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Software and business method patents - Trial

Table of content
Trial
Complaint
Motion of invalidity
5,424,944
Fictious Drawing
5,845,265
6,202,051
Markman
Background
Principle
Story
6,202,051
6,085,176
5,845,265
Motion ruling
6,202,051
6,085,176
Final order and opinion
Willful infringement
Half.com motion
6,085,176 obviousness
Damage background
Damages
Verdict inconsistency
Damage award
Permanent injunction
Motion for JMOL
Enhance damages

Trial

In this section I use the documents that MercExchange published on their site, at http://mercexchange.com/docs.htm and http://mercexchange.com/news.htm. I thank MercExchange for their contribution to Intellectual Property knowledge.

Complaint

Here is the Amended Complaint for Patent Infringement filed by MercExchange on November 21, 2001 against eBay, Half.com (a subsidiary of eBay) and ReturnBuy. In this complaint MercExchange says that:

The complaint presents the defendant business but does not explain in which way the defendants infringe the MercExchange patents. MercExchange did a good work in analyzing the defendant web sites and press releases. Though MeckExchange found that ReturnBuy "had completed the integration with eBay’s Application Programming Interface (API) that allow[ed] the two companies to instantly exchange data through a fully secure and private communication hotline" MeckExchange did not sue ReturnBuy for infringement of 6,085,176.

In its complaint MercExchange primarily explains why it thinks that the Court for the Eastern District of Virginia is competent for ruling this case:

  1. MercExchange is a Virginian company;

  2. the inventor, Thomas G. Woolston is a Virginian resident;

  3. though the defendant are not Virginian companies, they regularly transact business in the Eastern District of Virginia by offering their services via the Internet to customers, advertisers, business affiliates and partners in the Eastern District of Virginia.

Note that this version of the Complaint for Patent Infringement is amended. The amendment has probably consisted in explaining why the Court for the Eastern District of Virginia was competent for ruling the case. This is a reasonable assumption because eBay, Half.com and ReturnBuy filed a joint motion to transfer the case to the Northern District of California. The defendants explained that:

  1. the Half.com and ReturnBuy alleged infringement arises from their relationships and activities with eBay;

  2. the hub of the alleged infringing activity is in California, where eBay houses all its computers, databases and servers;

  3. numerous documents and witnesses are in California and inconvenient to transport to Virginia.

They offered to pay to the lodging and transportation of Thomas G. Woolston, sole owner and employee of MercExchange.

The Court denied this motion. To explain its decision the Court first said that it had to decide:

  1. if the suit could have been brought in the Northern District of California (1);

  2. whether the interest of justice (3) and the convenience of the parties (2) justify transfer to the Northern District of California.

USA law says that "a civil action for patent infringement may be brought in the judicial district where the defendant resides or where the defendant has committed acts of infringement and has a regular and established place of business". But because the principal place of business of Half.com and ReturnBuy was not the Northern California the Court answered no to (1).

USA law further says that "the plaintiff’s choice of forum [Court] should be given significant weight, and should not be disturbed unless the balance is strongly in favor of transfer". Here again because Northern California was not the principal place of business of Half.com and ReturnBuy and because eBay was already a multi-billion company with the financial means to transport the necessary evidence for trial in Virginia when MercExchange was a small, one-employee company the court found that litigating this case in Virginia was no more inconvenient than it would have been in California and answered no to (2).

USA law also says that the interest of justice can include "the pendency of a related action, the court familiarity with the applicable law, docket conditions, access to premises that might have to be reviewed, the possibility of an unfair trial, the ability to join other parties and the possibility of harassment". The Court found that none of these conditions was met and answered no to (3).

The Court choice is important. First the interest of a party is usually to have its case ruled by its home Court. The home state of the party has a "substantial interest in having local controversies decided at home and protecting local inventors" [or local business]. Second in a Federation like USA there are differences in the way Courts rule cases.

With Internet it may seem that any Court can rule a case (a company having customers everywhere). However if MercExchange had chosen to sue only eBay the case could have been transferred to the Northern California Court.

Motion of invalidity

The following actions were made by the parties:

The Court took two decisions:

  1. Schedule a Markman hearing in order to construe (interpret) a number of contested claims in the patents. USA law recognizes that the inventor can use words and build claim sentences in an arbitrary and ambiguous way. In such cases the exact meaning of claim words and sentences can be determined from the patent description and is a matter of law [not a matter of facts that a jury can rule]. This process was defined and first used in Markman vs Westview Instruments hence the name. We discuss this Markman hearing in a next section.

  2. Rule the pending motions that do not require claim construction under Markman. The Court denied the joint motion about 5,845,265, granted the motion to Strike Fictitious Drawing and denied the second motion of eBay about 6,202,051 (lack of novelty and obviousness). We detail now this ruling.

Here is its order.

The Court applied the USA law that says that:

  1. "When a patent has been examined and duly granted, judicial review must give due weight to the presumption of validity. The presumption of validity is based on the presumption of administrative correctness of actions of the agency charged with examination of patentability" [USPTO].

  2. "The courts are the final arbiter of patent validity and, although courts may have recognizance of, and benefit from, the proceedings before the patent examiner, the question is ultimately to the courts to decide, without deference to the rulings of the patent examiner."

Before analyzing the Court decision we must review 5,424,944, the patent that could make 5,845,265 invalid for lack of novelty.

5,424,944

5,424,944 entitled "System and methods for controlled asset disposition" was filed on February 2, 1994 and granted on June 13, 1995. The object of this business method patent is to "provide a system and method for the controlled disposition of assets". The meaning of asset is clarified by the beginning of the background "In many industries there is a need to control the disposition of certain capital assets for various reasons. Assets may become surplus due to obsolescence or overproduction, they may need refurbishing with new parts, they may need environmentally unsound parts removed or replaced, and the like".

5,424,944 is "a controlled capital asset disposition process supported by an interactive multi-media system which combines images of the assets with relevant data and audio records and disposition instructions for security and reconciliation purposes. The method of the present invention of controlling the disposition of an asset comprises the steps of transporting the asset from a customer facility to a disposition facility, receiving the asset at the disposition facility and creating a receipt record thereof, sorting the asset in accordance with a preselected method of disposition, and disposing of the asset in accordance with the preselected method of disposition."

5,424,944 is a system tracking asset disposition through the creation and use of records associated with assets. These records comprise an image of the asset and are stored in a database that can be displayed by customers. 5,424,944 further uses stations that contain an image capture device and a data capture device coupled to a computer capable of communicating with the server that handles the database.

In my view 5,424,944 is prior art of interest though 5,424,944 handles assets and not collectibles or used goods, the 5,424,944 station having the same function as the 5,845,265 posting terminal. 5,424,944 contains three figures named Fig. 1a, Fig. 1b and Fig. 2. Fig. 2 is the only figure relevant in the 5,845,265 dispute. It looks like this:

The three boxes containing data capture devices are stations.

5,424,944 is owned by Asset Management & Control, Inc.

The 5,845,265 patent does not refer to 5,424,944. The USA law says that "while the presentation at trial of a reference that was not before the examiner does not change the presumption of validity, the alleged infringer’s burden may be more easily carried because of this additional reference." However MercExchange showed that they distinguished 5,424,944 and disclosed their finding to the USPTO. They further explained that the "USPTO misplaced a certain page of the application and as a result, it appears that the 5,424,944 patent was not reviewed."

So we are in the situation where 5,424,944 was presented to but not reviewed by the patent examiner. Such cases [errors of agencies and offices] are not uncommon. The rule that applies then is that the alleged infringer’s burden is no more easily carried or to say it differently this is the alleged infringer who is impacted by the mistake of the office.

Fictious Drawing

The Court first ruled the motion to Strike Fictitious Drawing.

I did not see the considered drawing. I know that this drawing was based on the Fig. 2 above and the testimony of the inventor of 5,424,944 and a former employee of the inventor’s company. The drawing included a digital camera, a bar code scanner and the use of the World Wide Web. Therefore the Court found the drawing highly misleading and granted the motion to Strike Fictitious Drawing.

The Court said that defendants should have listed the various embodiments of an image capture device to present 5,424,944 in a way that was not misleading and considered later the question of whether or not the 5,424,944 actually used the World Wide Web.

This is difficult to not agree with the court on this point. I found surprising that 5,424,944 did not include bar code scanner and printer. The use of such devices is debatable in 5,845,265 because they address an inventory problem. In a tracking system like 5,424,944 bar code scanners and printers are needed to quickly and reliably identify assets. The World Wide Web is the simplest way to display the content of a database but reliable World Wide Web components (browsers and HTTP servers) were not available early enough before February 2, 1994 [the 5,424,944 system was in use starting in February 1993]. So I think that, though adding the World Wide Web to the picture was obvious for the person of the art, the World Wide Web could hardly be present in the original 5,424,944 system.

5,845,265

MercExchange said that the testimony of the inventor and of the former employee was not corroborated. The Court analyzed the factors that had been defined by the Federal Circuit to determine whether there is sufficient corroboration:

  1. the relationship between the corroborating witness and the alleged prior use;

  2. the time between the event and the trial;

  3. the interest of the corroborating witness in the subject matter in suit;

  4. contradiction or impeachment of the witness’ testimony;

  5. the extent and details of the corroborating testimony;

  6. the witness’ familiarity with the subject matter of the patented invention and prior use;

  7. probability that a prior use could occur considering the state of the art at the time;

  8. impact of the invention on the industry, and the commercial value of its practice.

Here comes the fun. The Court found that the inventor "does not appear to know many details regarding the system". The inventor explained "You should understand that I am the system architect and did not code the system". The Court further reported that while the inventor "invented the 5,424,944 system, there were numerous areas where he was unsure of how the system operated".

[I do not know enough about this case to make my mind. But for people who are not familiar with the patent business I must explain that a company inventor is a person who thank to his or her position in a company has the opportunity to sign a power to attorney paper. You should not assume that a company inventor has contributed to the invention or knows the patent. In the patent search page I explain how to read inventor lists.]

The former employee was a 16-year old intern, with no formal computer training, at the time the 5,424,944 system was implemented and ceased to work with the company either in late 1993 or early 1994. The inventor "often told the plaintiff’s attorney to talk to him about something especially if it dealt with Internet but the former employee could not [obviously] answer questions about sensitive aspects like billing.

The inventor said that his company created two sites

  1. www.assetmanagementandcontrol.com in 1994

  2. www.totalsurplus.com in 1995 or 1996

I made the following findings:

  1. The first site URL was actually www.asset-mgtandcontrol.com.

  2. On archive.org the oldest pages were recorded on December 2, 1998 for www.asset-mgtandcontrol.com and on January 9, 1998 for www.totalsurplus.com.

  3. www.asset-mgtandcontrol.com is the site handling asset disposition

  4. The customer may choose to resell the assets. www.totalsurplus.com is a site helping other parties to buy these assets (considered here as computer components and full systems and supplies). When www.asset-mgtandcontrol.com is the equivalent of the posting terminal of 5,845,265. www.totalsurplus.com is the equivalent of the mapping system allowing end users to buy or bid used goods and collectibles in 5,845,265.

We may remember here that the eBay site was recorded on June 14, 1997 on archive.org (Internet Wayback Machine) and that a page recorded on April 9, 1997 on archive.org already referred the eBay site. archive.org does not record all pages on the Web. I do not know precisely how archive.org is doing but a rule of thumb is that when a page is indexed by search engines it is recorded by archive.org. So the dates are the dates at which the sites became popular. So we can conclude that eBay was known before www.asset-mgtandcontrol.com and www.totalsurplus.com.

MercExchange found that neither of these web site names was registered with the Internet Domain registry until 1997. I can confirm this finding. I used the whois service of http://www.networksolutions.com and I found that asset-mgtandcontrol.com was registered on January 19, 1997 and that totalsurplus.com was registered on June 20, 1997. I even found that the administrative contact for both domains was Dottie Magliato (the inventor, who is also the president and co-owner of the company that owns 5,424,944, is Nicolas J. Magliato).

[In 1994 like today subscriptions to ISPs and network connections were managed by network administrators. The inventor (president) was too high in the company hierarchy and the former employee (intern) too low in the hierarchy to know these details. I do not believe that the Internet story was invented. In 1994 things were still managed informally. The company may have used the subscription of another party, for instance of a university. On the other hand witnesses talk about Internet whereas the Court tries to understand if the company used the Word Wide Web (so browsers and HTTP servers over Internet) in 1994.]

Coming back to the Federal Circuit factors the Court observed that

  1. As we have seen the corroborating witnesses did not know sufficiently the alleged prior use.

  2. The time between the event [5,424,944 system in use] and the trial was over nine years. Therefore the testimony of the former employee is nine years recollections.

  3. The corroborating witnesses had no special interest in the subject matter in suit.

  4. While neither witness explicitly contradicted the other, their answers directed attorneys in a circle of unanswered questions and unsupported answers. [Internet story above]

  5. Witnesses were unable to recall details of the system.

  6. Neither witness was familiar with the specifics of the prior use of the system.

  7. Based on lack of supporting documentation in this case, it was merely possible, not probable that the system described by witnesses existed.

  8. The witnesses’ testimony, absent any documentation such as billing records, Internet service records, records of sales of goods over Internet, design documents, copies of web site screens, etc cannot corroborate that the 5,424,944 system used the World Wide Web to conduct transactions in 1993 or 1994.

Therefore the Court denied the joint motion for Summary Judgement about 5,845,265.

6,202,051

Then the Court analyzed the eBay motion for Summary Judgement that all claims of 6,202,051 (Facilitating internet commerce through internetworked auctions) were invalid for lack of novelty and obviousness. eBay found that a philatelist (stamp collector) posted a proposal on a newsgroup called rec.collecting.stamps on June 17, 1994:

"What would be really nice would be a BidBroker software. It might work something like this:

  1. Interested bidders register their email address with BidBroker.

  2. A seller sends his description, reserve price, cut-off-date, etc to BidBroker.

  3. BidBroker assigns a lot number to the description, and forwards it to the list of registered bidders.

  4. On the cut-off-date, BidBroker determines the winning bidder and the winning price and forwards this information to the seller and the winner bidder. The seller and the winner bidder communicate directly to complete the transaction. The sell price is forwarded to all bidders who put a bid.

To pay for the upkeep of such a system, the seller (and possibly the purchaser) pays the operator / owner of the system a commission based on percentage of the sell price, or perhaps a flat handling charge per lot. Perhaps a company like AOL might provide this service."

To be valid the system disclosed in this posting had "to be known or used in this country [USA], or patented or described in a printed publication in this or a foreign country" before the invention of 6,202,051 according to USC 35 § 102. The court considered that though the posting was intended for the communication of ideas to persons who subscribed to the stamp collection group and an individual was required to obtain permission to join in the newsgroup and that there were no guarantee that MercExchange would have been granted permission. Furthermore these postings were not indexed or catalogued in any way. Therefore the Court found that the BidBroker posting did not have the status of a printed publication and denied the eBay motion for Summary Judgement that all claims of 6,202,051 (Facilitating internet commerce through internetworked auctions) were invalid for lack of novelty and obviousness.

I think that another Court could have found that the BidBroker posting had the status of a printed publication:

  1. MercExchange explained Google acquired an archive of old newsgroup messages and wrote software to index them so they would be searchable. Google could not acquire confidential newsgroup messages. So MercExchange would have been granted permission. Furthermore rec.collecting.stamps is a Usenet newsgroup. As explained in http://www.uncensorednewsfeed.com/usenet.html "anyone wishing to read or post messages in a particular group, does so by connecting to a Usenet Server across an internet connection. A newsreader (like Outlook Express) is needed on the user’s computer to read articles and download attached files. You 'subscribe' to a group by telling the software in your own computer to check the messages in a particular group. [...] Nowhere is there ever a subscriber list. The term 'subscribe' is used in reference to how you set up your computer and software." To confirm my understanding I connected to the NNTP server of my ISP. I only had to provide my e-mail address. Then I listed the newsgroups, I found rec.collecting.stamps.discuss, rec.collecting.stamps.marketplace and I downloaded the message lists. I think that the Court misinterpreted the argument of MercExchange that simply said that, "to obtain an access to a newsgroup in 1994, [...] one must have received the permission to access a [Usenet] server." But subscribing to a Usenet server was the same as subscribing to an ISP and setting up a Usenet server was a bit like setting up a HTTP server and most Unix users had access to a Usenet server.

  2. Newsgroup postings are not indexed or catalogued but they can be sorted and scanned by title. In case of the BidBroker proposal the title contained bid and broker - a subject matter of interest for MercExchange. Newsgroup postings are easier to browse than most printed publications. rec.collecting.stamps.discuss and rec.collecting.stamps.marketplace have today a retention of three to four months but older postings are normally archived [at least the BidBroker posting was archived because it was later acquired by Google]. Though newspapers qualify as printed publication, try to find an old newspaper without writing to the publisher... On the other hand it is almost impossible to find how long the BidBroker posting remained on the newsgroup because the retention period depends on the disk space: when there is no more space older messages are removed and disks had a lower capacity in 1994 than today.

  3. MercExchange patents are about creating a market place for used goods and collectibles. The specification of 6,202,051 contains 25 occurrences of collectible. Stamps are one of the most common collectibles and 6,202,051 uses "stamp" two times. Its background contains "Certain items and used goods have a large following of collectors. These items include baseball cards, dolls, pens, watches, comic books, stamps, coins, and the like." rec.collecting.stamps had one of the most self explanatory newsgroup names and was a popular newsgroup. This was a very logical place to make a prior art search.

This does not mean that this other court would have granted the eBay motion. The BidBroker posting (150 words!) does not disclose two elements of the first claim of 6,202,051:

  1. requiring the seller to establish a seller's account, the seller's account being based at least on the seller's identity and a financial instrument associated with the seller;

  2. charging a fee to the seller's account based on an amount of the high bid.

Markman

The goal of a Markman hearing is to construe the meaning of language used in patent claims. A Markman hearing is a kind of sub-trial without jury because, as the Supreme Court confirmed, the interpretation of claims is a matter of law reserved entirely for the court.

Before analyzing the Markman Order and Opinion about the MercExchange patents I must give more explanations about Markman hearings.

Background

In April 1984, Herbert Markman filed a patent application titled "Inventory control and reporting system for drycleaning stores". In October 1985 he was granted a patent 4,550,246 for his invention. As reported in a paper entitled "Markman v. Westview Instruments, Inc." by Sue Ann Mota, Herbert Markman sued Westview Instruments, Inc. and Althonon for patent infringement of claims 1, 10, and 14 of 33,054, a reissue of 4,550,246. "Westview produced the system accused of violating Markman's patent, and Althonon used the device in one of its dry cleaning shops. Westview responded that it did not infringe upon Markman's patent because Westview's system merely records an inventory of receivables, rather than recording and tracking an inventory of articles of clothing. The case was tried before a jury to determine whether Westview's system infringed claims 1, 10, and 14 of Markman's patent. The jury found that Westview infringed independent claim 1 and dependent claim 10 but found no infringement on independent claim 14."

Claim 1 of his patent reads "The inventory control and reporting system, comprising:

Claim 10 reads "The system of claim 1, wherein the input device is a keyboard having alpha-numeric keys, and also having keys specific to a plurality of common attributes of the articles and common optional attributes of the sequential transactions, said common attributes being recorded using single key strokes."

A district court granted a deferred motion of Westview for judgment as a matter of law (JMOL) concerning claims 1 and 10. "The court held that inventory as used in the claims meant 'articles of clothing' and not simply transaction totals or dollars. Under the district court's construction, the claims require that the system be able to track articles of clothing through the dry-cleaning process, detect and localize missing and additional articles of clothing, and generate reports about the status and location of the articles of clothing. It is undisputed that Westview's system is incapable of doing this because it does not retain information regarding the particular articles of clothing, but rather only a listing of the invoices and the cash total of the inventory. Among other things, the court concluded that Westview's device does not have the means to maintain an inventory total required by claim 1, and cannot detect and localize spurious additions to inventory as well as spurious deletions therefrom, and [therefore] directed a verdict of noninfringement of claims 1 and 10."

The core issue was about the meaning of inventory in the context of 4,550,246/33,054. Markman appealed the JMOL. He argued that

  1. The district court should not have substituted its construction of the claim for the jury's.

  2. The district court misconstrued the term "inventory" to mean "articles of clothing" in addition to "cash" or "invoice totals" in order to find that claim 1 defines a system that "tracks" articles of clothing through the dry-cleaning process. Markman said that the term "inventory" as used in claim 1 means "articles of clothing" or "dollars" or "cash" or "invoices," and is not necessarily limited to a construction that always includes "articles of clothing."

The Court Of Appeals For The Federal Circuit affirmed the District Court decision and wrote "We affirm the judgment of noninfringement. In doing so, we conclude that the interpretation and construction of patent claims, which define the scope of the patentee's rights under the patent, is a matter of law exclusively for the court. Thus, in this case the district court properly discharged its obligation to delineate the scope of the claim on motion for judgment as a matter of law when the jury had rendered a verdict that was incompatible with a proper claim construction."

Regarding the first objection of Markman the Court of Appeal For The Federal Circuit explained "The reason that the courts construe patent claims as a matter of law and should not give such task to the jury as a factual matter is straightforward: It has long been and continues to be a fundamental principle of American law that the construction of a written evidence is exclusively with the court." This is the responsibility of the judge to interpret and construe written instruments, whatever their nature.

Regarding the meaning of inventory The Court of Appeal For The Federal Circuit also found that the term "inventory" refers, at least in part, to articles of clothing based on

  1. The claim wording. If the inventory does not include articles of clothing the claim phrase "detect and localize spurious additions to inventory as well as spurious deletions therefrom" does not make sense.

  2. The specification.

  3. The prosecution history.

Markman hearings are new in USA and do not exist elsewhere in the world for the moment though countries like Canada (RealSearch case) seem to go in that direction. Markman hearings exist in USA partly because of the Seventh Amendment that says: "In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law." The Supreme Court further found that the Seventh Amendment guarantees that "a jury will determine the meaning of any disputed term of art about which expert testimony is offered". When it does not have the equivalent of the Seventh Amendment a country does not necessarily need the equivalent of Markman hearings.

I recommend reading the dissent opinions also included in the Court of Appeal For The Federal Circuit ruling. I love the comment of Judge Mayer: "Today the court jettisons more than two hundred years of jurisprudence and eviscerates the role of the jury preserved by the Seventh Amendment of the Constitution of the United States; it marks a sea change in the course of patent law that is nothing short of bizarre. Sadly, this decision represents a secession from the mainstream of the law. It portends turbulence and cynicism in patent litigation. For this is not just about claim language, it is about ejecting juries from infringement cases. All these pages and all these words cannot camouflage what the court well knows: to decide what the claims mean is nearly always to decide the case. But today's action is of a piece with a broader bid afoot to essentially banish juries from patent cases altogether. If it succeeds juries will be relegated, in those few cases where they have any presence at all, to rubber stamps, their verdicts preordained by 'legal' and 'equitable' determinations that brook only one 'reasonable' result."

However I think that the decision of the Court of Appeal For The Federal Circuit (confirmed by the Supreme Court) is correct. Claim construction is not the kind of thing that can be decided case by case. On the contrary it has to follow rules that say, for instance, that if a claim contains a term and does not contain another term then this claim has a given meaning. Inventors, potential infringers and patent examiners who must identify the patent scope must be able to apply the same rules as courts, so this has to be a matter of law.

Furthermore Markman hearings establish a new and much needed field of research that can give us rules easier to use for the persons of the art.

Principle

Here are excerpts of what the Court used to conduct its Markman hearing:

  1. The first step in a literal patent infringement case is claim construction, which is a matter of law.

  2. Claim interpretation begins with an examination of the intrinsic evidence, i.e., the claims, the rest of the specification and, if in evidence, the prosecution history. The specification acts as a dictionary when it expressly defines terms used in the claims... [and thus], it is the single best guide to the meaning of a disputed term. Interpreting what is meant by a word in a claim is not be confused with adding an extraneous limitation appearing in the specification [like limitations coming from the preferred embodiment]. But the usage "preferred" does not of itself broaden the claims beyond their support in the specification. If the specification describes only one single preferred embodiment the court may consider that the claims have the scope of this embodiment.

  3. The prosecution history limits the interpretation of the claim terms so as to exclude any interpretation that was disclaimed during prosecution. It is appropriate for the court to consider not only the changes made during prosecution, but also the reasons for the change.

  4. The Court may properly rely on extrinsic in the form of expert opinions, treatises, etc. But the claims, specification, and prosecution history rather than extrinsic evidence, constitutes the public record of the patentee’s claim, a record on which the public is entitled to rely. In other words, competitors are entitled to review the public record, apply the established rules of claim construction, ascertain the scope of the patentee’s claimed invention and, thus, design around the claimed invention. Allowing the public record to be altered or changed by extrinsic evidence introduced at trial, such as expert testimony, would make this right meaningless.

Story

The Court complained: "The Court was forced to construe practically every term in the claims of all three patents. Not only was this tremendously time consuming, it was completely unfair to this court. The law firms representing the parties, experts in patent law, had a number of partners and associates working on this case, as it was evident by the number of lawyers at the Markman hearing. In contrast, this court had far fewer resources available [...]. As the result of the parties’ inability to cooperate at all, this court has been forced to expend an incredible amount of time and resources handling this case."

I find this comment surprising. Claim construction has a dual nature. This is a technical work but its consequence is the strengthening or weakening of a party position. Some consequences of claim construction are apparent, some are not. Involved people need a framework in which they can give in on some points and in which they do not have to support the unpredictable consequences of their choices. The consequence is that parties cannot participate to claim construction except when they reached some kind of settlement.

Then the court construed claims for patents 6,202,051, 6,085,176 and eventually 5,845,265. I comment below the most interesting constructions.

6,202,051

Because most of the claims use the Court had only to address claim 1, 12 and 23.

The Court first considered the preamble of claim 1, which is "an automated method, performed by a computer-based auction system". The question was to determine whether "automatically" was a limitation to apply to claim elements. The Court explained that "A claim preamble has the import that the claim as a whole suggests for it. If the preamble adds no limitation to those in the body of the claim, the preamble is not itself a claim limitation and is irrelevant to proper construction of the claim." The Court found that two steps of claim 1 contained "computer-based auction system". Considering that all claims of 6,202,051 used the same language and finding that another claim contained the same preamble and steps with the word "automatically" the Court concluded the preamble had to be ignored in the claim construction.

The next disputed term was the word "auction". The Court accepted "process where participants can bid an item" as ordinary meaning of auction. It found that 6,202,051 "revolved around a trusted intermediary to present the good to the market, add value to the description of the item, and extract a commission based on sale price" and therefore does not "disclose a person-to-person transaction". Therefore the Court construed the term auction as "a process over a trusted network, or with a trusted intermediary, where participants can bid on an item".

Next the Court considered the term "seller’s account". Here MercExchange sought the term to be defined as a list of monetary transactions whereas for eBay "seller’s account" had to be defined as an account for receiving, holding and disbursing funds. The Court checked the prosecution history to conclude that a seller’s account is a list of monetary transactions. To clarify the Court interpretation I must say that choosing the "account for receiving, holding and disbursing funds" would have meant that 6,202,051 acted a bit like a bank and that I read this term in the same way as the Court.

Then the Court considered the term "Charging/debiting a fee to the seller’s account based on an amount of the high bid". This term was the focus of the eBay motion for Summary Judgement that all claims of 6,202,051 were invalid for an inadequate written description. MercExchange said that this meant "record as a debt against a person’s name or account to charge a purchase. eBay said that this meant "extracting the fee from the seller’s account". So this dispute relates to the "seller’s account" dispute. The court decided accordingly that "Charging/debiting a fee to the seller’s account" meant "record a debt (or charge) against a person’s name or account. I also read this term in the same way as the Court. [For both "seller’s account" and "account for receiving, holding and disbursing funds" there was maybe a misunderstanding. When I read 6,202,051 in 2004 I understood that the account was managed by a service similar to PayPal. This service does not have and in the inventor idea did not manage accounts. This service is included in 6,202,051 whereas PayPal is a company different of eBay. Though PayPal is a subsidiary of eBay you can use PayPal without using eBay and eBay without using PayPal.]

6,085,176

The Court considered claim 1 and the step sequence in claim 1, 7, 29 and 39.

The step sequence discussion is interesting. Half.com argued that the steps had to be performed in the sequence recited by the order of the limitations for all claims. MercExchange cited the law: "The general rule is that unless the literal language or the physical constraints of the process claim dictate otherwise, the steps of the claim have no required order of performance." This is not a Byzantine discussion. If a company runs or sells a product that performs the same steps as, but in an order different from a patent claim and if the Court construes the claim as an ordered list of steps this company does not infringe the patent whereas if the Court construes the claim as an unordered list of steps this company infringes the patent.

Claim 1 is:

"A method of searching a plurality of electronic markets to locate an item, the method comprising:

Claim 7 is like claim 1.

Claim 29 reads:

"A computer-implemented method of searching for an item in a plurality of electronic markets interconnected by a computer network, each electronic market having an associated data repository, the method comprising:

Claim 39 is like claim 29.

The Court determined that claim 1 and 7 recite an order of steps to be performed and the steps of claim 29 and 39 have no required order of performance. I think that for most readers all these claims recite an order of steps. In the context of claim 29 and 39 it seems illogic to search for an item on the computer network before receiving the input identifying the item [search before knowing what to search]. However claim construction follows precise rules. In claim 1 the inventor uses the word "said", which means that the search request at the second step is the same as at the first step and therefore that the second step necessarily happens after the first step. Using "an item" on the first step of claim 29 and "the item" on the second step is insufficient to establish that it is the same item.

The claim 29 and 39 findings matter. A company that would implement a method using a software search agent to search items in data repositories and cache the responses to answer faster to the user requests would infringe 6,085,176. If the Court had found that claims 29 and 39 recite an order of steps then the company would not have infringed 6,085,176. Note however that MercExchange (and maybe the Court) would have found that adding a caching facility to the method was an obvious change.

5,845,265

Because 5,845,265 contains a number of means-plus-function claims the Court explained the method of construction of such claims: "An element in a claim for a combination may be expressed as a means or step in performing a specified function without the recital of structure, material or acts in support thereof, and such claim should be construed to cover the corresponding structure, material or acts described in the specification and equivalents thereof". A means-plus-function claim is a statement that names a means and explains its function but does not explain how this means implements this function. Inventors should use means-plus-function claim when the how is obvious and for the sake of conciseness. The fact is that business methods frequently combine large claim sets and overuse of means-plus-function claims.

Then the Court considered claim 1, 2, 8, 15, 23, 26 and 27. We analyze here the most interesting findings in claim 1 and 8.

Regarding claim 1 the Court found that

  1. A "market for goods" is a trusted network where items or goods can be bought and sold, following the same reasoning as in case of 6,202,051 (see above).

  2. A "payment clearing means for processing a purchase request from said purchase" is a means-plus-function term. The Court further found that a "clearing means for processing a purchase request from said purchase" was a computer system that accepts electronic payment information from a participant, such as a credit card number, e-money or debit account number via an interface to an external clearing network or debit the amount from an account that is accessible from Internet, and any structural equivalent thereof.

  3. A digital image means for creating digital image of good for sale was another means-plus-function term. The Court further found that a "digital image means for creating digital image of good for sale" was a digital camera or digital scanner or a structural equivalent. MercExchange wanted digital image means to also include image repositories. The decision was not that obvious. Most users store images in files, optionally enhance these images with programs like PhotoShop and then import these image files with file system selects. I read "digital image means for creating digital image of good for sale" like the Court for two reasons (1) the word "creating" (2) the presence at the same level of bar code scanners and printers. Because of that I considered that the inventor enumerated hardware and software means.

  4. In "Transfer said data record to the market for goods via said communication means" the data record that is transferred must come from the data records stored on the computer’s local storage device. This was disputed though the previous phrase was "store said data record on said storage device". There are other terms whose meaning seems similarly obvious but were disputed and that the Court construed in the most logical way (in my view).

Claim 8 is "A market apparatus for use with a posting terminal apparatus, said posting terminal apparatus having means for creating a digital image of a good for sale, means for creating a data record of said good for sale, a tracking number printer means, a tracking number scanner means and means for communicating to said market apparatus, said market apparatus comprising:

In claim 8, the Court found that in "said communication handler detecting a predetermined posting terminal apparatus identification code from the posting terminal apparatus and verifying from said code that the posting terminal apparatus is an authorized user of said market apparatus" the posting terminal apparatus is verified as an authorized user of said market apparatus. In my view this interpretation is correct and refers to the way security is still enforced today for instance in travel agencies. This type of security implies that the user is working in an office registered in the market apparatus and that some kind of control of the physical access to the terminal is in place.

Motion ruling

After the first ruling the following actions were pending:

  1. 6,085,176: Half.com made a motion for Summary Judgement that claims 1 to 9 and 29 to 41 of 6,085,176 (Method and apparatus for using search agents to search plurality of markets for items) were invalid.

  2. 6,202,051: eBay made a motion for Summary Judgement that all claims of 6,202,051 (Facilitating internet commerce through internetworked auctions) were invalid for an inadequate written description. Then MercExchange made a motion for Summary Judgement that all claims of 6,202,051 were valid for an adequate description.

After the Markman hearing the Court ruled these motions, denying the Half.com motion about 6,085,176 and granting in part, denying in part the motions about 6,202,051. Here is its order.

6,202,051

Here are excerpts of what the Court used in his ruling:

eBay contended that MercExchange did not envision a seller’s account when the application was filed. Seller’s account was one of the terms whose meaning was construed in the Markman hearing. In the hearing the Court found that seller’s account means a list of monetary transactions. So the Court had to answer the question of whether or not the application reasonably conveyed to one skilled in the art that the inventor had possession of the idea of a seller’s account defined as a list of monetary transactions.

Because the application contained sentences like "It is understood that a consignment node user may have established a credit or deposit account for the participants from past sales or transfer of funds" the court found that seller’s account was adequately supported in the written description.

eBay also argued that the application does not contain any language regarding debiting a seller’s account a commission or fee. In the Markman hearing the Court held that debiting a seller’s account means to record a debt against a person’s name or account. The Court found that the specification envisions the consignment node operator removing the commission from the sales price prior to crediting the seller’s account. Therefore the Court concluded that "debiting a seller’s account" is not adequately supported by the written description.

Quite interestingly in the Markman hearing this was MercExchange that argued that debiting a seller’s account means to record a debt against a person’s name or account whereas eBay argued that debiting a seller’s account means removing the commission from the sales price prior to crediting the seller’s account. The reason was simple. The eBay system records debts. So if MercExchange had agreed on the latter definition eBay would not have infringed this part of the invention. But precisely because they won for the dispute on the "debiting a seller’s account" term MercExchange lose for the adequate written description dispute on this term.

6,085,176

Half.com found that nine months before MercExchange filed 6,085,176, a computer programmer named Keith Basil working at Internet Presence and Publishing Inc. invented a program called Shopkeeper and a search engine called MESCH (Multi-WAIS Engine for Searching Commercial Hosts). MESCH allowed Shopkeeper users to search the participating sites for keywords. The MESCH system was published on Internet bulletin boards and presented in Internet conferences.

The applicable rule is defined in 35 USC 102.

§102 (a) reads "a person should be entitled for a patent unless the invention was known or used in this country, or patented or described in a printed publication in this or a foreign country, before the invention thereof by the applicant for the patent."

§102 (g) allows a patent to issue unless before the invention thereof, the invention was made and not abandoned, suppressed or concealed

The Court first found that the prior art submitted by Half.com qualified as prior art under this 35 USC 102.

Under 35 USC 102 anticipation requires the disclosure in a single piece of prior art of each and every limitation of a claimed invention and the Court found that the MESCH system anticipates each and every limitation in the contested claims of 6,085,176 except searching for goods, and this only for two reasons:

  1. Some participating sites just allowed users to exchange information about prices and product offerings;

  2. MESH could search sites for articles that cannot be considered as items according to the construction of item in the Markman hearing. [I found that MESH was listed as a search engine like AltaVista. It does not seem that this finding could be disputed.]

Therefore the Court denied the motion of Half.com.

Final order and opinion

Here is this order.

Some documents are missing on the MercExchange site about:

Willful infringement

The ruling of willful infringement was one of the most interesting decisions of the jury.

MercExchange said that because the defendants knew of its patents since at least June of 2000 [presumably evidenced by the eBay patents referring to the MercExchange patents], and failed to obtain an opinion of counsel or conduct a patent clearing investigation, they cannot a good-faith belief that the patents were invalid or not infringed. The defendants argued that they could have designed around these patents for less than $15000. The court commented this argument in that way:

"The fact that this simple, inexpensive process would have saved the time, expense and necessity for this litigation and yet was not done by the defendants, [...] weights against them."

Therefore "based on the defendants’ notice of the patents and their duty to avoid infringement, the lack of a patent clearing policy, and the lack of a written opinion of counsel, there is sufficient evidence to allow a jury to determine willfulness."

So the lack of a written opinion of counsel was a determining factor for the jury to determine the willfulness of the infringement and willfulness matters a lot because in case of willful infringement the Court has discretion to increase the damages up to three times the actual amount (punitive rather than compensatory damages) and to require the defendant to pay the plaintiff attorneys’ fees. The Federal Circuit wrote "The role of a finding of willfulness in the law of infringement is partly as a deterrent—an economic deterrent to the tort of infringement—and partly as a basis for making economically whole one who has been wronged, for example by assessment of attorney fees under 35 USC sect. 285".

An opinion of counsel is a means that exists in USA but not in many other countries, in which even lawyers do not necessarily know that opinions of counsel exist. However with Internet the whole world is the regular and established place of business of a company. The dispute about the case transfer of the MercExchange litigation taught us that this is enough to have a partnership with a company whose headquarter is in another place, partnership that can be easily established with means such as Web services, for an American Court to feel competent for ruling a complaint for patent infringement filed by a local company or person.

An opinion of counsel is the opinion of an independent third party, knowledgeable in the relevant law. Opinion of counsel does not exist only for patent infringement. It exists for instance for contracts as in this example. In case of patents an opinion of counsel aims to show that the alleged infringer, after learning of another's patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or not infringed. The opinion should be prepared by an outside, independent U.S. patent attorney and the party seeking the opinion must not have withheld material information from counsel. To be reliable an opinion should:

Such opinion cannot be cheap and this is not enough for a company to hire a skilled patent attorney. The company must also present the accused composition, device, or process and answer the attorney questions, keeping in mind that the opinion of counsel can be disclosed to the patent holder and discussed in trial. I do not completely agree with "Ending Patent Law's Willfullness Game" by Mark A. Lemley and Ragesh K. Tangri though I think that this paper is worth reading. What I believe is that:

  1. An opinion of counsel is a challenging work.

  2. The average customer being able to check the bill but the quality of an opinion of counsel, the future is easy to predict. An opinion of counsel will be a "sort of pseudo-legal advice", a construct that courts will not anymore take seriously in consideration.

The reasoning that gives such weight to opinion of counsel in patent infringement disputes is exposed in Patent Infringement: The Role of Opinions of Counsel by John R. Wetherell Jr. This paper quotes the Federal Circuit:

"'Willfulness' in infringement, as in life, is not an all-or-nothing trait, but one of degree. The law recognizes that infringement may range from unknowing, or accidental, to deliberate, or reckless, disregard of a patentee's legal rights. [...] The term 'willfulness' thus reflects a threshold of culpability in the act of infringement. [...] The law of willful infringement does not search for minimally tolerable behavior, but requires prudent, and ethical, legal and commercial actions. Thus precedent displays the consistent theme of whether a prudent person would have had sound reason to believe that the patent was not infringed or was invalid or unenforceable, and would be so held if litigated. [...] Where a potential infringer has actual notice of another's patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing [...] Such an affirmative duty includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity. "

Upon appeal of the case of Knorr-Bremse GmbH v. Dana Corporation, the Court of Appeals for the Federal Circuit should answer to these questions:

  1. When the attorney-client privilege and/or work product privilege is invoked by a defendant in an infringement suit, is it appropriate for the trier of fact to draw an adverse inference with respect to willful infringement?

  2. When the defendant has not obtained legal advice, is it appropriate to draw an adverse inference with respect to willful infringement?

  3. If the court concludes that the law should be changed, and the adverse inference withdrawn as applied to this case, what are the consequences for this case?

  4. Should the existence of a substantial defense to infringement be sufficient to defeat liability for willful infringement even if no legal advice has been secured?

It is anticipated that the court will conclude that this is not appropriate to draw an adverse inference from the fact that an alleged infringer use its attorney-client privilege to not disclose an opinion of counsel. The Association of Corporate Counsel strongly supports this point of view in its Counsel of Amicus Curiae. This document sounds like a pro domo address. It seems logical to draw an adverse inference from the fact that an alleged infringer refuses to disclose an opinion of counsel in the same way as it is logical to suspect someone from a crime if he refuses to give an alibi. However an alibi and an opinion of counsel are not the same thing. The Society must encourage companies to get opinions of counsel. In no case it should be better to do nothing rather than spending time and money to get an external opinion or to monitor and analyze competitor patents.

I think that:

Anyway in 2004 this is definitely a good idea for a company to get an opinion of counsel at least when it receives the letter of the patent holder. This letter has to be the affirmative communication of a specific charge of infringement of a specific patent by a specific accused product or device (definition of a notice of infringement in 35 USC sect. 287(a)). The "specific charge of infringement" may be a threat of suit, a demand for cessation of infringement, or an offer for a license under the patent in issue.

Then defendants filed three motions and MercExchange seven motions. We review now what the Court decided about these motions.

Half.com motion

Half.com argued that it was entitled to judgment as a matter of law (JMOL) on non-infringement and invalidity for obviousness. The Court found that in its motion Half.com reargued arguments made to the jury and denied the motion.

More precisely Half.com made five arguments as to why JMOL was required for non-infringement including:

  1. No reasonable jury could have found the 6,085,176 market/trusted network limitations.

  2. No reasonable jury could conclude that Half.com searches a plurality of electronic markets for an item.

  3. Half.com uses a non-infringing centralized database technique with file transfers using FTP.

  4. No reasonable jury could find willfulness.

The Court rejected the two first arguments because it found that Half.com reargued the Markman hearing and the last argument because Half.com failed to obtain an opinion of counsel or conduct a patent clearance investigation. The Court did not challenge the third argument (FTP). It simply said that it was the jury right to accept or not the Half.com evidence or not. The Court explained that "JMOL should not be granted unless:

  1. there is such a complete absence of evidence supporting the verdict that the jury’s findings could only be the result of sheer surmise and conjecture or

  2. there is such an overwhelming amount of evidence in favor of the movant that reasonable and fair-minded men could not arrive at a verdict against him."

The Court further observed that Half.com used "a somewhat lengthy animation clip" to present its centralized database technique and that an expert supported MercExchange.

I find this third (FTP)argument quite strong. FTP (File Transfer Protocol) is one of the oldest Internet protocols. The preferred embodiment of 6,085,176 cites FTP four times:

  1. To download the interface program to the PCs of the consignment node users (I understand that these PCs are the posting terminals in most cases).

  2. To send updates of the advertising space to consignment nodes.

  3. To download market information to the PCs of the consignment node users.

  4. To receive records from and send record updates to the posting terminals.

"FTP" is used in combination either with UNIX or with xmodem and Kermit. So FTP has to be understood as the Internet/UNIX FTP and not as any protocol able to make file transfers. So MercExchange knew FTP but did not choose to use it in the "agent handler the consignment node may use to establish agent-to-agent and consignment node-to-consignment node connections to process participant agent requests." However the preferred embodiment cannot directly help construing the claims. So we must now turn our attention to the explanation of the agent mode:

"The Agent checks a list of other consignment nodes network addresses kept by the local consignment node database and generates an Agent communication message to each consignment node on the list and begins to establish communications to the other consignment nodes. An Agent message between consignment nodes begins by coordinating or reconciling the database on each consignment node of the locations and/or address of other consignment nodes. If a consignment node has a different list of consignment nodes in its database it will pass the node update information to the other consignment node. The consignment node originating the Agent task will generate a new Agent task to accommodate the information concerning the new consignment node."

So it seems that 6,085,176 uses a distributed database and a kind of peer to peer protocol and not a centralized database and FTP. This is further confirmed by claim 10 that also presents the system for updating the consignment node list and by claim 16 whose method instructs "a software search agent to search for the item on the computer network in the respective data repositories of one or more of the electronic auctions." We can also look again at claim 1 and 7:

"A method of searching a plurality of electronic markets to locate an item, the method comprising:

  1. receiving a search request for an item from an internet participant at a first computer;

  2. formatting said search request at said first computer into a predetermined format;

  3. transmitting said search request, using a software search agent, from said first computer to a plurality of other computers in said predetermined format, at least one of the plurality of other computers performing a search for the item in response to receiving said search request; and

  4. receiving at the first computer search results from at least one of the plurality of other computers in response to the transmitted search request."

Because the Court determined in the Markman hearing that claim 1 and 7 recite an order of steps to be performed it also seems that the search is performed on multiple computers upon user request and not from a single computer whose database has been populated before the user request and therefore that the jury ignored the claim construction of the Markman hearing.

6,085,176 obviousness

Now we can look at the second part of the Half.com motion, the request of JMOL on invalidity for obviousness.

The section 2143 of the Manual of Patent Examining Procedure (MPEP) says that three basic criteria must be met to establish a prima facie case of obviousness:

  1. there must be some suggestion or motivation, either in the references themselves or in the knowledge generally available to one of ordinary skill in the art, to modify the reference or to combine reference teachings;

  2. there must be a reasonable expectation of success;

  3. the prior art reference (or references when combined) must teach or suggest all the claim limitations.

The Court provided the jury the following instruction on motivation:

"In deciding whether to combine what is described in various items of prior art, you must keep in mind that there must be some motivation or suggestion for a person of ordinary skill in the field of the invention to make the combination covered by the patent claims [2143.1]. For each claim, you should also consider whether or not any of the prior art items teach away from the invention covered by the patent claim [2143.3]. The question to be answered is: Would someone reading the prior art be discouraged from following the path taken by the inventor?"

Because the jury was provided correct instructions the Court found no ground for a JMOL or a new trial. We can note that the examiner (though MPEP 2143) and the jury were given similar instructions and made the same conclusion, which was that 6,085,176 was not obvious.

Damage background

So to determine what the infringer has to pay to the patent holder the Federal Circuit has "repeatedly endorsed the conceptual framework of a hypothetical negotiation between patentee and infringer as a mean for determining a reasonable royalty."

eBay needs essentially the same system with 100,000 buyers and 50 millions buyers. $32 million of damages represent about 300 man * years, enough time to design and implement a comprehensive online sale system with all features discussed in the MercExchange patents.

A hypothetical negotiation between MercExchange, eBay and Half.com would have logically failed, MercExchange computing royalties based on the money earned by eBay and Half.com with the patents’ methods, and eBay and Half.com computing royalties based on the development cost of a different method achieving the same result without infringing the MercExchange patents. Therefore this is not surprising that eBay and Half.com made a motion on damages, the jury having chosen the MercExchange way of computing damages.

To assess the merits of the two licensing models we must consider what a patent enables. Vulcanization being the only means known to make something useful from rubber, the Goodyear patent enabled selling rubber goods. So Goodyear could ask for the difference between the value of rubber goods for customers and the production cost and therefore choose sales-based royalties. But vulcanization is an exception. Usually there are several ways to produce a good or a result, some of them being patented. Then the value of a patent is the difference between this patent way and the most effective patent-free way. The difference may equal (unit cost with the patent system – unit cost with the most effective patent-free way) * number of unit produced when the patent reduces the variable cost or the fixed cost delta when the patent reduces a fixed cost. The patent holder should logically choose a corresponding licensing model to allow companies to rationally choose between paying a license for the patented way, trying to find a new way or using a less effective patent-free way.

Usually a company can design around a software or business method patent and develop the design-around at a predictable and relatively low cost without serious feasibility concerns. Most of the time software or business method patents do not disclose enough details to make the implementation easier and the effort needed to understand a patent is almost the same as the effort needed to find a design-around. Therefore a company usually do not see any reason to deal with the patent holder. Therefore such business method and software patents have a small value. In case of infringement the damages can be computed with accuracy and don’t represent large amounts of money.

Let assume that the company involuntarily infringes the patent. When it is notified about the infringement by the patent holder the company, which does not want to sign a license agreement, should rationally implement the design-around to avoid additional damages and because it will have anyway to do so. In Corning Glass Work v. Sumitomo Electric Research Triangle, Inc the court wrote: "To proceed [after an infringement determination] to manufacture and sell the same [infringing product] without changes designed to avoid infringement can only be construed as outright defiance or baseless optimism... [which entitles the patentee] to recover increased damages."

For the settlement or for the damage computation the two parties can use the design-around cost as a basis.

This consists in considering the case of a hypothetical company that wants to offer a service using the patent method. The hypothetical company finds that the method is patented and that it can design around this patent for, let say $15,000. To be sure that this design-around is sufficient to not infringe the patent the hypothetical company must ask an opinion of counsel at $15,000. The hypothetical company can probably negotiate a license agreement with the patent holder at $30,000. If the patent holder wants more money the hypothetical company may rationally prefer the design-around option and the patent holder may lose the license money and have a weaker position to sue the hypothetical company. At $30,000 the interest of the hypothetical company is to acquire the license to avoid trials with the owners of neighbor patents.

The infringing company did not take care about patents and used these $30,000 in another way. So the patent holder is an involuntary shareholder of the business enabled by the patent. If the infringing company is a mono-product startup things are simple. If its share value is multiplied by ten between the time at which the patent is granted and the time at which the settlement is made or the jury renders the verdict, then it is logical to assess the damage to 10 x $30,000, $300,000. If the product enabled by the patent is only one of the numerous products of the infringing company it is obviously harder to determine the impact of the patent method on the company share value, especially if the patent method was not strategic for the company. However the product required an investment, generated a certain return on investment and had a certain synergistic effect with the other products of the infringing company. The consequences were improvements in revenues, market perception and market share and therefore a higher value for the infringing company. These improvements may just counterbalance the decline of other products but they should normally exist. Otherwise the infringing company made a wrong choice, lost money with the patent method and should pay only for the fact that the patent holder did not choose to take a share of this business and could have used the license money in a better way.

However business method and software patents claim notably new ways of interacting with users. These interaction means have to be as simple and convenient as possible for the invention to be useful. Given that (1) the user computer is usually a personal computer running a graphical system like Windows and a browser; (2) users got used to use these graphical systems and browsers in a certain way; it is almost impossible to innovate in user interactions and the simplest and most convenient interaction means is also the most obvious. When we consider the interaction need and apply the advice given by books and vendors’ guidelines we usually find precisely the claimed interaction means. However, when this obvious interaction means is supported by the design, processes and data of the invention, then claiming this means is a valid way to make the invention understandable. It would be harder for the inventor to explain in abstract terms how the invention interfaces with its users.

When a business method or software patent achieves a certain purpose with certain user interaction means and when products implementing the patent are successful then the inventor is a bit like Goodyear. However instead of providing a good it provides a service. So he is more like a franchiser and he can ask for the difference between the revenue generated with the patent system and the cost of implementing and operating the system and therefore choose revenue-based royalties.

Damages

Let’s turn back our attention to MercExchange v. eBay. The MercExchange damage experts used Gross Merchandise Sales (GMS) as the base in computing the reasonable royalty due to MercExchange for the defendants’ infringement of the patents at issue. The defendants’ expert offered four alternative amounts for damage:

  1. The design-around cost, $14,500 (200 hours for the eBay 5,845,265 design-around, 100 hours for the Half.com 5,845,265 design-around, 100h for the Half.com 6,085,176 design-around).

  2. The valuation of MercExchange for tax purpose, $50,000.

  3. The valuation of MarcExchange in a stock exchange, $2,5 million.

  4. The application of the royalty rate determined by the MercExchange damage expert to the revenue instead of the GMS, $2,4 million.

Here is the way I summarize the pros and cons of the GMS chosen by MercExchange as a royalty base.

Pros:

  1. The main MercExchange damage expert had negotiated numerous license agreements.

  2. eBay uses GMS to calculate its commission for the sales of the items.

  3. The GMS is a reliable figure used in eBay financial reports.

Cons:

  1. The MercExchange damage experts (1) had never used GMS as a royalty base before (2) had never seen GMS used as a royalty base before.

  2. GMS was not used in the MercExchange licensing agreements.

  3. Revenue is also a reliable figure, presumably also used in eBay financial reports.

The jury followed the MercExchange experts. Then eBay and Half.com made a motion to strike the testimony of the MercExchange damage experts because it did not meet the standard set forth in Federal Rule of Evidence 702.

Rule 702 provides that expert testimony is admissible only if

  1. "the testimony is based upon sufficient facts or data;

  2. the testimony is the product of reliable principles and methods;

  3. the witness has applied principles and methodology reliably to the facts of the case."

To apply this rule there is a Daubert test [from Daubert v. Merrell Dow Pharmaceuticals, Inc.] that requires checking:

  1. "whether the expert’s technique or theory can or has been tested - that is, whether the expert’s theory can be challenged in some objective sense, or whether it is instead simply a subjective, conclusory approach that cannot reasonably be assessed for reliability;

  2. whether the technique or theory has been subject to peer review and publication;

  3. the known or potential rate of error of the technique or theory when applied;

  4. the existence and maintenance of standards and controls; and

  5. whether the technique or theory has been accepted in the scientific community."

The Daubert principles were later found to apply not only to scientific testimony, but to all expert testimony.

The Court found that the testimony of MercExchange experts met the criteria of rule 702 and complied to the Daubert checklist and therefore that what remained was a question of facts for the jury to decide. So the Court denied the motion to strike the testimony.

Verdict inconsistency

The jury initially found no indirect infringement of 6,085,176 and, yet, awarded a total of $5 million in damage for this infringement. The Court informed the jury from this inconstancy. Then the jury asked to the Court asking they could adjust the other damage figures after curing this inconsistency. The Court permitted them to do this and the jury returned a new verdict in which they had increased the damages for direct infringement of 5,845,265 by $5 million.

So the Court resubmitted the verdict to the jury. eBay and Half.com found that the Court erred in doing so, relying on a McCollum v. Stahl case. In this case the jury found that the defendant was not liable for his actions. However they rewarded punitive damages for his malicious conduct. Then the Court resubmitted the verdict to the jury that found this time that the defendant was liable for his actions. The Appeal Court found that the "resubmission was procedurally impermissible". The Appeal Court held that "the remand of the questions to the jury was tantamount, in its effects, to a direction to the jury to find liability in order to warrant the award for damage." The McCollum Court precisely gave the instructions that if the jury answered no to the liability question, they were not to answer any further question. The MercExchange Court merely noted the pages where the errors were on in the verdict form and told the jurors to read again the instructions. For this reason the Court denied the eBay and Half.com motion.

In my view the Court is right. From the fact that damages are awarded for infringements, anybody can deduce logically that (1) the combination (non-infringement, damages) is inconsistent and that (2) if there is no infringement there are no damages. However with (1) the juror has to reconsider her findings whereas the juror can immediately deduce from (2) that to award damages she has to find an infringement.

Damage award

eBay and Half.com found that the jury verdict represent damages that are $15,824,834 over the amount the MercExchange experts found reasonable. For instance because of the second verdict that increased the damages for direct infringement of 5,845,265 by $5 million Half.com had to pay $14;5 million, 3,5 time the amount that MercExchange experts found appropriate and reasonable. The Court explained that

  1. the reasonable royalty represents the floor to damages, not the ceiling;

  2. the jury was entitled to consider other factors in determining what amount of damage would compensate MercExchange;

  3. it is of no consequence that this amount is greater than the amount asked by MercExchange;

eBay contended that because ReturnBuy was is a eBay seller, ReturnBuy’s GMS are included in eBay’s GMS calculation and thus, awarding separate damages amounts is double counting. The Court agreed and struck from the jury’s damage award the damages awarded for eBay’s inducement of ReturnBuy to infringe 5,845,265, $5.5 million.

Why the Court did not find this double counting and inform the jury about it when it resubmitted the verdict to the jury? Should we understand that if the Court had not resubmitted the verdict then they would have struck the $5 million in damage for indirect infringement of 6,085,176? I understand that the reason is that ReturnBuy entered a license agreement with MercExchange before the trial. Because of this agreement there was no double counting inside the verdict.

Permanent injunction

MercExchange made a motion for entry of a permanent injunction order to prevent the defendants, eBay and Half.com from further infringing its patents.

Permanent (like preliminary) injunctions are a matter of equity and not of law. The principle is to issue a permanent injunction "once the infringement has been established unless there is a sufficient reason to deny it" because a patent represents a property right. The Federal Circuit Court said in Richardson v. Suzuki Motor Corp.:"It is contrary to the laws of property, of which the patent law partakes, to deny the patentee’s right to exclude others from use of his property."

[This property right should not be confused with the proprietarian model discussed above. We explained there that patents are the counterpart of having found something new and useful (a progress of the useful arts) and of having disclosed this thing. The counterpart is a property right (the incentive to invent). The proprietarian model consists in patenting what has been made not because it is a progress of the useful arts but because (1) it has been made (2) the maker has the resources to buy a property right. So the proprietarian model aims to change the reason why patents are granted. The Federal Circuit explains injunctions in the following way: "Without the injunctive power of the courts, the right to exclude granted by the patent would be diminished, and the express purpose of the Constitution, to promote the progress of useful arts, would be seriously undermined."]

The Court used the following text:

"Issuance of injunctive relief against [the defendant] is governed by traditional equitable principles, which require consideration of

  1. whether the plaintiff would face irreparable injury [irreparable harm] if the injunction did not issue,

  2. whether the plaintiff has an adequate remedy at law,

  3. whether granting the injunction is in the public interest, and

  4. whether the balance of hardships tips in the plaintiff’s favor."

The Court denied the motion for the reasons summarized in this table:

Question

Reason

Irreparable harm

MercExchange does not practice its inventions and exists merely to license its patented technology to others. The Federal Circuit has observed that "the lack of commercial activity by the patentee is a significant factor in the calculus" of whether the patentee will suffer irreparable harm absent an injunction. [This reasoning also applies in case of license infringement. In MySQL v. Progress the preliminary injunction of MySQL was denied for the same reason.] Moreover MercExchange never moved the court for a preliminary injunction.

Remedy at law

MercExchange has licensed its patents to others and expressed its willingness to license the patent to defendants. The Federal Circuit has held that evidence showing that the patent holder is willing to license his patent rights "suggests that any injury suffered by [the patent holder] would be compensable in damages assessed as part of the final judgment in the case."

Public interest

As a general rule the interest of the public is to maintain the integrity of the patent system and hence to grant an injunction. However the public interest is also to benefit from the inventions that the patent holder declined to practice.

Balance of hardship

Any harm suffered by MercExchange can be recovered by way of damages.

Motion for JMOL

MercExchange sought a Judgment as a Matter Of Law (JMOL) that the claims of 6,085,176 and 5,845,265 were valid. Specifically, MercExchange argued that the validity of these claims should not be tried because the jury’s verdict demonstrated that no reasonable jury could determine that:

Rule 50(b) states that if a verdict is returned the court can allow the judgment to stand, order a new trial or direct entry of judgment as a matter of law. The Court found that "there was substantial evidence presented by the defendants to contest the validity of the patents at issue" and that another jury could have viewed this evidence in another way. There jury did not direct the entry of JMOL but allowed the judgment to stand.

Enhance damages

MercExchange made a motion for enhanced damaged and the award of attorney fees based on the jury’s finding of willful infringement.

"In determining whether a particular case requires enhanced damages, the Federal Circuit has provided a number of factors a court should consider. These include:

  1. whether the infringer deliberately copied or design of others;

  2. whether the infringer, when he knew of the other patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed;

  3. the behavior of the infringer as a party in the litigation;

  4. the defendant’s size and financial condition;

  5. the closeness of the case;

  6. the duration of the defendant misconduct;

  7. the remedial action by the defendant;

  8. the defendant motivation to harm;

  9. whether the defendant attempted to conceal its misconduct."

Note that some of these factors (3, 5 and 7) are not independent. A defendant who is convinced that a patent is invalid or was not infringed will presumably be uncooperative and slow to put a remedy in place.

The Court denied the motion for the reasons summarized in this table:

#

Factor

Reason given by the Court

1

Deliberate copy

The Court agreed with the defendants that the patents offer no business or engineering guidance which the defendants could copy.

-

2

Good-faith belief

The defendants failed to obtain an opinion of counsel or conduct a patent clearing investigation. They could not form a good-faith belief that the patents were invalid or not infringed.

+

3

Behavior

Neither side came at this stage with perfectly clean hands.

=

4

Financial condition

While eBay is large and wealthy corporation is certainly a factor in determining whether to enhance the damages, the Court will only give minor consideration when weighting the totality of circumstances.

=

5

Closeness

The jury found that neither defendant indirectly infringed 6,085,176 and that Half.com did not indirectly infringe 5,845,265 and the Court found 6,202,051 invalid. Both facts support the finding that the case was close.

-

6

Duration

MercExchange never filed a motion for a preliminary injunction.

-

7

Remedial action

The defendants failed to design around the patents.

+

8

Motivation to harm

MercExchange did not allege that the defendant’s motivation was to harm it.

-

9

Concealment

There was no indication that the defendants attempted to conceal their misconduct.

-

There are two + (to increase damages) and five - (to not increase damages) but the determining factor was the closeness of the case.

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