Recent concerns over alleged patent system abuse by non-innovating, non-practicing patent assertion entities have led to many patent reform proposals. This is the second article in a three-part series addressing some of these proposals. In Part I of this series, we started with the understanding that the U.S. patent system is a great system for innovation that, like all thriving systems, needs occasional tending and improvement. We examined a proposal to establish uniform procedural rules for patent infringement cases. In this article, we consider proposals that seek to protect “end users”—businesses that simply buy and use an off-the-shelf product.
So why the concern about assertions against end users? Historically, a practicing entity—a company that makes or sells products or services—rarely brought infringement claims against end users. Such end users tend to be the practicing entity’s current or potential customers, as suing one’s customers generally is not a good business practice. Whether the entity is continuously innovating also is a factor. A non-practicing entity that actively invests in R&D to continuously innovate is less likely to price gouge end users on patent licenses, in order to encourage adoption of future innovations.
A non-innovating non-practicing entity, on the other hand, often lacks such business-related concerns. For example, an entity that exists solely to assert patents it acquired out of bankruptcy has no customers and is not generating any new innovations for the industry to adopt; it simply seeks to maximize licensing revenues. It may demand unreasonably high royalties or broaden the potential royalty base from the price of the accused equipment to the revenue generated by the customer using that equipment—for example, rather than seek a one-time royalty based on the price of a taco machine, seek a nickel for every taco the machine makes.
As added settlement leverage, many end users are not familiar with the alleged-infringing technology (e.g., hotels that purchase WiFi equipment know little about the technology within that equipment.) Thus, vendors often become involved in their customers’ patent infringement disputes. In order to derive judicial efficiencies from the vendor/customer relationships, courts developed the “customer suit exception” to the general rule that grants priority to the “first-filed” infringement action involving the same or similar parties and issues. This exception allows courts to stay customer cases pending resolution of a later filed case with the vendor. The rationale is twofold: the vendor is the “true defendant,” presumed to have a greater interest in defending its actions against charges of patent infringement (more at risk for collective infringement by all of its customers than its customers risk individually); and the vendor case may resolve most or all issues in the cases against the vendor’s customers. But courts do not always stay the customer cases, because the customer suit exception is discretionary and often limited to venue disputes.
Calls for more end-user protection have been raised by Congress, the Obama administration, and industry associations. Some want Congress to pass an “end-user immunity” provision that would entirely insulate end users from patent infringement liability. In June, the White House included in its list of patent reform-related legislative recommendations protection for “off-the-shelf use” of technology by businesses and consumers, including statutory implementation of the customer suit exception. Some academics likewise have called for the customer suit exception’s expansion.
To this end, Rep. Bob Goodlatte, chairman of the House Judiciary Committee, proposed in May a “Patent Discussion Draft” that codifies a modified version of the customer suit exception. Under Rep. Goodlatte’s proposed bill, courts must stay infringement cases against end users if the principal manufacturer or supplier of the accused product either intervened in the case or became involved in its own action against the patent owner. This working-draft bill largely removes the discretionary component of the judicially-created customer suit exception, although the statute does provide for certain instances when a stay may be denied or lifted.
But not all agree that end users need more protection. While granting patent infringement immunity to certain individuals is not without precedent (e.g., immunity to medical practitioners for certain patents), the patent laws do provide a patent owner with the right to exclude others, including end users, from “using” his or her invention. There are also concerns that some end users are not just buying off-the-shelf products, but are adding functionality. Some have criticized making the customer suit exception mandatory, arguing that this effort would usurp the authority of the courts to manage their own dockets and evaluate the individual facts of each case. Whether end-user protection will get traction in this round of “patent reform” is definitely an issue worth watching.