LICENSING LESSONS: THE BLACKBERRY AND EBAY CASES

by: Jeffrey L. Van Hoosear

The ability to prevent another from making use of your intellectual property (whether it be a patent, trademark, copyright or trade secret) is an essential and critical right. The primary leverage that an intellectual property owner has to prevent others from infringing its rights is the ability to sue, and to potentially recover monetary damages or equitable relief (usually in the form of an injunction). In the case of licensor and licensee, it is often the licensee that has the primary interest commercially from enforcing the intellectual property right. For example, if someone else is using another’s intellectual property without having to pay a licensing fee or royalty, that entity may be making more profit by the ability to have a higher margin. That entity may also be taking away sales from the licensee as well. In addition, if the license is exclusive in some aspect (territorially for example), it is the licensee who is most harmed by an infringing use in the territory.

It should come as no surprise that it is normally the licensee that wants to litigate and seek protection of the intellectual property rights it has licensed. However, the licensor, which as the owner of the right is the usually the entity which must initiate the litigation, may resist taking such action due to either the cost of the prospective litigation in relation to the possible damages, or due to the minimal impact the infringement has on the commercial market involved. In the U.S., the exclusive licensee may be the entity to bring the suit if the court finds that the parties intended, and the license expressly grants, such a right. If the court finds that the license implies such as a grant by giving substantially all rights to the exclusive licensee, it can also decide that a license is entitled to bring suit.

From a licensing perspective, two relatively recent cases in the U.S. involving the “licensing” of intellectual property rights provide some valuable lessons on how to handle offers to license from the perspective of the both the licensor and the licensee. In each of these two cases case, a large damage award was made to a small company, which had initially offered a license, where the high profile and larger defendant had a very successful consumer product. The “classic” game in litigation involving a well-off defendant and a plaintiff with arguably lesser resources is to try and prolong the proceeding as long as possible. In addition, terms such as “stonewalling” and “scorched earth” have earned a prominent place in the litigation vocabulary. The theory being that a defendant can cause the plaintiff to spend all its money in order to obtain a settlement on terms more favorable to the defendant than could otherwise be achieved on a level playing field. This strategy failed miserably in the Blackberry case discussed herein. Not only did the defendant not get more favorable terms, there was the very real possibility of having the company’s most successful product shut down if a license agreement could not be reached between the parties. When a business’s primary product is threatened by an injunction, the pressure to settle the matter is intensified (as shown by the US$612 million dollars paid by RIM to settle the case).

It would be hard to believe that anyone who uses a cell phone or e-mail has not heard of the “Blackberry” case NPT, Inc. v. RIM (Research in Motion). The Blackberry case reflects the situation where an intellectual property holding company (while patent troll has been used liberally to describe NTP, there are several reasons that it is arguably not a patent troll) is able to use an injunction threat as settlement for a license.

This astounding case began in January 2000 when RIM ignored NTP’s first “form” letter offering a license in several of its patents. In fact, NPT had sent numerous letters (perhaps as many as 40) to various companies offering to “license” the patents owned by the company. In regard to protecting trademark and copyright rights, the usual letter sent by the intellectual property owner to the alleged infringer is known as a “cease and desist” letter. In such a letter, the owner of the intellectual property right is demanding that the infringer stop all further use of the intellectual property in issue. However, it would not be unusual for a trademark or copyright owner to offer a license as well, depending upon the circumstances and whether or not the owner is using or licensing the property, so parallels to the Blackberry case come in to play in evaluating other intellectual property rights as well.

As to patent rights, it would be normal for the first letter to be phrased in terms of taking a “license” to use the invention or technology in issue rather than an outright demand to stop. This is often done so the alleged infringer cannot go into court (in a jurisdiction arguably more favorable to it) and seeking a declaratory judgment of non-infringement. An offer to license is often seen as lacking the “threat” necessary to bring a declaratory judgment action. However, if the Blackberry cases shows nothing else, it shows that any offer to “license” needs to be taken seriously enough to evaluate whether or not it is threat to the business, any of its products or to any of its technology that it may (or already has) licensed to others. One of the complicating factors for RIM was that in at lest as early as August 2004, RIM had introduced an extensive licensing program that allowed other manufacturers to incorporate Blackberry technology and software applications. RIM no doubt had not only it own substantial stake in the matter, but a substantial stake as a licensor as well. However, RIM was not the only entity to “ignore” the NPT letter. While, not surprisingly, others have since taken licenses from NTP, it appears that no one that was offered a license by NTP back in 2000 accepted the initial offer.

The initial “license” letter from the intellectual property owner may often, as in the case of NTP, be a form letter and not contain much information. In fact, RIM had argued that the letter was inadequate notice of NTP’s rights as no particular licensing fee was set forth in the letter. Needless to say, this argument presumably did not carry much weight with the jury.

Probably one of the most critical facts was that NTP apparently never offered to “fully” license RIM; that is, it offered a license for products already sold and a license base on an ongoing royalty for future products that would use the intellectual property. This position (or variations of it) is very common in the licensing of all intellectual property rights, not just patents. The theory being that the more you sell using the intellectual property right, the more you generally are obligated to pay. However, according to RIM the fact that NTP would not offer a fully paid license (a license fee which would cover all past and all future sales in one amount, not necessarily one payment) left it “no option” but to continue to litigate. Only time will tell whether or not requiring a fully paid license was a good position to take in this matter.

In response to this argument, and other arguments as to why RIM was willful in its infringement, the court noted that the amount of time dedicated to the investigation of the matter left “considerable doubt as to whether an investigation actually occurred.” The issue of RIM’s investigation of NTP’s claims was critical to the court’s finding of willful infringement. In fact, RIM could not even produce its copy of the initial license letter from NTP. Further, the copies of the NTP patents RIM claimed to have obtained (and reviewed) contained no markings or notations (a fact that could not be explained even by the witnesses which took the stand to testify in the case). Finally, and perhaps of most concern, was the fact that RIM did not seek outside legal counsel to review and investigate the matter, nor did it seek any independent technical review of the patents in issue and the technology used by RIM which was accused of infringing these rights.

Ironically, it was most likely the press generated by RIM that it was suing a competitor for what it claimed was an infringement of its rights in the Blackberry product that lead NTP to first contact, and later sue, RIM. After getting no satisfactory response from RIM, and no longer willing to be ignored, NTP sued RIM in Federal Court in Virginia. Of critical importance to the development of this case was the fact that this court has a “rocket docket.” A defendant cannot use a long delay to try and get an advantage by prolonging the matter in such a system. The RIM case was off to a very swift start that clearly worked to NTP’s advantage and RIM’s detriment.

A jury verdict in the Blackberry case was obtained one year later (November 2002) and resulted in a finding of infringement, $54 million in damages and an injunction against further infringement of the certain patent claims in issue. However, the district court judge allowed a stay of the injunction pending an appeal. Lawyers for NPT had argued that RIM should be prohibited from any and all sale of Blackberry products unless RIM takes a license on NTP’s intellectual property rights. However, RIM had sought a stay in the matter as the patents in issue were in the process of being re-examined. However, this was a wait that the district court indicated was not acceptable. Once the Supreme Court turned down Rim’s case, despite (or maybe because of) tremendous political pressure to intervene, RIM finally saw the proverbial light and settled the case. Accordingly, while the patents in issue in the case could still be rejected by the US patent Office, it will not provide much help to RIM at this point.

Even though RIM now faces the fact that it licensed intellectual property that may be invalidated (and therefore not infringed by RIM’s Blackberry), the litigation and probable injunction was seriously affecting revenue and customers. This license now removes the cloud that threatened the company. RIM did get a license that protected the entire Blackberry system for a fixed amount (no ongoing license fees). Of note is that the licensing resolution of the case covered not only RIM but also all the wireless carriers and channel partners who sell Blackberry products. It also covered the other manufacturers who have licensed software from Blackberry for use in their own devices. The press that this case has received will arguably impact on how future “license” letters are viewed by parties on each side of the issue.

The second case dates back to 2001 and involves a small plaintiff, MercExchange, and on-line auction giant eBay. After the initial licensing negotiations with eBay (and a related company Half.com) failed to reach a resolution, MercExchange brought suit in federal district court. This case, while having elements in common with the Blackberry case, has also had a very different course at certain critical points. However, this case, like the Blackberry case, has also attracted significant interest and attention among those who believe it has become too easy for so called “trolls” to hold businesses hostage through intellectual property suits. As such, this case may have much more impact on the way intellectual property cases are actually litigated in the next few years than its Blackberry counterpart. Several of the amicus briefs (from the likes of Microsoft and Cisco) in the case supported eBay’s position that an injunction should not be automatic, and echoed the concern that a position of entitlement to an injunction allows intellectual property owners who do not provide a service or produce a product to threaten companies that are predominantly “non-infringing.”

This case really “started” in 2003 when a jury sided with MercExchange, and found that its two e-commerce patents had been infringed. MercExchange received an award of $35 million dollars. However, the district court judge declined to issue a permanent injunction. The injunction would have forced eBay (and Half.com) to stop using the “Buy it Now” feature. This feature allows a seller to set a fixed price for an item and allows a buyer to complete the transaction instantly by accepting the fixed price rather than waiting until the ending time of the auction set by the seller.

The judge, applying the traditional four-part test to determine whether an injunction should be entered, found that the test was not met. This ruling may turn out to have significance in how such cases are tried. MercExchange had argued that “irreparable harm” would occur and that it would be “deprived of its ability to . . . have the exclusive right to license its patents and technology to others on the most beneficial terms available.” However, substantial evidence had been introduced during trial that MercExchange exists merely to license its patents to others. Further, MercExchange had made statements at trial that it sought appropriate damages from eBay, not to enjoin it. Finally, the lower court noted that MercExchange had not sought a preliminary injunction in the matter. All of this evidence was sufficient to rebut the presumption of irreparable harm if an injunction was not granted in favor or MercExchange

On appeal, the decision on the injunction was reversed by the Court of Appeals under the "general rule that courts will issue permanent injunctions against patent infringements absent exceptional circumstances." The appellate court stated that it is customary to expect an injunction “once infringement and validity [of the intellectual property right] has been adjudged.” However, it stayed this ruling pending a review by the Supreme Court. Unlike in the RIM case, the Supreme Court took the eBay case, and subsequently ruled in its favor.

According to some intellectual property owners, the threat of an injunction is the only way of forcing companies (the intellectual property “pirates”) into fully considering and accounting for their actions. However, making injunctions more difficult to receive (as monetary damages could arguably be paid by most large defendants (like eBay, RIM, Microsoft and Cisco) would increase the pressure to intellectual property holders to license rather than litigate. However, the eBay case also provides insight in how to properly prepare the case so an injunction is still a viable option to the plaintiff.

Businesses should view licensing as a way to spend less time in court (and less money on litigation lawyers) and more time and money in creating and promoting new technology and products. In order to do this, businesses must be diligent in investigating any intellectual property rights they are thinking of licensing – or have been offered to license.

In evaluating a license it is also critical to adequately address the intellectual property issues at issue in order to avoid the potential damage of an injunction. While the eBay case may mean that permanent injunctions are harder for plaintiff’s to get, as they are no longer “automatic,” they are still obtainable and remain an appropriate threat. Accordingly, one should always take infringement and “license” letters seriously. If nothing else, the RIM case clearly establishes the necessity of conducting a careful analysis, and that you should document your thoroughness. The RIM cases also supports the position that it is very important to get competent, and perhaps independent, advice in the matter. Don’t let the only people who review and analyze an infringement matter be in-house personnel. While this means hiring outside counsel, and perhaps outside technology experts, to review the matter and or provide a written opinion, the cost of such steps will be offset by the substantial proof they provide that you took the matter seriously. Taking these steps with hopefully allow you to determine the difference between a serious case, a nuisance case, and a specious case and to respond accordingly.