Patent Troll and View of Exercise of Software Patent

February 26, 2008
HARAKENZO World Patent & Trademark
Patent attorney Takashi Murakami

1. Introduction
Recent years, exercise of patents by patent holders who are called “patent trolls” (i.e., patent monsters) is perceived as a problem especially in the U.S. The patent troll is a person who makes a huge profit through a suit by abusing a patent. At the present day, the patent trolls are threat for IT companies in the U.S.
In view of this, this column deals with responses to the patent trolls in Japan and in the U.S. and a view of exercise of a software patent in Japan.

2. Patent Troll
A patent troll is defined as “a person who acts in order to gain a large profit from, in many cases, a patent which is never carried out, the person who does not actually carry out an invention and also does not have an intention to carry out the invention” by Peter Detkin, who was a corporation lawyer for Intel. That is, the patent troll is a person who acts in order to gain a license fee, a legal settlement, and the like from a large company, by exercising a patent obtained inexpensively from a deceased company etc., without conducting research, development and manufacture.
A patent troll launches suits against many companies at once when the patent troll prepared a certain amount of cost of the suits or targets a few large companies in a market where a huge profit is expected and then launches suits against those companies [1]. Since a patent troll does not conduct manufacture etc., the patent troll does not have a situation in which manufacture etc. are forced into discontinuation, even if the patent troll loses a suit. Therefore, the patent troll has almost nothing to lose except the cost of the suit. On the other hand, the companies which are sued by the patent troll cannot respond to the patent troll by filing an infringement suit based on their own effective patent since the patent troll does not carry out manufacture etc. In addition, the companies cannot take countermeasures based on a cross-license agreement or a technology-based alliance. In consideration of disadvantage in a case where the companies lose and a case of a prolonged dispute, paying a license fee or a settlement to the patent troll may result in a small loss for the companies.
In the U.S., the number of suits related to the patent troll increases recent years. An amount of compensation or settlement also increases. These costs are said to exceed a profit obtained from a granted patent [2]. It is said that the triple compensation in the U.S. patent system and compensation based on a value of an entire completed article serve as a background to this.
eBay v. MercExchange is a famous case that a patent troll filed a suit against a large company. Although MercExchange obtained a patent related to online auction, MercExchange did not engage in business due to deteriorating business performance. MercExchange then launched a suit against eBay, who opened an online auction shopping site. MercExchange insisted that “Buy It Now” function on the site infringed a patent of MercExchange.
Although patent trolls grab our attention recently, a case of submarine patent, which case used to be in the news in the U.S., is a similar case in that a huge license fee was paid. A submarine patent is not disclosed for a long period after its application and is granted when an art of the patent diffused. This is based on that, in former U.S. patent system, there was no system of unexamined applications and an inception date of a term of patent right was a point of a grant of a patent.

3. Patent Troll in IT Sector
In the U.S., it is said that a patent troll gives a large impact especially in IT sector. One reason for that is that IT sector is suitable for activities of a patent troll since IT sector has many patented inventions being used by many companies due to its large market size.
Another reason is that, for example, as for the field of software, software has specific structural characteristics. Specifically, software has a “multilayer structure” such that a module in an upper layer can function by depending on a module in a lower layer and/or a “communication structure” such that a plurality of components associated with each other each can function by communicating with each other [3]. Note that, since software has such structural characteristics, software is a technology which can effectively spurs technological innovation by sharing among developers each other's knowledge [4].
That is, since one software product is developed based on many components, the one software product includes many patented inventions. Therefore, even if one component solely infringes a patent of a patent troll, the patent troll can demand an injunction with respect to the entire software product. Accordingly, the field of software is considered to be suitable for activities of a patent troll [5].
Moreover, in the field of software, a number of patented inventions are subjected to a prior art search since one software product is developed based on many components. Therefore, in some cases, a prior art search is not sufficiently carried out. For also this reason, the field of software is considered to be suitable for activities of a patent troll.
In the field of software, even if one company determines that the other company in the same business field infringes a patent of the one company, it is common that the one company makes a cross-license agreement or a technology-based alliance with the other company rather than filing a suit with the other company. This is because, in many cases, the one company considers: a possibility that the one company conversely infringes a software patent of the other company; a future cooperative relation with the other company; and the like. However, as stated, it is impossible to take against a patent troll countermeasures based on a cross-license agreement or a technology-based alliance.

4. Response in U.S.
The United States Supreme Court showed an important holding with respect to the case of eBay v. MercExchange (No. 05-130, Judgment date: May 15, 2006). Specifically, the United States Supreme Court explained that, even if a patent infringement is acknowledged in a patent infringement suit, the conventional four-factor test of Equity Law applies. After this judgment, a demand for injunction is not acknowledged only by satisfying a requirement that a patent is infringed and the patent is valid. Specifically, a patent holder is further required to verify the following four requirements. The United States Supreme Court explains that Equity Law applies here for the reason that U.S. Patent Law Section 283, which stipulates an injunction, has a phrase saying “in accordance with the principles of equity.”

(1) The plaintiff has suffered an irreparable injury.
(2) Remedies available at law are inadequate to compensate for that injury.
(3) Considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted.
(4) The public interest would not be disserved by a permanent injunction.

Due to the following a, b, and the like, filing a patent infringement suit in the U.S. used to involve a huge cost and risk.

(a) Triple Compensation
In the case of an infringement by intention, a judge can increase a compensation up to three times.
(b) Entire Market Value Rule
Even if a patented invention is applied to a part of a completed article, a royalty and/or a compensation is acknowledged based on a value of the completed article.

As for (a), the Court of Appeals for the Federal Circuit (CAFC) made that judgment on a case of Seagate in which a requirement for acknowledgement of a patent infringement by intention is strictly interpreted (Misc. Docket No. 830, Judgment date: August 20, 2007). Specifically, the CAFC heightened a standard to verify an infringement by intention. That is, the CAFC showed a holding saying that it is required that at least objective recklessness is verified by evidence which is clear and sufficient to bear assurance.
As for (b), the U.S. Congress currently discusses a law revision in order to limit a royalty and/or a compensation to an amount equivalent to a part being a patented invention, without calculating a royalty and/or a compensation based on a value of an entire completed article.

5. Response in Japan
It is said that an influence of a patent troll is not currently recognized in Japan. However, it is sufficiently possible that patent trolls actively do their business in Japan, as the U.S. experienced an increase in patent trolls.
Japanese Patent Law Section 100(1) states “A patentee or exclusive licensee may demand a person who infringes or is likely to infringe the patent right or exclusive license to stop or prevent such infringement.” That is, in Japan, a patentee can demand an injunction, regardless of whether or not the patentee carries out a patented invention, as long as the patent has been rightfully assigned to the patentee. Therefore, even a patent troll can literally demand an injunction. Current Japanese Patent Law does not have countermeasures against a patent troll.
However, innovation may be discouraged by an acknowledging a demand for injunction of a patent troll. This discourages the development of industry, which is the object of Japanese Patent Law.
The Ministry of Economy, Trade and Industry made a public announcement “Sofutowea ni kakaru chitekizaisanken ni kansuru junsoku” (General Standard on Intellectual Property of Software) [6] on an appropriate exercise of a software patent. Guidance for legal interpretation is shown in the announcement. That is, shown is interpretation on what kind of exercise of a software patent has a possibility to apply to Civil Law Section 1(3) (abuse of rights).
A general standard is to show an applicable law and legal interpretation therefrom, on a legal issue. Accordingly, since a general standard itself has no legal binding force, a judgment which is different from a general standard may be made.
“Sofutowea ni kakaru chitekizaisanken ni kansuru junsoku” (General Standard on Intellectual Property of Software) is currently titled “II-2-I Sofutowea tokkyoken no kooshi to kenri ranyoo“ (Exercise and Abuse of Software Patent) in “Denshi shootorihiki oyobi joohoozai torihiki too ni kansuru junsoku” (General Standard on E-commerce, Information Goods Commerce, Etc) [7].

6. General Standard on “Exercise and Abuse of Software Patent”
According to the general standard, a possibility that abuse of rights applies is comprehensively determined from the following (1) and (2), with respect to a situation of a plaintiff, a situation of a defendant, a social situation, etc. in a specific case

(1) Assessment and analysis on validity and maliciousness of a claim of rights
(2) Profit assessment for both cases where exercise of rights is permitted and where exercise of rights is not permitted

As for (2), profit and disadvantage are compared and estimated with respect to each of i) means for exercise (injunction/claim for damage/claim for compensation for unfair profits gained by the infringer/claim for means for recovery of reputation), ii) a subject for exercise (use of software, state of use of software, and characteristics of software, the software based on a patented art which is a subject of exercise), and iii) a state and possibility of utilization of a patent (presence or absence of a profit of a patent holder and an amount of profit of a patent holder).
The general standard states that a patent infringement can be acknowledged when a disadvantage of an infringer and society by permitting exercise through an injunction etc. by a patent holder is extremely larger when compared with a profit of the patent holder and the society and when a social/economic welfare is extremely larger in a case where exercise is not permitted than a case where exercise is permitted.
In addition, as to especially ii) above, the general standard states that when characteristics of software are as follows, an impact to an infringer and society can become larger due to exercise by a patent holder.

(a) In a case where a function which is a subject of exercise is necessary for securing interoperability (especially an interface of a software product is a standard), programs cannot communicate with each other, exchange information, and accordingly use information mutually. As a result, some of functions which need the information cannot function properly.

(b) In a case where a function which is a subject of exercise is a function of software as a platform such as an OS, middleware, and the like, without the function, not only the software but also other software based on the function and/or hardware cannot function properly.

Therefore, when a function to be subjected to exercise is widely used as a base to run software and omitting the function or replacing the function with other function is difficult, an infringer and society can experience a large disadvantage. In such a case, abuse of a patent would be acknowledged.
As stated, according to the general standard, for a case which seems to be an abuse of patent, which deviates from the object of Patent Law, it is comprehensively determined based on characteristics of software whether or not an extremely larger disadvantage than a profit of a person who exercises his patent is given to an infringer and society. If an extremely large disadvantage turned out to be given to an infringer and society based on the determination, Civil Law Section 1(3) can apply.
The Commerce and Information Policy Bureau in the Ministry of Economy, Trade and Industry has created “Sofutowea tokkyoken no kooshi to kenri ranyoo no sootei shiteiru jirei” (Possible Cases of Exercise and Abuse of Software Patent) [8]. Since this shows assessment/analysis on maliciousness and profit assessment, with respect to three concrete cases, this would be a help to understand the general standard.

7. Conclusion
The U.S. has accumulated precedents regarding patent trolls and discusses a measure through law revision. In Japan, which does not have many precedents, the Ministry of Economy, Trade and Industry has shown interpretation on possibilities that abuse of a patent applies to exercise of a software patent, by preparing the general standard above. Noteworthy is what holding a court shows when a patent troll brings an action for an injunction in future.

References
[1] Terry Ludlow, “Patento torooru taisaku o kangaeru,” July 2, 2007
（http://www.ipnext.jp/journal/kaigai/terry.html, Accessed: February 23, 2008）
[2] Michael Fitzgerald, “A Patent Is Worth Having, Right? Well, Maybe Not,” The New York Times, July 15, 2007
(http://www.nytimes.com/2007/07/15/business/yourmoney/15proto.htm,
Accessed: February 23, 2008)
[3] The Commerce and Information Policy Bureau, the Ministry of Economy, “Sofutowea no hooteki hogo to inobeeshon no sokushin ni kansuru kenkyuukai,” October 11, 2005
(http://www.meti.go.jp/press/20051011003/ronntennseiri-set.pdf, Accessed: February 23, 2008)
[4] Mitsuyoshi Hiratsuka, “Sofutowea tokkyo ni yoru inobeeshon no sokushin oyobi sogai ni tsuite no ichikoosatsu,” Chizaikanri, Vol. 58, No. 1, pp31-40 (2008)
[5] Yasuo Ookuma et al., “Beikoku, Nippon, Taiwan, Ooshuu ni okeru patento torooru,” Tokugikon, 2007
(http://www.tokugikon.jp/gikonshi/244kiko1j.pdf, Accessed: February 23, 2008)
[6] The Commerce and Information Policy Bureau, the Ministry of Economy, “Sofutowea ni kakaru chitekizaisanken ni kansuru junsoku,” December 1, 2006
(http://www.meti.go.jp/committee/materials/downloadfiles/g61201d06j.pdf, Accessed: February 23, 2008)
[7] The Commerce and Information Policy Bureau, the Ministry of Economy, “Denshi shootorihiki oyobi joohoozai torihiki too ni kansuru junsoku,” March 30, 2007,
(http://www.meti.go.jp/press/20070330011/denshishoutori3.pdf，Accessed: February 23, 2008)
[8] Nobuhiro Nakayama, “Denshi shootorihiki oyobi joohoozai torihiki too ni kansuru junsoku to kaisetsu,” Bessatsu NBL, No. 118 (2007)