The world of patent law has changed radically in the past three years, and business executives who have not kept up are likely to be making decisions based on the wrong premises. Basically, a patent means a lot more now than it used to.
Lawyers in town last week for the annual meeting of the American Bar Association spent hours discussing just what this new development means for companies.
"Many engineers and businessmen believe that patents are easily avoided, that most patents are held invalid, or that the damages which may be assessed for patent infringement are slight," Dale M. Heist of Philadelphia noted at one ABA session. "These views, if they ever had any validity, are no longer in line with the current judicial climate."
That new climate wafted into town on Oct. 1, 1982, when the Court of Appeals for the Federal Circuit opened for business. For the first time, there was a single forum for all appeals from patent disputes, no matter where in the country they arose. The new court was supposed to settle the law in dozens of areas for which regional appellate courts previously had laid down different rules. The CAFC has indeed resolved most of these conflicts, and it is consistently resolving them in favor of the patent owner.
Before, the appellate courts had been "overturning patents at a dismally high rate, dismally high, that is, at least to patent lawyers," Washington patent lawyer Michael M. de Angeli said. "The CAFC has changed this by upholding the validity of patents and finding in favor of patentees in infringement actions at a much higher rate."
That means a patent is now a much more valuable business asset and that, among other things, owning one makes it easier for a new venture to find financing. Banks are increasingly willing to look at a patent -- or even a pending patent application -- as collateral against which they are willing to lend, de Angeli has found. With the new court more often finding a disputed patent is in fact enforceable against infringers, the grant becomes all the more useful as collateral.
But the other side of the new pro-patent stance is that it is increasingly tough for other companies to blink at a competitor's patent rights. The engineers and executives who thought that when push came to shove they could get around a patent were not really wrong. But it ain't that way no more.
In the past, even marginal arguments often got accused infringers off the hook, but now "weak defenses are less likely to be sustained," warns Lawrence H. Pretty of Los Angeles. He sees "a greater willingness by defendants to settle on terms favorable to the patent owner than was the situation before the creation of the new court." It is not just that a patent holder is more likely to win an infringement action: In the new climate, the patent holder is likely to walk away from such litigation with a lot more than the company would have charged in a negotiated license agreement. It can, for instance, collect for profits lost on sales made by the infringing company, and "the CAFC is liberal in allowing methods to show lost profits," said Washington lawyer George W. Whitney.
The CAFC judges worry that if all a company that loses an infringement suit has to pay is the royalty rate that other companies have been paying all along for the right to use the patent, it has little to lose by being a holdout. The rate set by the market is a floor below which the infringer's payments should not fall, the judges explain, but in no way is it a ceiling. In one tractor case, for instance, companies had been paying a 1 percent royalty, but the firm that contested the validity of the patent and turned down a chance for a similar licensing deal was ordered to pay damages figures at a 15 percent royalty rate.
The new court is adding even more clout to patent owners' demands by making punitive damages more common in infringement suits. In these cases, the losing company has to pay three times as much as it otherwise would, and also pick up the legal bills run up by the patent owner in prosecuting the case.
To protect against such punitive damages, the CAFC has told companies that may be using technology similar to that already patented to check with a patent lawyer before they go ahead -- and the judges have strongly suggested that the lawyer be outside counsel, not someone on the company's payroll. They can escape the treble-damages blow only if the lawyer gives unequivocal advice -- and management follows it. In the key case from the new court okaying punitive damages, George A. Hormel Co. had in fact gotten good legal advice, but, the judges found, it had not done what the lawyers advised.