The Software Patent Mess

In monetary terms, the Supreme Court case being heard next Wednesday – pitting online retail giant eBay Inc. against its left-in-the-dust competitor MercExchange – might seem trivial. MercExchange, which won the original suit in 2003, by proving to a Virginia jury that eBay’s “Buy it Now” direct purchase feature had infringed on a 1994 patent filed by its founder Thomas Woolston, received $29.5 million in compensatory damages – a mere rounding error measured against eBay’s $4.5 billion in revenues last year. Consider that BlackBerry device manufacturer Research In Motion just agreed to pay $612.5 million to end its own long-running legal battle with Network Technology Partners (NTP).

But don’t be fooled by the small stakes in eBay’s appeal. By taking its case to the highest court in the land, the company is looking to even a playing field that many of its supporters say currently favors the plaintiff in almost every patent dispute. With patent reform still trudging through Congress, only a clear signal from the Supreme Court can keep a $612.5 million settlement from becoming the norm – now that plaintiffs’ patent attorneys have tasted blood.

“If eBay is successful, patent trolls will have one less weapon to use against legitimate firms,” says University of Chicago law professor Douglas Lichtman, one of 52 legal scholars who have signed a friend of the court brief supporting eBay’s position.

That “weapon,” in both the original MercExchange filing and the more recent Research in Motion resolution, is the “general rule” observed by federal district courts in granting a permanent injunction – a severe legal penalty, in which, in the wake of a successful plaintiff verdict, a judge orders a defendant to shut down a disputed technology pending appeal.

The roots of this general rule lie in the U.S. Constitution. According to Article I, Section 8, a U.S. patent holder enjoys not just ownership of an idea, but also the “exclusive right” to determine how that idea will be presented or marketed to the public. Over time, courts have come to interpret that “exclusive right” as a directive to err on the side of the plaintiff during the appeals process.

Proponents of the rule see it as a check against foot-dragging by a defendant. Without the threat of substantial revenue loss caused by an injunction, deep-pocketed defendants could tie up litigation, draining the monetary resources of small-time patent holders. Proponents also emphasize the limited time protection granted to U.S. patent holders – 20 years from the date of the first application filing – as another reason for the rule. “By its very nature, the patentee’s loss of its finite exclusivity period is irreparable,” notes a pro-MercExchange brief jointly filed by the American Intellectual Property Law Association and Federal Circuit Bar Association.

Those on the opposing side point to the increasing number of patent claims in software technology and Web services – two realms where shared standards, haphazard documentation, and the recent convergence of once-independent technology platforms have created a target-rich environment for savvy patent plaintiffs. Given the U.S. Patent and Trademark Office’s eagerness to hand out patents on broadly defined concepts, such as one-click Internet shopping, the automatic injunction threat has become a Sword of Damocles, hanging over not only defendants but also customers who rely on their services.

“Modern innovation often involves collaborative efforts among otherwise independent entities,” notes a brief filed by IBM in support of eBay’s position. In other words, while industrial-era manufacturers had the ability to fly solo, steering patent-worthy concepts from research and development to the marketplace, today’s innovative companies, at least in Web-based services, rely on the technology community as a whole to support emerging platforms and standards. This dependency tends to blur the clear lines of ownership, leaving successful companies exposed to easy infringement claims. “While the patent laws and their interpretation have responded flexibly to changes in technology, business, and commerce,” the IBM brief adds, “the Federal Circuit’s approach to patent injunctions has become rigid.”

In the case of eBay, the company’s lead law firm, Skadden, scored a rare grace period last spring, when an appeals court judge agreed to suspend a court-imposed sanction that would have shut down its “Buy it Now” service pending a Supreme Court review. At issue is the fact that MercExchange, while still in the online retail business, no longer offers the service to its customers, so that the injunction arguably puts patent-holder rights ahead of the public interest.

In its successful appeal to appear before the Supreme Court, eBay argued that injunctions have become an automatic add-on to monetary penalties imposed in most successful patent complaints, at a time when many patent claimants offer no rival service. According to eBay, this violates the legal provision, established over two centuries of U.S. patent law, that judges weigh the public interest before shutting down a beneficial technology or service, as well as the original Constitutional assertion that patents be granted solely “to promote the progress of science and useful arts.”

Attorneys for Blackberry maker Research in Motion weren’t so lucky. Although U.S. District Court Judge James Spencer agreed to delay an injunction in February – just days after the U.S. Patent Office invalidated several key NTP patents related to wireless e-mail transmission – the judge’s unwillingness to lift the injunction threat altogether forced RIM executives eventually to strike a bargain with NTP. The resulting out-of-court settlement, valued at $612.5 million, was 36 percent higher than the $450 million offer that had fallen through the year before – indicating how much pressure an injunction imposes on even one of the healthiest technology companies.

“The financial market was speaking pretty loudly for RIM to settle,” says William Rooklidge, an intellectual property litigator with the Irvine, CA branch of law firm Howrey LLC and a close watcher of both cases.

Such pressure, coupled with the near-certainty that the plaintiff will secure at least a temporary injunction in the wake of a successful verdict, creates the ideal situation for a “hold up,” writes University of Chicago’s Lichtman. In popular patent law venues, such as the Eastern District of Texas (see “A Haven for Patent Pirates”), patent defendants face less than a one-in-eight chance of getting a sympathetic verdict. Not surprisingly, then, most of them forego the litigation process altogether and settle out of court.

“If damages were the only things at stake, RIM could have fought [its case] to its natural conclusion and paid only a small price,” writes Lichtman. “Because NTP could use an injunction, however, RIM had to cut a deal.”

Lichtman and his fellow legal scholars see a similar unfair threat of injunction in the eBay case. “EBay is a vibrant electronic marketplace with millions of users,” they argue in their brief. “MercExchange can likely obtain a larger royalty from eBay by settlement if it can threaten to shut down eBay altogether. But in doing so it will not be capturing value associated with its invention, but value that eBay has actually contributed to the world.”

Rooklidge, an attorney who has worked on both the plaintiff and defense sides of patent cases, however, sees the bias toward plaintiffs in most patent cases as a simple reflection of the U.S. legal system’s bias toward all private-property owners. Once a violation has been shown in court, it takes a sea change to compel any judge to allow the violation to continue.

“You start out with a thumb on the scale once a patentee proves his patent is valid and has been infringed,” Rooklidge says.

That bias creates an inevitable tension, argues Jason Schultz, a staff attorney and patent specialist with the Electronic Frontier Foundation (EFF), considering that the Internet, as both a business and technology platform, historically has rewarded innovations in which the creator traded exclusive control for huge user-adoption rates. At the O’Reilly Emerging Technology Conference earlier this month, Schultz warned attendees to be prepared for the inevitable wave of lawsuits now that “mashup” applications – Web services built from third-party components and powered by merged coding standards such as AJAX (Asynchronous JavaScript and XML) – have taken off in the Internet marketplace.

“If you look at the name AJAX, it’s just a new exciting name for very a long list of prior actions,” Schultz told the audience. “Now that companies are using it successfully and receiving a lot of investment capital because of that success, the potential is there for a whole suite of patents covering the AJAX approach.”

One reason so many eyes are focused on the Supreme Court, says Schultz, is that the Patent Reform Act of 2005 – the latest Congressional attempt to modernize the patent system – is still lodged in the House intellectual property subcommittee. Authored by Rep. Lamar Smith (R-TX), the bill seeks to cap damages, force the publication of patents, and establish a post-grant opposition system. It also seeks to “remove the legal gamesmanship” in patent law, by making it harder for plaintiffs to shop their cases between various judges and jurisdictions.

But the bill hasn’t garnered consensus support from the pharmaceutical industry, which generally supports strong penalties, and the IT industry, which is learning to love softer penalties, as well as many other industries with a stake in U.S. patent law.

“We are looking at a number of options,” writes Congressman Smith (who declined to discuss the eBay case, but answered questions related to his patent bill). “But ultimately we would prefer a uniform policy that does not offer special treatment to any one industry.”

That puts the Supreme Court at center stage for now. If the court agrees with eBay that public interest should play a bigger role in setting post-verdict injunctions, that decision might put a chill on the current land rush in patent litigation, says the EFF’s Schultz. If the Supreme Court doesn’t agree with eBay, he says, the industry’s best hope will be another high-profile case like NTP v. RIM, which would annoy Internet users, and might just ignite Congressional concern for the economic well-being of the high-tech industry’s largest employers.

“I think it will take three or four more years of this kind of lawsuit ‘hell’ before we see a full-scale [patent law] revision,” Schultz says.