As a technology strategist, you also need to understand how to use patents effectively. This chapter discusses two important issues: the use of multiple patents to protect technology and the use of the legal system to enforce patents.
Picket Fences and Brackets
Although you might try to obtain a broad patent with strong claims to protect your invention, such patents are not always possible. As a result, you might want to apply for more than one patent to protect your new product or service. For example, if you run a biotechnology company that has invented a new drug, you might try to patent both the molecule itself and the process for producing it.
If you cannot get a single broad patent to protect your invention, then building a picket fence of patents around the core invention can be a way to protect your new product or service. For example, when Gillette developed the Sensor razor, it obtained 22 different patents to protect the product, including patents on the blades, the handle design, and the packaging container.1 Because your competitors’ ability to imitate your invention without infringing on your patents depends on coming up with a way to do the same thing as your invention in a way not indicated in your patent claims, then obtaining a variety of patents can deter imitation by closing off alternative paths.
Because companies build picket fences of packet protection around their inventions, other companies engage in bracketing—the process of keeping an inventor from using his or her invention by patenting around it—to counteract their efforts. For example, if your competitor has obtained a patent on a filament for a new, higher intensity light, you can keep your competitor from using its filament patent by patenting ancillary inventions, such as a new bulb, new housing, new connections, and a new shade, thereby bracketing the filament patent with your own patents on the rest of the light.2
Patent Litigation
Because patents only provide you with the right to sue to collect damages from others who infringe your patents, successful strategies for exploiting patents invariably involve legal action. Therefore, intellectual property litigation is, and has always been, an integral part of technology strategy.
But before we can discuss how you can enforce your patents, you first have to know what patent infringement is. Infringement occurs when someone to whom you have not licensed your invention makes, uses, sells, or imports something covered by the claims of your patent. Your invention does not have to be duplicated in its entirety for your invention to be infringed. If any part of what is claimed is duplicated, infringement has occurred. Moreover, infringement can occur inadvertently as well as deliberately and can occur if one party induces another to build something that is covered by your patent.3
So how do you know if your patent has been infringed? Infringement occurs if another invention does substantially the same thing, in the same way, with the same result, as a patented invention. For example, a new bicycle wheel would infringe an existing bicycle wheel patent even if the second bicycle wheel was not exactly the same as the first but performed the same function in a similar manner to the patented wheel.4 But a patent on the engine of a fuel-cell powered car would not infringe a patent on a car powered by an internal combustion engine. Even though the two technologies both make the car go, the two kinds of engines do so in very different ways: one by turning hydrogen into water and the other by burning gasoline.
If you suspect that your patent has been infringed, then you should take legal action immediately. If you wait too long to enforce your patent rights, then the courts will presume that you know about the infringement and do not care to take action.5 After filing a patent infringement lawsuit, you can ask the court for an injunction to stop the alleged infringer from engaging in the actions that violate your patent. An injunction alone may be enough for you to achieve your goal of stopping the infringement. For example, when Amazon.com sued Barnes & Noble for violation of Amazon’s patent on its one click purchase method, Amazon.com obtained an injunction against Barnes and Noble, which had the effect of shutting down Barnes & Noble’s Express Lane purchasing system, and therefore achieved Amazon’s objective.6
If you initiate a patent infringement lawsuit, the defendants are likely to fight back by seeking to prove that your patent is invalid (because if your patent is invalid, then no one can infringe it).7 Patents are invalid if the invention is deemed obvious to people trained in the relevant technical art, or if the patent holder publicly disclosed or sold the invention more than one year before the filing of the patent application.8 For example, eBay Inc. recently won an infringement lawsuit against it by MercExchange LLC, by showing that MercExchange’s e-commerce business process patents were obvious technical improvements to people trained in the art.9
The U.S. Supreme Court recently made it easier to challenge the validity of someone else’s patent. A licensee can now challenge validity while still paying royalties to the patent holder, which protects the licensee against the risk of a countersuit for patent infringement. Because patent infringement can result in large damages, the previous requirement that the licensee stop paying royalties to challenge patent validity kept many small, start-up companies from challenging the validity of established companies’ patents. They were simply afraid of a countersuit that would cause them to go bankrupt if they lost.10
If you win a patent litigation lawsuit, you can obtain monetary damages and/or a permanent injunction that prohibits the infringer from using the patented technology. The amount of damages that you can obtain depends largely on the intent of the infringer. If the infringement was not deliberate, then the penalty is very lenient, usually a reasonable royalty that might be based on what the infringer would have paid the patent holder had they licensed the invention in the first place or the amount that the patent holder lost because of the infringement. Moreover, if the infringement is unintentional, the courts may require you to license the technology to the infringer in return for royalties.
It is a very different story if the infringement was willful. Then the courts can award you triple damages.11 Willful infringement occurs if the infringer deliberately copied your patented idea, tried to conceal its effort, or acted in bad faith.12 Therefore, the damages that you can be awarded if you win a patent litigation lawsuit can be extremely large. For example, the University of California and Eolas Technologies Inc. were awarded $565 million from Microsoft for the infringement of a software patent.13
The largest patent infringement penalty ever awarded went to Polaroid. In that case, Kodak had to pay $990.5 million for infringement of Polaroid’s instant camera technology.14 Moreover, Kodak had to close down a $1.5 billion manufacturing operation, lay off 700 workers, and spend $500 million to buy back cameras it had sold using the infringing technology.15
While the damages that you receive from winning a patent infringement lawsuit can be large, so can the costs of enforcing a patent. For example, Jet Dock Systems Inc., a company that invented a floating dry dock, has had to engage in six lawsuits to protect its patents against infringement since its founding in 1993. The cost of enforcing the company’s patents—$1.2 million since founding—is large for a company that only does approximately $15 million in sales annually.16 This makes patent litigation a major strategic issue if you run a new and small company.
It also takes a lot of time to enforce a patent. For example, it took Ron Chasteen, the inventor of a patented snowmobile fuel injection system, 11 years to win his patent infringement lawsuit against Polaris Industries.17
Because new and small companies must devote a large portion of their revenues and management time to enforce their patents, large, established companies often test their willingness to do so by infringing the start-ups’ patents and running the risk that they might have to pay damages. Many entrepreneurs simply run out of cash or energy before they can prevail in the several-year process of enforcing a patent and then get nothing for their efforts, or settle for much less than triple damages, which they would be due if they proved willful infringement.
Patent Trolls
Patent trolls are companies whose business model is to buy up patents and seek royalties through licensing. Unlike large, established companies, such as Lucent, IBM, and Texas Instruments, that make hundreds of millions of dollars a year on licensing, patent trolls do not produce products.
The main strategy for patent trolls is litigation. Because patents give inventors the right to sue others for making or using an invention without permission, entrepreneurs can assemble a portfolio of patents and use the threat of litigation to collect royalties from potential infringers. For example, the former chief technology officer at Microsoft, Nathan Myhrvold, has created a company that has purchased several thousand software patents and uses the potential of litigation to motivate infringers to license them.18
Many patent trolls buy patents cheap from the creditors of bankrupt technology companies. With those patents in hand, they seek licenses from users of the patented technology, generally asking for a small royalty from companies generating high revenues from the technology. For example, they might seek a 1% royalty from a company whose product is generating $5 billion annually. Even though the trolls’ odds of winning patent infringement lawsuits are small, the potential payoff is high enough to make significant profits off of their investments in the patents even if they win only occasionally.
Often companies decide that it is better to settle with patent trolls than to fight them in court. Patent trolls have a powerful strategic tool— the injunction. If they can convince a court to stop a potential infringer from producing its products or services until after an infringement lawsuit is decided, then the alleged infringer will often settle and pay a royalty to the patent troll rather than shutter its business for months or even years. For example, NTP won a $612.5 million settlement from RIM, the maker of the BlackBerry, because NTP got a federal judge to issue an injunction against RIM that would have caused them to shut down BlackBerry service while the case was decided.19