Richard A. Epstein: Trolling for (patent) trouble

Everyone agrees that MercExchange vs eBay before the United States Supreme Court is shaping up as one of the biggest patent battles anywhere in many a moon. When I last wrote about this case, I talked about the risks of creating an unworkable system of compulsory licenses by refusing to grant injunctions routinely in infringement cases.

“Routinely” does not mean “always,” but it does guard against denying the injunction solely on the perception of the high value of the patent to the infringer or society at large, on some amorphous “public interest” theory. In reality it is anything but.

Rather, tie any denial of an injunction to some shortcoming in the patentee’s conduct, as by sitting on his rights (in legal terminology ‘laches’), or by giving the false impression that some license will soon be forthcoming (’estoppel’). Any patentee can guard against these risks by prudent behavior, so these exceptions to the basic injunction rule won’t throw the entire patent system into confusion.

More recently, the debate over injunctions in eBay has honed in on one critical question. How should the patent law control pesky patent trolls?

The troll of course was the fairy-tale figure who controlled a key bridge over (or under) which all traffic had to pass. He used his position to charge tolls so high as to curtail traffic along the road (or the river). His disproportionate chokehold spurred an entire tradition of common carrier law that restricts the holders of these key outposts to charging reasonable and nondiscriminatory rates - sometimes called RAND, which could be a model here.

Well, just what kind of patent turns the run-of-the-mill patentee into a troll? Hard to say. All patents could be said to confer a monopoly position on a particular invention: after all, that is just the flip side of saying that they have an exclusive grant.

But the issue isn’t whether the grant is exclusive. It’s whether there is some close substitute for it, either in the public domain or under some another patent. This vital distinction has finally worked its way into US antitrust law now that the Supreme Court in Illinois Tool Works, Inc. v. Independent Ink, Inc. rejected the presumption that patents confer monopoly power in tie-in cases. So the potential class of trolls occupies only a subset of the vastly larger set of unquestionably valid patents.

Still, there’s more ambiguity than first meets the eye. In one breathe, we want to stop the troll. In the next, we want to encourage the pioneer by giving him the benefit of a broad construction to his patents. I don’t have much use for this approach to patent claims either. But these conflicting impulses show how difficult it is to figure out what the troll is anyhow.

But let’s suppose that we identify some super-valuable patents, such as the NTP patents that Research in Motion paid a cool $612.5m to license. What next? Should our fear of trolls lead us to abandon the 1908 rule in Continental Paper Bag Co. v. Eastern Paper Bag Co.?

That long-standing rule routinely grants injunctions for someone who practices the patent, or licenses the patent, or sits on the patent because it has chosen to develop some substitute technology. Clearly Bag’s per se rule makes eminently good sense, lest countless rivals glom onto someone else’s patent today in the hopes of escaping damages tomorrow.

But what about that troll that just sits on the patent, without doing any of the above? One version of the troll argument says he gets no relief whatsoever, which looks like the complete negation of property rights.

A second approach allows some damages, but not an injunction, given the fear that one key patent will shut down a thriving firm. But the sneaky troll demanding injunctive relief has vulnerabilities of his own. If he sits by and lets others develop technology, he runs the risk of losing all or some relief to laches or estoppel, not to mention losing licensing revenues from others on what is, after all, a wasting asset.

And finally, that injunction is a two-edged sword. The patentee that shuts down an infringer loses all revenues from that infringer. It was the threat position, both ways, that made the Blackberry patents settle for a lot less than was predicted.

In sum, there’s no knock-down argument that says that sneaky trolls can never have their day in the sun. But there’s none that make them public enemy number one either. The issue is a bit like predatory pricing, where everyone knows of the hypothetical dangers of driving folks out of business by undercutting their rates but no one is quite sure how often it ever works.

There are lots of glitches in determining patent quality that better institutional design might cure. But nothing in the eBay v. MercExchange case frames the issue in a way for the Supreme Court to sensibly address. So the Court should postpone this issue for another day, instead of trolling in troubled waters.

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law, the University of Chicago, and the Peter and Kirsten Senior Fellow, The Hoover Institution. Along with Scott Kieff and Polk Wagner he authored an amicus brief defending on the MercExchange side of the case, calling for a retention of the current rules