by Lee Gesmer | Mar 22, 2006 | Patents
Patents. On Wednesday, March 29, 2006, the Supreme Court of the United States (SCOTUS) will hear oral argument in eBay v. MercExchange. The issue is whether the owner of a patent (in this case MercExchange) has the right to enjoin (or stop) an infringer (eBay) from selling an infringing product or service – in this case eBay’s popular “Buy It Now” (or, to eBay aficionados, “BIN”) purchase feature.
A jury has already found that eBay infringed MercExchange’s patent on this technology, and MercExchange is attempting to invoke the general rule that a successful patent plaintiff can shut down an infringing product, pending appeal. It was just this threat — the threat of a shut down — that led to Research in Motion paying a $612.5 million settlement to NTP in February. eBay is asking SCOTUS to modify the traditional rule and permit it to continue to use this service pending appeal. In patent circles this is a very big deal, and the outcome is expected to be a “landmark case.”
For an interesting discussion of the patent policy issues underlying this dispute see the article by Sam Williams in the MIT Enterprise Technology Review [link].
For a primer on software injunctions, and links to many of the briefs filed in the case, see this article in the “Patently O” patent blog [link].
by Lee Gesmer | Mar 21, 2006 | Business Lit. Session, Noncompete Agreements
Noncompete Agreements. If I had a dollar for every time a client who had been sued asked me if they could recover attorney’s fees or damages if they won, I’d have, well, probably hundreds of dollars. Even when a lawsuit proves to be frivolous the Massachusetts courts have traditionally been extremely reluctant to turn the tables on a plaintiff and make it pay damages for the harm its suit has caused to the defendant.
Every once in a while, however, a judge shows some courage and punishes a company the judge concludes has brought a frivolous case. In January 2006 Judge Gants, in the Suffolk Business Litigation Session, turned the tables on Brooks Automation, a Massachusetts company with a billion dollar-plus market valuation, ordering it to pay over $600,000 in damages for bringing a frvolous lawsuit against a former employee. After a trial Judge Gants concluded that the suit was devoid of both any reasonable factual support or any arguable basis in law. A link to the decision is [here].
Judge Gants found that the suit, which Brooks brought against a former employee and a new company he had formed to compete with Brooks (but which was not, as yet, actually competing), had been filed with “reckless disregard” for its merits and to disrupt a potential relationship between the former employee and one of Brooks’ customers (Brooks actually emailed the complaint to the customer, Applied Materials, immediately after filing it, and before even serving it on the former employee).
After an expedited discovery and trial schedule (trial took place only two months after Brooks filed suit), the jury held that the employee had not stolen Brooks’ trade secrets and had not violated his noncompete agreement. The jury did, however, find that Brooks had intentionally interfered with the employee’s relationship with Applied Materials, and awarded the employee $200,000 in damages. Talk about your case backfiring.
The Judge then found that this interference was a violation of Mass. Gen. Laws. c. 93A (which makes illegal “unfair and deceptive acts or practices”), and trebled the $200,000 award. While not mentioned in the decision, the judge is almost certain to also award the former employee his attorney’s fees.
Importantly, the Judge made it clear that he intended to send a message: Judge Gants wrote that his decision was –
necessary to send a loud and clear message to Brooks and to any other corporation that seeks to abuse the right to sue in order to interfere with a competitor’s efforts to develop a contractual relationship with a coveted customer. A start-up company is especially vulnerable to such an abuse of process, since time, effort, and money are needed to defend even a frivolous lawsuit and all are generally in short supply in a start-up company. It is important to make clear to any corporation that contemplates crushing a vulnerable competitor by conjuring a frivolous lawsuit that it will pay dearly for its misuse of the judicial process.
One case does not make a trend, and cases like this do appear occassionally in the decisions of the Superior Court. However, because this decision originated with the Massachusetts Business Litigation Session it carries more weight, and sends a stronger message to the business community and the bar, than if it it had been decided by one of the non-Business Litigation Session judges. Massachusetts lawyers who are defending former employees (and their new employers) will be well served by studying this decision carefully and keeping its teachings (which have been greatly abbreviated here) in mind in defending cases of this sort. Of course, Brooks still has the right to appeal this decision. If it does, I’ll report the outcome.
by Lee Gesmer | Mar 20, 2006 | Antitrust, Patents
Patents, Antitrust. Suppose that you live in a small farming community, Village 1, that relies entirely on its own members for food supplies. I have the only farm that grows corn. Whenever you come to me to purchase corn I tell you that I will only sell you my corn if you also buy a pound of cauliflower for every pound of corn you purchase. Cauliflower is plentiful, and you don’t want to buy my cauliflower (in fact you don’t even like this vegetable), but since you (and your fellow citizens) need corn you have no choice.
Assume that you move to a new community, Village 2. You still need corn, but you discover that there are several purveyors of corn in your new town. You go to the closest of these, and you discover, to your dismay, that this farmer also insists that if you buy his corn, you must also buy his cauliflower. Before purchasing you check around, and learn that the other corn vendors do not require that you purchase cauliflower as a condition to purchasing corn, and you happily proceed to do business only with them in the future. You later learn, to your satisfaction, that the corn farmer that you first encountered in Village 2 has gone out of business.
Thie simple example illustrates one of the more complex and vexing doctrines of U.S. antitrust law, the doctrine of tying arrangements. At its most simple, this intimidating term means that if you want to buy one product from me, you have to buy another that you may not want at all.
In antitrust parlance, corn is the “tying product,” and cauliflower the “tied product.” The product you don’t want (cauliflower) is “tied” to the product you do want (corn).
In Village 1 the corn farmer had what antitrust types call “market power” – in fact, he had a monopoly. If you wanted corn, you had to get it from him, and because he had a monopoly in corn he had the power to force you to buy his cauliflower as well. U.S antitrust law has long held this practice to be illegal per se, meaning there is no legal justification that would excuse it.
In Village 2, the first corn farmer had no market power at all. Because he foolishly insisted that a purchase of corn be accompanied by a purchase of cauliflower, he was soon out of business. In cases where the seller has no market power in the tying product, anitrust law has almost always found that a tying arrangement is permitted. After all, since the purchaser has the option to go to other sellers, how can the seller who lacks market power harm competition?
All of this seems intuitive and makes perfect sense, but lawyers being what they are nothing is ever this simple. What is the market? In the market, what is market power, and how do you measure it? How much is too much? Are there situations where there is a justification for requiring people who want product A to also buy product B (such as safety or cost efficiencies)? Are products A and B so closely related that they aren’t really separate products at all, but actually one product? These questions, to name just a few, have occupied the minds of judges, lawyers and economists for over one hundred years, and have resulted in enough pages of briefs, decisions and legal and economic treatises to reach from here to Pluto (well, not quite, but you get my point).
The most recent twist on the law of tying arrangements is the Supreme Court’s March 1, 2006 decision in Illinois Tool Works v. Independent Ink, Inc.
In this case the Supreme Court considered the question of whether one who holds a patent in Product A (remember, this is the “tying product” – the one you want) should be presumed to have market power simply by virtue of holding that patent. After all, once you obtain a patent you have a government-granted monopoly in products that incorporate the patent, don’t you? How could there be any doubt that the patent holder has market power?
This argument was accepted for over 40 years [link]. However, the prevailing winds at the all-powerful academic institutions and federal agencies (the antitrust division of the U.S. DOJ and Federal Trade Commission) that influence antitrust policy have shifted, and the Supreme Court decided to catch up with current economic thinking and put an end to the “patent-equals-market-power” presumption. In Illinois Tools the Court reversed this 40 year line of precedents, holding that one challenging a tying arrangement must show power in the relevant market, rather than relying on a mere presumption of power based on patent ownership.
Does this decision make good economic sense? In today’s environment, it probably does. Not only are most patents of little or no value, but in a 21st century economy there often are non infringing alternatives to the patented product that serve as substitutes, robbing the patent holder of market power. The Supreme Court has joined the Justice Department and the Federal Trade Commission [link] in concluding that it is implausible to presume that the owner of a patent possesses market power merely by virtue of the patent. However, because patents have become such an important part of the economy, the case is highly significant, and can be expected to have broad application.
by Lee Gesmer | Mar 8, 2006 | Business Lit. Session, Noncompete Agreements
Noncompete Agreements. Our firm used to write “year in review” articles [link], and I decided it was time for a reprise. Here is a year-in-review summary of the most significant Massachsetts state court cases from late 2004 through calender year 2005 involving the attempted enforcement of noncompete or nonsolicitation contracts. Rather than getting bogged down in the detailed facts of the cases I’ll provide a quick summary of the key facts and legal issues that led to the outcome in each case. The goal is to get a feel for how judges are approaching these kinds of cases – what works and doesn’t work in the state courts when employers are attempting to enforce noncompete/nonsolicitation agreements against former employees.
L-3 Communications v. Reveal Imaging [link] involved a complex series of corporate sales, the result of which was that the defendant-employees were several corporate acquisitions down the road from the companies with whom they had signed their agreements years earlier. Their new employer, who had “acquired” the employees via acquisitions, had failed to require the employees to enter into new agreements. Tough luck for the plaintiffs, as Judge Van Gestel concluded in the Suffolk Business Litigation Session in a decision issued on December 2, 2004. One of the employees had signed a noncompete agreement with a company that wasn’t even a predecessor-in-interest with the plaintiff. Another group of employees had signed noncompetes with a predecessor-in-interest, but unfortunately for the plaintiff they had signed a weaker intervening agreement which provided that it superceded the first agreement. Again, the plaintiff was out of luck, since the superceding agreement didn’t contain a post-employment noncompete provision (it contained a noncompete that only applied during the period of employment). Another noncompete agreement signed by this group of employees was not assigned as part of a sale to the current employer, and therefore was not enforceable.
The corporate purchases and sales in this case, and all of the agreements involved, are quite complex. But, the lesson of this case (and a number of other unreported Superior Court cases) is straightforward: if you buy a company make sure that you don’t expect employees who come with the acquisition to be bound by a pre-existing noncompete unless the employee agrees to assignment of the noncompete. Even better, have the employee sign a new noncompete agreement that states the terms you want enforced, rather than relying on the old agreement.
Accordia v. Academic Risk Resources resulted in two decisions. The first decision [link], on a motion for temporary restraining order, was decided by Judge Margot Botsford in Suffolk Superior Court on January 5, 2005. The second decision [link], on a motion for preliminary injunction, was decided a week later by Judge Nonnie S. Burnes.
This case involved the mass defection of an insurance department of 14 employees, who formed a competing company, followed immediately by a swift, targeted appropriation the former employer’s major clients. All of the employees had agreed in writing not to solicit their employer’s clients.
This was the kind of case that puts smiles on the faces of lawyers trying to enforce noncompete/nonsolicitation agreements, and makes the blood of defense lawyers run cold.
Not only did the department resign en masse, but the employees took Accordia client files with them, and even unilaterally moved one client’s business to the new company. These facts made Judge Botsford see red. Her decision is sprinkled with references to breach of fiduciary duty, “arrogation” of Accordia’s business and unfairness in the defendants’ behavior. Judge Botsford gave the former employes 24 hours to return all of Accordia’s property to it, and enjoined them from providing services to their former clients at Accordia. In other words, she shut them down cold.
However, the former employees got a break a week later when, in a second hearing, Judge Burnes took some of the sting out of the ruling by permitting the former employees to service the clients, but ordered them to put all fees from these services into an escrow account. Not surprisingly, that growing pot of money, which couldn’t be touched by either side, led to a quick settlement.
This case has a least two lessons, both of which are as old as the law itself. First, this is a case study in what not to do when leaving an employer – don’t take the employer’s property; don’t solicit your co-employees while you’re still employed if you’re an officer or executive; don’t resign en mass; and don’t move clients to your new company without written prior permission. The second lesson is that even in a case with facts this extreme what may be abhorrent to one judge may leave the next judge cold. However, Judge Burnes may have had the wisdom of Solomon – by permitting the former employees to service their former customers at Accordia (who may have gone to a third party provider and been lost to both parties, had she maintained the injunction), but ordering fees to be paid into escrow, she created a financial incentive for both sides to settle which, after all, is every judge’s primary goal.
by Lee Gesmer | Nov 27, 2005 | Copyright
Copyright.
“Imagine the cultural impact of putting tens of millions of previously inaccessible [books] into one vast index, every word of which is search able by anyone, rich and poor, urban and rural, First World and Third, en tout langue — and all, of course, entirely for free.”
Eric Schmidt, Google CEO
“Mr Schmidt fails to mention that Google’s intent . . . is to make even more money. . . . Can it be so greedy that it seeks to bolster it profits by freely exploiting the rights of publishers and authors?”
Patricia Schroeder, President, American Association of Publishers
The legal controversy over Google’s plan to use a proprietary high speed scanning process to copy (to start with) the entire book collections in the libraries at Michigan, Stanford, Oxford, the New York Public Library and Harvard, whether or not a particular book is under copyright, and to require copyright owners to notify Google if they wish to “opt out” of this program, has reached fever pitch. Indeed, its easy to see why. In almost every case until now, copyright litigation has implicated the legal rights of one copyright owner and one alleged infringer. In the few cases to involve broader rights, such as the Napster/Grokster line of file sharing cases, it was easy for anyone with a moral compass to conclude that wholesale copying and distribution of copyrighted music (or the encouragement of same) was wrong, and was a violation of the copyright laws.
Google’s is not threatening to Napsterize the book publishing industry, but its chutzpah is breathtaking: “Google Book Search” (f/k/a Google Print) proposes to scan every book, in every language, in-print or out-of-print, in-copyright or out of copyright, and make it freely searchable. If the copyright owner gives permission, make available for Internet searches the full page on which a search result appears, and adjacent pages. If Google doesn’t have the copyright owner’s permission, present only a “snippet” from the book to searchers using Google.
Whew! You would be hard pressed to come up with anything to make the book publishing industry angrier (short of outright Napsterization), and Google’s proposal has had a predictable effect (although its not clear whether the Googlers in Mountain View anticipated that their altruistic undertaking would result in copyright infringement lawsuits brought by both the American Association of Publishers and the Author’s Guild).
Here’s my view on the debate over the legality of Google’s on-again/off-again project. For the views of numerous other academics and observers (and more than you could possibly ever want to know about this issue, unless you are a lawyer for one of the sides in these lawsuits and are trolling for arguments), read here and here.
First, just as was true for many people when the peer-to-peer music file sharing issues first arose, there’s a lot of emotion over this issue. We are all consumers of information, and what consumer wouldn’t want “one giant electronic card catalogue that makes all the world’s books discoverable with just a few keystrokes by anyone, anywhere, anytime”? (Google’s Schmidt again). However, unless the courts rewrite the law (as Lawrence Lessig suggests), the legality of Google Book Search is going to be decided under the law as it exists today, not based on what’s good for the planet or Utopian philosophies of copyright law.
Second, I suspect that what’s really keeping the publishers and authors up nights is this question: who’s going to have control over this compilation of data? Sure, it’s “Do No Evil”-Google today, but who might have the resources to do the same thing, even on a smaller scale, in the future? And remember, the future is a long time. One can imagine the great-to-the-nth descendants of today’s publishers cursing their literary ancestors for allowing Google to take the first step down the slippery slope that leads, who knows where?
And, if that’s not enough to keep a good capitalist publisher awake nights, how long will it before the entire estimated 20 million books can be copied onto some kind of high capacity optical/nanotech data storage (blah, blah, woof, woof) DVD? Fifty years? Less? What’s to stop some Google employee who only pretended to buy this “do no evil” stuff from stealing this collection someday, and selling a copy to a wealthy collector? What if Google goes bankrupt (stranger things have happened), and the compilation is sold to . . . . ? (complete the sentence yourself, Constant Reader – your imagination is almost certainly better than anything I could provide).
Bottom line: for the publishers, this is the Battle of the Somme and the Battle of Normandy rolled into one. For the publishers, lose here, and the consequences are too horrible to imagine. Or at least they so imagine.
Now, the dry legalities. There is no question that Google is making literal copies of copyrighted works. Not only do they not deny it, they boast about it. By doing so, they are violating the first of the six “exclusive rights” that belong to a copyright owner, the right to “reproduce the copyrighted work.” Accordingly, Google must fall back upon the copyright “fair use” doctrine, which states:
[T]he fair use of a copyrighted work, including such use by reproduction in copies . . . for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include-
(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work.
This statute may appear reasonably straightforward on its face, but of course in application it’s not. The courts have applied these factors in many different contexts, and reversals by appellate courts (including SCOTUS on many occasions) has proved that applying them in a given case is no simple matter.
It is almost inconceivable that any court would give Google summary judgment in this case (although the same is not true if the publishers/authors move for summary judgment). Assuming a trial, what kind of evidence might the jury expect to hear in the copyright “trial of the century” ? Well, on the first factor, start with evidence of Google’s expected profits from this project, including all internal memos and analyses by Google projecting its business plans for Google Book Search, as well as Google’s contracts with the universities, one of which has already been made public. I’d be surprised if the publishers can’t show that Google Book Search is motivated by commercial interests. On second factor, the jury will learn that many of the copyrighted books involved are works of fiction, which are granted far stronger protection than factual works.
On the third factor, consider that although Google claims it will display only “snippets,” it is copying the full text of the works, and the publishers/authors have no guarantee that Google will forever comply with its promise. What will the jury focus on, the amount and substantiality of the material copied, or the substantiality of the material displayed in a single search? Finally, the fourth factor, which focuses on the effect on the potential market or value. What effect might a compliation of this magnitude have on the market if Google lost control of all or even a part of it, a concern that is far from hypothetical, and that the publishers/authors are likely to press aggressively?
Bottom line: while as a consumer I would love to have access to a fully stocked Google Book Search, as a lawyer I would place my bets with the copyright owners. I do not agree with Jonathan Band’s argument that the Ninth Circuit’s decision in Kelly v. Ariba Soft is controlling, or even persuasive precedent in this case. Arriba held that an online database of photographs, displayed as thumbnails and linked to the original web site that hosted the photo, fell within the fair use exception. The most significant difference, of course, is that in that case the copyright owners had freely put their works on the Internet themselves, and Ariba made copies only for the purpose of providing a directory for them.
When the publishers and authors first filed suit my water cooler prediction was that Google would back down. Since then, Google has made aggressive statements to the press, asserting that it believed in its position, and that it would take this case through the courts. Frankly, I don’t believe it, and I expect to see some form of out-of-court resolution that can be held up as a victory for both sides, but which is far less than Google Book Search as it was originally conceived.
