The Software Patent Mess

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"Modern innovation often involves collaborative efforts among otherwise independent entities," notes a brief filed by IBM in support of eBay's position. In other words, while industrial-era manufacturers had the ability to fly solo, steering patent-worthy concepts from research and development to the marketplace, today's innovative companies, at least in Web-based services, rely on the technology community as a whole to support emerging platforms and standards. This dependency tends to blur the clear lines of ownership, leaving successful companies exposed to easy infringement claims. "While the patent laws and their interpretation have responded flexibly to changes in technology, business, and commerce," the IBM brief adds, "the Federal Circuit's approach to patent injunctions has become rigid."

In the case of eBay, the company's lead law firm, Skadden, scored a rare grace period last spring, when an appeals court judge agreed to suspend a court-imposed sanction that would have shut down its "Buy it Now" service pending a Supreme Court review. At issue is the fact that MercExchange, while still in the online retail business, no longer offers the service to its customers, so that the injunction arguably puts patent-holder rights ahead of the public interest.

In its successful appeal to appear before the Supreme Court, eBay argued that injunctions have become an automatic add-on to monetary penalties imposed in most successful patent complaints, at a time when many patent claimants offer no rival service. According to eBay, this violates the legal provision, established over two centuries of U.S. patent law, that judges weigh the public interest before shutting down a beneficial technology or service, as well as the original Constitutional assertion that patents be granted solely "to promote the progress of science and useful arts."

Attorneys for Blackberry maker Research in Motion weren't so lucky. Although U.S. District Court Judge James Spencer agreed to delay an injunction in February -- just days after the U.S. Patent Office invalidated several key NTP patents related to wireless e-mail transmission -- the judge's unwillingness to lift the injunction threat altogether forced RIM executives eventually to strike a bargain with NTP. The resulting out-of-court settlement, valued at $612.5 million, was 36 percent higher than the $450 million offer that had fallen through the year before -- indicating how much pressure an injunction imposes on even one of the healthiest technology companies.

"The financial market was speaking pretty loudly for RIM to settle," says William Rooklidge, an intellectual property litigator with the Irvine, CA branch of law firm Howrey LLC and a close watcher of both cases.

Such pressure, coupled with the near-certainty that the plaintiff will secure at least a temporary injunction in the wake of a successful verdict, creates the ideal situation for a "hold up," writes University of Chicago's Lichtman. In popular patent law venues, such as the Eastern District of Texas (see "A Haven for Patent Pirates"), patent defendants face less than a one-in-eight chance of getting a sympathetic verdict. Not surprisingly, then, most of them forego the litigation process altogether and settle out of court.

"If damages were the only things at stake, RIM could have fought [its case] to its natural conclusion and paid only a small price," writes Lichtman. "Because NTP could use an injunction, however, RIM had to cut a deal."