The U.S. patent system affects the work of every company and individual in the country, but can be highly technical and difficult to understand. Unified Patents is proud to celebrate Patent Quality Week - June 6-10, 2022 with a few blog posts on why patents matter and educate others about the effects of low-quality patents that can create barriers to innovation and competition.
I. Introduction
Direct patent infringement is often considered a “strict liability” offense.[i] It doesn’t matter if a person accused of infringement intended to infringe, or even if they never heard of the patent or a patentee’s product before the accused conduct. No, the inquiry for patent infringement is black and white: if a person “makes, uses, offers to sell, or sells” something claimed by a patent, they will be liable for direct patent infringement.[ii]
Additionally, whether the patent owner suffered any harm or damages from the person’s actions is irrelevant to liability; the patent owner will at least be entitled to what is called a “reasonable royalty” from the time the patentee gives notice of the infringement to the accused infringer.[iii] The notice may occur either constructively, by marking products, or actually, through a demand letter or by filing a patent complaint.
Often, notice takes the latter form, sprung upon a defendant in the form of a lawsuit years after the defendant has invested in research and development, market testing, advertising, infrastructure, debugging, customer service, and their own patents related to a product or service. And damages awarded often depend on the accused infringer’s success, not the patentee’s actual contribution in the technology space.
One problem with this liability structure involves patents claiming priority to a nearly two-decade old parent patent through a chain of continuations, drafted with an eye towards technology as it is developed and commercialized by others.[iv] Such patents can be filed after the allegedly infringing conduct began, and the defendant will be expected to pay up or stop doing business for claims it never could have seen coming.
This framework fails to promote innovation. Instead, it encourages vague specifications and claims[v] and holding at least one child application open at the USPTO, exacerbating agency backlog so one can eventually read on someone else’s golden goose. Then, when a company does take risks in new markets and succeeds, the patent owner has wiggle room to capture the products in their next continuation patent.
This op-ed, which reflects my views and not those of Unified Patents, suggests that we must revisit the liability framework of patent law to improve patent quality.
II. Background of Liability in Torts
“Strict” liability torts, also called “no-fault” torts, are torts where one can be held liable even without malice or aforethought, such as intent or negligence. In strict liability cases, a plaintiff need only prove that the act occurred and that the defendant was responsible for the act.
Typically, strict liability applies in cases where (1) the conduct in question involves something inherently dangerous, such as an exotic animal or explosives, or (2) the conduct in question involves a product whose defects could not be foreseen by a harmed end-user. In these cases, the idea is that to best serve public policy, society must hold liable those who are best equipped at preventing these harms from occurring in the first place.[vi] Another strict liability tort includes certain types of trespassing, where intent to enter another’s land is enough to show liability.
Patent law is unlike these torts. First, a plaintiff does not need to prove damages or harm from the infringing conduct—monetary harm is assumed if a patent is infringed, regardless of whether or not the patent holder ever developed or invested in a product or service outside of the fees for obtaining a patent.
Indeed, while some may find it convenient to draw an analogy between infringing what has been coined intellectual “property” and the trespass of real property, the damages available in patent cases are incomparable. Even where the patentee has shown no interest to use or make the patented concept, the damages available can be enormous. And regardless of the value provided by the patent, patentees have the right to block others through exclusive or non-exclusive licenses and obtain reasonable royalties from accused infringers for products the patentee might have never foreseen or in markets they never operated. In actual trespassing, damages must be based on injury in fact, such as the loss of use of the property or loss of market value, and injunctions are justified by the fact that land, unlike patents, involve a rivalrous property; that is, one’s use of a land limits the owner’s ability to use it, while one’s use of an idea does not limit a patentee’s ability to use it. But in patents, a reasonable royalty the minimum damages award the patentee is assumed to have incurred. Patentees may alternatively seek lost profits.
Second, there’s nothing inherently dangerous about selling a product that happens to be claimed by a patent. A patentee is never vicariously liable for an infringer’s defective products or exotic services. This point does not require much elaboration.
III. Liability in Other Intangible-Rights Contexts
Patent liability is odd not only compared to other torts, but also other intellectual property fields. First, trade secret misappropriation typically has an intent element.
A finding of trademark infringement may be considered strict liability in that the knowledge or intention of an accused infringer to infringe the trademark is irrelevant to the finding of infringement. This is because, unlike patent law, the central focus of a trademark infringement claim is whether there is a likelihood of confusion, that is, the target consumers might confuse the alleged infringer’s product with the brand-holder’s products.[vii] Unlike patent law, however, trademark infringers must show use of their brand to obtain and enforce a trademark. And, again unlike patent law, an innocent trademark infringer will not be liable for monetary damages.[viii]
Copyright infringement liability is similar to the patent infringement framework, because liability does not exist simply on the basis of use, it is better described as a simple negligence tort than strict liability.[ix] For example, to prove infringement requires evidence of actual copying after having notice of an author’s work, and an accused infringer’s independent creation is an affirmative defense to copyright infringement.[x] Further, there are exceptions for fair use of a copyrighted work. No independent invention defense is available in patent law.
It cannot be that patents are so special or that damages are so much harder to prove than these other types of rights, because at no point in the patent process does a patentee need to prove that their patent actually provides value to society. The value is assumed based on another’s infringement, including infringement arising from another’s independent invention. Quite simply, this may be the only area of civil liability where both the mental state of the infringer is irrelevant to liability AND the minimum monetary liability is untethered to the harm suffered by the plaintiff.
IV. Why Revisit Now: The Rise of Patent Litigation Finance
I am certainly not the first to question the liability framework of patent law, but this unique scheme has resulted in a concerning rise in litigation focused on patent claims. Over the last decade, patent litigation has become an opportunity for litigation funders to treat patent portfolios as speculative capital investments, where capitalization requires the weaponization of the federal court system against productive companies to extract settlements or jackpot jury verdicts.[xi] On its face, litigation funding is not inherently a bad thing. However, the type of plaintiffs often backed by litigation financers, non-practicing entities (NPE), make no products, are not vulnerable to countersuits, are motivated to file complaints based on vague chains of continuation patents described above, have the ability to confuse juries by anchoring the meaning of the claims to an accused product (since there are no patented products), have low operational costs to bring and maintain a suit compared to the companies they sue, and are often structured as shell companies purportedly secure from fee-penalties arising from bringing frivolous claims.[xii] Their game is one of volume, not merit.
Supporters of the litigation finance industry have a simple response to these concerns: stop infringing when you learn of the patent. Don’t do the bad thing, and you won’t get sued. If a potential defendant is innocent of wrongdoing, then the financing industry doesn’t have interest in coming after them. But this response is disingenuous, particularly for patent infringement, for at least two reasons.
First, it is not only dismissive, but naïve to simply advise companies and individuals to just, “stop infringing” because intent is not an element of patent infringement liability –defendants don’t need to be deliberate or willful in their infringement to be found liable. And when a business has reached the point that they are selling a product, they may have already invested millions in getting that product to a point where it is commercially viable. Meanwhile, patentees are not required to do anything to contribute value to this process but happen to own a tangentially related patent.
Second, and perhaps more importantly, this ignores the nature of litigation finance in the context of patent infringement. Litigation finance investments in patent portfolios are not about exposing infringers for the benefit of innovation; rather, these suits require about the same strategy as throwing darts at a target to see with the hope that a few score you some points, and maybe even a bullseye. This is possible because of the unique liability framework of patent law: no defense for innocent infringement, high defense costs, particularly multiple challenges, and a statutory-minimum for damages tied to the infringer’s commercial success.
As the NPE-Litigation Finance trend continues to grow, policy makers should consider a new liability framework to ensure that patents are about protecting innovation, not extorting it.
V. Policy proposals
While this article is intended to encourage discussion on the topic of patent liability, it would be inappropriate to present a perceived flaw in our current system without also providing suggested solutions. The suggestions below are based on my experience in patent litigation, my discussions with others even more experienced on these topics, and my understanding of the policy goals of patent law.
Admittedly, my research in proposing these suggestions is not as rigorous or developed as I’d like. I invite constructive discourse on any suggestion. That being said, I’m not sure that any of the ideas below are entirely new, and while each has its pros and cons, so do the policies of our current system.
Suggestion 1: Remove liability for innocent infringers who have not behaved negligently, i.e., codify an affirmative defense for accidental infringement[xiii]
As a starting point for a prima facie case, notice-based liability may make sense. It would be difficult to prove actual knowledge of a patent or intent to infringe, and a high initial hurdle might disincentivize the investment in and disclosure of inventions.
However, a pure strict-liability framework (perhaps better called “notice-liability” for damages purposes) is not justifiable anymore, when patents can be bought, sold, and asserted as speculative commodities. Thus, there should be affirmative defense for an “innocent” infringer, that is, an infringer who took reasonable care not to infringe.
As an example, one innocent-infringer defense could be based on the infringer’s own patenting or licensing activity, such as if the accused infringer can show that (1) the accused infringer filed or received their own patents or licenses to patents directed to the accused technology, (2) the asserted patents were never cited during prosecution of the accused infringer’s patents, and (3) the petitioner had no reason to believe the asserted patent existed (e.g., no competing products were sold under the asserted patent when the allegedly infringing conduct began). This is just one example of how we could shield good-faith competition from the risk of seven-figure judgments.
Suggestion 2: If (a) the patent plaintiff has never produced a product or service covered by the claims of the patent AND (b) the accused infringer had no actual knowledge of the patent before the first sale of the accused products or services, then a damages award should be tied to the patent plaintiff’s pre-issuance investment in developing a prototype and obtaining a patent
The idea behind this suggestion is to balance the policy interests in innovation and competition by tying the damages to the patentee’s contributions to their alleged innovation and actual harm, rather than the accused infringer’s success, as the current reasonably-royalty minimum framework does.
Reasonable royalties and lost profits awards would still apply to productive patent holders to encourage innovation and competition by newer companies. This would also prevent a patentee from sitting on a million-dollar idea while the innocent infringer does all of the legwork to bring that idea to reality.
Suggestions 3(a) and (b): No liability for continuations filed after the first instance of accused conduct AND/OR patents subject to a terminal disclaimer presumed invalid after a parent patent is found invalid
These suggestions are lumped together because they address continuation abuse. A rule limiting liability for patents filed after infringement would protect otherwise innocent infringers from sleeper patents written to capture infringing conduct only after patentee had the benefit of hindsight. While this policy would not change the effective filing date of continuation patents, it would chill assertions of low-quality sleeper patents and incentivize clarity in claiming in the first iteration of a patent.
Additionally, daisy-chain continuations with similar claims as their parent patents pass through examination with comparatively little scrutiny. Examiners issue double-patenting rejections on these patents if the claimed subject matter is not much different from their parents. Applicants circumvent these rejections by filing a terminal disclaimer. A topic that deserves its own article, these child patents have little public value; if patentees want different claims, they have the option of filing a re-issue application on the parent patent. Continuation chains exacerbate the problem of agency backlog and frustrate emerging technologies. One way to reduce their impact would be to presume that a patent subject to a terminal disclaimer is invalid after its parent is proven invalid.
Suggestion 4: Remove liability for “use” of inventions
Removing use-based liability would (1) protect end-user consumers, including small businesses, as these entities are rarely in a position to know whether products they use infringe a patent or how to defend against a lawsuit, (2) encourage improvements or design-arounds to existing technologies by allowing competitors to experiment with them, and (3) motivate patentees to focus their patenting efforts on products or services that are more than just tangential to their business operations.
Suggestion 5: Codify a laches defense
The current statute of limitations for patent infringement is six years, not from the first act of infringement, but after any act of infringement. The long statute of limitations might be justified by the time it takes to obtain a patent, as a patent may be filed before and issued after infringement for reasons outside an inventor’s control.
But the case may arise where an accused infringer sells a product for six years either quite publicly or with the patentee’s knowledge, and then is only accused of infringement seven years later. Sometimes, the accusation may be triggered by sales of a next-generation model that uses the same accused technology as previous products but is more commercially successful for reasons unrelated to the asserted patent. In cases like this, accused infringers should be able to rely on the lack of previous accusations when innovating other aspects of their product. In the past, defendants were able to assert an equitable defense called laches to prevent claims like this, but in 2017, the Supreme Court observed that Congress never codified a laches defense.[xiv]
Not yet suggested: Reducing the patent term
One thing I have not suggested is reducing the default patent term. Because others have suggested this, it seemed appropriate to address why I have not. While a term adjustment may make sense for fast-changing and low-innovation-cost technologies, such as those in computer science, software, and novelty consumer products, it may not make sense for areas that involve research and development costs as well as hurdles imposed by other regulatory bodies before a product may come to market, such as medical technology and pharmaceutical treatments, fine-motor robotics, and large infrastructure systems like water treatment processes. The problem might not the term’s length, but the broad application of this length across all technology.
VI. Conclusion
Promoting innovation by giving true inventors a time-limited exclusive right on their inventions is sound policy contemplated by the Constitution. But allowing innocent entrepreneurs and businesses to take risks on new products is at least as important a public interest. Given the changing patent litigation landscape, it may be time for policy-makers to revisit the liability framework in patent law to ensure that the public’s interest in promoting innovation is realized and to ensure that it doesn’t come at the price of the public’s interests in the judicial enforcement of only valid and valuable patents, appreciating those innovations, and competition.
