November 12, 2013
Several Members of Congress propose stay provisions as part of patent litigation legislation. These stay proposals direct courts to stay judicial proceedings against vendors, manufacturers, and end-users of a product when a retailer or manufacturer farther “upstream” in the distribution chain of the product or component that is covered by the patent is a party in the infringement suit.
Stay proposals aim to spare “innocent” end-users from patent litigation suits and promote the efficient resolution of infringement cases by placing the burden of litigation on “manufacturers.” However, current stay proposals raise numerous negative consequences, without promoting judicial fairness and efficiency. These proposals are drafted too broadly, invite abuse by infringers who want to limit their damages, prevent patent holders from obtaining relief in court, and actually increase patent litigation.
Instead of mandating a broad, one-size-fits-all approach, lawmakers should craft stay proposals to target true consumer end-users, rather than protecting vendors and other manufacturers “downstream” in a distribution chain. In all other cases, lawmakers should encourage courts to use their existing discretion to manage their patent litigation cases. In complex patent suits, which involve many different kinds of implementations, conduct, and distribution chains, judges are typically best positioned to allow for intervention by upstream parties and grant stays.
Stay proposals are drafted too broadly, shielding many parties other than “innocent” end-users from litigation.
Stay proposals are ripe for abuse by infringers who want to limit their damages.
- Stay proposals aim to protect “innocent” end-users of allegedly infringing products from costly litigation, particularly small “mom-and-pop” businesses that may use retail products that incorporate patented technology. However, current stay proposals are drafted broadly to reach all parties downstream in the chain of commerce, not just small businesses. In some cases, these parties are large companies that incorporate infringing technologies in their own operations and truly devalue the patent holder’s rights, thus making them an appropriate target for litigation. Under current stay proposals, these infringing companies would be unfairly protected from suits.
- For example, suppose a patent holder has a patent that covers a certain technology. This technology is incorporated into hardware components by a component manufacturer that is not a licensee of the patent holder. The infringing components are then incorporated into consumer electronic devices by a manufacturer that sells devices to retail customers. As you can see from the example below, stay provisions protect the infringing retail customer and manufacturer from liability.
Stay proposals may leave patent holders whose claims rely on a showing of indirect infringement with no relief.
- Under the current proposed stay provision, if either the end user or the device manufacturer issued for patent infringement by the patent holder, that suit would be stayed by the court so long as the component manufacturer is also a defendant in the suit, and agrees to a stay.
- A stay against the device maker could effectively cap compensatory damages at the price of the infringing component even if the market value of the patented technology is far greater, for example, where the technology contributes significantly to the value of the consumer device.
- This attempt to cheapen the cost of infringement mirrors an “apportionment of damages” policy that Congress rejected when it passed the America Invents Act.
Stay proposals increase patent litigation and decrease judicial efficiency.
- Under patent law, there are two types of infringement: direct and indirect infringement. Direct infringement occurs when a single party manufactures, sells, or uses a patented invention without the permission of the patent holder.
- Indirect infringement, on the other hand, occurs through something less than the full act of sale, manufacture or use of a patented invention but nonetheless ultimately leads to direct infringement by another party. To prove indirect infringement, a patent holder must generally prove that another person directly infringed the patent, and that the alleged indirect infringer knew about the patent and intended to encourage direct infringement.
- Where the downstream party is an alleged direct infringer and the upstream manufacturer is liable only under indirect infringement theories, the proceeding against the upstream manufacturer can’t advance without having first established direct infringement by the downstream party. If the litigation against the downstream party is stayed under current stay proposals, the patent holder must rise to the very difficult task of proving direct infringement without the direct infringer.
- In addition, under recent Federal Circuit case law, certain indirect infringers need only plead that they had a good faith belief in patent invalidity to avoid all infringement liability under indirect infringement theories -- making it very easy for indirect infringers to avoid liability.
- Thus, stay proposals could inadvertently insert patent holders into a “Catch 22” scenario -- they are not able to proceed against the direct infringer and may not get relief against the indirect infringer, the only party they are permitted to sue.
Congress Should Target True End-Users and Courts Should Retain Discretion
- Current proposals state that a stay will be granted if the downstream party agrees to be “bound” by any judgment entered against the upstream party “with respect to issues that they have in common.” This ambiguous commitment is easily subject to gaming and will do little to prevent piecemeal litigation against different infringers in the stream of commerce. A downstream party for whom a stay is granted will invariably argue that different parts of the patent case – e.g., infringement, validity, and remedies – present unique issues that preclude enforcement of the upstream judgment and must be litigated again against the downstream party. Thus, even if the patent owner succeeds in proving its case against an upstream infringer, it will be forced to bring potentially multiple suits against downstream infringers to fully enforce its rights. The resulting piecemeal litigation, with the attendant costs and delays, is the antithesis of litigation reform and judicial fairness.
- For instance, a difference in when the upstream and downstream parties received notice of the patent will lead to a difference in damages, meaning that the parties will not have the damages issue in common. A downstream party may also have different licensing agreements than the upstream party, leading to different defenses that must be litigated separately. The downstream customer may also discover different prior art references that weren’t litigated during the upstream party’s case.
- In other words, as a result of the stay provision, to recover against the covered manufacturer and covered customer, the patent holder will need to litigate most of the issues twice. This added expense and time is unfair to the patent owner, and to the taxpayers who support the judicial system.
- Instead of a broad, one-size-fits all statutory approach, lawmakers should target end-users whose unwitting use of a patented technology has a de minimis impact on the patent owner’s rights relative to others in the stream of commerce: i.e., “innocent” consumers like mom-and-pop stores who purchase goods at retail.
- In the case of other alleged infringers, judges already have the discretion to decide motions for stay based on the myriad facts and circumstances of the particular case. Courts have decided whether to grant stays in different patent cases by weighing over a dozen relevant factors. In appropriate cases, they have allowed for intervention by upstream parties and granted stays with respect to certain classes of defendants.
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