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Barnes & Noble Opposes Microsoft's Motion for SJ on Patent Misuse Defense ~pj
Thursday, January 12 2012 @ 12:09 PM EST

Barnes & Noble has responded to Microsoft's Motion for Leave to Reply to a Barnes & Noble document titled "Barnes & Noble's Statement of Additional Material Facts". It was under seal, as was Microsoft's motion, but Barnes & Noble's Opposition [PDF] isn't, so finally we get to find out a few more clues on what is going on.

Also, the parties have stipulated [PDF] to Microsoft dropping from the ITC investigation some of its patent infringement claims, which they say Microsoft is doing "to simplify" the investigation, "streamline the hearing", and conserve resources "in consideration of the amount of time allotted for the hearing". And maybe because they were stupid patents to begin with.

Like *that* could ever be acknowledged by Microsoft in the open air. Quite the contrary. They state that this stipulation "is also not an admission as to the merits of any claim". It just *looks* like that is what it is.

Actually, it's more likely strategic. I was reading up on patent misuse last night, and the Federal Circuit has narrowed what kinds of horrible behavior can be called patent misuse, and one requirement now is that the misuse must be associated with a particular patent. Part of the stipulation says that Barnes & Noble isn't to use the fact that Microsoft dropped these claims "as evidence in support of their affirmative defense of patent misuse" before the ITC, but they can otherwise use them. So that's what that convoluted language is probably about. I'll show you what I mean and what I found.

Jump To Comments

Here are the latest filings:

01/04/2012 - 467702 - Agreement to be Bound by the Protective Order of Sean Grant and Susan Magee

01/05/2012 - 467837 - Agreement to be Bound by the Protective Order of David Eiseman

01/09/2012 - 468068 - Agreement to be Bound by the Protective Order of Joan Cain and Cali Day

01/09/2012 - 468112 - Stipulation Regarding Assertion of Certain Claims

01/09/2012 - 468117 - Opposition of Respondents Barnes & Noble and barnesandnoble.com LLC to Complainant Microsoft Corporation's Motion for Leave to Reply and Response to Respondent Barnes & Noble's Statement of Additional Material Facts

01/10/2012 - 468248 - Unopposed Motion of Complainant Microsoft for Partial Termination of the Investigation as to Certain Asserted Claims

What Is Patent Misuse Anyway?

What I got from my reading up on patent misuse is that it's extremely hard to prove, thanks to a recent en banc decision by the Court of Appeals for the Federal Circuit, the appellate court that handles patents and which adores them and does all it can to preserve their power. Here are some resources so you can read up on patent misuse too, so you'll understand what I mean:

The Federal Circuit's position seems to be that your relief has to come from antitrust claims instead, unless you fall into their narrow definition, which is mighty narrow:
Recognizing the narrow scope of the doctrine, we have emphasized that the defense of patent misuse is not available to a presumptive infringer simply because a patentee engages in some kind of wrongful commercial conduct, even conduct that may have anticompetitive effects....

While proof of an antitrust violation shows that the patentee has committed wrongful conduct having anticompetitive effects, that does not establish misuse of the patent in suit unless the conduct in question restricts the use of that patent and does so in one of the specific ways that have been held to be outside the otherwise broad scope of the patent grant.

The two judges who dissented, Judges Dyk and Gajarsa, wrote that it made no sense that a felony could not be patent misuse:
This case presents important questions concerning the scope of the doctrine of patent misuse. The critical question is whether the existence of an antitrust violation—in the form of an agreement to suppress an alternative technology designed to protect a patented technology from competition—constitutes misuse of the protected patents.

The majority holds that it does not. This seems directly contrary to the Supreme Court’s view of patent misuse in its recent Illinois Tool Works decision, where the Court concluded that “[i]t would be absurd to assume that Congress intended to provide that the use of a patent that merited punishment as a felony [under the Sherman Act] would not constitute ‘misuse.’” Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 42 (2006).

The majority declines to give the patent misuse doctrine significant scope because it “is in derogation of statutory patent rights against infringement.” Majority Op. at 4. Evidently the majority thinks it appropriate to emasculate the doctrine so that it will not provide a meaningful obstacle to patent enforcement. Outside of unlawful tying arrangements and agreements extending the patent term, the majority would hold that antitrust violations are not patent misuse and would leave to private and government antitrust proceedings the task of preventing abuse of patent monopolies, enforcement that is likely inadequate to the task.

Like I say, the Federal Circuit judges are generally patent purists. They love and defend them. That's why from time to time, the US Supreme Court gives them a bit of a spanking. In this case though, Princo, they let the decision stand, refusing to hear the appeal.

Dennis Crouch on the ruling:

In a split decision, an en banc Federal Circuit has held that the non-statutory equitable doctrine of patent misuse should be narrowly applied. Here, the court held that an anticompetitive agreement between companies to suppress a given technology would not constitute misuse of a patent covering an alternative technology being promoted by the companies. Thus, the patents can still be enforced. Of course, companies following this pathway could still be liable for antitrust violations.
By "nonstatutory equitable doctrine", he means that there is no statute regarding patent misuse. It's something that arose from courts looking at really bad actions, folks trying to overreach with their patents, and they punished the bad actors by ruling that the entities accused of patent infringement were not liable, even if the patent was valid and infringed. It's kind of like the idea of "unclean hands," as Arnold B. Silverman wrote in "Patent Misuse: Limitations on a Patentee's Rights". That article, however, was written in 1992, and that universe shifted in 2010 with Princo. You can read about example cases both in Hoerner's testimony, linked above, and in the Princo decison itself, including the case that initiated the equitable doctrine of patent misuse, Morton Salt Co. v. G. S. Suppiger Co.. Hoerner, who testified the doctrine may had become "an anachronism" at least of the "extension-of-the-monopoly type":
The "misuse of the patent" doctrine originated by name in a 1942 case, Morton Salt Co. v. G. S. Suppiger Co.. There Morton sued a direct infringer of its patent covering a canning machine. Morton required its licensees, which did not include Suppiger, to use salt tablets purchased from Morton.
He goes on to explain why some oppose the doctrine, by the way, so you can at least understand it's not *just* unmitigated greed and lack of regulation of the Wall Street variety. The view is that since patents allow you to exclude, no one should lose its "property" rights by forfeiture of royalties because of licensing practices or an antitrust violation. But there is still a line. Obviously, the salt tablets were not patented, even if the canning machine was, so it was overreaching, as the court ruled, or patent misuse to require folks to use only salt from the canning machine patent owner:
Within the granted monopoly excludes from it all that is not embraced in the invention. It equally forbids the use of the patent to secure an exclusive right or limited monopoly not granted by the Patent Office.
Even the Federal Circuit would view that still as patent misuse. But patents are a monopoly grant, so it's really hard for lawyers and judges to parse out when a monopoly grant is going too far and what should be done about it. And since it's a judge-made doctrine, they can uninvent it, if they want to, unless some clueful legislators in some alternative universe we definitely don't live in currently were to create a statute to delineate what patent misuse is and what the penalties for it are.

Obviously, Barnes & Noble has its work cut out for it in this universe, trying to get *any* relief, either from the patent misuse doctrine or from antitrust regulations. However, there has been increased activity from the DOJ's Antitrust Division recently, as we saw when Microsoft tried to buy Novell's patents, so who knows? Here's a paper on Antitrust limits to patent settlements, by Carl Shapiro, which helps to explain that patent owners can't do simply anything they feel like even in reaching patent settlements, and how antitrust regulators have gotten involved. He explains a bit about what happens if the defense of patent misuse is sustained:

Under certain circumstances, one being sued for patent infringement may assert, as a defense, that the patentee is guilty of "patent misuse." If the defense is sustained, the defendant will not be liable for patent infringement even if the patent was, in fact, valid and infringed.

Patent misuse has its origins in judicial interpretation of equitable concepts regarding what would be fair under the circumstances. There is a general equitable standard employed by the courts that the plaintiff cannot come into the court with "unclean hands"; this generally precludes the plaintiff from prevailing even though the action might otherwise be meritorious. The patent misuse concept, in its broader aspects, is a type of unclean hands.

In general, misuse exists when the patentee has either engaged in conduct involving the patent that amounts to a violation of the antitrust laws or has improperly sought to expand the scope of the patent (either in a physical or temporal sense).

It is clear that as long as one remains within the legitimate confines of a patent, there is a shield that precludes liability under the antitrust laws. There are, however, many instances where the conduct goes beyond the limits of patent protection and may be objected to under the antitrust laws. For example, if one initiates litigation seeking to enforce a patent that is known by the patentee to be invalid, such action can be an unlawful attempt to monopolize under section two of the Sherman Act. In the United States, one cannot obtain a valid patent if a patent application is filed more than one year after an invention is placed "on sale." If a patentee knows that this condition has not been met but still files an application, what was previously known as "fraud on the Patent and Trademark Office" results; it is currently referred to as "inequitable conduct." Having obtained such a patent, initiation of litigation to enforce the patent could violate the antitrust laws. Since there would be no valid patent to serve as a shield against the antitrust laws, the conduct would have to be measured under basic antitrust principles. As a result, the defendant not only could enter a counterclaim seeking relief under the antitrust laws but also could assert the defense of patent misuse.

In a case involving hydraulic pumps for use in oil wells, one company purchased 72 dominant patents in the field; the court ruled that it was not possible for someone else to make a competitive product without infringing one of the patents. The court stated that while there was nothing inherently wrong with purchasing a patent and enforcing it against an infringer, the intent and underlying purpose of accumulating such a large number of patents amounted to a violation of antitrust laws and patent misuse.

Among other antitrust violations involving patents are attempts to, by agreement, control the resale price of a patented product and the use of a patent on one product as a means to coerce the sale of another product or the sale or license of another patent.

While violations of the antitrust laws involving patents also involve patent misuse, there can be misuse without violating antitrust laws. When one improperly attempts to expand the physical or temporal scope of a patent, the requirements of antitrust laws (e.g., anticompetitive effect of the conduct and individual harm) need not be proven. For example, coercing someone to sign a license agreement that calls for royalty payment on unpatented products or royalty payments beyond the expiration of the patent would be patent misuse. Similarly, seeking to enforce a patent obtained through inequitable conduct might also be patent misuse but not a violation of antitrust laws.

What I came away with is that Microsoft endlessly announced patent license agreements, always deep dark secrets as to the terms, might not be secrets forever, in that presumably they too can be investigated, if there were to be a suspicion that it's all part of the type of anticompetitive strategy that Barnes & Noble is complaining about.

This paper [PDF], "American Bar Association Section of Antitrust Law Intellectual Property Committee's IP Committee Alert: Patent Misuse", published this spring, contemplates what the Princo decision did *not* rule on, showing where the room for action still may lie. From the summary:

The Federal Circuit’s en banc opinion in Princo clarified significantly the two-pronged “patent misuse rule of reason,” holding that a patent holder commits misuse if it (1) “broadened the physical or temporal scope of the patent grant,” (2) such that the “overall effect” of the practice “tends to restrain competition unlawfully in an appropriately defined relevant market.” Princo provided much-needed clarity to the first prong, and should aid lower courts in weeding out misguided misuse claims. But the Court had no occasion to explain fully how the second prong (“anticompetitive effects”) should be applied—and it is in this area that future cases will flesh out the doctrine. This article briefly examines the Princo opinion and the anticompetitive effect requirement, and then explores two inter-related questions that will require further development: (1) what should courts require the proponent of a misuse claim to prove (and plead) with respect to the relevant market; and (2) what types of effects will demonstrate that competition has been restrained and how rigorously must such effects be proven? The future application of the “anticompetitive effect” requirement is of great interest to antitrust practitioners because misuse claims often accompany antitrust claims as a practical matter. Its application will also dictate the circumstances in which misuse claims may exist independent of a viable antitrust claim. Indeed, sometimes misuse may substitute entirely for antitrust because the prerequisites for maintaining an antitrust claim (antitrust standing and injury) need not be met to maintain a misuse claim.
Clearly, this is an area where Barnes & Noble has some room to breathe. Perhaps it will be the case that clarifies the questions the article poses.

The "Additional" Material Facts:

It turns out that it's Microsoft trying to get a summary judgment dismissal of Barnes & Noble's patent misuse defense, with some last-minute facts Barnes & Noble says Microsoft failed to produce on time and which prove that summary judgment isn't appropriate anyway, given all the "additional material facts" that are in dispute:

UNITED STATES INTERNATIONAL TRADE COMMISSION
WASHINGTON, D.C.
Before the Honorable Theodore R. Essex
Administrative Law Judge

__________________

In the Matter of

CERTAIN HANDHELD ELECTRONIC
COMPUTING DEVICES, RELATED
SOFTWARE, AND COMPONENTS THEREOF

Investigation No. 337-TA-769

OPPOSITION OF RESPONDENTS BARNES & NOBLE, INC. AND
BARNESANDNOBLE.COM LLC TO COMPLAINANT MICROSOFT
CORPORATION’S MOTION FOR LEAVE TO REPLY AND RESPONSE TO
RESPONDENT BARNES & NOBLE’S STATEMENT OF ADDITIONAL
MATERIAL FACTS FILED IN RESPONSE TO MICROSOFT’S STATEMENT
OF UNDISPUTED MATERIAL FACTS IN SUPPORT OF ITS MOTION FOR
SUMMARY DETERMINATION OF RESPONDENTS’ FIRST AFFIRMATIVE
DEFENSE (MOTION DOCKET NO. 769-043)

Microsoft Corporation (“Microsoft”) made a tactical decision to prematurely file its Motion for Summary Determination of Respondents Barnes & Noble’s and barnesandnoble.com LLC’s (collectively, “Barnes & Noble”) First Affirmative Defense of Patent Misuse (the “Motion”) prior to the close of both fact discovery and expert discovery related to patent misuse—and, indeed, refused to agree to any extension of the deadline for submitting summary determination motions even though it agreed to extensions of essentially every other deadline relating to patent misuse. And when it filed its Motion, Microsoft ignored the evidence and instead simply rehashed the same purely legal arguments it had already made to the Court six months earlier in its motion to strike Barnes & Noble’s patent misuse defense.

Nonetheless, Microsoft now seeks leave to file a reply to Barnes & Noble’s Response to Microsoft’s Motion “[t]o assist this tribunal with its evaluation of Microsoft’s summary determination motion”. (Motion for Leave to Reply and Response [sic], at 2.) As part of this “assistance” to the Court, Microsoft has submitted 51 exhibits with its Motion for Leave—over five times as many exhibits as it submitted with its original Motion for Summary Determination—and 70 pages of disputed facts in response to Barnes & Noble’s Statement of Additional Material Facts.1 Microsoft cannot have it both ways—submitting an additional 51 exhibits and 70 pages of responses to disputed facts in support of its Motion and then in the same breath continuing to argue that there are no “genuine issues as to any material fact” with respect to Barnes & Noble’s patent misuse defense.2

At bottom, Microsoft’s Motion for Leave, and the accompanying exhibits and responses, are an implicit acknowledgment that there are genuine issues of material fact with respect to Barnes & Noble’s patent misuse defense that make summary determination inappropriate. See 19 C.F.R. § 210.18(b).

A motion for leave to file a reply brief is not a second chance to present new arguments that could have been presented originally. In re Certain Digital

2

Imaging Devices & Related Software, Inv. No. 337-TA-717, Initial Determination, 2011 WL 2742200, at *81 (May 12, 2011) (noting that it is an “improper use of the reply brief” to raise issues for the first time therein, and refusing to consider such new arguments); In re Certain Silicon Microphone Packages & Products Containing the Same, Inv. No. 337- TA-629, Commission Determination, 2010 WL 4788911, at *44 (Sept. 2010) (refusing to consider new arguments contained in reply brief); In re Certain Elec. Devices, Including Handheld Wireless Commc’ns Devices, Inv. No. 337-TA-673, Order No. 48C, 2009 WL 3865366, at *3 n.1 (Oct. 14, 2009) (“Reply memoranda should be filed sparingly, and only in instances where a new issue raised by the non-moving party’s response truly necessitates a reply.”). That is, a motion for leave to reply to a party’s response is only permitted where the response raises “new issues”. See, e.g., In re Certain Equipment for Telecomm. or Data Commc’ns Networks, Including Routers, Switches, & Hubs, & Components, Thereof, Inv. No. 337-TA-574, Order No. 44, 2008 WL 2336530, at *1 (June 3, 2008) (finding “good cause” for reply when response raised several new issues); In re Certain Personal Computer/Consumer Elec. Convergent Devices, Components Thereof, & Products Containing Same, Inv. No. 337-TA-558, Order No. 15, 2006 WL 2439847, at *1 (Aug. 14, 2006) (finding “good cause” for reply when staff response “raised new issues”); In re Certain Display Controllers with Upscaling Functionality & Products Containing Same, Inv. No. 337-TA-481 (Remand), Order No. 43, 2004 WL 1181596, at *1 (May 20, 2004) (finding “good cause” for reply when response raised “new arguments”). Barnes & Noble’s Response to Microsoft’s Motion does not raise any new issues, only facts to support arguments of which Microsoft was well aware. In fact, Microsoft acknowledges as much in its proposed Reply to Barnes & Noble’s Response.

3

(Proposed Reply, at 3 (Barnes & Noble’s facts “were already addressed in Microsoft’s summary determination motion”).) Furthermore, because there are no “new issues” to address in its proposed Reply, Microsoft does not raise any new arguments. Instead, it spends almost an entire page of its three-page proposed Reply regurgitating the Staff’s arguments. (See proposed Reply, at 2.) For the foregoing reasons, Microsoft’s Motion for Leave to submit a proposed Reply is improper and should be denied.

Dated: January 9, 2012

Respectfully submitted,

/s/ Peter T. Barbur
Stuart W. Gold
Stephen S. Madsen
Peter T. Barbur
Cravath, Swaine & Moore LLP
[address, phone, fax]

Paul F. Brinkman
Quinn Emanuel Urquhart & Sullivan LLP
[address, phone, fax]
Counsel for Respondents Barnes & Noble, Inc.
and barnesandnoble.com LLC

4

[Certificate of Service - See PDF]

5

_________
1 Barnes & Noble submitted a Statement of Additional Material Facts with its Response to Microsoft’s Motion. The Statement contains 88 additional material facts with numerous citations to the record. Proving that patent misuse is a “fact-intensive” defense, B. Braun Med., Inc. v. Abbott Labs., Inc., 124 F.3d 1419, 1426 (Fed. Cir. 1997), Microsoft now disputes, or partially disputes, 73 of those 88 additional material facts in its proposed Reply.

2 Microsoft even goes so far as to suggest that Barnes & Noble’s 88 additional material facts—facts such as Microsoft’s worldwide market share of the PC operating system market (Statement 1), the dates Barnes & Noble introduced its Nook products to the market (Statement 53) and the royalty rates included in Microsoft’s proposed February license to Barnes & Noble (Statement 73)—are not “facts” at all. (Motion for Leave, at 1; proposed Reply, at 3.) That is nonsense.


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