New Study: Non-Practicing Patent Holders are Not Overcompensated

A new study was published last month, titled "Revisiting Injubctive Relief in High Tech Industries With Non-Practicing Patent Holders," which looked at alleged market power abuses of non-practicing entities. The paper, authored by Vincenzo Denicolo, Damien Geradin, Anne Layne-Farrar, and Jorge Padilla analyzes various assertions about patent hold-ups, injunctions, and royalty stacking, and concludes that there is no reliable evidence that shows that they are being rewarded "unjustly":

Injunctive relief is at the center of the intellectual property debate over market power abuse. Some scholars, with fears of patent holdup and royalty stacking in mind, have advocated limiting the right to obtain an injunction. In particular, some have called for categorical denials of injunctions for any “non-practicing” patent holder or whenever the patent in question is but one component of a larger, complex product incorporating multiple patented technologies. In this paper we examine the injunctive relief policy proposals using an error cost framework. We find the theory these proposals rest upon to be overly restrictive and therefore likely to result in substantial “false positives”, where patent holders with no designs of patent holdup are nonetheless denied injunctive relief. Moreover, the available empirical evidence does not support the position that patent holdup and royalty stacking are pervasive enough problems to warrant significant policy reform. Instead, we argue that the recent Supreme Court eBay decision can and should be read as a return to a balancing test, where costs and benefits are weighed carefully before granting or denying a patent injunction.

It's a very interesting study, that highlights some policy implications:

[A]ny delay in payment [for infringement] benefits the infringer and harms the patent holder since a dollar today is always worth more than a dollar tomorrow. This is doubly true for R&D focused firms who rely on licensing for their revenues. Nor is there any guarantee that the courts will apply an appropriate interest rate to account for the lost time. Thus, infringers have strong incentives to drag out proceedings while patent holders have incentives to settle.

Furthermore, when courts finally do force payment, patent holders face considerable dangers in a court setting its royalty rates. Specifically, in the absence of ex post holdup a court-set royalty rate acts as a "cap", not a floor, on licensing terms . . . Furthermore, if a court sets a rate too low, it will not only cost the firm in that one transaction but will hinder the firm’s future negotiations, as no other party will pay more than the publicly noted court rate. This dynamic reinforces patent holders incentives to settle on a license, even when it appears that they will win a court case, just to avoid court set rates.

It is therefore easy to imagine circumstances where hardship arguments could favor either side in a patent dispute. Patent holders face substantial delays in receiving payment, delays that might jeopardize their operations; they also face the risk of inadequate royalty rates set by a court, and the long term repercussions that entails. On the other side are the potential losses to a manufacturer from shutting down its plant and the impact this might have on customers or the industry. It is the case particulars under the test that should decide this question, and not the business model of the patent holder.

Download a copy of the paper here (link)

See also Lemley, Shapiro, "Patent Holdup and Royalty Stacking" (link)

MercExchange v. eBay Remand - Injunction Denied, Partial Stay Granted

MercExchange v. eBay, (E.D. Va.), July 27, 2007, case no. 02:01cv736

In the remanded case, the district court considered MercExchange's motion for a permanent injunction, and eBay's motion for a stay, pending the outcome of the reexamination.

Judge Friedman first considered the motion stay the proceedings, given that the '051 and '265 patents were initially rejected by the USPTO. After reviewing the facts surrounding each patent, the court granted a stay for the '051 patent, but denied the '265 patent, due to "vastly differing procedural postures":

[T]he court has considered the timing of eBay’s request for reexamination; namely, that reexamination was sought by eBay after the jury reached a verdict on the ’265 patent in favor of MercExchange. Thus, even in light of the non-final PTO actions indicating that all claims of the ’265 patent are invalid as obvious, the court is not inclined to stay the post-trial proceedings as doing so would create the incentive for adjudicated infringers to seek to circumvent an otherwise enforceable jury verdict by utilizing an alternate forum.

* * *

[U]nlike the advanced stage of the litigation involving the ’265 patent, the ’051 patent never reached the jury as prior to the 2003 infringement trial on the ’265 and ’176 patents, the court granted summary judgment in favor of eBay on the ’051 patent, finding such patent unenforceable for failing to provide an adequate written description. This court’s grant of summary judgment was thereafter reversed by the Federal Circuit, but as five years have passed since discovery was conducted on such dispute, it does not appear that the parties are presently prepared for trial. Likewise, the fact that a large portion of the trial evidence will involve experts further indicates that both plaintiff and defendants will need to expend significant additional time and resources to prepare for trial.

Regarding the permanent injunction, the court found that MercExchange failed to satisfy most of the SCOTUS 4-prong test:

Irreparable Harm:

The court found it significant that MercExchange entered licensing negotiations with multiple parties, including UBid.com, during and after the litigation with eBay. Because the evidence showed that MercExchange was primarily interested in money, the court ruled against it in this regard. Interestingly the court also also distinguished between patentees that used their inventions as a "sword" versus those that use them as a "shield":

This court recognizes and concurs with such utility and further recognizes that a patent holder’s decision to establish a licensing program does not negate the possibility that such patent holder will suffer damage to its goodwill, reputation, research and development opportunities, or ability to bring a unique product to market. However, the majority of the utility achieved by such licensing programs results from the fact that patent holders are still seeking to develop their patent, they are just opting to do so in partnership with others. In contrast, here, MercExchange’s modus operandi appears to be to seek out companies that are already market participants that are infringing, or potentially infringing, on
MercExchange’s patents and negotiate to maximize the value of a license, entered into as a settlement to, or avoidance of, litigation. Such consistent course of litigating or threatening litigation to obtain money damages by a company of two employees,
the inventor of the patents a former patent attorney, indicates that MercExchange has utilized its patents as a sword to extract money rather than as a shield to protect its right to exclude or its market-share, reputation, goodwill, or name recognition, as MercExchange appears to possess none of these.

Adequate Remedy at Law:

Again, since MercExchange was "only in it for the money," so to speak, the court found this factor weighed against Mercexchange.

Although the court recognizes that MercExchange has every right to utilize its patents in such manner, such behavior suggests that an injunction against eBay may also be used to obtain similar ends. Utilization of a ruling in equity as a bargaining chip suggests both that such party never deserved a ruling in equity and that money is all that such party truly seeks, rendering monetary damages an adequate remedy in the first instance.

Balance of the Hardships:

Recognizing that forced royalties are an "imperfect solution," the court found that royalties were nevertheless the best option. Noting that this factor "favors neither party," the court stated that too much uncertainty lingered over the validity of the patents, especially in light of KSR. If the patents are found to be ultimately invalid, the "equitable calculus" would change.

The Public Interest:

On this prong, the court noted that it "weighs slightly against entry of an injunction." Being careful not to issue any categorical rules, the court considered the type of patent involved, the impact on the market, the impact on the patent system, and any other factor that may impact the public at large.

When considering the type of patent involved, the court ran with Justice Kennedy's concurring eBay opinion and KSR to disparage business method patents:

[T]he ’265 patent is a business method patent that appears to rely upon combining non-unique elements into a unique combination. The questionable nature of many business method patents has both forced the PTO to implement a second level review policy . . . See eBay, 126 S. Ct. at 1842 (Kennedy, J., concurring) (recognizing that the “potential vagueness and suspect validity of some [business method patents] may affect the calculus under the four-factor test”). Furthermore, the validity of patents constituting nothing more than a combination of elements depicted in prior art producing a predictable result was recently called into question by a unanimous Supreme Court in KSR, 127 S. Ct. at 1739. Here, although the ’265 patent is presently valid and enforceable, the court must recognize that such patent never underwent a “second look” review by the PTO and that interim findings from the PTO during reexamination have twice indicated that every claim in the ’265 patent is invalid as obvious. Although this court does not ground its opinion in
speculation regarding the final outcome of such reexamination, it would be futile to attempt to craft forward looking equitable relief without considering foreseeable future events.

Also, in a footnote, the court looked at the use of litigation financing companies (Altitude Capital), and noted that money used for funding litigation, instead of development of the patents, weighed against injunctive relief:

Altitude Capital invested such funds to purchase an interest in MercExchange’s litigation recovery. Specifically, $4 million of such investment was distributed to MercExchange’s three members, and a large portion of the remainder was used to fund litigation or set aside as a reserve to pay MercExchange’s two employees salaries of $240,000 a year; little appears to have been devoted to developing the patents. Although the court accepts MercExchange’s sensible explanation that such investment, although substantial, was insufficient to enter the market as a freestanding competitor to eBay, it nevertheless appears to represent a bypassed opportunity to attempt to develop MercExchange’s patents.

View the opinion here (link)