The Injunction Presumption: Revisiting eBay v. MercExchange

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.

 

 

Nick Marr:  Welcome, everyone, to The Federalist Society's teleforum conference call as this afternoon, February 4, 2021, we're discussing "The Injunction Presumption: Revisiting eBay v. MercExchange." I'm Nick Marr, Assistant Director of Practice Groups at The Federalist Society.

 

      As always, please note that expressions of opinion on today's call are those of our experts. I have the pleasure of introducing our moderator, and then he'll take it from there.

 

      We're joined this afternoon by Mr. Robert Rando. He's a partner at Taylor English Duma LLP, and he's an executive committee member of our Intellectual Property Practice Group, which is very pleased to be hosting this distinguished panel today.

 

      Without further ado, Rob, I'll give the floor off to you.

 

Robert J. Rando:  Thank you, Nick. Good afternoon. I would like to thank The Federalist Society for the opportunity to moderate this panel of distinguished speakers on today's topic, which is whether it is time to revisit the Supreme Court decision in eBay v. MercExchange.

 

      Before we begin the discussion, and in the interest of time, I will provide only a brief introduction for each of our panelists and suggest an internet search for those interested in a more detailed description of their background and outstanding accomplishments.

 

      The Honorable Paul Michel is a retired former Chief Judge at the U.S. Court of Appeals for the Federal Circuit. Judge Michel received his commission in 1988, serving on the court for 22 years and as chief judge from 2004 to 2010 when he retired from the bench. Since then, and currently, Judge Michel has remained an active and prestigious voice on the major issues affecting the U.S. patent law system.

 

      David Jones is the Executive Director of the High Tech Inventors Alliance. Prior to that, David was Assistant General Counsel for patent policy at Microsoft where he spent more than a decade handling both domestic and international patent issues. Previously, he held multiple positions on Capitol Hill, most recently as anti-trust and IP counsel to Senator Orrin Hatch on the Senate Judiciary Committee. He clerked for Chief Judge Sharon Probst of the Federal Circuit and Judge Will Garwood on the Fifth Circuit.

 

      Adam Mossoff is a Professor of Law at Antonin Scalia Law School, George Mason University. He has published extensively on why patents, copyrights, and IP rights have been, and in Adam's opinion should be, legally secured to innovators and creators as property rights. His scholarship has been relied on by the United States Supreme Court, lower federal courts, and U.S. federal agencies. He's been invited to testify numerous times before the U.S. Senate and the House of Representatives on IP legislation. He is also a longstanding member of the executive committee at The Federalist Society Intellectual Property Practice Group on which he has served as the chairperson from 2016 to '18.

 

      Now, for a brief reminder about the eBay case. In 2006 Supreme Court decision in eBay v. MercExchange, the Supreme Court issued a unanimous decision authored by Judge Thomas reversing the Federal Circuit opinion that an injunction should be issued based on the finding of a patent infringement but rather, instead, the lower courts should apply the four-factor test traditionally used to determine if an injunction should issue in any given federal case.

 

      The Court also held that the district courts' apparent categorical rule that a licensing entity that lacked the commercial activity in practicing the patent would not suffer and satisfy the irreparable harm prong of the four-part test that was also in tension with the Court's precedent in Continental Paper Bag and could not be squared with the principles of equity.

 

      Chief Justice Roberts, in a concurring opinion joined by Justices Scalia and Ginsburg, noted that "From at least the early nineteenth century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases."

 

Justice Kennedy, in a concurring opinion joined by Justices Stevens, Soutor, and Breyer, in somewhat of a response to Chief Justice Roberts' concurrence, expressed skepticism about what he characterizes as "vagueness and suspect validity" of the business method patent involved in the case and with the past practice of the injunction presumption had a negative effect when applied to non-practicing licensing entities.

 

Okay. Let's begin the discussion with some opening remarks from our panelists. Adam, maybe you can lead us off by telling us a little about the long history of injunction and patent cases and the related case law, and, in your opinion, why the eBay decision was incorrect and should be overruled or abrogated by Congress. Adam?

 

Prof. Adam Mossoff:  Thank you, Rob. It's a real pleasure to be here. I'm just going to keep my opening remarks very brief so that we can jump into discussion between and amongst the panelists and with our audience today.

 

      I'm just going to, in my opening remarks, just very quickly summarize the legal concerns with the eBay four-factor test. When the Supreme Court handed down this four-factor test, they emphasized repeatedly that this was a historical test, well-established in equity, reaching back to the historical foundations of equitable protection of property interests and other types of rights with injunctions.

 

      Unfortunately, those claims were utterly and completely incorrect. There is no four-factor test for the issuance of permanent injunctions upon the violation of a property right, whether an intellectual property right or even a real property right.

 

I became interested in this because of these invocations of the historical foundations of this four-factor test, so I actually have been doing a long-running study of all of the patent cases decided in the nineteenth century and reported in the Federal Cases Reporter. I'm about 85 to 90 percent of my way through the study, and I have a little over 800 cases of injunctions where injunctions were requested. I can actually confirm, of those 800 cases that I have in my database, zero apply a four-factor test.

 

      I want to repeat that: zero apply a four-factor test for determining whether a patent owner can receive an injunction on a finding of ongoing or willful infringement of their patent right. What the courts did apply was the same equitable presumption for real property for the violations of patent rights. It was essentially a two-step inquiry.

 

The question was was there a valid property right? There was, in this instance, a valid patent right that had been infringed, and there were many presumptions that established whether that patent right was valid, including the mere fact that it issued after examination at the patent office created a prima facie case of validity. Also, longstanding use, either in licensing or manufacturing, established also a presumption of validity by acquiescence by the public.

 

      The second inquiry was simply whether this property right was infringed by either ongoing infringement, which is almost par for the course with commercial infringement, or whether this infringement was willful. On the finding of that, the courts often stated, although injunctions are certainly discretionary, this is the standard way that we secure property rights, whether in inventions or in real property against ongoing or willful infringement.

 

      At the end of the day, it was eBay, actually, and the Supreme Court that changed the law for the issuance of permanent injunctions. I think this, perhaps, explains a little bit of what has happened since then because what then happened was is that there was no real precedent that courts could look to to find. eBay is telling them there's this well-established, historical test. They looked in the precedence for this well-established historical test. They couldn't find any.

 

      Within a few years, lower federal courts and the Federal Circuit were turning to Justice Kennedy's concurrence in eBay. His concurrence is equally anachronistic and ahistorical. He bemoaned the rise of this allegedly new patent licensing business model that allegedly did not exist, although it has long existed and was used by such inventors as patent owners as Thomas Edison and Charles Goodyear and Samuel Morse and others—Elias Howe.

 

      Since courts turned to his policy-laden concurrence, they got swept up in this patent-troll narrative that has been pushed by big tech for the past ten or 12 years, and they abandoned the presumptions that had traditionally existed for protection of intellectual property rights like patents and other property rights. In fact, they established de facto presumptions against injunctions.

 

      Following a slew of decisions in trial courts and at the Federal Circuit now, if you were an owner of a standard essential patent or if you actually are a licensing company, your ability to obtain an injunction for ongoing or willful infringement of your valid patent right is essentially nil.

 

      Unfortunately, this has spread even now beyond owners of patents who engage in licensing. Even manufacturers are now having a reduced ability to obtain injunctions as confirmed by empirical studies that have been done over the past several years. This is becoming a real concern as property rights owners in innovations are losing the longstanding historical protections that they received in the law, which is what drives innovation and which drives their licensing and other commercial practices in our innovation economy.

 

      I want to stop there because I don't want to go on too long. I want to continue our discussion with the other panelists and with our audience. Thank you.

 

Robert J. Rando:  Thank you, Adam. Judge Michel, perhaps you can provide your insight on the eBay decision and the subsequent Federal Circuit decisions and the practical impact on stakeholders.

 

Hon. Paul R. Michel:  Well, the impact has been dramatic. There are various ways to assess it. As Professor Mossoff mentions, there have been investment changes as a result of the difficulty of getting injunctions even if you're a manufacturer and the near impossibility of getting injunctions if you're not a manufacturer.

 

      Let me suggest a few perspectives. In Germany, now increasingly in England, and in the Netherlands and in other countries in Europe as well as in Asia, including China, injunctions are routinely granted once infringement is established. The U.S., that used to have a very pro-injunction regime, now has an anti-injunction regime, and it is the outlier globally. So that's one dimension.

 

      Second dimension is what are the impacts on external funding decisions that need the incentive of patents? In patent-dependent industries, in the wake of eBay, we've seen a huge fall off in venture capital investments. The proportion of venture capital going into things like chips, drug discovery, pharmaceutical, surgical devices, wireless technologies, and so forth, the proportion is now one-seventh of what it was before.

 

      Correspondingly, the portion of VC investments going into non-patent-dependent industries, like entertainment and hotels and restaurants and casinos and things like that, has gone up sharply.

 

      The practical impacts have been dramatic and very adverse. Now, it's true; there's more venture capital out there in total than before, but the change in proportions, I think, is very dramatic and very deleterious to the hard technology that relates to burgeoning industries like 5G telecommunications, artificial intelligence, quantum computing, internet of things, and so forth; the very technologies that China is surging in based on massive investments while we're disinvesting in these same technologies.

 

      If you look at it from a legal or doctrinal juris prudential standpoint, the conclusions are equally dramatic. In my view, the eBay regime, meaning not only the eBay case 14 years ago, but all the subsequent lower court cases, can be characterized by unpredictability, inconsistent decisions, chaos, and discrimination against non-manufacturers.

 

      I think the eBay decision itself, in addition to the defects Adam Mossoff has identified, was so poorly written as to provide virtually no guidance to the lower courts. And for reasons I can't understand, the Roberts-authored concurrence has largely been ignored, and the dicta in Kennedy's concurrence—based on assumptions that were unidentified and, I think, are unsubstantiated—has effectively become the law.

 

      So, we have a crazy situation of a minority opinion of four justices, two of whom aren't even on the Court anymore, set the essential parameters of the law. Then comes the Federal Circuit, and what did they do? They made it even worse. For example, in all the years since then, they've been all over the lot on issues like how much of a nexus -- how proven do you need? And on whether there's even a presumption of irrevocable harm.

 

      In 2011, in the Bosch case, they said that since categorical entitlements were overruled by eBay, that that must also mean that procedural evidentiary devices like presumptions, not irrevocable presumptions but rebuttable presumptions—also impliedly, in the view of the Bosch panel with no analysis, no real discussion—they're out too.

 

      What we have is a regime that's had very bad effects on technology, on investment, puts us out of line with the rest of the world, and doctrinally, it makes no sense. I have to close by saying that, as a judge, I'm embarrassed that the courts, from the Supreme Court right on down the hierarchy, have made a total mess of the injunction remedy in U.S. law.

 

      Whether you look at it from practical standpoints, global competition, investment standpoints, or doctrinal coherence, it's a total mess. It needs to be repaired as soon as possible. Actually, long overdue. I don't care whether it's done by the Supreme Court or the Federal Circuit or the Congress or some other agent, but it's desperately needed because the harms multiply every single day.

 

      Thanks. Rob?

 

Robert J. Rando:  Thank you, Judge Michel. David, I'm sure you're chomping at the bit to respond to what you've heard and also give us your opinion why the eBay decision was correct and should not be overruled or abrogated by Congress. David?

 

David Jones:  Thanks, Rob. Yes, I should respond to a few things that have been said. Although, this isn't a debate about venture capital or investment in technology. I will just say that the numbers Judge Michel cited are not reflected in the numbers I see in the publicly available data.

 

      Also, the idea that eBay is somehow leading to underinvestment in technologies like AI -- my organization includes the three top funders of R&D in AI, or at least the three top corporate funders, and none of them feel that they are being harmed in their pursuit of AI. Google, Microsoft, Amazon all have very robust portfolios and very robust incentives to pursue AI, and none of them has expressed that they feel in any way undermined by eBay.

 

      Going back to the question of should be go back to the pre-eBay world? I think we have to remember what the pre-eBay world looked like. I think that the best way to do that is to think back to the prototypical case of NTP v. RIM. I don't know what age group the audience is on this call. I don't know if you actually remember the case, but I remember it well. I'm sure that Adam and Judge Michel also remember it.

 

      It was a suit by a non-practicing entity against RIM, and RIM was a provider of what were initially called two-way pagers but evolved into something that was, essentially, the precursor of the modern smartphone. It allowed you to do voice calls as well as email and text. At the end, they also provided some limited internet capability. It was called the BlackBerry phone. They were extremely popular in business and in government and considered mission critical by many.

 

      A non-practicing entity called NTP sued them and won. A jury award $33 million in damages. Presumably, if you believe in the jury system and believe that juries do a good job, that $33 million would've made the mole. The judge upped that damages award to $53 million plus attorney's fees. So now they're at a point where they're getting, say, roughly double of what they were entitled to.

 

Because of the fear of an injunction, that case settled for over $612 million, roughly ten times what they were getting from the courts and roughly 20 times what the jury found would be compensatory. That was a real case. It was an extreme case. They're higher dollar amounts and more drama than is typically involved in these cases, but it was typical in some ways. It was typical of the way that the automatic injunction allowed patent owners to receive a windfall.

 

The question I think I would have is is that the kind of patent system that we think we need to drive innovation? I would argue it's not. It just isn't. There's no evidence, that I've seen, that it's necessary to overcompensate patent owners in order to incentivize them. That's not how we do things normally. We don't normally say, "Well, we need to provide an incentive. Let's do something at roughly 20X what is compensatory."

 

I guess I'll just close -- I want to keep this short so we have a discussion. But I guess I would say—and Judge Michel and Adam both kind of hinted at this in raising the notions of presumptions—we can't have a system that works if we have poor patent quality followed by a presumption of validity that prevents invalid patents from actually being canceled followed by an automatic injunction.

 

If you want stronger patents and a stronger patent system, in my view, you start at the beginning and you work on patent quality. Once the patent office no longer issues 30 to 70 percent of patents that contain invalid claims, then we talk about making the remedy stronger. If you don't do it that way, you're not creating a stronger patent system; you're just creating a stronger enforcement mechanism for weak patents.

 

I think that does not serve innovation and that should not be our goal.

 

Robert J. Rando:  Thank you, David. Judge Michel or Adam, do you want to address -- I guess, Judge Michel, maybe from a doctrinal perspective, anything that David had added?

 

Hon. Paul R. Michel:  Well, I take issue with the phrase—it's a propagandistic polemical kind of phrase—"automatic injunction." The Federal Circuit never had an automatic injunction rule. It never had a rule, and it never said "automatic injunction." I was actually on the original eBay panel, and the decision written by Judge Breyer never said what the Supreme Court was told about automatic injunctions. So that's the first response.

 

      Secondly, with respect to investments in technology, it is certainly true that cash-rich, super giant companies such as the Fang Group, as they're sometimes labeled in Silicon Valley, are doing massive amounts of research in AI and other critical technologies because they have so much cash they can do that and pay great dividends and buy back stock and, and, and. But where does it leave universities and startups and small emerging companies that are dependent on outside funding by venture capitalists, pension funds, private equity firms, and the like?

 

      The fact that Microsoft, for example, is spending a lot of money on AI is good for them and good for the country, but it doesn't make up for the lack of investment where companies are dependent on external funders, which is the big problem here.

 

      Now, just finally on the doctrine, the Federal Circuit, 14 years later, is still groping to try to have a coherent doctrinal set of tests. This is ridiculous. Fourteen years later, you still can't say what the limiting principles are, and that's because the decisions were so badly written, both the minority opinions and the unanimous opinion of the full court authored by Justice Thomas.

 

The Federal Circuit has not been able, despite dozens of cases, to make sense out of this, so the district courts do their best guess. Because of Highmark and Octane Fitness, the Federal Circuit can almost never reverse the decision by a district judge no matter what the decision is because they have to show it's an abuse of discretion which, as a practical matter, is almost never possible.

 

      We have district judges doing their best guess and then that stands. It's incoherent. It's not really law. It's just fiat, and it's unfair and unproductive for the country.

 

Robert J. Rando:  Thank you, Judge. David, separate from the doctrinal issue that Judge Michel addressed, is there anything else that you might want to address that Judge Michel had brought up?

 

David Jones:  Again, I don't want to turn it into a debate over investment, but it's not true that the investment by companies like my members does not benefit the companies in need of external investment. The companies I represent are also some of the biggest VC providers. Beyond that, the prospect of being acquired by one of the largest tech companies is what kind of makes it worthwhile, in many cases, for completely independent venture capital to come in.

 

      I would argue that, contrary to what the Judge said, investment by large tech companies actually has the effect of raising all boats.

 

      On the doctrinal matter, I'd just say I'm not here to defend the poor application of eBay. I do not think eBay should be revisited. That doesn't mean I don't think that eBay should be better applied by the Federal Circuit. I see that as a completely distinct issue and not one that warrants just throwing out eBay and the doctrine behind it.

 

Robert J. Rando:  Okay. Well, thank you, David. Another issue: having the benefit of almost 15 years of hindsight, many have argued various consequences of the eBay decision. We've talked about some.

 

One such consequence is the notion of affirmative business decisions to engage in what is referred to as "efficient infringement." Adam, maybe you can first speak to that concept, and then, David, provide your input, and of course, Judge Michel, any thoughts you have on it. Adam?

 

Prof. Adam Mossoff:  Sure. Happy to discuss this issue. The phrase that's used by policy wonks lawyers is "efficient infringement" where a company chooses to deliberately infringe a patent given that it is cheaper for them, knowing that an injunction will not issue and that damage rates have been also suppressed through various changes in remedies doctrines over the past ten, 12 years, and that they can drag a small company or an individual inventor through a very lengthy and expensive litigation process, further depressing the ultimate payments that they have to make because they would account for that in any settlement that they would eventually reach.

 

      I prefer not to call it efficient infringement because we, at school, learn that efficiency is good, and people generally think that efficiency is good, to be efficient. I prefer to call this predatory infringement because it is large companies that have hundreds of millions, if not billons, of dollars in the bank; companies like the big tech companies—Apple, which actually funds its legal department at $1 billion a year. So, they can afford to do this.

 

Whereas, if you are a startup or an individual inventor or even a small company, you can't afford to incur all these massive expenses with the inability to ultimately obtain an injunction to stop a company that is either deliberately and willfully infringing or committing ongoing infringement after you've given them notice.

 

      I just want to reiterate Judge Michel's point is that it's not an automatic injunction; never was. It was a presumption of an injunction. The presumption could be rebutted, as there could always be inequity with showing that the property right is invalid. That addresses the poor patent quality concerns that Dave mentioned as well as showing all the other issues that you could raise in equity, like estoppel and unclean hands and things of that sort.

 

      This is becoming quite a concern. I think the recent litigation by Sonos against Google highlights this where Sonos had been in negotiations with Google for, I think, approximately five or six years after Google took its technology and incorporated it into its own wireless speakers. Sonos finally had to bring a lawsuit. But Sonos is a very successful company as well, and many, many companies and many individuals are unable to do that.

 

This is becoming a prevalent problem. It highlights the importance of having this injunction to secure property rights, which protects the weakest members of our society—the people who are undercapitalized, don't have a lot of money, but have that new idea. Just like Thomas Campana did, who is the inventor who actually formed NTP who, when he went to RIM and told them they were infringing his patent, which was upheld as valid multiple times by the courts and by the USPTO, RIM refused to negotiate with him and told him to go pound sand, which is ultimately why he had to sue.

 

Thank you.

 

Robert J. Rando:  Thank you, Adam. David, can you provide some input on the concept of efficient infringement?

 

David Jones:  Sure. Let me begin by responding to Adam a little bit. If the issue is lack of resources to litigate and enforce your patents, injunctions isn't the answer. If the problem is an initial lack of capital, then overcompensating a patent owner and, arguably, overcompensating all patent owners at the end of the day, doesn't solve that problem in any way.

 

      If that's the problem, we should be talking about mandatory fee shifting or maybe some process for ensuring that smaller companies have access to litigation capital. That, honestly, has nothing, that I'm aware of, to do with injunctions.

 

      The second thing I would say is I was in-house at a large tech company for a decade, and I cannot recall a single instance, not one instance, that I'm aware of, where my former employer made an affirmative decision to infringe. The risks were just too high. The litigation costs, the likelihood of a damages award, which Adam would call undercompensatory but which I think most economic analyses would indicate were vastly overcompensatory. You have to remember, I worked for a company that had a $1.3 billion jury verdict against it for a feature that was not used in a practical way in a free product.

 

      The idea that people make an affirmative decision to infringe -- I'm sure that some do. That is not prevalent, and it is exceptionally rare among the fortune 100 companies just because the risks are too high.

 

      I don't buy either of those arguments. In terms of efficient infringement, I think Adam's right not to want to call it efficient infringement because we are in favor of efficiency, or at least I am. And I think we have to remember that in a very similar context, it was conservative icons, like Judge Posner, who were in favor of efficient breach, which is kind of the model for this notion of efficient infringement.

 

      While I don't believe it occurs, or at least not very often and very rarely by reputable companies -- if we're talking about something that's the equivalent of efficient breach, it shouldn't be thought of as a bad thing, as far as I'm concerned. In the same way as efficient breach is welfare-enhancing overall and ensures compensation to the wronged party, it is not a net negative, as far as I can tell.

 

Robert J. Rando:  David, just to follow up a bit. It seems like one could say that this is tasked as kind of an issue that maybe pits large companies against a small company or small inventors and so forth. Is that a mischaracterization, from your perspective?

 

David Jones:  Yes and no. Honestly, the large tech companies get so many patent infringement suits that they sort of have at least a few of every type you could imagine—big companies, small companies, competitors, noncompetitors, practicing entities, non-practicing entities, good guys, bad guys. I guess I would dispute the notion that there is a substantial amount of David versus Goliath type of litigation out there. That's for a couple of reasons.

 

      The non-practicing entities that are typically suing the large companies may look small on paper, and quite often they are small on paper because all they are is a holding company that holds the five or ten patents that are being asserted in the current campaign. They don't have employees. They have a couple of officers and a P.O. box for an address. Beyond that, their only assets are these patents. In that sense, yes, they are very small guys.

 

      But you have to remember that a lot of those small guys have nothing to do with startups, nothing to do with the original inventors. In fact, in recent years, for most of my members, an enormous amount of the litigation driven by those types of entities has actually been driven by entities that are owned by a large venture capital bank that is exceptionally well capitalized.

 

      The idea that it's the deserving small versus the evil big, I think, is at best a mischaracterization. I'm sure that people feel strongly about it, but I just don't see a lot of evidence that that's the case.

 

Robert J. Rando:  Thank you, David. Judge Michel, any thoughts on these issues?

 

Hon. Paul R. Michel:  Well, let's do a before and after comparison. Throughout the 1990s, just to take an example, IBM licensed many thousands of patents to thousands of companies where the licensing program was so extensive that it earned IBM billions of dollars per year. It was able to do that because, in those days, we had an honor system where users of technology voluntarily, without litigation, took licenses when they were shown that they were infringing valid patents. So that was the '90s. That was before eBay.

 

      Let's fast forward to the decade that we're just toward the end of. In 2013, I was part of a group that tried to create what you could call a New York stock market-style computerized transparent system for exchanging patent license rights for compensation. The project called Intellectual Property Exchange International failed because the portfolios provided to it by household-name companies for technologies in major areas that were being used by dozens of other household-name companies resulted in a circumstance where, in every case, the infringer company agreed they were infringing, agreed that the patents were valid, and agreed that the licensing rates being offered, which were per product rather than temporal, were a good deal.

 

They recommended to their management, in every single case, that they take a license. In every single case, and there were dozens of these, the CEO ultimately consulted his outside litigation counsel and said, "My people are telling me we should take a license. What do you think?"

 

In every single case, the outside litigation counsel said, "Don't take a license. Don't even talk to those people. Don't negotiate. Don't communicate. You don't need to. They probably can't get an injunction. They probably won't be able to last through the ten-year litigation process that'll cost millions and millions of dollars. And if they do sue you, we'll take them to the Patent Trial and Appeal Board with IPRs. We can probably kill the patents or at least some of the claims, and then we'll raise other invalidity defenses in district court. As a result, you would be stupid to take a license even though you are infringing a patent and you agree the patent is valid because you'll save more money if you don't take a license."

 

      We were so shocked by this that we had our staff at the Exchange go out and talk to other leading litigation—again, household-name firms you all know. Huge, successful, top-quality firms—and we asked them, "What kind of advice are you giving your corporate clients in these sort of circumstances?" And they said exactly the same thing: "We tell them don't take a license. Don't negotiate. You don't need to. It doesn't matter that you're infringing a valid patent that you agree you're infringing." Because the entire leverage has been sucked out of the system by the weakening of the injunction regime and the creation of the PTAB. We've wrecked the incentive system, which is the whole point of patents.

 

Robert J. Rando:  Thank you, Judge. Shifting our focus a bit, absent SCOTUS revisiting eBay, in Congress, Senator Coons has introduced and reintroduced the STRONG Patents Act in 2019. In his current leadership role in the majority on the judiciary committee, it's likely he may reintroduce it, and it might have legs.

 

      The STRONG Patents Act effectively abrogates eBay and statutorily restores the injunction presumption on a finding of continuing or willful infringement of a valid patent. Adam, is this an appropriate solution?

 

Prof. Adam Mossoff:  Yeah, thanks Rob. It's a great question. I think it is for the same reason that it was an appropriate solution in the omnibus bill at the end of December that Congress enacted where they abrogated the application of eBay in trademark law. Where eBay had been extended out into other areas and the test had been applied in eBay, and they recognized that it was inapplicable there. All the reasons why it was inapplicable there apply equally to patent law.

 

      Because, at the end of the day, the Court is merely interpreting the statutes that Congress has enacted, and this is our separation of powers system at work. If the Court misinterprets those statutes or misapplies the doctrines, including misunderstanding and warping longstanding historical doctrines and changing the law in unjustified ways, then Congress can certainly step in and correct that.

 

It has done that many times with the patent system. It enacted, in 1952, the Section 103 for non-obviousness overruling the flash of genius test that had been created by Congress in which Justice Jackson, at one point, said, "The only good patent is one that this court has not yet got its hands on under that test."

 

I think, similarly, the Court has made another mistake and has led to similarly deleterious effects in our innovation economy, and Congress can certainly step in and correct it like it has corrected the Supreme Court before.

 

Robert J. Mondo:  David, your thoughts on this?

 

David Jones:  Yeah. I clearly don't support that and don't think it solves any of the problems that people are talking about. To the extent the problem is that alleged infringements are certain transigents and are going to just keep on litigating. That doesn't necessarily solve it. In fact, it may actually make it worse because you want to delay the dates of the imposition of an injunction for as long as is possible and then settle.

 

      All the ills that have been discussed about people won't take licenses; people will just litigate. None of that it seems to me to have anything to do with the injunction. The injunction is used as a scare tactic, but it doesn't get people scared immediately into compliance. Quite often, they don't get scared until the injunction is actually about ready to issue.

 

      These arguments, to me, just don't make a lot of sense. If claim construction were certain, if quality were high, and if the payout and compensatory damages were clear, then all you would have to do is engage in a time-discounting exercise in order to go to some funder and say, "Look, you should fund this litigation because it's going to be a net positive for you at the end of the day, and here's the deal that we could cut."

 

      None of these make sense to me as solutions for any of the problems we've been discussing. And, again, I think the solution is to get to a point where the patent office isn't issuing a majority of invalid patents. That is a core problem for any property system. If that many of the formal representations of the property are actually invalid, incorrect, unenforceable, then it becomes impossible to have any sort of working property system that would support the kind of thing that Judge Michel was apparently involved in.

 

Robert J. Rando:  Judge Michel, on the issue of Congress stepping in and the STRONG Patents Act, and regarding what David has just said, can you maybe give us your thoughts on whether David is correct that maybe it's the front end of the patent system that needs repair rather than the back end, enforcement?

 

Hon. Paul R. Michel:  Well, my problem with David's view is he's basically saying, "Don't solve any problem until after you've solved every other problem." We'll never solve the problem of some alarming level of invalid patents being issued after examination because you'd have to have 30,000 examiners, if not more. It would be unaffordable. So, it's not a practical answer to say first we have to have perfect examination and then we'll think about all these other problems.

 

      Secondly, Congress has, from the start, from 1790, made the patent system, as the Constitution contemplated, the subject of a statute. We've had a Patents Act for the entire life of this country, and it's expanded and become more complicated, of course, over time, but it's a statutory regime. It's not a common-law regime.

 

      Therefore, the courts should be very cautious and circumspect before interfering with the way that the system has been structured and the balance is struck by the Congress, which is the correct place for those kinds of broad national policy determinations to be made in a democracy.

 

      But instead of that, the Supreme Court, for the last 50 or 60 years, keeps intervening based on policy preferences and guesses, frankly, and wrong guesses, by individual justices based on who knows what. I think that there's no question that the Congress has the right to set the basic parameters, and they should do that with respect to eligibility where, again, the courts have gone off the deep end, and they should do that with respect to injunctions where, again, the courts have gone off the deep end.

 

There's no question that they have the authority to do that, and I would argue that they have a better knowledge base and better mechanisms for doing it properly. After all, the Supreme Court is only looking at a record of an individual lawsuit, usually between two parties, with hired gun lawyers and hired gun expert witnesses and a very thin record whereas Congress, as the AIA itself recently reminded us, can have dozens of hearings and get input from thousands of people, including hundreds of experts of various disciplines, and carefully work their way through the problem intellectually, which they took seven years to do for the AIA.

 

      So that's a better mechanism to get proper policy balances struck, and it's the right institution anyway in a democracy. We shouldn't be having rule by judges on policy matters.

 

      Beyond Congress, the Federal Circuit, and I hate to say this because I loved being on the court. I loved the colleagues and the cases and the advocates. But, in my opinion, the Federal Circuit, in recent times, has become the scene of chaos where everything seems to depend on what panel you get in the random draw and the decisions, to my eye, of one panel versus another versus another on the very same issue are completely inconsistent.

 

      The Federal Circuit ought to be going embank to clean up the inconsistent decisions that they have regarding injunctions but also eligibility and obviousness and claim construction and, and, and. Even though Congress has the lead role, there's also an important role for the Federal Circuit, and I wish they would take up the challenge and speak with one voice.

 

Robert J. Rando:  Thank you, Judge. In order to allow for some audience questions, perhaps, before we end the discussion, any closing thoughts briefly by each of you? Adam, then David, then last, but certainly not least Judge Michel. Adam?

 

Prof. Adam Mossoff:  Thank you, Rob. I just wanted to kind of sum up and respond to some of the points that have been made by Dave in our discussion today, very quickly, which is I'm really worried about just-so stories and rhetoric driving what should be, as Judge Michel, I think, very nicely and succinctly explained, should be evidence-based and proper policy-based decision making.

 

      The constant references to injunctions lead to "overcompensation" of patent owners or the claim that we have a problem with patent quality. These are all completely empirically unverified statements. There's no—and I want to emphasize this—there's no ensigned empirical study that has followed actual established norms in economics and in other empirical studies where they've actually proven that patent quality is worse today than it was 30 years ago, let alone 100 years ago. There's no study that shows that.

 

      Equally, there's no study that shows that injunctions were leading to overcompensation of patent owners. In fact, it's exactly the exact opposite. Yes, you can have a couple stories told of a couple cases here and there of the millions of patents that are enforced, just like you could have a couple stories of the property owners abusing the real property or a bad landlord here or there.

 

      But the fact of the matter is injunctions are the backstop for free market negotiations. If you do not injunctions, you do not have the free market. A property owner's ability to say no and yes to the legitimate use of their valid property rights, just like Thomas Campana, the owner of NTP, the person who was accused of being an improper patent troll by Dave at the start of this discussion, had the ability to say [inaudible 00:49:18] with his valid patent right. It was valid. It was upheld repeatedly as valid.

 

There was no question of patent quality there. There was no question of infringement, and he should've been rightly paid. And he actually asked for a very small license fee from RIM. They turned him down. A multi-hundred-million-dollar company, at the time, turned down a request for a $3 million licensing rate.

 

      They chose to roll the dice by litigating, just like he said that companies don't do. They did that. Many other companies do it now because you can't get an injunction because, as Judge Michel rightly explained, when people go to ask for licenses to contract in the marketplace, they're told no because the ability to actually have that market transaction has been undermined.

 

      This is, I think, having serious problems for our operation of our innovation economy. Because in the pre-eBay world that Dave described, it was a world of incredible explosive growth. This is when in the world that the whole internet came into existence and all of our PC revolution occurred, the biotech revolution occurred, and we've had incredible innovation with this presumption of an injunction and relative certainty in obtaining patents under patent eligibility and other doctrines, and I think that should continue, and hopefully will continue, with reform to the patent system.

 

      Thank you.

 

Robert J. Rando:  Thank you, Adam. David, your closing thoughts?

 

David Jones:  Sure. I'm a little confused about some of Adam's facts. The claims at issue in the NTP case actually were held invalid, or found invalid, rather, in rexam by the PTO, I believe. They do appear, at least to me, to have been both found invalid and invalid just based on my recollection of what they look like.

 

      There has been empirical evidence of patent invalidity rates coming out of the PTO. Now, they may not be historical comparisons, but I don't know why you'd do a historical comparison. It's a lot more useful to look at the just raw rates, raw invalidity rates, coming out of the PTO. Probably the best study that I can remember, I believe, came to the conclusion that 28 percent of the patents being issued were invalid under 102 and 103 alone. That was across all parents.

 

      When you get to the software and business method patents, it was roughly twice that rate of invalidity. Now, if you take that and add in the additional invalid patents that are invalid under 112 and 101 currently, you get to an enormous rate of invalidity. There have also been any number of empirical efforts to estimate the number of, or the proportion of, invalid patents based on litigation data. I think that's harder to do because there are a bunch of selection biases that you have to filter out of the data.

 

      But, again, those have generally concluded that somewhere around half of all patents that are issued are at least partially invalid, and some of them have gone up to 80 percent of all patents. I don't believe the 80 percent number, but I do believe the 50 percent number. And it's just absolutely not true that there's no evidence and no empirical analysis of this.

 

Robert J. Rando:  Thank you, David. Judge Michel, your final thoughts?

 

Hon. Paul R. Michel:  Well, just two brief points, Rob. One is the question of who's best able to figure out the right royalty rate? Is it courts or is it the commercial actors actually immersed in the marketplace and active in their industry? My view is that the private actors are vastly better equipped to come up with a market-based, commercially reasonable, and efficient royalty rate way better than the courts.

 

      What used to happen in the pre-eBay days was that an injunction would issue, and then what? Then the parties would settle. When I was on the court, for the first decade and a half, we almost never had a damages issues because damages were resolved by the parties not the court. And that was because an injunction issued in most cases.

 

      If you look abroad, what happens in Germany? As soon as infringement is proven, they nearly always issue an injunction. What happens then? The parties settle. They settle on royalty rates that are acceptable to both the implementer and the patent owner. It seems to me that's the desirable way to do it, the way we used to do it here, the way it's still done in other leading jurisdictions. To get back to that functioning system, we need to restore injunctions.

 

Robert J. Rando:  Thank you, Judge. At this point, Nick, maybe we can open the floor for some questions? I know we don't have a whole lot of time, but if Adam, Dave, and Judge Michel, if you don't mind, maybe the next five minutes or so taking questions?

 

Prof. Adam Mossoff:  Yeah, I'd love to.

 

Nick Marr:  Yeah, let's do it. We'll try to get in one or two questions. We've got three questions, so we'll to get them.

 

Raymond Van Dyke:  Yes, this is Raymond Van Dyke. I'm really dismayed at this NTP case, this canard is still being perpetuated. In that litigation, there were some serious fraud by RIM's counsel that really caused that increase in damages. So, it's hardly an overcompensation to the inventor. It was a more a punitive measure to RIM.

 

David Jones:  I'll just respond to that by saying that any punitive damages are, by definition, beyond the compensation and are overcompensatory. I was not making any sort of moral judgement. I actually agree with you that RIM behaved in a bad and stupid way in that litigation, and to a certain extent, they did roll the dice. My only point is that, again, by definition, punitive damages are overcompensatory.

 

Raymond Van Dyke:  Well, it's hardly a reason to find the inventors in this instance at fault and to call the whole paradigm at fault because of this one instance.

 

David Jones:  Yeah, I'm less worried about the additional $25 million that -- the roughly doubling that occurred due to the punitive damages. I actually think that's probably appropriate in a patent system. It's the getting to 20 times the compensation that resulted from this settlement that was the valuation of the injunction.

 

You have to remember, despite the argument that all this is all a market and private parties are better at negotiating market-appropriate rates, what they're valuing is not the value of the rights themselves; it's the negative value of the patent rights. It's the amount of damage that can be inflicted by an injunction, which often has nothing to do with the value of the rights themselves.

 

Raymond Van Dyke:  So other data points would be useful instead of using that old canard.

 

Nick Marr:  All right. We'll take our next question.

 

Dan Weinger:  Hi, how you doing? My name is Dan Weinger. I'm a partner at Mintz. I think this is mostly directed at Mr. Jones, but obviously, I would like everybody's input. I think that maybe you could agree there should be some balance in the injunction. Right now, it's basically impossible to get an injunction if you're not in a direct competitor, two-player market circumstance. We get situations like VirnetX who has to litigate with Apple for ten years before they can get paid.

 

      Is there a fact pattern outside of the two-player, direct competitor market where you would approve of issuing an injunction when the patent infringement is found? And what would that look like? We're seeing cases where like Ericsson can't get injunctions. Nobody can get injunctions. Is there some fact pattern that you would approve an injunction getting issued?

 

David Jones:  There are lots of fact patterns beyond that. And my argument isn't that injunctions should be necessarily restricted to the extent they are today. As I said initially, I'm not here to defend the current eBay practice. I'm here to defend the idea of eBay. Is it better or worse to have an injunction test that includes a presumption of irreparable harm?

 

I believe strongly that district court judges are in a good position to evaluate the equities on both sides and grant an injunction or not. That's my basic premise. Not that any particular instance deserves an injunction or does not deserve an injunction but rather that the eBay decision was right to remove the presumption of irreparable harm because I think that presumption was unwarranted. I think it is inconsistent with the historical way that equitable remedies were determined, and I personally trust trial judges, more or less, to do justice using the injunction.

 

      I'll just say that I'm sure there are all sorts of fact patterns beyond those that you mentioned where I think an injunction would be appropriate. But then again, I'm not a district court judge, so my view doesn't matter much. My point is we should let district court judges balance the equities.

 

Nick Marr:  Panelists, we have one more question in the queue, but we're past our time, so we can either take it or call it a day.

 

Robert J. Rando:  Let's take it.

 

Hon. Paul R. Michel:  Let's take it.

 

Robert J. Rando:  Yeah, we're not going anywhere.

 

David Jones:  [inaudible 00:59:03] plenty of time.

 

Nick Marr:  Great. Let's go to our last question now.

 

Robert Barker:  This is Robert Barker in Atlanta calling. I just was curious. Is there a perception that there are different technology players here? I mean, obviously, Google and some of the larger—Amazon, eBay, all the rest of them—have one interest, but there's just the basic, what I would call the more basic fundamental technologies of aeronautics and areas like that.

 

It seems like a falloff in investment in those areas has been pretty marked over the years. Are there two different kinds of technology players here whose interests should be considered?

 

David Jones:  I guess I can take a shot at that. There are differences across subject matter. I'm skeptical of the argument that there have been enormous drop offs in investment in all these other technologies. But setting that aside, there are some differences there, and a lot of that involves the amount of capital required to innovate in a particular industry and the quality of patents that are coming out in that area from the PTO.

 

      In many cases, the more important distinction is going to be between the producers of complex technologies and simpler technologies. The simple versus complex distinction has nothing to do with the actual difficulty of developing the technologies since both technologies can be extremely difficult and costly to innovate in.

 

The distinction is that in the simpler technologies, you basically have one stream of innovation that results in a product or service. The chemical industry tends to be that way. You have a relatively small number of patents per product.

 

With complex technology aggregators in particular, you have lots of technologies in the product and many, many, many different patents per product. That distinction tends to drive a lot of the positions on this. I agree that both sides are completely legitimate stakeholders on these issues and definitely should be listened to.

 

Hon. Paul R. Michel:  At the end of the day, the patent system's main goal is to incentivize desirable investment to the maximum possible extent so we get the best technology at the earliest possible. It seems to me that the bottom line on the eBay regime is we've moved completely away from that goal and gone in the opposite direction, and we should reverse course.

 

Prof. Adam Mossoff:  I would just like to highlight that complexity and innovation and systems where people have component contributions and patents on just those components goes all the way back to the inventions by Samuel Morse and the electromagnetic telegraph, and there were multiple [inaudible 01:02:03] innovators who contributed to that, as well as the sewing machine.

 

In fact, both Morse and the sewing machine innovators, like Isaac Singer and Eliza Howe, ended up in patent wars in the 1840s and '50s. You had different inventors who contributed basic core technologies to the electrical distribution systems that were invented by Tesla and Edison and Latimer and others as well as telephone systems and so on.

 

      This is not a new phenomenon. This exact same presumption of an injunction drove those types of innovations and those types of commercial distributions as it did for the biotech revolution and the first couple decades of the personal computer and internet revolutions, and it should continue to this day, hopefully.

 

Robert J. Rando:  Well, we've actually gone past our time, and I'll just close by saying these issues that impact the U.S. patent system are deep and wide and can fill up much more time than our one-hour discussion.

 

      Thank you, Adam, David, and Judge Michel, for an excellent and informative discussion.

 

Hon. Paul R. Michel:  Thank you, Rob.

 

Prof. Adam Mossoff:  Thank you.

 

David Jones:  Thank you. This was great. This was a lot of fun.

 

Robert J. Rando:  Bye bye.

 

Prof. Adam Mossoff:  Take care, guys.

 

Nick Marr:  This is Nick. I want to thank you all very much for joining us today. To our panelists and to the audience for calling in, your great questions, and for this lively panelist discussion.

 

The podcast will be posted in a week or two, so check that out, and be keeping an eye on your emails and our website for announcements about upcoming teleforum calls.

 

      Until that time, we are adjourned.

 

[Music]

 

Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.