Tag: equitable remedy

Categories
Patent Law

Christa Laser on Patent Law’s Equitable Defenses

The following post comes from Wade Cribbs, a 2L at Scalia Law and a Research Assistant at CPIP.

a pair of glasses, an apple, and a stack of booksBy Wade Cribbs

In patent law, equitable defenses can play an essential role in multi-million-dollar patent infringement cases. Unclean hands, misuse, or estoppel can render a potential verdict unenforceable. CPIP Edison Fellow and Assistant Professor of Law at Cleveland-Marshall College of Law Christa J. Laser dives into the unique and unsettled role of equity in her Edison Fellowship paper, Equitable Defenses in Patent Law, which is forthcoming in the University of Miami Law Review.

Professor Laser compares two theories to determine how courts might interpret undefined language governing equitable defenses in patent statutes, given that the Supreme Court has repeatedly dodged the issue. One interpretive method is a traditional point of view, the faithful agent approach, that advocates for courts to only interpret the statutes’ scope from the legislature’s intent when crafting them. The alternative approach, referred to as dynamic statutory interpretation, suggests that courts should determine what the law ought to be given the vague nature of patent statutes. The unique relationship between patent law and equity and the historically broad language of patent statutes frame the discussion about how courts should interpret equitable patent defenses.

Professor Laser sets the stage by discussing the historical distinction between law and equity before merging in 1938. The distinction in patent law is that most patent claims had been brought in equity since 1870. In the Patent Act of 1870, Congress granted equity courts the ability to award actual damages in addition to equitable remedies, effectively giving equity courts the power of law and equity regarding patents.

This early delegation of patent law to equity courts fits with Congress’s lack of specific rules for patents. Equity has historically been more flexible than law. A common argument is that Congress’s lack of specific rules for patents is to enable a common law approach to patents. Congress establishes the rough outlines of the law while leaving the finer contours for the courts, and flexibility is a necessary trait in establishing these contours. However, even if that was once the case, equity has been constrained to standards that resemble the law. In 1952, Congress amended the Patent Act in an attempt to stabilize the common law approach by codifying it.

The question now is, did Congress codify preexisting decisional law or expand it? Also, what methods should courts take to determine the answer? The confusion and its specific relation to equity arose out of the 1952 amendment removing the specifically delineated equitable defenses established under the 1870 Act and replacing them with a defense of unenforceability. Further confusion arose because Congress eliminated the statement that the listed “defenses may be pleaded in any suit in equity for relief against alleged infringement” and left it to state only that “the following shall be a defense in any action.” While committee notes clarified that unenforceability covered the previously recognized equitable defenses, there was no comment on what “defenses in any action” meant. Previously, all equitable defenses were not understood to bar all claims under both law and equity. For example, estoppel barred claims in law and equity, but laches was limited to actions at law.

Professor Laser proposes three possible interpretations of the “defenses in any action” language. The phrase could mean that the defenses would apply equally in law and equity, that the equitable defenses would only bar claims in equity, or that courts should adopt a case-by-case approach, drawing guidance from prior case law. Professor Laser tosses out the first two alternatives as too stark a change from established law, given the lack of legislative comment. The case-by-case approach is unproblematic when it comes to laches and estoppel because their applications to law and equity claims is well delineated. However, for unclean hands, inequitable conduct, and patent misuse, the case law is much less clear, and the disagreement over statutory interpretation is necessary.

As a case-by-case approach is necessary, Professor Laser outlines the case law before 1952 and the impact the amendment had on unclean hands, inequitable conduct, and patent misuse defenses.

For prior case law on unclean hands, Professor Laser looks at Keystone, Hazel-Atlas, and Precision Instruments. Keystone highlights that unclean hands can serve as a bar to equitable relief when plaintiffs commit acts such as bribery or suppression of evidence. Hazel-Atlas allowed unclean hands to bar a judgment at law in an infringement suit because the plaintiff based both the patent itself and the infringement case upon bribery and fraud. In Precision Instruments, the court dismissed the case because blackmail by the plaintiff was an act related to the cause of action that transgressed equitable principles. The case law before 1952 illustrates that equitable claims are barred when a party commits an unconscionable act related to the cause of action, and legal claims are barred if fraud leads to a legal judgment.

After the 1952 amendment, the Federal Circuit has expanded unclean hands to bar both legal and equitable relief without the related cause of action requirement. In Gilead v. Merck, the Federal Circuit held that unclean hands constituted grounds for summary judgment on both legal and equitable claims where an attorney had given false testimony in support of unethically obtained patent strategy information. Pre-1952 case law did not bar legal relief when the conduct was not inequitable, but in Gilead, the court held that conduct that was unclean hands—but that was not inequitable—still barred legal relief.

Some courts believe that inequitable conduct arose out of the unclean hands doctrine. However, inequitable conduct was a defense against patent claims in the first Patent Act passed in 1790. Inequitable conduct and invalidity overlap heavily. Inequitable conduct requires a deceptive intent with misleading information to render a patent invalid. Invalidity requires no such intent. Previously, the reasoning for pleading inequitable conduct instead of invalidity was that inequitable conduct had infectious invalidity. If a claim was invalid, only that claim was invalid and did not affect any other claim in the patent. However, inequitable conduct in a claim would infect the entire patent making it invalid. Congress removed this distinction in 2011 when it passed the America Invents Act and removed the infectious invalidity result from inequitable conduct. The doctrines is now no longer distinguishable from invalidity.

Patent misuse is improperly using a patent outside of the scope of the patent grant. The Supreme Court, in Continental Paper Bag, held that an unused patent was not a misused patent. On the other hand, in Morton Salt and B.B. Chemical, the Supreme Court found that product tying did qualify as patent misuse, and selling a patented machine cannot be tied to the sale of an unpatented dependent product. Before 1952, patent misuse was only an equitable defense to prevent infringing injunctions. There has not been a patent misuse Supreme Court case since 1952, so how the amendment affected the doctrine has yet to be seen.

The policy arguments supporting a dynamic statutory interpretation are that courts more readily see the impact of policy decisions and therefore are better suited to craft policy. Also, Congress acts too slowly to handle the rapid advancement of the latest technology.

The counterpoint, Professor Laser explains, is that slow and deliberate policymaking is advantageous in patent law. Much of a patent’s value comes from the predictability of patents. A single case changing the landscape of an industry or invalidating hundreds or thousands of patents would ruin faith in the patent industry. Congress is slow because it takes time to gather information in ways that courts cannot. This ability to obtain the necessary knowledge to craft patent legislation is essential in the highly technical application of broad policy. Finally, courts are not policymakers, and judges who are not practiced in crafting policy may prove hesitant or rash in their decisions. While rash decisions have apparent consequences, even inaction will lead to unintentional policy. Judges are accustomed to making decisions based on precedent, not broad policy implications.

Professor Laser closes by suggesting a third strategy. Congress could delegate its authority to an agency to handle the ever-changing patent landscape. This would have the positives of superior access to knowledge and practiced policymakers without Congress’s gridlock and combative lobbying forces. The fact is, until the Supreme Court or Congress provides guidance on how to handle the vague nature of patent statutes, lower courts are left on their own to consider an ever-growing list of factors when determining equity’s impact on patent litigation.

To read Professor Laser’s paper, please click here.

Categories
Infringement Patent Theory

Explaining Efficient Infringement

By Adam Mossoff & Bhamati Viswanathan

files labeled as "patents"In a recent New York Times op-ed, “The Patent Troll Smokescreen,” Joe Nocera used in print for the first time the term, “efficient infringement.” This pithy phrase quickly gained currency if only because it captures a well-known phenomenon that has been impossible to describe in even a single sentence. Unfortunately, some commentators are confused about the validity of this term. This is understandable, because no one has yet described exactly what it means, especially in comparison to the similar commercial practice of “efficient breach” in contract law.

In a nutshell, efficient infringement occurs when a company deliberately chooses to infringe a patent given that it is cheaper than to license the patent. The reason it is cheaper is what makes it hard to explain briefly: a slew of legal changes to the patent system by Congress, courts, and regulatory agencies in the past ten years have substantially increased the costs and uncertainties in enforcing patents against infringers.

Accused infringers now can very easily invalidate patents, either in court or at the “patent death squad” known as the Patent Trial and Appeal Board. If a patent owner runs this gauntlet after several years of costly litigation and obtains a judgment in its favor, courts are increasingly refusing to award injunctions for anyone other than manufacturing companies. What is left for the patent owner is only damages, but changes in the legal rules for awarding damages have made damage awards very minimal compared to the actual economic harms suffered by a patent owner (a 2015 PricewaterhouseCoopers study found that median damage awards in 2014 were at their second lowest level in the past 20 years).

The result of all of this is that a company economically gains from deliberately infringing patents. It pays less in either legal fees or in court-ordered damages than it would have paid in a license negotiated with a patent owner. This is efficient infringement.

As a term in the legal policy debates, efficient infringement draws some inspiration from the well-known economic model of “efficient breach” in contract law. But the two seem very different, at least superficially.  Thus, efficient infringement needs further explanation by way of a more explicit comparison to efficient breach theory.

The model of efficient breach posits an overall net gain in social welfare from a willful breach of contract. It supposes a scenario in which one contracting party has an opportunity to obtain a higher payment for its goods or services, producing a profit that exceeds any damages from a breach of contract that would be paid to the other contracting party. Thus, the contracting party breaches: it receives the higher payment, it pays the other contracting party its “expectancy interest” (lost profits), and it pockets its net profits. Everyone wins and society is better off, at least according to this highly stylized and abstract economic model.

In practice, though, one rarely finds cases in which this opportunistic breach of contract works. The losses suffered by a victim of a breach of contract easily exceed mere profits, and courts account for this by awarding reliance and restitution damages, as well as punitive damages for deliberate misconduct like opportunistic breach of contract. Other legal claims, such as tortious interference with a contract and equitable claims for rescission and restitution, provide additional sources of relief for victims of willful breaches of contracts. In fact, one reason contracting parties negotiate liquidated damages provisions in their agreements is to limit liability for these widely recognized costs that go beyond mere expectancy interests.

These additional damages reflect the total costs created by strategic, opportunistic breaches of contract. These include institutional and systemic harms in eroding reasonable reliance on contractual commitments, lost investments made on the basis of contractual commitments, lost opportunities to pursue other commercial transactions, reputational harms, and so on. A victim of an opportunistic contract breach, for example, can seek the equitable remedy of rescinding the contract and seek restitution to disgorge the willful bad actor of his wrongful gains at the expense of the victim.

This is why one usually finds successful efficient breach only in hypothetical examples in economic textbooks or in law review articles, and not in actual court cases. As one of the scholars who first coined this term in 1977 recently observed, “efficient breach is both a null set as well as an oxymoron.” Or, as Professor Gregory Klass similarly notes, efficient breach is a “dead letter,” although he still believes it “remains a great teaching tool.”

Recognizing this difference between theory and practice is key in understanding the parallels between efficient breach and efficient infringement.  In theory, efficient breach considers only the lost profits in a one-off case of contract breach, and it thus sounds like a gain in social welfare because everyone benefits. But, in practice, contracting parties and courts recognize the total individual and systemic costs caused by willful violations of legal rights, whether a contract right or a property right. The same is true for efficient infringement, in both theory and practice.

Theoretically, efficient infringement posits a breach of a legal right that enhances both private and social welfare. The company benefits privately because it pays less via a patent infringement lawsuit in either legal fees (invalidating the patent) or in a compulsory license (court-awarded damages). Society is better off, too, because the company engaging in efficient infringement has more resources to put to productive endeavors, as opposed to paying for use of an invalid patent (a monopoly) or in making a larger wealth transfer payment on the basis of a negotiated license.

In the real world, though, efficient infringement creates more costs than merely the lost licensing profits for the patent owner, or the lost patent itself. The more fundamental problem with efficient infringement is that it undermines the proper functioning of the patent system. It frustrates the promise of the reward to the innovator for one’s inventive labors. Once inventors know that the deck of (legal) cards is stacked against them and that they will suffer efficient infringement, they will create less patentable innovation. Without legal security in stable and effective property rights, venture capitalists will not invest in inventors or startups and the innovation economy will suffer.

The important point is that these negative dynamic efficiency effects from efficient infringement are systemic in nature. This is similar to the concern about systemic costs represented by such causes of action for willful breach of contract as restitution and disgorgement of wrongful gains. As a matter of real-world practice, the costs created by efficient infringement are similar to the broader private and systemic costs created by opportunistic breaches of contract—both threaten the viability of legal institutions and the policies that drive them, such as incentivizing investments and promoting commercial transactions.