Imagine that you have an idea for a new product. You invest a great deal of time, effort and funds refining and improving upon the idea, developing a successful prototype and finally in manufacturing a finished product that is better than anything available in the market. Along the way you obtain patent protection, which requires you to invest even more funds. The product is introduced into the marketplace, including prominent marking indicating that the product is protected by a patent. The product quickly achieves success in the marketplace. A large competitor intentionally copies your product knowing that it is patented. You approach the competitor and demonstrate evidence of patent infringement that would make Sherlock Holmes proud. You tell the infringer that you could seek an injunction but you are willing to grant a license for a reasonable fee. The competitor, apparently unconcerned about your patent, replies “Sue me or get lost”.
Wait, what? You expected the competitor to respect your patent. You made a considerable investment to develop your product including obtaining the patent that protects it and your competitor did not meaningfully dispute the infringement allegation. In fact, the competitor is intentionally infringing your patent and is now using your own patented invention to compete against you. The patent is supposed to protect your invention from such intentional wrong-doers in precisely this type of situation. How can this be?
Your patent collided with the practice of efficient patent infringement (“efficient infringement”). Entities engaging in efficient infringement ignore or simply stall efforts by a patent owner to enforce their patents, even if amicable, with a view that given the current state of the patent market, the likelihood of being called to judgment and having to pay royalties for a patent license is minimal. For more on the practice of efficient infringement see “From Efficient Licensing to Efficient Infringement,” by David Kappos, Richard Ludwin and Marc Ehrlich from the New York Law Journal special section on intellectual property, Vol 255, No 63, April 4, 2016. The practice evolved as a response to non-patent-practicing entities (NPEs) and, in particular, to a small number of abusive patent owners who sent large volumes of form letters asserting patent infringement without presenting credible evidence of infringement and even misrepresenting their success in enforcing the relevant patents. Those abuses were wrong but they sparked a legislative, judicial and regulatory reaction that has significantly weakened the U.S. patent system, and substantially hindered the ability of U.S. patent owners to enforce their patents. See “The Roots of Innovation,” US Chamber International IP Index, Fifth Edition, February, 2017.
That reaction has undermined the U.S. patent system and harms inventors large and small. Although the changes to the patent system over the past five years have largely eliminated the abuses, those changes have so weakened the rights of patent owners that infringers now enjoy commercial advantage (“efficiency”) allowing them to infringe patents with impunity. Although the inventors impacted by their behavior may have a different perspective, efficient infringers are just behaving rationally in a patent system that is now skewed in their favor regardless of the legal merit of a patent and the case for infringement. Efficient infringers hope that patent owners, knowing the deck is stacked against them, will simply go away rather than incur the risk, time, resource, stress and fees associated with litigation. Patent owners who have the fortitude to pursue their claims, must then litigate to enforce their patents, potentially increasing the volume of patent infringement litigation and deflecting resources that might otherwise have been used more productively. And in your case, your ability to fund litigation against a larger competitor (or perhaps a trove of larger competitors) copying your invention is a significant disincentive to proceed, and more alarmingly a significant disincentive to invent in the first place.
Efficient infringement is a relatively new dynamic in the patent market. Not many years ago patent owners enjoyed stronger patent protection than was appropriate. Patent holders used the threat of litigation to compel licensees to pay to avoid litigation. That was not good and led to the abuses noted above. But with the current overcorrection, the patent system has become so hostile towards patents and the uncertainties of patent enforcement have become so great that instead of patent owners abusing alleged infringers, actual infringers are abusing the rights of patent owners!
In a patent system that makes it difficult to enforce patents, patent owners may respond by selling their patents to others with business models designed to enable rapid and efficient patent infringement litigation. Ironically, these entities are themselves NPEs—the original target of the reaction that led to the current state of affairs. Furthermore, practicing entities holding patents that are not enforceable without significant investments of time and resources, may decide to sell these NPEs their high-quality patent portfolios, thereby increasing the quality of patents enforced by the NPEs and perpetuating the NPE business model.
There was a time when patent owners and alleged infringers evaluated the risks and rewards of their respective positions in earnest and frequently negotiated reasonable settlements. That time has passed. See former Federal Circuit Chief Judge Paul Michel’s remarks on the demise of the “honor system” summarized by Gene Quinn in IP Watchdog, May 12, 2015. Patents are intended to promote innovation but efficient infringement is impeding our innovation economy by discouraging invention and encouraging alternate and traditionally less honorable routes of monetization that do occur.
The patent system works best, in general, when a patent owner notifies an alleged infringer of its infringement claim and the terms of a proposed patent license, and the alleged infringer responds in good faith to the infringement allegation. The alleged infringer may refute the allegations and/or make a counteroffer. If the parties reach an impasse litigation may be appropriate, but this “old” course provides a workable and effective path for the parties and benefits both the patent system and the innovation economy. We need a patent system that is structured to discourage efficient infringement and appropriately balances the risks and rewards for all patent system participants.
Manny Schecter is chief patent counsel and associate general counsel at IBM. His accomplishments have helped IBM generate over $20 billion of income from IP while maintaining its position as the top annual US patentee for the last 23 consecutive years. Schecter is active in intellectual property policy matters including legislative, judicial and patent office reform and he specializes in the application of technology to improving patent quality. He has worked his entire career, first as an engineer and then as an attorney, in various business units of IBM, achieving his current position in 2009.