing royalty, an inquiry that is much the same as its sunset royalty analysis. The district court may wish to consider on remand additional evidence of changes in the parties’ bargaining positions and other economic circumstances that may be of value in determining an appropriate ongoing royalty. See Paice, 504 F.3d at 1315 (“Upon remand, the court may take additional evidence if necessary to account for any additional economic factors arising out of the imposition of an ongoing royalty.”). Indeed, ActiveVideo’s bargaining position is even stronger after this appeal. We leave the procedural aspects of how to proceed on the issue of prospective damages to the discretion of the district court.

The Federal Circuit further explained that some of the Amado factors considered by the district court in its sunset royalty analysis might not be appropriate to consider when calculating an ongoing royalty. Those might include the defendant’s likelihood of success on appeal, the ability of the defendant to immediately comply with the injunction, and the evidence and arguments found material to granting the permanent injunction.

IV.           Effect on Apple v. Samsung

The Federal Circuit’s teachings in the ActiveVideo case are likely to have significant influence on Judge Koh’s upcoming decision on Apple’s request for an injunction prohibiting future sales of infringing smartphones in the Apple v. Samsung case.  In the fist instance, she is likely to be guided by the ActiveVideo opinion in determining whether to impose the injunction Apple wants.  If she decides not to impose the injunction, then she will likely refer to it if she needs to impose an ongoing royalty.

 

 

IP Licensing Checklist

Here is a general checklist of things to consider when licensing IP, in no particular order. If you spot any significant omissions, please comment.

1)    What precisely is being licensed?

2)    What will be the term of the license?

a)     any automatic renewal?

b)    options?

c)     fee changes in subsequent license periods?

d)    termination rights?

3)    What will be the fee?

a)     how calculated? flat fee? percentage of sales? gross or net?

b)    how often paid?

c)     what currency?

4)    What territory?

5)    Exclusive or non-exclusive?

6)    Licensee’s Rights and Duties

a)     Accounting

b)    Reporting

c)     Branding

d)    Training

e)     Updates

f)     Quality control

g)     Right to modify materials?

h)    Who owns licensee modifications?

i)      Any right to sublicense?

j)      Any right to assign license?

k)    Any sell off of any materials at the end of the term?

l)     Any minimum sales quota or other duty to exploit the IP?

m)  How will complaints be handled?

7)    Licensor’s Rights and Duties

a)     Warranties or Indemnities (duty to defend licensee?)

b)    Training

c)     Updates

d)    Provision of materials

e)     Trouble shooting?

f)     Right to inspect/monitor/approve product and/or marketing materials

8)    Choice of law, choice of forum, mediation or arbitration?

9)    IP registrations, how will they be handled?  Licensee acknowledges licensor’s IP?

10)  Who sues infringers?  If license is exclusive, will licensee have any right?

The Practical Difference Between Contributory Infringement and Inducing Infringement in Patent Cases

The Federal Circuit’s recent decision in Toshiba v. Imation highlights a key difference between the concept of contributory infringement and inducement of infringement in patent cases.  It is that an accused infringer may escape liability for contributory infringement if his product is capable of “substantial non-infringing use”, but if the accused infringer encourages infringing use, the fact that his product is capable of substantial non-infringing use will not save him from inducement liability.

Toshiba illustrates the point.  The Federal Circuit affirmed summary judgment for the defendant on contributory infringement, but reversed on inducement.  The case involved patents for DVD recorders. The court held: (1) Toshiba had not proven that an insubstantial number of Imation users did not take the last step claimed by the patent of “finalizing” their DVDs after recording them; (2) therefore (common sense notwithstanding) a not insubstantial number of Imation users could be skipping that step; and thus (3) Toshiba had not proven that the Imation recorders were not capable of substantial non-infringing use and its claim of contributory infringement therefore failed.

With respect to inducement, however, the Federal Circuit held that because Imation urged users of its product to finalize the DVDs, it was error to grant summary judgment for the defendant.  The Court explained that just because a product is capable of non-infringing use does not mean the defendant is not inducing its users to use it in an infringing manner.  Moreover, in this context, the court explained, where an alleged infringer designs a product for use in an infringing way and instructs users to use the product in an infringing way, there is sufficient evidence for a jury to find direct infringement.

In addition to highlighting the important distinction between contributory infringement and inducement, the case illustrates the potential significance of burdens of proof.  If Imation had been required to prove substantial non-infringing use, it does not seem certain it could have done so.  One might ask whether, as a matter of policy, it is best to place the burden on the plaintiff to prove that an accused product is not capable of substantial non-infringing use, but that is a topic for another day, or for comments to this post.

The Damaged are Welcome; the Merely Annoyed are Unwelcome in Federal Court

Two recently-decided cases brought by Apple illustrate the necessity of identifying real harm to one’s business before filing a lawsuit in federal court.  The court dismissed the first, Apple v Motorola, because Apple was unable to show that it had been damaged by the alleged patent infringement.  In contrast, Apple achieved a tremendous victory in Apple v. Samsung.  The court granted a preliminary injunction prohibiting Samsung from selling its new Galaxy Nexus smartphone, because Apple was able to demonstrate that it was likely to suffer irreparable harm if Samsung was permitted to continue to infringe Apple’s patents.

Apple v. Motorola illustrates the types of claims a business should not pursue.  At the end of that case, Apple was left with claims that Motorola had employed two features subject to its patents, the value of which Apple could not quantify.  At bottom, the court’s reaction was “stop wasting everyone's time.”  Finding that Apple would not be able to prove any money damages, and could not prove entitlement to an injunction, the court dismissed the case.  The court gave the back of its hand to Apple’s claims that the court should issue a declaration that Motorola had infringed or award symbolic “nominative” damages.  The court wrote:  “You can’t go into federal court and say you had a contract with X and X broke it and you’re really annoyed even though you sustained no injury of any sort (in fact you made money because you re-contracted at a higher price) so please give me a judgment for $1 that I can pin on my wall.”

Apple v. Samsung, on the other hand, illustrates precisely the type of case a business should pursue.  In that case Apple was able to show that, unless the court issued a preliminary injunction, Apple would be likely to lose not only phone sales, but immeasurable additional sales when purchasers of the Galaxy Nexus followed that purchase with purchases of other Android products and applications rather than the Apple products and applications they would be likely to purchase if they first purchased an iPhone.  The size of the victory for Apple is reflected in the size of the bond the court required Apple to post: $95 million, the amount of profit Samsung asserted it would lose if it could not sell the Galaxy Nexus.  It seems intuitive that Apple is correct that the smart phone is a “gateway” device that leads one to purchase additional products that use the same operating system as the phone.  Therefore posting the $95 million bond (which is unlikely to be posted in cash, and which will be returned to Apple unless Samsung succeeds in overturning the injunction on appeal or otherwise proving that the court was wrong to grant the injunction) to knock out the Galaxy Nexus seems like it will be good business for Apple.

The take away for businesses should be that there is little utility in starting lawsuits out of spite.  Although you may cause your adversary to incur legal fees and suffer disruption caused by litigation, you are bound to incur costs like that of your own, and to lose momentum when the strong action you trumpeted at the outset of the case turns into fodder for your adversary at the end.  On the other hand, Apple v. Samsung teaches that despite the incessant protests of those who would curtail the protection given to IP owners, those who do suffer actual harm can still obtain not mere vindication, but effective relief in federal court.

 

More Ways to Prove Irreparable Injury

In order to obtain an injunction prohibiting a competitor from violating your IP rights, one of the things you must prove is that his actions are causing you irreparable injury, as opposed to injury that can be remedied by paying money.  When considering possible ways in which your competitor is causing you irreparable injury, it may be worthwhile to consider two concepts proposed by Apple in the Apple v. Samsung case.

The first is a dilution argument.  Apple argued that Samsung’s use of a smartphone design in violation of Apple’s design patent eroded the distinctiveness of the iPhone design, causing Apple harm that would be impossible to quantify.

The second is that lost sales in the smartphone market would have repercussions for sales of other devices, primarily because of compatibility issues.  Once one chooses a phone that operates on the Android platform, for example, one will be more likely to purchase other Android/Samsung products rather than Apple products.

At the preliminary injunction stage, Apple did not succeed on either theory.  The Federal Circuit pointed out, however, that Apple lost not because its logic was flawed, but because there was not sufficient proof to support it.  It seems likely that Apple will be pursuing such proof with renewed vigor as the case goes forward.  Apple’s strategies of proof, whether they are based on surveys, statistics or other measures, and Apple’s success or failure, may provide IP owners with further insight regarding the effectiveness of these theories going forward.

 

Copyright (and Patent) Misuse – It’s Narrower Than You Think

The copyright misuse doctrine does not prohibit a copyright owner from requiring that licensees use the copyrighted work only on it own products. It only prohibits the copyright owner from imposing conditions that prohibit the licensee from making competing products. That is one of the rulings in the recent Ninth Circuit case of Apple v. Pystar. Other discussions of interest in that case concern the validity of software developers issuing licenses rather than engaging in sales to avoid application of the first sale doctrine, and application of injunction standards in the absence of a presumption of irreparable harm. (See my post of July 13, 2011 for a discussion of the elimination of the presumption of irreparable injury in copyright cases.)

The doctrine of copyright misuse derives from the similar doctrine of patent misuse. Basically, it prohibits a copyright owner from using his copyright to inhibit competition in either products that compete with the copyrighted work or tied products. So, for example, in the patent context, once cannot require a licensee of a salt shaker patent to buy salt only from the licensor. One might think, then, that it could be copyright misuse to require that a user of copyrighted software use it only on the licensor’s hardware.

Not so, says the Ninth Circuit. In the Ninth Circuit, copyright misuse occurs only when the copyright owner seeks to prevent a licensee from using a competing product. In the Apple case, the court held that although Apple prohibited use of its software on non-Apple hardware, it did not commit copyright misuse because it did prevent the licensee from developing or using competing software or hardware.

With respect to the license/sale distinction, the court endorsed the principle that so long as the copyright owner restricts the uses that can be made of his product, he can call it a license and avoid the first sale doctrine (the principle that once there has been an authorized sale, the buyer can resell or use the product without restriction).

Notwithstanding the absence of a presumption of irreparable harm, the court found irreparable harm sufficient to impose an injunction, based on the facts that liability had been determined against the defendant, there was a history of infringement, and a significant (albeit unexplained in the court’s opinion) threat of future infringement remains. Hopefully that means that the demolition of the presumption of irreparable harm will not, as a practical matter, curtail the issuance of injunctions in many infringement cases, and infringers will not be able to successfully adopt the infringe now, pay later model.

Real World Effects of the Absence of a Presumption of Irreparable Harm

If you want to see the effect of recent cases abolishing the presumption of irreparable harm following automatically from a likelihood of success, consider the recent decision in the Apple v. Samsung case. Apple sued Samsung for infringements of three design patents and one method patent, each of which pertained to the IPad or IPhone.  Apple sought a preliminary injunction prohibiting sale of three Samsung phones and one tablet.

The court denied Apple a preliminary injunction with respect to all four Samsung products, despite finding that Apple had demonstrated a likelihood of success with respect to three of its patents, in whole or in part because Apple was unable to demonstrate irreparable harm.

If irreparable harm had been presumed, perhaps Apple would have gotten its injunction against one or more of the Samsung products.

Taming The E-Discovery Beast

The Federal Circuit’s proposed Model Order on E-Discovery offers a number of good suggestions that should help reduce the burden of electronic discovery in patent cases, and some that merit further consideration and debate. Among the best ideas are the following three:

1. Requiring separate requests for email, rather than permitting email to be included in requests such as all documents and electronic information. This will sharpen the focus on just what types of email communications are relevant. We should consider whether all types of electronic information should be requested separately, and indeed whether to require that specific types of documents (correspondence, memoranda, drawings, etc.) should be specifically requested rather than encompassed with omnibus terms.

2. Limiting the metadata parties are required to produce to that revealing times of sending and receipt and the distribution list. There are times when creation and edit dates are important, so perhaps that also should be included. Most other metadata is typically irrelevant.

3. Presumptive limits of 5 custodians and 5 search terms. Those limits obviously will not be suitable in all cases, but at least we have a low-number starting point. The suggestions about how to treat conjunctive and disjunctive combinations of terms, and encouragement of the use of narrowing search criteria, are excellent.

Three ideas that merit more careful thought are:

1. The blanket exemption of disclosures of privileged esi from the usual rules concerning waiver, and prohibition on use of allegedly privileged material to challenge the privilege. One might consider whether we should go that far. Exclusion of material based on privilege is an obstacle to the discovery of truth, and examination of the privileged material itself is the best way to see if it should be privileged. Particularly since the model rules require that requests specify custodians and search terms and limit data to senders and recipients, it should be easier to identify privileged materials and therefore we may not need to be so tolerant of inadvertent disclosures.

2. The extent to which the proposed rules rely on cooperation among counsel. Not all patent litigants and litigators are particularly cooperative, and one might argue that we are better off just ringing the bell and allowing the parties to come out fighting rather than asking them to make nice first. The idea that parties will jointly agree to modify presumptive limits strikes me as fantastic. One side or another will always think it is in its interest to have less discovery rather than more and vice versa.

3. The decision not mandate initial disclosure of basic documentation about the patents, prior art, accused products and relevant finances. Why not?

The premise and impetus for the proposed model rules cannot be disputed. Far reaching electronic discovery can be tangential to the real issues in a patent case, and collecting volumes of electronic data with the idea that one will run key searches later is expensive and inefficient. The proposed model rules for patent litigation offer possible ways to address those concerns that merit serious examination, not just for patent cases, but for all intellectual property cases.