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Intellectual Property Law in Cloud Computing: Part 2 | @CloudExpo #Cloud

Combating patent litigation - the dark cloud over cloud computing

The growing cloud computing industry brings many new opportunities, but with success comes litigation, both from competitors seeking to gain an edge in a crowded market and opportunists seeking to make a quick buck. Valid patents and good innovations deserve due respect and consideration, but the vast majority of infringement actions are started by non-practicing entities (aka "patent trolls") that acquire and assert broad patents, many with questionable validity. There is no question that patent litigation is costly. Litigation that goes to trial can cost over $3 million, and result in damage awards that can exceed $15 million. Being involved in or losing patent infringement suits also impacts customer relationships and marketing opportunities, translating to even bigger losses. Even so-called "nuisance suits" cost time and money to defend. With the presumption of validity that each patent enjoys, and the current backlog of cases in the most popular district courts, the scales have been tipped in favor of patent holders. Tech companies are faced with a no-win situation: pay money to settle meritless lawsuits quickly or invest substantial time and money in their defense.

The passage of the Leahy-Smith America Invents Act (AIA), which was signed into law on September 16, 2011, was a first step to stem the tide of baseless litigation and level the playing field. The AIA expanded the number of procedures available to defendants for challenging patents in the U.S. Patent Office, providing the defendants with less costly defense tools. Additional bills for further patent reform have been proposed and are currently being considered. In the meantime, the courts have played their role in patent reform by issuing several decisions which have made it easier to invalidate specious software patents and reduce the value of some lawsuits by limiting what constitutes infringement. Cloud computing companies may find that the cases discussed below will be very useful for defense against pesky patent litigation, and help clear the dark cloud over cloud computing.

Challenging Patent Validity under Alice
The recent Alice decision (Alice Bank v. CLS Bank International from the Supreme Court in 2014) has made perhaps the most impact on patent litigation relating to computer-implemented inventions in recent times. In Alice, the Supreme Court found invalid claims relating to a computer-implemented technique of mitigating "settlement risk" in financial transactions because they are directed to an "abstract idea," and do not involve an "inventive concept" that is "significantly more" than the abstract idea itself. Following Alice, courts have used the Alice analysis to invalidate patents relating to many types of computer-implemented inventions in over 60 cases.

Patents asserted against cloud or computing services have frequently involved information processing and organizing, and courts have invalidated many such patents. Some examples from the past 12 months involved: 1) patent claims for processing information through a clearinghouse; 2) patent claims for examining information using rules to identify options; 3) patent claims for using categories to organize and transmit information; and 4) patents for organizing information using mathematical correlations. Patents related to methods of doing business and gaming have fared no better. Courts similarly have struck down: 1) patent claims that relate to using advertising as an exchange or currency; 2) patent claims for managing bingo games; and 3) patent claims using the Internet to identify credit-card fraud. Simply put, patents are invalid if they merely claim using computers for what was known economic practice or can be performed by a person with pen and paper.

Cloud-computing defendants will find these new developments and examples significant because many software or cloud-related patents might not survive the same analysis. Facing such a patent-infringement assertion, companies can now meaningfully attack validity based on the claimed subject matter, in addition to traditional prior-art-based attacks, and they can do so during negotiation, litigation, or both. As a negotiation strategy, an accused infringer increases its bargaining power by mounting challenges that significantly threaten the patents' validity, as well as the potential revenue stream of the patent owner from other licensees. As a litigation strategy, defendants may raise §101 validity challenges in the district court early in litigation, such as with Rule 12(b)(6) motions to dismiss, or later in litigation with motions for summary judgment of invalidity, judgment on the pleadings, or judgment as a matter of law. The success rate for these motions increased from less than 10% to over 60% in the past year, and consequently they are now brought with more frequency. Courts have also demonstrated a willingness to entertain §101 motions earlier in the litigation, making them an effective tool to end litigation early and avoid lengthy, costly proceedings. Additionally, the accused infringer may attack the validity of the asserted patents at the Patent Office (United States Patent and Trademark Office). The earlier threat of a potentially case-ending motion or Patent-Office proceeding has meant that more defendants are challenging patents rather than making a quick settlement payout, which in turn has had the positive effect of deterring non-practicing entities from bringing some questionable lawsuits.

Overseas Activities Carry No Infringement Liability under Halo
Another potentially helpful case for the cloud-computing industry is the Federal Circuit's decision in Halo Electronics v. Pulse Electronics, Inc. In this case, the accused infringer, a component supplier, negotiated prices, sales forecasts, product specifications, and quantities with Cisco in the United States. Following the negotiation and Cisco's approval, Cisco's manufacturers in China ordered components for delivery to China and assembled, also in China, products with those and other components for Cisco. The Halo decision concluded that because the sales of the components occurred entirely overseas, the component supplier cannot be liable under U.S. patent law, even though certain pre-sale activities occurred in the United States.

Like the actions in Halo, cloud-computing industry defendants will likely have cases in a variety of jurisdictions and not all of them within the United States. This case highlights that transactions conducted entirely overseas cannot infringe a U.S. patent; nor do activities that occur partially or primarily overseas, such as hosting servers, manufacturing equipment, supplying components, and rendering services.

Cloud computing companies frequently face patent owners who demand royalty payments based on worldwide sales, arguing that because most services have no boundaries, neither do royalties. Based on Halo, however, one can significantly discount liability risks in the U.S. because overseas activities implicate no U.S. liability. The fact that companies do business in the United States does not render all worldwide sales and services patent-infringing. To correctly evaluate one's liability during negotiation or litigation, one needs to work with knowledgeable counsel to weigh many facts, including how the services are provided, how the products are distributed, what contractual terms matter, what the pre-sale and post-sale activities are, and whether there are additional connections to the U.S.

Limiting Liability for Joint Activities After Global-Tech and Akamai
Clearing the sky further for the cloud computing industry, courts have raised the hurdle for proving induced and contributory infringement. Finding no direct activity that is liable, a patent owner frequently seek damages by asserting that an entity still is liable because it induced or contributed to the customers' infringement. For example, if a patent claim relates to steps performed by customers, the entity that provides the services may be liable as an indirect infringer. Such liability, however, requires that the supplier not only knows of the patent but also knows (or is willfully blind to the fact) that the activities of another are infringing, as explained in the Global-Tech decision (Global-Tech Appliances, Inc. v. SEB S.A. from the Supreme Court).

When a supplier has no knowledge of the patent prior to the lawsuit, the liability is limited to only the proven induced or contributory infringement after the lawsuit is brought. Furthermore, liability is limited for companies which know little about customers' activities, especially the activities relevant to a patent. On the other hand, companies that specifically request or instruct customers to perform certain steps have increased indirect-infringement risks, where the instructed activities are infringing. The infringement risk also increases when companies specifically customize their designs or services for infringing use by their customers. Relying on these specific instructions or customizations, if relevant to patented designs or steps, a patent owner can establish induced or contributory infringement because these instructions or customizations cause users to infringe.

In other words, when patents are not directed to one company's activities, but to those of its customers, that company has no direct infringement liability. To seek any damages, the patentee must establish indirect infringement, which can be challenging if the company knows nothing about the patent, its customers' activities, or that certain activities may be infringing.

Because of the knowledge requirement, a good-faith belief that customers' activities don't infringe negates the requisite knowledge (or possible infringing activities). Therefore, when concerned about infringement risks, getting an opinion of counsel to scrutinize the customer's activities that you are aware of or involved in helps to minimize such risks. While simple logic may suggest that a good-faith or reasonable belief of a patent's questionable validity should also negate the required knowledge, the Cisco decision (Commil USA, LLC v. Cisco Systems, Inc. from the Supreme Court) held the opposite, stating that a mere belief of patent invalidity does not negate the knowledge or intent to induce someone else's infringement.

Some patent claims in the cloud-computing area recite not only user actions but also actions of a service provider or an intermediary, all in a single patent claim. But such claims are ineffective against potential infringers. Divided or joint acts are not infringement unless the joined parties are in a control, agency, or joint-enterprise relationship, essentially making them a single party, as explained in Akamai (Akamai Technologies v. Limelight Networks, Inc. from the Federal Circuit in 2015). Because of the strict control, agency, or joint-enterprise requirement, mere concerted or coordinated actions short of the required relationship cannot infringe. Unless further appeal changes the law from Akamai, a patent owner with multi-entity claims may have difficulty finding an infringer when no single entity performs all the claimed steps or acts. For accused infringers, the current law enables them to defend their actions, because performing only 90% of the claimed, required acts and leaving 10% to customers is not 90% infringing. It is 0% infringing.

Thorough Preparation and Analysis Remain Your Allies
Patent-infringement lawsuits don't go away easily, but many can be reduced to lesser threats with the breadth and strength of these defenses. While no one can guarantee that any action is completely free of infringement risk, these new developments help companies deliver powerful blows against unjustified or abusive patent enforcement. Companies negotiating or litigating against patent owners are now better equipped with various options.  By analyzing these defenses with counsel, companies can seriously question the validity of asserted patents, putting the accuser's asset in jeopardy. Companies can also operate in foreign territories or serve foreign customers without being threatened by U.S. patent-infringement risks. They also can insulate themselves from potential liability associated with customer activities. The potential infringement and liability risks are contained, so long as companies themselves are not instructing or otherwise inducing or contributing to those customer activities. Joint infringement also does not exist where the companies are not in a control, agency, or joint enterprise relationship with other actors. By working with their patent counsel and being well guided on what infringes and what not, companies can manage liability risks but at the same time remain effective in marketing its services, selling its products, and serving its customers. With these effective measures and well-planned defense in place, the sky is clear after all.

The authors thank Michael L. Su and Nicholas D. Petrella, also with Finnegan, for their candid comments and feedback.

More Stories By Linda Thayer

Linda Thayer focuses her practice on patent litigation and administrative trial procedures before the Patent Trial and Appeal Board (PTAB) to request review of the patentability of issued patents outside of litigation, including post-grant review, inter partes review, and review of covered business method (CBM) patents. She also advises clients on worldwide patent portfolio development, management, licensing, and sales.

More Stories By Ming-Tao Yang

Ming-Tao Yang focuses on litigating and defending against patent infringement actions in various forums, including the U.S. International Trade Commission; the federal district courts for the Northern, Central, and Southern Districts of California, the Eastern District of Texas, and the Western District of Washington; and the Court of Appeals for the Federal Circuit. He counsels clients frequently on issues relating to patent enforcement, pre-litigation investigations, patent prosecution, and license negotiations.

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