United States: "CSIRO V. Buffalo Technology": A Permanent Injunction Trump Card For Patent Trolls?

The recent decision in CSIRO v. Buffalo Technology, Inc. just might have been the trump card traditional patent trolls could use to visit the permanent injunction promised land. 2007 U.S. Dist. LEXIS 43832 (E.D. Tex. Jun. 15, 2007). Unfortunately for the trolls, however, the impact of this decision will not be as far-reaching and applicable to their business models as they might hope.

Background – eBay v. MercExchange

The patent injunction issue has been widely discussed since the U.S. Supreme Court considered it last year. In eBay v. MercExchange, 126 S.Ct. 1837 (2006), MercExchange was a patent-holding and non-manufacturing entity that held a business-method patent for an electronic market designed to facilitate the sale of goods between consumers. In this case, the U.S. Supreme Court ultimately decided that patent litigation is no different than any other case in which a permanent injunction is sought, and as a result, held that a permanent injunction’s propriety should be judged according to the well-established principles of equity. Thus, the following four factors must be satisfied before a permanent injunction will issue after a finding of patent infringement: (i) the plaintiff has suffered an irreparable injury; (ii) remedies available at law, such as monetary damages, are inadequate to compensate for this injury; (iii) an equitable remedy is warranted, given the balance of hardships between the plaintiff and the defendant; and (iv) the public interest would not be disserved by a permanent injunction. eBay, 126 S.Ct. at 1839.

Permanent Injunction Granted for a Non-Manufacturing Entity

CSIRO represents the first patent infringement case in which a non-manufacturing entity demonstrated that it was deserving of a permanent injunction, absent either any traditional commercialization of its patents or any direct competition between the parties.

The Commonwealth Scientific and Industrial Research Organization ("CSIRO") is an Australian governmental scientific research organization that "develop[s] technology that can be used to create start-up companies and/or be licensed to firms to earn commercial royalties to fund other research." CSIRO, 2007 U.S. Dist. LEXIS 43832 at *2. CSIRO easily can be considered a non-manufacturing entity. In 1992, CSIRO developed technology that greatly enhanced indoor wireless internet network performance, and applied for U.S. patent protection thereon. CSIRO intended to license the resulting patents, and to generate revenue that would fund its other ongoing research projects. CSIRO sought to license Buffalo Technology, which was producing indoor wireless products covered by these CSIRO patents, but eventually was forced to litigate. The case was submitted on summary judgments of validity and infringement, and the court ultimately decided that the CSIRO patents were valid and infringed. CSIRO sought permanent injunctive relief, and the court applied the four-prong equitable test from eBay in granting CSIRO’s injunction request.

Even though CSIRO and Buffalo are not direct competitors, the court found that CSIRO would suffer irreparable harm if Buffalo was not enjoined from selling their infringing products because CSIRO is a research institution that "relies heavily on [its] ability to license its intellectual property to finance its research and development." Id. at *10. These licensing revenues fund further research for frontier projects and the forecasted licensing royalties are usually already allotted to certain projects. The court also found that CSIRO’s harm was not only financial –CSIRO’s reputation is important to succeed in the competition with other research entities for resources, ideas and minds. Forcing CSIRO to spend millions of dollars in litigating their patents results in lost research capabilities and lost opportunities – and the court found that the harm of lost opportunities is irreparable because they "already belong[] to someone else." Id. at *12.

CSIRO’s remedies at law were inadequate, according to the court, because a royalty payment to CSIRO based on Buffalo’s past sales inadequately reflected the worth of the patent, today, to Buffalo. Further, such a compulsory royalty payment does not necessarily include other "non-monetary license terms that are as important to a licensor such as CSIRO." Id. at *16. The court also advised that because the patent was directed to a technology that was a very large component of Buffalo’s infringing products, monetary damages are less able to compensate CSIRO for Buffalo’s current and future infringement. In this vein, the court cited Justice Kennedy’s concurrence in eBay, advising courts to consider that legal damages may be sufficient when the invention is a small component of the infringing product, but writing that an injunction may be more necessary when a product embodies a patent. Id. at *15-16; eBay, 126 S.Ct. at 1842 (Kennedy, J. concurring).

CSIRO would have been forced to accept a compulsory license if a permanent injunction was not issued. On the other hand, Buffalo would have been forced to shut its infringing business it were enjoined. However, the court reasoned, "mere hardship incurred in the process of ceasing operations is not sufficient" to tip the balance. Id. at *17. An injunction only harms Buffalo in a monetary sense, whereas for CSIRO, the lack of an injunction has farther reaching effects – it would harm CSIRO financially, and the financial harm will poison the remainder of CSIRO’s operations.

The court reasoned that permanent injunctions serve the public interest in maintaining a strong patent system and enforcing patent rights – there are, however, certain situations in which an injunction would be contrary to the public interest. This was not one of those situations said the court. Id. at *21. Buffalo’s wireless network products were not essential for public health or welfare, and the same products are available from many other non-infringing sources. Id. CSIRO’s work is "fundamental to scientific advancement" and as such, is worthy of "strong patent protection." Id.

In light of eBay and now CSIRO, it does not seem likely that courts will be more willing to grant permanent injunctions to non-manufacturing entities, as such entities will still suffer from the same problems in seeking the injunctions. CSIRO’s holding will not be applicable to the model of traditional patent trolls – its impact is necessarily limited by its fact-intensive nature. The court made a pronounced effort to describe CSIRO’s publicly beneficial goals and the resulting allocation of patent royalties received to achieve such goals. One thing was made clear – the harm of not granting CSIRO an injunction would have had far-reaching and non-recompensable effects on its research and ability to innovate. On the other hand, a traditional non-manufacturing patent troll’s business – royalties derived from patent litigation and the threat thereof – is considerably different than CSIRO’s, plain and simple. Any attempt by such a troll to cloak itself in CSIRO’s robes, particularly in the necessity of its royalty stream in the context of its business, will be highly attenuated and ultimately unsuccessful. The business of patent trolls, exaction of a royalty payment by litigation, will continue to be at least reparably harmed, and injunctions should continue to be denied, even after CSIRO.

In Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. ___ (2007), the U.S. Supreme Court made it easier for manufacturers and licensors to set the minimum price at which their goods can be sold. This practice, commonly known as minimum resale price maintenance ("RPM") had long been considered per se (automatically) illegal under a nearly century-old line of court decisions. This article will explain the potential effects of the decision on intellectual property owners, what the decision means, and, just as importantly, what the decision does not mean.

The most obvious impact of the Leegin decision involves the ability of manufacturers and licensors to set minimum prices for their goods, as discussed below. With licensing of IP an ever-increasing source of revenue for many companies, licensors may now be able to agree not only on royalties to be paid by a licensee, but also on the minimum price at which the products embodying the IP are to be sold. Additionally, trademark owners may now be better able to control the connotation their mark gives to consumers, particularly in the case of luxury goods, through setting the minimum price at which the goods bearing the trademark are sold. To better understand how the antitrust landscape has changed, a brief look at antitrust law and the Leegin case is useful.

Section 1 of the Sherman Act prohibits every "contract, combination and conspiracy in restraint of trade." Many antitrust cases have focused on determining what exactly constitutes a "restraint of trade." The goal of antitrust law is to promote competition, which is ultimately thought to benefit consumers. While violations of Section 1 were originally considered per se illegal, the modern trend for most cases is to look at the potentially illegal action, compare the potential procompetetive and anticompetitive effects of the action, and then determine whether the action tends to mainly restrain or promote competition. Several factors are instrumental in this analysis, including the market power of the parties to the agreement.

This analysis, utilizing modern economics, is commonly referred to as the "Rule of Reason" ("ROR"). The ROR looks at the expected and actual effects of an action on the marketplace, rather than analyze the possible effects in a vacuum. In looking at an action that may potentially harm competition, another key aspect is whether the action affects intrabrand competition, such as competing retailers that sell the goods of the same manufacturer, or interbrand competition, such as competing manufacturers of similar goods. Agreements that affect intrabrand competition are commonly referred to as "vertical restraints," while agreements that affect interbrand competition are often called "horizontal restraints." RPM falls into the category of vertical restraints, as it involves agreements between manufacturers/licensors and their distribution/sales chains or licensees.

In Leegin, the plaintiff was a designer, manufacturer and distributor of leather goods and accessories. Leegin sold its goods mostly through small, independent retailers. PSKS operated one of these retailers, named "Kay’s Kloset," ("Kay’s") and Leegin’s products constituted a large portion of Kay’s sales. Leegin instituted a "retail pricing and promotion policy," and Leegin refused to sell to retailers that sold certain Leegin goods below the suggested prices. When Leegin discovered that Kay’s and other retailers were selling below the suggested prices, Leegin requested that Kay’s stop discounting. When Kay’s refused, Leegin ceased selling to Kay’s, and, after Kay’s sales revenue drastically declined, Kay’s brought suit.

At the time of the Leegin case, most other vertical restraints, including agreements to set maximum resale prices, were already being judged under the less restrictive ROR, a fact not lost on the Court in Leegin. Furthermore, as the per se rule does not allow a defendant the chance to offer evidence of procompetitive effects of the alleged restraint, the Court stated that a per se rule should only be used where courts have significant experience with a particular practice, and have found that the practice almost always has anticompetitive effects. Finally, the Court found that besides possible anticompetitive effects, RPM can have several important procompetitive ones. Some examples provided include preventing "free riding" by a discounter on retailers that spend large amounts of money promoting interest in a product, and giving new manufacturers the ability to induce competent and aggressive retailers to sell their goods.

Post Leegin, the opportunity exists for manufacturers to implement a successful minimum RPM program, which, in the view of the Supreme Court, can benefit manufacturers, retailers and consumers alike. Besides the potential benefits discussed above, the Court in Leegin believed such agreements can alleviate competition between retailers of the same brand, based on price. This allows retailers to focus on other means of competition, such as better service and advertising. The belief is better service and advertising lead to happier and more educated customers. In turn, happier customers lead to increased sales; something in the interest of both manufacturers and retailers.

It is important to realize that the Leegin decision did not make minimum RPM per se legal, it just made it no longer per se illegal. Furthermore, the decision does not affect existing prohibitions against horizontal price-fixing agreements between competitors. These agreements continue to be considered per se illegal. A vertical minimum retail price agreement can still be held illegal under "Rule of Reason" analysis; the decision in Leegin just makes it harder for a plaintiff to prove its case. Indeed, the Court stated that if the ROR were to apply to minimum retail price maintenance programs, which it now does, "[C]ourts would have to be diligent in eliminating their anticompetitive uses from the market." While the decision creates the possibility of a legal and successful minimum RPM agreement, any licensor or manufacturer thinking of implementing such a program should first recognize the potential liabilities, and carefully balance them against the potential benefits. Moreover, in crafting such an agreement, it should be remembered that the agreement must have arguably procompetitive justifications, if the agreement is to have a chance at withstanding a Sherman Act, Section 1 challenge.

Case Emphasizes Importance Of Providing Clear Notice Of Change Of Online Terms

The U.S. Court of Appeals for the Ninth Circuit recently held that the proposed modification of an online terms of service agreement which was simply posted on the company’s website, was not effective against a company’s customer who had no notice that the terms had changed. Douglas v. U.S. District Court for the Central District of California, 9th Cir., No. CV-06-03809, 7/18/07. This recent case questions the common practice of many companies to merely post revised terms on their websites and emphasizes the importance of taking steps to provide existing customers with clear notice of material changes to online agreements.

The plaintiff had entered into an agreement with America Online Inc. ("AOL") for the provision of long distance telephone service. AOL subsequently sold its long distance telephone service to a third company called Talk America Inc. ("Talk America"). Upon purchasing this business, Talk America made several changes to the services agreement that was to be binding upon its customers. Among the significant changes, Talk America imposed additional charges on its customers, required its customers to waive their right to bring any class action against the company, required its customers to assent to an arbitration provision and to agree to a choice-of-law provision that would designate New York law as the governing law of the agreement.

Following the changes to the agreement, the plaintiff continued to use the services of Talk America for a period of four years without any objection. Upon become aware of the additional charges, however, the plaintiff filed a class action lawsuit, claiming various federal and state-law causes of action. Citing the arbitration clause in the revised services agreement, Talk America made a motion to compel arbitration. The lower court granted the motion, and the plaintiff appealed.

Before the Ninth Circuit Court of Appeals, the plaintiff contended that Talk America had changed the service contract without notifying him. The lower court dispensed with this argument by observing that Talk America made the service contract available on its website which the plaintiff could have accessed and read should he had wished to understood the terms under which he was receiving the services. On appeal, the plaintiff contended that because the monthly charges were charged automatically to his credit card, he did not have occasion to visit the provider’s website each month. The lower court did not address this argument of the plaintiff. The Ninth Circuit addressed it, and then dismissed it, contending that even if the plaintiff had visited Talk America’s website to pay his monthly bill, he would have had no reason – or obligation – to look at the service contract posted there. The court contended: "Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side."

The court relied upon traditional principles of contract law, contending that a party to a contract cannot unilaterally change the terms of the deal without obtaining the party’s consent to doing so. The court rejected Talk America’s contention that the plaintiff had agreed to the service contract changes by continuing to use Talk America’s services, emphasizing the lack of notice. The court contended that even if continued use of service could be deemed to be assent to the contract changes, as has been held by some courts, such assent could only be inferred after the plaintiff received proper notice of the changes. Unfortunately, the court did not provide detail on what "proper notice" might be.

The case really emphasizes the importance of providing users with sufficient notice of changes to services agreements. While the court did not detail the components of proper notice of changes, the court did distinguish two district court opinions that had been relied upon by the lower court. In one of the prior cases, the customer was advised by mail that she could see the new terms online or call the service provider to learn about them and in the other case, the customer received the modified contract in the mail. In addition, each of the distinguished cases involved new customers. This was a key fact in the court’s view, as new customers would be on notice that they were required to assent to contract terms as condition of using the service.

Given that the defendant in this case changed the terms of service contracts that had been put into place by the company from which it had purchased the business, the case also emphasizes the importance of conducting proper and thorough due diligence when purchasing an existing business. Prospective purchasers are advised to review the service agreements of the business that they are purchasing and consider whether the terms of those agreements are acceptable to the purchasing entity. Where the terms are unacceptable, the purchasing entity will need to develop a strategy for revising the terms in a manner that will be enforceable.

Goodwin Procter LLP is one of the nation’s leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

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