Patent liability rules as search rules

University of Chicago Law Review

Volumn 78, Issue 1, 2011, Pages 187-206

  Masur, Jonathan S ^a  

^a UNIVERSITY OF CHICAGO   (United States)

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EID: 79955948506     PISSN: 00419494     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (82)

1. See 35 USC § 271(a), (c).
2. See 35 USC § 271(c); Aro Manufacturing Co v Convertible Top Replacement Co, 377 US 476, 488 (1964) ("[Section] 271(c) does require a showing that the alleged contributory infringer knew that the combination for which his component was especially designed was both patented and infringing."). This Article focuses on contributory infringement, rather than induced in fringement, because the latter imposes an even greater mens rea requirement.
3. See 35 USC § 271(b); Mark A. Lemley, Inducing Patent Infringement, 39 UC Davis L Rev 225, 237-38 (2005) ("In part to avoid these problems, courts interpreting the 1952 Patent Act have uniformly interpreted section 271(b) to require not just knowledge, and certainly not mere willful blindness, but also a 'specific intent and action to induce infringement.'") (citation omitted). The inducement doctrine is also in a state of some flux. At the time of this writing, the Supreme Court has granted certiorari in a case that will likely clarify exactly what degree of intent is necessary for liability.
4. See Global-Tech Appliances, Inc v SEB S.A., 131 S Ct 458 (2010).
5. A mens rea requirement is present only within the related doctrine of induced infringement, 35 USC § 271(b), and the doctrine of willful infringement, which awards treble damages against defendants who have engaged in particularly egregious conduct by continuing to infringe after they learn of the existence of the patent. 35 USC § 284.
6. See 35 USC §§ 101-02.
7. See, for example, In re Aimster Copyright Litigation, 334 F3d 643, 650 (7th Cir 2003) (holding that the owner of file-sharing software cannot escape liability for the copyright infringement of its users simply by encrypting the transferred data and thus avoiding direct knowledge of any infringements).
8. See, for example, MPC § 2.02(3) (ALI 1985) (stating that "recklessness" will suffice for culpability under most criminal statutes).
9. See, for example, MPC § 2.02(9) (stating that knowledge of whether conduct constitutes an offense is itself never an element of a criminal offense).
10. See, for example, Matthew T. Nesbitt, Comment, From Oil Lamps to Cell Phones: What the Trilateral Offices Can Teach Us about Detangling the Metaphysics of Contributory Infringement, 21 Emory Intl L Rev 669, 686 (2007) (explaining that the knowledge requirement "was no doubt intended to prevent the almost unlimited liability that would result if a manufacturer produced a component covered by any claim of an enforceable patent").
11. Aro Manufacturing, 377 US at 482-83 ("[I]f there is no direct infringement of a patent there can be no contributory infringement.").
12. The term "producer" is meant very generally. The producer could be any entity from a private user who violates a method patent in the privacy of her own home to a major manufacturing company. The salient differences between these possible parties will become clear in the examples that follow.
13. See 35 USC § 286.
14. 35 USC § 284 ("[T]he court may increase the damages up to three times the amount found or assessed.");
15. In re Seagate Technology, LLC, 497 F3d 1360, 1371 (Fed Cir 2007) (setting forth the modern standard for determining when infringement has been willful).
16. See Oren Bar-Gill and Omri Ben-Shahar, The Law of Duress and the Economics of Credible Threats, 33 J Legal Stud 391, 412 (2004);
17. Oliver Hart, Firms, Contracts, and Financial Structure 29-33 (Oxford 1995).
18. For an analysis of mixed strategies in law, see Douglas G. Baird, Robert H. Gertner, and Randal C. Picker, Game Theory and the Law 313 (Harvard 1994) (describing a mixed strategy equilibrium as one in which "one or more of the players adopts a strategy that randomizes among a number of pure strategies").
19. This is in contrast to any number of other economic races, in which two parties compete along the same dimension to be the first to complete some activity. In many types of races, including patent races, the losing party's effort is entirely social waste.
20. See, for example, John M. Golden, Principles for Patent Remedies, 88 Tex L Rev 505, 530-31 (2010);
21. Einer Elhauge, Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory, 123 Harv L Rev 397, 440 (2009)
22. ("Thus, the patent race literature proves that firms will make socially excessive (and often duplica-tive) investments if they capture all the total surplus created by their innovations.").
23. There are a number of reasons why this might be the case. For instance, the producer might simply be insolvent or insufficiently capitalized to pay a judgment of infringement. The producer might be located in a jurisdiction that US law does not reach and thus may not be available for suit. Or, most likely, the "producer" may be an individual who violates a patent in the privacy of his own home and is not practically amenable to suit for infringement.
24. See, for example, Lucent Technologies, Inc v Gateway, Inc, 580 F3d 1301, 1320-22 (Fed Cir 2009) (involving a suit against Microsoft for contributory infringement of a patent for using a calendar function, in which the direct infringers were individual users who installed Microsoft programs and ran the calendar function).
25. It is not uncommon for a large company to supply a component of a larger invention to a smaller producer, creating situations in which the supplier continues as a going concern even after the producer has become insolvent.
26. See Aro Manufacturing, 377 US at 488.
27. Of course, a supplier might directly infringe another patent, and thus would be forced to search for that patent and arrange licensing deals. But that search and the search for patents that might be infringed by the finished product will frequently diverge. For instance, in the example described above, S2 would be concerned only with patent processes for manufacturing semiconductors, rather than product patents on circuit boards and related semiconductor devices.
28. See, for example, Nesbitt, Comment, 21 Emory Intl L Rev at 708 (cited in note 8) ("[T]he U.S. approach to the knowledge requirement can have the unintended effect of encouraging manufacturers to remain ignorant about issued patents.");
29. Alfred P. Ewert and Irah H. Donner, Will the New Information Superhighway Create "Super" Problems for Software Engineers? Contributory Infringement of Patented or Copyrighted Software-Related Applications, 4 Albany L J Sci &Tech 155, 202 (1994)
30. ("[A]t least in this instance, ignorance is 'bliss.'")
31. See, for example, In re Schreiber, 128 F3d 1473, 1474 (Fed Cir 1997) (holding that a patent on a conical top used to dispense oil for industrial use read on the invention of a cone-shaped top for slowly dispensing popcorn).
32. See, for example NTP, Inc v Research In Motion, Ltd, 418 F3d 1282, 1287 (Fed Cir 2005) (involving a suit against the manufacturer of the BlackBerry concerning a patent that it did not know existed).
33. See United States Patent and Trademark Office (PTO), Search for Patents, online at http://www.uspto.gov/patents/process/search (visited Oct 25, 2010) (providing a searchable database of patents, with images for patents filed after 1790 and full-text searching for patents filed after 1976).
34. See Christopher A. Cotropia, Mark A. Lemley, and Bhaven N. Sampat, Do Applicant Patent Citations Matter? Implications for the Presumption of Validity *12 (unpublished manuscript, Aug 2010), online at http://www.ssrn.com/ abstract-id=1656568 (visited Oct 25, 2010).
35. See, for example, Dunlop Holdings, Ltd v Ram Golf Corp, 524 F2d 33, 34, 35 n 7 (7th Cir 1975) (involving a patent on a coating for golf balls, the formula for which could only be determined-with difficulty-by chemically analyzing the coating).
36. To be certain, the producer may have to hire an attorney to examine a patent before understanding whether its product infringes. This can be quite costly. But a patent holder must examine a potentially infringing product and hire an attorney to assess its own patent before it can initiate an infringement suit. The fact that the patent holder owns the patent does not mean that it will instantly understand the metes and bounds of that property right and its applicability to a new technology.
37. See Susan Walmsley Graf, Comment, Improving Patent Quality through Identification of Relevant Prior Art: Approaches to Increase Information Flow to the Patent Office, 11 Lewis &Clark L Rev 495, 503 (2007)
38. ("[E]xaminer-cited prior art references are heavily weighted toward U.S. and foreign patents, as opposed to non-patent literature."). See also Robert P. Merges, As Many as Six Impossible Patents before Breakfast: Property Rights for Business Concepts and Patent System Reform, 14 Berkeley Tech L J 577, 589 (1999)
39. (observing that US patents make up 60 percent of all references cited in software patents). Patents are available at lower cost than nearly any other type of technical information, particularly actual physical products.
40. See Baird, Gertner, and Picker, Game Theory at 31-38 (cited in note 14).
41. See, for example Aro Manufacturing, 377 US at 488-89;
42. Trell v Marlee Electronics Corp, 912 F2d 1443, 1448 (Fed Cir 1990);
43. Armstrong v Motorola, Inc, 374 F2d 764, 773 (7th Cir 1967).
44. Trell, 912 F2d at 1447 ("[T]he knowledge requirement of section 271(c) limit[s] an alleged contributory infringer's liability to sales made after it receive[s] a letter from the patent-holder informing it of the existence of the patent.").
45. also Aro Manufacturing, 377 US at 491 ("Aro cannot be held liable in the absence of a showing that at the time it had already acquired the requisite knowledge that the Ford car tops were patented and infringing.").
46. In Part II, I consider whether this transfer of wealth from patent holders to producers and suppliers has negative dynamic effects on welfare as well. For the moment, it suffices to note that producers and other commercial firms will be able to use ignorance as a substitute for licensing relevant patents, to the detriment of patent holders.
47. See text accompanying note 13.
48. This upfront investment would typically involve the purchase of specialized machinery, or even the hiring of particular employees skilled in the relevant tasks.
49. This value is based on the alternatives available to Si. S1 could switch to producing B, but this would require another investment of $2,000 and would yield net profits of $2,500 ($900 x 5 -$2,000). If S1 were allowed to continue producing A, it could earn $5,000; the $2,000 it has invested in new machinery is a sunk cost. The net value to S1 of being able to continue producing A is thus $5,000 -$2,500 =$2,500.
50. S1 stands to earn $5,000 over five years from producing A and $4,500 over the same time period from producing B. Because S1 has not yet made an A-specific upfront investment, the patent holder cannot extract the value of that investment from S1 in licensing negotiations.
51. This analysis assumes that there are no uses for A that would not be covered by the patent. If there were, S1 would be doubly protected against holdup by the patent's owner. If S1 can sell good A to another producer whose end product will not violate a patent, then S1 can simply transfer its sales when confronted by the patent holder and need not negotiate a license. In addition, if this were the case, A might qualify as "a staple article or commodity of commerce suitable for substantial noninfringing use" and thus not be subject to suit for contributory infringement. 35 USC § 271(c).
52. The difference between locating the patent holder before S1 makes an initial product-specific investment and locating the patent holder only afterward is $2,500 -$500 =$2,000. Of course, it is unlikely that the patent holder would be able to extract the entire surplus in licensing fees. More likely, it will settle for some amount up to a maximum of $2,000.
53. See Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J Legal Stud 399, 417-29 (1973) (describing the manner in which parties to a civil lawsuit will opt to divide the surplus from settlement);
54. William M. Landes, An Economic Analysis of the Courts, 14 J L &Econ 61, 101-06 (1971) (same).
55. See, for example, Applied Materials, Applied Materials Fact Sheet (Aug 2010), online at http://phx.corporate-ir.net/External.File?item= UGFyZW50SUQ9MjYyMTM1M3xDaGlsZElEPTQwNTEzOHxUeXBlPTI=&t=1 (visited Oct 25, 2010) ("Founded in 1967, Applied Materials creates and commercializes the nanomanufacturing technology that helps produce virtually every semiconductor chip and flat panel display in the world.").
56. Whether S1 chooses to engage in search will depend on whether search is efficient-whether S1 will be able to save itself money by attempting to find existing patents, which would allow it to lower the price on the components it manufactures for P. See note 37 and accompanying text.
57. It is almost a shibboleth among patent-related articles to recite that there is no way of knowing whether the patent law currently sets incentives to innovate at socially optimal levels.
58. See, for example, Julie E. Cohen and Mark A. Lemley, Patent Scope and Innovation in the Soft ware Industry, 89 Cal L Rev 1, 5 n 5 (2001)
59. ("The extent to which the patent system is actually necessary to induce innovation that would not otherwise occur is an unanswered, and perhaps unanswerable, empirical question."). The point here is merely that the patent holder will receive less compensation than it would normally be entitled to, given the contours of its patent and the commercial value of the invention. What to make of this fact as a normative matter is the subject of the analysis that follows.
60. See Keith N. Hylton and Sungjoon Cho, The Economics of Injunctive and Reverse Settlements, 12 Am L &Econ Rev 181, 198 (2010)
61. ("[I]t is believed that there is a dynamic efficiency cost associated with patent infringement. If patents are infringed easily with no punishment to infringers, innovators will have weak incentives to invent new products and processes.").
62. See Craig Allen Nard, Deference, Defiance, and the Useful Arts, 56 Ohio St L J 1415, 1419 n 13 (1995)
63. The most traditional economic theory relating to patent law is the 'reward theory,' which holds that there will be little or no innovative activity in the absence of patent protection because ideas are easily appropriated once they are made available to the public.")
64. See Edmund W. Kitch, The Nature and Function of the Patent System, 20 J L &Econ 265, 265-71 (1977).
65. See Mark F. Grady and Jay I. Alexander, Patent Law and Rent Dissipation, 78 Va L Rev 305, 316-22 (1992) (developing "the idea that the benefit to society of an invention is dissipated when there are redundant development efforts").
66. See Kitch, 20 J L &Econ at 278 (cited in note 43).
67. See Robert P. Merges and Richard R. Nelson, On the Complex Economics of Patent Scope, 90 Colum L Rev 839, 843-44 (1990).
68. See Donald G. McFetridge and Douglas A. Smith, Patents, Prospects, and Economic Surplus: A Comment, 23 J L &Econ 197, 202 (1980) (presenting an economic model suggesting that efficiency gains realized from the granting of a patent are "dissipated in the rivalry for the patent itself").
69. Again, the producer must be insolvent and the suppliers must themselves be unaware of the patent for any real issue to arise. If the producer is solvent, it is directly infringing; if the suppliers know of the patent, they are liable for contributory infringement as of the moment they take action. In either case, the situation reduces to the easiest case, in which both parties have strong interests in locating one another.
70. See Hylton and Cho, 12 Am L &Econ Rev at 198 (cited in note 41);
71. Katherine J. Strand-burg, Users as Innovators: Implications for Patent Doctrine, 79 U Colo L Rev 467, 471 (2008)
72. ("In the standard analysis, incentives for inventing, disclosing, and disseminating new technologies arise from the potential for recouping innovative investments through commercial sales.").
73. See Part II.B.
74. See Part II.C.2.
75. On this normative point, see note 40.
76. Consider MPC § 2.02(2)(d) ("A person acts negligently ... when he should be aware of a substantial ... risk.").
77. It is worth noting that this would not immediately impose liability on every supplier that furnishes part of an infringing device. In addition to the mens rea requirement, it would be necessary that the part "be especially made or especially adapted for use in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial noninfringing use." 35 USC § 271(c) (defining a contributory infringer).
78. See Amelia Smith Rinehart, Contracting Patents: A Modern Patent Exhaustion Doctrine, 23 Harv J L &Tech 483, 486-87 (2010)
79. ("Strong property rights, in the form of draconian patent enforcement or broad patent grants, may increase the deadweight loss to society resulting from the grant of exclusive rights.").
80. A similar problem arises through the doctrine of joint and several liability. When multiple tortfeasors are each partially responsible for some harm, any single one of those tortfeasors can be held liable for the full amount of damages. See, for example, American Motorcycle Association v Superior Court, 578 P2d 899, 901 (Cal 1978)
81. (preserving the doctrine of joint and sever al liability even under a regime of comparative negligence). That single tortfeasor can force the others to indemnify it to the extent that they are responsible, id at 901-02, but this right of par tial indemnification is worthless if one or more of the other tortfeasors is judgment proof. This creates an incentive for potential tortfeasors to examine the finances of parties with whom they might be involved in a joint action. For instance, a surgeon would likely want to invest in learning whether the anesthesiologist working alongside her carries sufficient malpractice insurance.
82. 35 USC § 271(c).