Thursday, March 27, 2014

Eliminating remedies against infringing customers: a simple solution to reining in customer lawsuits?

This may be a completely off-the-wall idea, but sometimes it's worth proposing something a little unusual to see if it's worth pursuing in greater depth (or not).  One of the more contentious issues in the current patent trolling debate is this:  when a manufacturer allegedly incorporates an infringing technology into a device and then sells that device to a purchaser (who in turn may resell it to another purchaser, etc. etc. until it winds up being used by the ultimate end user or users), should the patent owner be able to sue the person or persons at or near the end of the distribution chain?  As Professors Love and Yoon state in their recent article Expanding the Customer Suit Exception in Patent Law, 93 B.U. L. Rev. 1605 (2013), available here:
Recent years have seen a marked increase in patent suits filed primarily for nuisance value. Nonpracticing patent holders . . . have collectively sued thousands of alleged patent infringers in cases that generally settle for less than the cost of mounting even the slightest defense. Suits like these overwhelmingly target the numerous resellers and end users of allegedly infringing products rather than the accused products’ original manufacturers. More individual defendants mean more lawyers, more discovery, and, thus, more litigation costs to inflate settlement amounts.
Love and Yoon propose that courts should more frequently stay litigation against customers pending the resolution of litigation against the infringing manufacturer.  Congressman Goodlatte's proposed Innovation Act also would expand courts' ability to stay litigation against customers under some circumstances.  Alternatively, some state legislatures and state attorneys-general in the U.S. have begun using or modifying unfair competition or deceptive trade practices laws in response to perceived problems arising from NPE suits against customers. 

Some years back Roger Blair and I published a paper titled An Economic Analysis of User and Seller Liability in Intellectual Property Law, 68 U. Cin. L. Rev. 1 (1999), a version of which is still available on ssrn here, in which we posed the question why U.S. patent law renders everyone in the chain of distribution, from the initial infringing manufacturer all the way down to the end user, liable for infringement--as it generally does under Patent Act section 271(a), which states that "Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent."  We suggested that a reason for extending liability all the way down the chain is to preserve the patent incentive:  in some instances, the infringing manufacturer might be judgment-proof or otherwise not amenable to suit, and so the extension of liability down the chain helps to ensure that the patentee will be able to recover damages from someone.  Moreover, the parties farther down the chain can contract for indemnification from the parties further up the chain (and in some though not all instances, such an indemnification might even be implied as a matter of commercial law, see id. at 21 n.81).  Nevertheless, we were doubtful whether this rationale provided much support for extending liability all the way down the chain:
First, nothing in the analysis thus far provides a strong reason for holding private noncommercial users liable; one would expect that in most cases the effect on incentives of being able to sue a consumer for using a patented invention would be virtually nil. On the other hand, since patentees do not appear in practice to sue consumers for the unauthorized use of their inventions, the extension of liability may do little harm, and perhaps it serves to economize on litigation costs: by not distinguishing between commercial users and private consumers, we avoid the costs of having to determine what constitutes a commercial use. Still, the American practice is at odds with that of other countries, such as Britain and France, that specifically exempt private noncommercial uses from the scope of liability. 
Id. at 27 (citing, for the proposition about French and English law, Code de la propriété intellectuelle, art. 613-5(a) (Fr.) (exempting from liability under French law private, noncommercial uses of patents), and Patents Act, 1977, § 60(5)(a) (Eng.) (same)). 

We also noted, however, that there is a provision of the U.S. Patent Act that in very limited circumstances does express a preference for pursuing a claim against someone higher up the chain than the end user or retail seller:  namely, section 271(g).  In relevant part, this provision reads as follows:
Whoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer, if the importation, offer to sell, sale, or use of the product occurs during the term of such process patent. In an action for infringement of a process patent, no remedy may be granted for infringement on account of the noncommercial use or retail sale of a product unless there is no adequate remedy under this title for infringement on account of the importation or other use, offer to sell, or sale of that product. 
It seems to me that, from an economic perspective, that second sentence of section 271(g) gets things right:  the patentee can pursue a claim against a retailer or consumer for the infringement of a process patent if it is absolutely necessary (if "there is no adequate remedy" against anyone else), but not otherwise.  And, as we noted in 1999, other major patent systems also exempt private noncommercial users, though not retailers, from liability.  (The German Patent Act has a provision similar to the one in the French and English statutes we cited in 1999, as discussed in my book at p.226 n.29.  There may be other countries that follow this approach as well, but I haven't done exhaustive research on the matter.)

The question then is, why not amend the Patent Act to make all claims against end users and retailers subject to the rule stated in section 271(g)--in other words, the patentee can obtain a remedy against these defendants only if there is no adequate remedy against someone higher up the chain of distribution?  One problem would be that some of the conduct at issue in the NPE suits is or could be deemed "commercial" in nature:  a small business's use of allegedly infringing office equipment might be for business purposes, for example.  So the term "noncommercial" would have to be defined in some way to exclude these uses; or a different word chosen.

So how about something like this:  amend section 271(a) to read
Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.  However, no remedy may be granted for direct infringement on account of a customer's use or resale of the invention, unless there is no adequate remedy under this title for infringement on account of another person's manufacture, importation, use, offer to sell, or sale of that invention.
In some respects, this might be a simple solution to the perceived problems with customer suits.  On the other hand, maybe the proposal goes too far; maybe there are instances in which it would be more efficient to allow the patentee to sue, say, a distributor without having to show that there is no adequate remedy against the manufacturer.  (Professor Siebrasse suggests the possibility of several small manufacturers all designing the same, infringing product for purchase by a big distributor.  One suit against the big distributor might be more efficient than one or more against numerous small manufacturers.)  The question would be whether such cases are significant enough to keep the existing rule in place. 

Another possible objection is that the proposal in some instances would eliminate the possibility of recovering against a purchaser who knowingly instructed a manufacturer to make infringing articles for the purchaser, though I think I've covered that by putting the word "direct" before "infringement" in the above.  In such a case, the patentee could sue the purchaser for inducing infringement without bothering to sue the manufacturer, if that's what the patentee wanted to do.  Notice too that if the purchaser had an inventory of infringing merchandise on hand, the patentee presumably could get an injunction against the purchaser's selling that merchandise, because otherwise there might be no adequate remedy at law with respect to those prospective sales.
Again, at the end of the day maybe this proposed solution is not warranted or is no better than other solutions that focus on stays; but I still find it intriguing.  I'd welcome additional thoughts or comments from readers.  Maybe someone else has already proposed or critiqued something like this, in some article or blog post I haven't seen.

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