Enforcement of Patents on Geographically Divisible Inventions

← 18 | 19 → Table of Figures

Figure 1: Geographically divisible invention

Figure 2: Geographically divisible invention – generalized overview

Figure 3: Menashe Business Mercantile v. William Hill. United Kingdom

Figure 4: NTP vs. RIM. United States← 19 | 20 →

← 20 | 21 → 1. Introduction

The development of the Internet¹ and Internet-based technologies has confronted legal academic community and policy makers with several issues. These range from cyberspace² being declared an independent sphere of no national interests³ to prolific pirating of music.⁴ The Internet triggered, affected and accelerated the formation of new interactions, new technologies, new behavior and new thinking. Over the past three decades, many of these issues have been pointed out and several have been addressed. Governments and researchers worked on creating approaches dealing with the ephemeral, globally-spread and interconnected nature of the Internet.

← 21 | 22 → Despite the continued efforts, certain topics remain unresolved today and some of them may require major shifts in the accepted and established structures of legal, political, and economic international order. This research aims at addressing one of such issues – lying at the nexus of patent law and the Internet – namely the challenge in enforcement of patents on inventions enabled to function without geographical integration. The analysis focuses on the substantive patent law infringement provisions, which are applied in infringement proceedings, involving such patents. The specific inquiry into geographically divisible inventions is justified by nature of the applied technological solution, as such inventions pose an unprecedented challenge to the territorially-based system of patent protection, as will be explained below. The focus on geographically divisible inventions is justified as their nature ultimately challenges the underlying principle of patent law, namely its territorial dimension. Courts faced with patent infringement proceedings involving geographically divisible inventions underlined their being different from other types of inventions5 and their decisions have raised broad interest in the scientific literature⁶ as well as in the involved community.⁷ The developments and views in the field demonstrate lack of consensus⁸ on how to approach enforcement of these types of inventions and it leads to lack of clarity on the side of the parties as to how the law approaches the issues of remotely integrated inventions. This introduces uncertainty as to the result of the litigation and may, in the long run, inhibit inventive effort if right holders are convinced that they cannot be sure of protection against infringement.⁹

← 22 | 23 → Motivation

The motivation for this research is based on two premises. The first stems from the assertion that a well-functioning and legitimate system for patent law enforcement is important for the knowledge-based society and its economy. As such it is one of the core ingredients of today’s economic policy. As a policy area on the rise, it has gained in importance over the past decade and is still under a lot of development. This premise is set out with the understanding that enforcement is one of the three core and interdependent components of the patent system, namely patent application up to the grant, enforcement of rights, and commercialization. Based on this premise, the goal of this research is to analyze how well patents on geographically divisible inventions can be enforced. This is done, at first, by appraising the application of the infringement provisions by Courts within the currently available enforcement framework in substantive patent law and assessing their functioning.

The focus on Internet as a sociotechnical system¹⁰ is chosen due to the second premise. At its basis is the observation that the broader socio-economic context, in which the patent system operates, has developed rapidly and changed profoundly over the past few decades, especially due to the introduction of digital technologies and the Internet. The speed and dimensions of this development put significant pressure on the legal regimes to react. However, these reactions, because they had to be made in the shortest possible time, were characterized by a quick succession and demonstrated sub-optimal design.¹¹ Taking stock of the resulting enforcement options with regard to geographically divisible inventions aims to contribute to setting a more balanced approach.

The so-called “knowledge revolution”, which evolved alongside the technological revolution¹² has brought about changes in the socio-economic context in dimensions, which are compared to the greatest ground-braking changes in ← 23 | 24 → human progress, such as the invention of steam engine or printing press.13 One of the manifestations of this transformation is the rise in importance, as well as diversification of use, of intangible assets. Patents are increasingly valuable as economic assets,¹⁴ which results in a change in corporate treatment of patent rights. Decisions related to filing patent applications or pursuing infringements are no longer constrained to the select group of patent attorneys or lawyers. The patent system has evolved over time and adapted with the changing context of technical, political, and economic developments.¹⁵ Following from that an analysis of patent-related issues requires an approach, which places it in the broader context rather than constraining it within the legally dominated technical discussion.¹⁶

← 24 | 25 → The recognized significance of this shift in technological progression justifies an inquiry into whether the existing ramifications for patent enforcement are serving the purposes that the policy and law-makers have foreseen.17 Additionally, as these objectives are also evolving, it is important and necessary to revise the full extent of the viability of the patent enforcement framework. Moreover, this inquiry is motivated by the observation that the change from systems of physical components to digital technologies has brought about a new type of patentable inventions, namely such in which separated elements function as a unit without the necessity of the parts to be physically located together. This characteristic of functioning without physical integration could only gain in significance due to the Internet providing an international communication network.¹⁸ Thus, it brings the controversies related to the global networks and territorially limited rights also into the realm of patent law. ← 25 | 26 →

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1 According to the Web community, the differentiation between “internet” and “the Internet” is being made to distinguish a technical term from the particular system. “The Internet” denotes the whole web of IP networks spread globally, while “internet” is a short form of internetwork, which is a technical term denoting a set of networks connected via routers and gates. Source: Wikipedia, Internet, Available at: http://en.wikipedia.org/wiki/Internet [Last accessed on 15.09.2013].

2 Cyberspace, as differentiated from “the Internet,” is understood as the digital and virtual environment enabled by the global penetration of the Internet. While commonly both terms are used interchangeably, cyberspace emphasizes the technology-enabled environment in which virtual reality is experienced, regardless of one’s location. Wikipedia, Cyberspace, Available at: http://en.wikipedia.org/wiki/Cyberspace [Last accessed on 15.09.2013].

3 Johnson and Post propose that the global network of computers is such a different dimension from the physical world that it creates a distinct sphere – the cyberspace, which is supposed to create its own laws of virtual reality and is not supposed to be subject to territorially delimited laws of nation-states. Johnson, David R., Post, David G., Law and Borders – The Rise of Law in Cyberspace, 48 Stanford Law Review, 1367, 1996.

4 International Federation of the Phonographic Industry (IFPI) provides estimates, in its widely cited report, that by 2015 1,2 million jobs will be lost in Europe due to piracy in the music sector and retail sales of music will lose 240 billion of Euros between 2008 and 2015 due to piracy. International Federation of the Phonographic Industry (IFPI), IFPI Digital Music Report 2011, Music at the touch of a button, 2011, pg. 5. Available at: http://www.ifpi.org/content/library/DMR2011.pdf [Last accessed on 15.09.2013]. Estimates based on Tera Consultants’ report. TERA Consultants, Building a Digital Economy: The Importance of Saving Jobs in the EU’s Creative Industries, 2010, Pg. 5. Available at: http://www.teraconsultants.fr/assets/publications/PDF/2010-Mars-Etude_Piratage_TERA_full_report-En.pdf [Last accessed on 15.09.2013].

5 Menashe Business Mercantile Ltd v William Hill Organization Ltd, [2002] EWCA Civ 1702, 28.11.2002, [2003] R.P.C. 31, 575-586. [Menashe v William Hill]

6 A proof of such interest may be seen in a large amount of papers and law journal case reviews devoted particularly to one of the decisions: NTP Inc. v. Research in Motion Ltd., 418 F .3d 1282 (Fed. Cir. 2005), cert denied, 126 S.Ct.1174 (2006). Exemplary for the field stand the following: Dinges, Jason R., Extraterritorial Patent Infringement Liability after NTP, Inc. v. Research in Motion, 32 J. Corp. L. 217-236, 2006; Lane, Jennifer, NTP, Inc. v. Research in Motion, Ltd.: Inventions Are Global, but Politics Are Still Local - An Examination of the Blackberry Case, 21 Berkeley Tech. L.J. 59-77, 2006 and the literature reviewed in section 4.1.

7 There was quite a bit of interest and coverage in patent blogs, such as patently-o. Patently-o blog. Available at: http://www.patentlyo.com/patent/2006/01/ntp_v_rim_black.html [Last accessed on 15.09.2013].

8 Refer to sections 6.1 and 6.2 as well as chapter 7 below for a detailed discussion.

9 Refer to section 2.2 for an elaborated explanation of this argument.

10 Cox, Noel, TECHNOLOGY AND LEGAL SYSTEMS, Ashgate, Aldershot, UK, Burlington, VT, USA, 2006, pg. 64.

11 In the words of Cornish and Llewelyn: “Legal regulation of the whole complex presented by the digital revolution is forming and transforming as fast as the technology is expanding. With IPRs the changes have mostly been by way of rough adaptation of existing rights. How far the results have been effective in real terms, (…), is a debate that for the moment can only rage.” See Cornish, William, Llewelyn, David, INTELLECTUAL PROPERTY, 6^th ed., Sweet & Maxwell Publishing, London, 2007, sec. 20-02, pg. 805.

12 Organisation for Economic Co-operation and Development (OECD), Sacher Report, OECD Digital Economy Papers, No. 29, OECD Publishing, 1997, pg. 4.

13 Ibid.: “Our generation stands on the very cusp of the greatest technological revolution that mankind has ever faced. Some compare this age of electronic communication with the arrival of the Gutenberg press, or with the industrial revolution.”

14 Organisation for Economic Co-operation and Development (OECD), Intellectual property as an economic asset: key issues in valuation and exploitation, Conference Report, 2005, pg. 5.

15 Davis, Lee, Intellectual property rights, strategy and policy, in: Davis, Lee, Guest Editor, Special Issue: The Changing Role of Intellectual Property Rights, Economics of Innovation and New Technology, Vol. 13, No. 5, 2004, 399-415, pg. 404. Consider also Jestaedt, Bernhard, PATENTRECHT, ein fallbezogenes Lehrbuch, 2. Auflage, Carl Heymanns Verlag GmbH, Köln, München, 2008, marginal no. 10.

16 See for example WIPO: “It is generally recognized that the patent system should be viewed in the context of national economic and development policies and strategies in order to truly empower the patent system as a tool for technological development and economic growth. While the patent law provides the legal framework, a number of other features need to be in place (…).” World Intellectual Property Organization, Standing Committee on the Law of Patents, 12^th Session, Report on the International Patent System, SCP/12/3, 15. 04.2008, pg. 4.

This development is also demonstrated by the sheer variety of fields that are included today in the IP/patent debate, such as the importance of IP for the green revolution, United Kingdom Commission on Intellectual Property Rights, Agriculture and Genetic Resources, Final Report, http://www.cipr.org.uk/graphic/documents/final_report.htm [Last accessed 15.09.2013] or the law and economic studies of intellectual property, human rights and IP law, etc.

Pugatch puts it pointedly: “Regardless of how trivial and banal this may sound, IPRs are but one of many factors that affect a particular situation. And no matter if we view them as part of the solution or as part of the problem, IPRs are never the only factor – the silver bullet – and sometimes not even the most important factor. This should be taken into account and remembered even when focusing solely on IPR.” Pugatch, Meir, P., (ed.), THE INTELLECTUAL PROPERTY DEBATE, Cheltenham, UK and Northampton, MA, USA, 2006, pg. 9.

17 It is without doubt that technological progress affects and pressurizes the broadly understood legal system. This development has also affected the patent law, in which one of the symptoms has been demonstrated by the struggle to incorporate new areas of technologies into the patentable subject matter. Issues of computer-implemented inventions in Europe, the on-going debate about the patentability of software and business methods or the discussions about differentiated approaches to patenting in the biotechnological sector are but few examples. The research question does not ask whether technology has an impact on law but rather whether the technological development brought about with the establishment of the Internet exerts an impact so large that the patent law must be adjusted in order to fulfill its functions.

18 It is important to stress that such inventions became much more common and gained in economic importance since the introduction of the Internet. As demonstrated by examples from American case law, notably the Decca case geographically divisible systems were invented and patented as early as 1970s. However, Decca presents an exception. Today, such inventions are widely spread. Decca Ltd. V. United States, 544 F . 2d 1070 (Ct. Cl. 1976).

← 26 | 27 → 2. Conceptual underpinnings

2.1. Justifications of a system for patent protection

While philosophical¹⁹, political²⁰, legal²¹, and economic²² reasons²³ for the ← 27 | 28 → establishment of a patent system have been given over time,24 there is a general, widely accepted understanding that, from a societal point of view, a patent right represents a certain “bargain”²⁵ or a regulatory contract²⁶ that is offered by the state to the patent applicant. Within that bargain, the state provides the successful patent applicant with a time-limited²⁷ exclusivity right and in return the patent applicant discloses a new, inventive technical solution, which is industrially applicable.²⁸

Patents operate as rights within national markets, which are, in the majority of cases, based on private property and freedom of competition.²⁹ The exclusivity ← 28 | 29 → granted by a patent has a limiting effect on competition, which calls for justification.30 Generally, there are two distinguishable streams of approaches as to the reasons for the provision of exclusivity, namely a moral and an economic approach.³¹ The moral approach stems from the Lockean theory of right to the fruits of one’s labor. The economic rationale³² for the creation of patent protection is based on the recognition that an inventive process results, essentially, in arriving at new technical knowledge. Knowledge, on the other hand, demonstrates characteristics similar to a public good,³³ which is non-excludible³⁴ and non-rivalrous.³⁵

Under the assumption that markets are spaces in which rational³⁶ economic agents manage resources with maximum efficiency in order to maximize their ← 29 | 30 → utility, economic theory provides that public goods will be underproduced.37 Such a situation is referred to as a market failure³⁸ and in economic theory existence of market failure justifies government intervention, in order to redress the sub-optimal functioning of the market.³⁹ Notably, Coase warns about the ← 30 | 31 → benefits from alleviating the market failure as compared to the cost of the introduction of government’s measures.40 Without patents, the incentive to invest in technological improvements within a business is lacking. This is due to the fact that without patent protection competitors are not prevented from also improving their business by copying the first-mover’s improvement and thus the firm that covered the initial research and development costs will not be able “to appropriate an adequate portion of social benefit that would be achieved with an upgrade.”⁴¹ This is known as an appropriability problem.⁴² It occurs when a firm invests resources in innovation processes and the investments cannot be recouped because another firm can easily copy the invention, implement it in a product and sell it on the same market as the original inventor, thus competing directly with the innovating firm. The introduction of patents makes it possible to solve some of the economic problems related to the innovation activity that public goods exhibit.⁴³ Currently, it is widely accepted that the economic approach⁴⁴ best explains why patent rights are granted.⁴⁵

← 31 | 32 → From the public policy point of view, creation of new knowledge, and especially new technical knowledge in form of inventions, which can be transformed into marketable products, is desirable.46 This policy rationale is widely accepted by all developed economies and shared by many developing nations.⁴⁷ In that sense, Intellectual Property Rights (IPRs) are important mechanisms in the commoditization of knowledge and information and one may claim that patents are the strongest form of IPRs.⁴⁸ However, the provision of exclusivity is not without ← 32 | 33 → a cost.49 It is recognized that an introduction of patents limits the freedom of the efficiency-maximizing activity in the market. As a measure of state intervention in the market, it requires careful revision as to whether it fulfills the objectives set for it and, which, at the same time, justify its competition-limiting aspects. In economic terms, patent law is a trade-off between incentives for innovators and social costs for the society, all taking place within a functioning market.⁵⁰ The social cost is due to the fact that a granted patent right enables the right holder to extract higher rents than he could extract without the exclusive right. This, in turn, means that the society is charged a premium when purchasing goods, which include the patented technology.

In competition law terms, the trade-off inherent to patent law is that between allowing unrestrained competition in the market⁵¹ for technology and some sort ← 33 | 34 → of intervention,52 in order to provide incentives or rewards for the companies investing in research and development.⁵³ For understanding this trade-off, economic theory analyzes these issues in terms of differing types of economic efficiencies. There are, in principle, three distinguishable types, namely allocative efficiency, dynamic efficiency, and productive efficiency.⁵⁴ When discussing innovation, usually it is distinguished between the ex-ante(dynamic) and ex-post ← 34 | 35 → (productive and allocative) efficiency. The trade-off that is at the core of public policies is that between preserving the firms’ incentives to innovate and providing access to the created knowledge (inventions) to all agents in the market, thus also to the competitors of the innovators.55 The balancing mechanism is the patent law, which provides the government with a way to “commit not to expropriate an innovating firm ex post. A firm knows that for a certain period of time it will be able to exploit fully its R&D results.”⁵⁶ Economic theory allows arguing that the long-term gains from innovation outweigh the short-term losses due to the exclusivity, providing that the patent law conforms to its own principles.