IPXI: Creating an Efficient Patent License Marketplace

By Chase Means[*]

Intellectual property is considered by some to be the largest asset class in the world.  Intellectual property assets in the United States were recently estimated at $5.5 trillion.[1]  Despite this huge estimate of intellectual property assets, not all of these assets are being effectively utilized.  In fact, in the United States alone, it is estimated that “a staggering $1 trillion” is wasted in underutilized patent assets.[2]  In order to help exploit some of these unused resources, a new exchange called the Intellectual Property Exchange International, Inc. (IPXI) has been created.[3]  The basis of IPXI is to allow IP owners to list their IP on an open market where licenses can be bought and sold freely.

I. How IP Owners Have Exploited Their Assets in the Past

Prior to the creation of IPXI, there were several ways one could take advantage of IP assets through licensing.  The most traditional methods were bilateral licenses and compelling a license through court proceedings.  These options have certain challenges or weaknesses that IPXI attempts to remedy.[4]

A. Bilateral Negotiations for a License

Negotiating a license with a potential licensor is one of the most common ways IP licenses come about.  Generally this requires a company to identify a particular potential licensor and negotiate a license with it.  This can be difficult or troublesome for several reasons.  First, corporations often discover potential licensors by identifying potential infringers of their IP.  It is often not easy to negotiate a license with an entity that feels accused of appropriating IP.  Second, there are numerous steps involved for an entity that seeks to enter into a bilateral license.  When seeking a license, negotiating with every potential infringer takes significant time and effort.[5]  This increases transaction costs from a hypothetical market-based scenario where anyone could take licenses at a market-determined rate.[6]

B. Compelling Licenses Through Litigation

The next traditional way IP licenses occur is compelling a license through litigation.  There are several issues with this method.  Similar to the first method, the litigation route requires one to sue a single infringer at a time, greatly increasing the amount of effort to get an entire market to respect an IP asset.  Next, litigation has significant risk.  By suing a potential infringer, there is risk of not procuring a license.  Worse still, one may have to take a compulsory license based on any counterclaims from the other party.  Additionally, a court may find that a particular IP asset is invalid and the value of the asset may be lost completely.

Finally, the top reason to avoid seeking a license through litigation is the huge cost of litigation itself.  In 1992 U.S. dollars, the mean cost including trial for a patent suit with $1 to $25 million at stake is $2.10 million.[7]  In addition to the cost of litigation expenses, the opportunity and business costs of participating in litigation can cost parties even more.

II. How IPXI Aims to Help IP Owners Better Monetize Their IP

IPXI’s top goal is to create an open marketplace where buyers and sellers of patent licenses can easily come together to reduce transaction costs and other difficulties present in the current IP licensing market.  It hopes to create an exchange where licenses can be bought and sold in an open market that will remove barriers to trade.

A. ULR Contracts

In order to facilitate a marketplace for patent licenses, IPXI has created a unit license right contract, or ULR contract.[8]  A ULR contract generally consists of a non-exclusive license for a single patent, or several grouped or pooled patents.[9]  In this manner, IPXI intends to list on its exchange patents or groups of patents that most easily facilitate the use of an entire technology or invention, not just of a single patent.

The ULR contract is also different from typical licensing and royalty arrangements.  Traditionally, most royalty arrangements negotiated between two parties agree on a particular royalty rate that should be paid each time the technology is used.  In this arrangement, the licensee pays the licensor the predetermined rate every time the technology is used.  ULR contracts are designed differently.  A ULR contract gives the purchaser the right to use the patent for a future one-time use of the technology.[10]

For example, a telecommunications company may list on the exchange a patent for a particular cell phone technology.  If another company would like to utilize the technology in a cell phone, it must purchase ULR contracts through the exchange.  If the second company wants to make 200,000 cell phones using the technology, it must purchase 200,000 ULR contracts through the exchange.  Each time the company builds one of the cell phones with the patented technology, one of its 200,000 ULR contracts is exhausted.  In this arrangement, each ULR contract is preserved until actually used.  As a result, if the company fails to exhaust all 200,000 ULR contracts it had purchased, it can in turn sell unused ULR contracts on the exchange.  When you have multiple parties buying and selling ULR contracts, something resembling a marketplace for patent licenses can be conceived.  IPXI’s hope is that this will create a robust resale market for ULR contracts.

B. How a ULR Contract Makes It to Market

The first step IPXI has contemplated before listing IP in its exchange is a vetting and valuation process.  IPXI will first internally assess the quality and validity of the IP that is to be listed.[11]  This is an important step because IPXI is likely not interested in listing IP that will not have buyers or IP that could be easily invalidated.  This process will include some evaluation of the potential market for the IP.  It will also include a validity evaluation which can include prior art searches, review of the file history of a patent, and review of the patentability requirements in light of the particular patents at issue.

The next step, pending the IP makes it through the first round of evaluation, is approval by a selection committee.  The idea of the selection committee is to have market or industry leaders sit on this committee and independently assess the viability of the offering.[12]  If the selection committee thinks the IP is worthwhile, the vetting moves on to the next step in the process.

This next phase utilizes external parties to check the IP for validity and value.  This will include valuations and validity determinations.[13]  Also during this phase, the potential listing will be described and publicized for any members of the exchange to comment on.[14]  After a certain period of time to collect comments and perform the further validity and valuation checks, the selection committee will review all the assembled information for a final assessment.[15]

Once the IP is approved for an offering, the IP owner must pay IPXI a fee to fund marketing for the IP and for other activities to make the IP ready for an offering as ULR contracts.[16]  Through this process, IPXI will come up with an “Offering Memorandum” that details what IP will be offered, how many ULR contracts will be offered in the initial offering, and at what price the ULR contracts will be listed.

IPXI has developed a unique approach for auctioning off approved IP, which it hopes will best induce an accurate market price for ULR contracts.  By utilizing an initial offering and subsequent offerings, it hopes to stimulate demand for the ULR contracts and get a more accurate market price for the IP.  Although an asking price for the initial offering will be determined during the approval process, IPXI will conduct the initial offering as an auction.  In this auction there will essentially be a minimum number of ULR contracts that must be sold at a certain price (essentially a reserve price).  “By setting an asking price for ULR contracts and lowering that price until bidders are willing to accept a minimum number of offered ULR contracts, the Dutch auction method determines an initial offering price based on market input.”[17]

Whatever rate the first offering of ULR contracts is sold at, IPXI plans to list the next offerings of ULR contracts at a relatively higher rate.[18]  This is to help stimulate demand during the first offering.  Ideally, this higher price of subsequent offerings of ULR contracts will entice buyers to use the secondary market for procuring ULR contracts.  Additionally, IPXI hopes this will stimulate organizations other than technology producers to buy ULR contracts.  “IPXI contemplates that ULR contract futures and derivative products also will be developed.”[19]  IPXI hopes that this system brings about several advantages over the old methods for licensing.

C. Potential Advantages of IPXI

The transparency and efficiency with which IPXI operates will offer corporate management the opportunity to make better business decisions regarding their IP.  IPXI will offer license rights with standard terms at market-based prices.  As a result, licenses are available to parties that normally wouldn’t have the ability to negotiate a license.[20]  This increases demand for the technology, benefitting the licensor while keeping prices low for the licensee.[21]

IPXI also has the potential to greatly reduce transaction costs associated with previous methods of licensing, such as bilateral licenses.  It also reduces prejudices that may exist within a market between two market players that would impact license terms.  IPXI aims to offer identical terms to any potential licensee in a transparent way, which allows the market of licensees to be larger than it could be otherwise.

Another potential benefit for the licensee is that only a small number of ULR contracts need to be purchased, which may be helpful in covering the needs for “research and development, limited product releases, and the like.”[22]

Finally, IPXI could help remedy some of the larger issues plaguing the United States patent system.  These include patent trolls, the “patent thicket,” and rising costs of patent litigation.

D. Challenges Facing IPXI

The biggest challenge IPXI will face is finding buyers for the IP offerings.  Patents are inherently unstable assets that can be invalidated in court.  Further, parties often disagree about whether infringement actually exists or not.  This could make implementing an exchange for patent licenses very difficult.

The next challenge for IPXI will be finding high quality IP that will sustain a marketplace.  Patents expire and technology moves quickly, so taking advantage of IP rights often needs to be done quickly and efficiently.  It is unlikely that companies will be willing to list IP on the exchange that is part of their core business.  As a result, IPXI will be dealing with “leftover” IP to a certain extent.  IPXI must be able to sift out the worthless IP and exploit the valuable IP they come across.

A final difficulty IPXI will face is how to structure its procedure for dealing with infringers of the patents listed on its exchange.  One of IPXI’s goals is to reduce litigation and increase licensing.  But if litigation must be used as a last resort, IPXI must determine how the litigation should proceed and how it will be funded.  If parties are pooling patents these arrangements can get very complex, and IPXI would do well to develop a procedure for dealing with infringers.

III. Conclusion

IPXI is an exciting new entity that has the potential to significantly change the face of the IP marketplace.  Despite significant hurdles, IPXI is poised to help create a better true market for patents and increase transparency and predictability in such a volatile sector of the law.

[*] J.D. Candidate, University of Illinois College of Law, 2013.  B.S., Electrical Engineering, Olivet Nazarene University, 2008.  I am incredibly grateful to Jeff Charbeneau and Dr. Robert Sanders for their invaluable assistance in helping me develop this topic.  I would also like to thank the editing staff of the Journal of Law, Technology & Policy for all of their contributions to this article.

[1] David Silverman, Intellectual Property: The World’s Great Unknown Asset Class, Swiss Derivatives Rev., Autumn 2009, at 46, 46, available at http://www.sfoa.org/sfoa2010/include/Publications/doc/publi-pdf/SDR_41_Final.pdf.

[2] Kevin G. Rivette & David Kline, Discovering New Value in Intellectual Property, Harvard Bus. Rev., Jan.–Feb. 2000, at 7, available at http://www.pctcapital.com/pdfs/Harvard.pdf.

[3] The Exchange, Intellectual Prop. Exc. Int’l, http://www.ipxi.com/inside-ipxi/the-exchange.html (last visited Mar. 6, 2013).

[4] See Cameron Gray, A New Era in IP Licensing: The Unit License Right Program, Licensing J., Nov./Dec. 2008, at 1, available at http://www.oceantomo.com/system/files/New_Era_in_IP_Licensing_NovDec08_CGray_0.pdf (describing a new paradigm in IP licensing: the Unit License Right program, which is being developed by IPXI).

[5] Ian D. McClure & James E. Malackowski, The Next Big Thing in Monetizing IP: A Natural Progression to Exchange-Traded Units, Landslide, May/June 2011, at 3, available at http://www.ipprospective.com/wp-content/uploads/2011/05/mcclure-landslide_may_june20111.pdf.

[6] See Gray, supra note 4, at 5 (discussing how the ULR program can reduce transaction costs).

[7] James Bessen & Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk 132 (2008).  The cost for a similar suit through discovery is $1.20 million.  The mean cost including trial for a patent suit with more than $25 million at stake is $4.14 million.  The cost for a similar suit through discovery is $2.59 million.  Using a different metric, the mean legal costs for a patent owner in an infringement suit that goes to trial is $1.20 million, and $1.10 million if summary judgment is granted.  Comparatively, the mean legal cost for an alleged infringer in an infringement suit that goes to trial is $2.85 million, and $0.66 million if summary judgment is granted.  All numbers presented here are in 1992 U.S. dollars, so the current costs are likely much higher.  Id.

[8] McClure & Malackowski, supra note 5, at 3.

[9] Id.

[10] Sarah J. Duda & Benjamin Urban, The Patent Exchange: A New Approach to Licensing Intellectual Property, Snippets Volume 10, Issue 3, Page 11, available at http://www.mbhb.com/files/Publication/65686f54-b019-44ee-95ee-823981e6570f/Presentation/PublicationAttachment/145c9b5a-7903-4d5f-8244-89e9379e7b6c/Snippets%20Vol%2010%20Issue%203_081612-FINAL.pdf.

[11] Id.

[12] Id.

[13] Ian D. McClure, The Value of Efficiency and Transparency in IP Licensing: Let the Market Decide, Intell. Prop. Mag., Feb. 2011, at 53, 54, available at http://www.ipo.gov.uk/ipreview-c4e-sub-mcclure.pdf.

[14] Id.

[15] Duda & Urban, supra note 10.

[16] Id.

[17] McClure, supra note 13, at 54.

[18] See Intellectual Prop. Exch. Int’l, http://www.ipxi.com/inside-ipxi/faq.html  (last visited Mar. 10, 2013) (discussing how “[t]ranche pricing creates early adoption incentives for ULR purchasers”).

[19] McClure & Malackowski, supra note 5, at 4.

[20] Id.

[21] McClure, supra note 13, at 54.

[22] Duda & Urban, supra note 10, at 12.


Better to be Good than Lucky: Using Fantasy Sports Strategy to Defend the Legal Status of America’s Newest Pastime

By Erica Buerger

I. Introduction

When Indianapolis Colts’ future Hall of Fame quarterback Peyton Manning announced that he would not start the 2011 NFL season, his streak of 227 consecutive starts ended and fantasy team owners panicked.  In 2011, there were approximately $650 million of fantasy football prizes on the line.[1]  It is estimated that Manning’s absence shifted $65 million away from people who would have won their fantasy football leagues had he not been injured.

There are currently over 32 million fantasy sports players in the United States and Canada, and the industry generates more than $3 billion in revenue.[2]  Fantasy sports have become as much of an American pastime as the games upon which they are based.  But this popularity may be disguising the fact that fantasy sports are just another form of illegal gambling.  In most states, the legality of a betting game depends upon the amount of skill versus chance required to play the game.  In general, the more skill that is involved, the more likely the game is legal.

The problem is that as fantasy sports evolve to meet the needs of an ever-expanding fan base, many leagues have added features that allow less-knowledgeable players to participate.  By lowering the amount of skill needed to play, the outcome is more chance-based.  If this trend continues and current gambling law prevails, fantasy sports could become so dependent on chance that they will become illegal.

II. Gambling Law

A. Federal Law

The purpose of federal gambling law is to “aid the states in controlling gambling.”[3]  Specifically, to assist the states in the “enforcement of their [gambling] laws.”[4]  Federal gambling laws do not attempt to create uniformity between the states.  Rather, they exist simply to supplement each state’s own laws.

B. State Law

Gambling regulation is mostly a function of state law and can vary considerably.  The dictionary defines gambling as “play[ing] a game for money or property” or “bet[ting] on an uncertain outcome.”[5]  However, most states allow activities that seem to fall into this category, such as state lotteries.  In fact, in most states, an activity is legal unless a plaintiff makes an affirmative showing that a particular activity involves three elements: consideration, reward, and chance.[6]

1. Consideration

Consideration is often loosely defined as something given in exchange for something else.  In the context of gambling, most courts construe this term narrowly holding that consideration exists only when a “participant provided money or a valuable item of property in exchange for the chance of greater winnings.”[7]  However, some courts adopt a broader definition finding that consideration exists when any legal detriment is given in exchange for the chance to win a prize.[8]

2. Reward

In gambling, the reward is the prize that one receives after winning a game of chance.  To meet this requirement, courts have held only that the reward must be tangible.[9]

3. Chance

Chance is the most controversial element.  To constitute a game of chance, courts have held that the outcome of the game must depend upon factors that are out of a player’s control, as opposed to a player’s “judgment, practice, skill, or adroitness.”[10]  To make this determination, courts have applied three tests: (1) the “dominant factor test,” (2) the “any chance test,” and (3) the “gambler’s instinct test.”

Most states use the dominant factor test.[11]  In Johnson v. Collins Entertainment, the South Carolina court explained that a game is chance-based when “the dominant factor in a participant’s success . . . is beyond his control . . . even though the participant exercises some degree of skill.”[12]  The threshold of the dominant fact test is the point at which either skill or chance affects the outcome by more than 50%.

Some states use the any chance test.  In these states, an activity is a game of chance if it incorporates any element of chance, regardless of whether the game also incorporates skill.[13]  Because almost every game involves some chance, most games will not survive scrutiny in these states.

Finally, a few states use the gambler’s instinct test.  This test defines a game of chance as one that appeals to the “gambling spirit,” without regard to whether skill or chance dictates the outcome.[14]  Because of the highly subjective nature of this test, a court’s decision can vary considerably.

III. The Legality of Fantasy Sports Under the Majority View

Most states adopt a narrow definition of consideration and use the dominant factor test.  In these states, the structure and features of a particular fantasy game is of utmost importance.  Legal fantasy games generally fall into three categories: (1) leagues that do not charge an entry fee; (2) leagues that do not award prizes; and (3) leagues that are predominately skill-based.  The first two categories are relatively straightforward.  Leagues that are free are legal because there is no consideration.  Alternatively, leagues that do not award prizes are legal because there is no reward.

The third category is more complex.  In this category, fantasy games are legal if the outcome is more than 50% based on skill.  Fantasy leagues are generally considered skill-based if they allocate players through a traditional auction and span at least one entire season.[15]  This is because fantasy players have the opportunity to offset chance occurrences, such as player injuries or adverse weather conditions, with efficient team management, lineup changes, and trade negotiation.  It is this category of fantasy games that is most at risk as the popularity of fantasy sports increases.

IV. The Future of Fantasy Sports: How New Features Affect the Dominant Factor Test

A. Auto-Draft

Auto-draft is a feature used during a fantasy draft that ensures a fantasy team owner automatically drafts the highest-rated player available.  Automatic drafting algorithms are designed to create competitive leagues.  Beginners typically use auto-draft because they lack enough knowledge to fill their teams.  Some argue that auto-draft is unfair because there is no guarantee that the owner using auto-draft would have actually selected the highest ranked player.[16]

B. Point Projections

Point projections are similar to a cheat sheet in that they predict how many points a player will earn during a game.  To set a lineup, an owner starts the players on his team with the highest number of projected points.  Point projections place a passive team owner in the same position as an owner who has done extensive research on his players’ current matchups, injury reports, or other conditions affecting a player’s potential performance.

C. Short Season Leagues

Fantasy games that stretch over longer time spans allow an owner’s managerial skills regarding drafting a team, setting lineups, and making trades to counteract the effects of chance.  Fantasy leagues that span multiple seasons allow owners to employ strategies that may take several years.  These leagues require a considerable level of commitment, knowledge, and skill.  Conversely, some leagueslast only a day or a week.  In these games, the outcome is more chance-based because it is closely tied to a single, real-world event.

D. The Effect

The intent of auto-draft, point projections, and short season games is to increase fantasy sports participation.  These features accomplish this task by reducing the need to spend time analyzing statistics and setting lineups.  But because the legality of a fantasy sports game is based on the level of skill required to play the game, these features, while increasing participation, are simultaneously pushing a multi-billion dollar industry to the brink of extinction.  To avoid this outcome, current gambling laws should not be used to regulate fantasy sports.

V. How Fantasy Sports Differ From Other Gambling Games

Fantasy sports cannot be regulated effectively under current gambling law because they are different from other casino-type games.  Fantasy sports are different because strategy can be used to overcome the chance elements involved in the game.  To understand the impact of strategy in fantasy sports games, it is important to understand the differences between strategy and skill.

Skill is “the ability to use one’s knowledge effectively.”[17]  Skill can be obtained through study, repetition, drill or practice. Often, exercising skill becomes an automatic response that occurs independently of any cognitive process.  Strategy, on the other hand, is a deliberate, planned, and conscious activity.   Strategy involves the application of skill but it also implies an understanding of the interaction between underlying concepts.

Managing a fantasy sports team takes skill and strategy.  Drafting players, for example, is partly skilled-based because players’ statistics can be learned through study.  Drafting players is also strategy-based because an owner must prioritize his selections by anticipating other owners’ choices.  Trade negotiation, however, is primarily strategy-based.  Skill-based trades would involve analyzing statistics to make mutually beneficial trades.  But most trades are not mutually beneficial.  Instead, trades typically involve psychological warfare, feeding off other owner’s impulsive natures, or exploiting other teams’ weaknesses.  In fact, many fantasy experts insist that trade negotiation is an art.

By utilizing strategy, owners can prevent chance from determining the outcome of the game.  All fantasy sports involve chance due to adverse weather conditions and possible player injuries.  However, a skillful owner circumvents these elements by drafting backup players, checking game day weather and injury reports, and adjusting his lineup as necessary.  Conversely, a poker player cannot eliminate the chance that he will be dealt an unfavorable hand, a craps player cannot anticipate the roll of the dice, and a roulette player cannot predict the number on which the ball will fall.  Therefore, the ability to use strategy to “beat chance” distinguishes fantasy sports games from other illegal gambling.

VI. Resolving Fantasy Sports’ Differences Under the Law

A. Ambiguity

Not only are fantasy sports different from other gambling activities, they are also different from each other.  Because of this, attempts to regulate fantasy sports under existing gambling laws have produced ambiguous guidelines.  For example, in Humphrey v. Viacom, a New Jersey court held that the fantasy sports game at issue was legal because it would be “patently absurd” to conclude that the combination of an entry fee and a prize constituted gambling.[18]  The court reasoned that such a holding would mean that spelling bees, beauty contests, and golf tournaments would also be considered gambling.  Although this holding appears to give fantasy sports a “clean bill of health,” it has been severely limited to its facts.[19]  Therefore, fantasy sports games continue to be arbitrarily analyzed depending on the rules of each particular game.  A better approach is for states to pass specific fantasy sports legislation.

B. Fantasy Sports Specific Law

Montana is currently the only state with specific statutory authorization for fantasy sports.[20]  While the Montana Code is a good starting point, new legislation should expand the law by first defining a fantasy sports game and then requiring the game to meet a two-part test.  First, like in Montana’s Code, a fantasy sports game could be defined as an activity in which “a limited number of persons . . . pay an entry fee for membership in the league” and create “a fictitious team composed of athletes from a given professional sport.”  If the game meets the basic definition, its legal status could be determined based on (1) whether the game involves strategy; and (2) whether strategic decisions lessen the effect of chance on the game.

Part one of the test would require a court to consider whether the game involves strategy.  This inquiry looks only at whether participants’ strategic decisions ultimately affect the outcome of the game.  Part two asks whether a participant can use strategy to effectively “beat chance.”  This requires a court to identify chance elements, such as player injuries or adverse weather conditions, and ask whether a strategic player could reduce the effect of those elements.

When the two-part test is met, the game should be deemed legal.  Alternatively, if chance elements, such as those dependent on random number generators, dice throws, or card shuffles, cannot be controlled, the game should be illegal.  The new law recognizes fantasy sports games as a game of strategy.  By distinguishing them in this way, the law protects the legal status of true fantasy sports games.

VI. Conclusion

Fantasy sports emerged as an American pastime as participation skyrocketed over recent years.  New features, designed to further increase participation, arguably lower the amount of skill involved in the game thereby threatening the legality of fantasy sports. To fix this problem, state legislatures must pass fantasy sports specific laws.  By doing so, states can protect the multi-billion dollar industry.

[1] Darren Rovell, Peyton Manning Injury Could Shift $65 Million in Fantasy Winnings, CNBC (Sept. 6, 2011, 6:57 PM), http://www.cnbc.com/id/44414737/Peyton_Manning_Injury_Could_Shift_65_Million_in_Fantasy_Winnings.

[2] Michael Stein, The Verdict: Yahoo Is Endangering Fantasy Sports, THT Fantasy (Feb. 1, 2011, 5:11 AM), http://www.hardballtimes.com/main/fantasy/article/the-verdict-yahoo-is-endangering-fantasy-sports/.

[3] New York v. World Interactive Gaming Corp., 714 N.Y.S.2d 844, 852 (App. Div. 1999).

[4]Id. at 851 (emphasis added).

[5] Gamble Definition, Merriam-Webster, http://www.merriam-webster.com/dictionary/gamble (last visited Feb. 6, 2013).

[6] E.g., New York v. Hunt, 616 N.Y.S.2d 168, 169 (Crim. Ct. 1994); Valentin v. el Diario la Prensa, 427 N.Y.S.2d 185, 186 (Civ. Ct. 1980); McKee v. Foster, 347 P.2d 585, 590 (Or. 1959); Geis v. Cont’l Oil Co., 511 P.2d 725, 727 (Utah 1973).

[7] Marc Edelman, A Short Treatise on Fantasy Sports and the Law: How America Regulates its New National Pastime, 3 Harv. J. Sports & Ent. L. 1, 27 (2012).

[8] E.g., Affiliated Enter. v. Waller, 5 A.2d 257, 262 (Del. Super. Ct. 1939); State ex rel. Schillberg v. Safeway Stores, Inc., 450 P.2d 949, 955 (Wash. 1969).

[9] Arkansas v. 26 Gaming Machs., 145 S.W.3d 368, 374 (Ark. 2004).

[10] Edelman, supra note 9, at 28

[11] Anthony N. Cabot et al., Alex Rodriguez, a Monkey, and the Game of Scrabble: The Hazard of Using Illogic to Define the Legality of Games of Mixed Skill and Chance, 57 Drake L. Rev. 383, 390 (2009).

[12] Johnson v. Collins Entm’t Co., Inc., 508 S.E.2d 575, 584 (S.C. 1998).

[13] Texas v. Gambling Device, 859 S.W.2d 519, 523 (Tex. App. 1993).

[14] Milwaukee v. Burns, 274 N.W. 273, 276 (Wis. 1937).

[15] See Joker Club L.L.C. v. Hardin, 643 S.E.2d 626, 629 (N.C. Ct. App. 2007); (“[S]kill will prevail over luck over a long period of time”).

[16] Derek Ambrosino, Is Autodraft a Necessary Evil?, THT Fantasy (Jan. 4, 2012, 5:44 AM), http://www.hardballtimes.com/main/fantasy/article/is-autodraft-a-necessary-evil/.

[17] Skill Definition, Merriam-Webster, http://www.merriam-webster.com/dictionary/skill (last visited Feb. 6, 2013).

[18] See generally Humphrey v. Viacom, Inc., No. 06-2768 (DMC), 2007 WL 1797648, at *7 (D.N.J. June 20, 2007)

[19] Eric Sinrod, Fantasy Sports Leagues Participation is not Illegal Gambling, Judge Rules, Find L. (July 3, 2007), http://articles.technology.findlaw.com/2007/Jul/03/10896.html.

[20] Mont. Code Ann. § 23-5-802 (2011).

The Changing Landscape of Willful Infringement: The Effect of Willfulness as a Question of Law

By Shawna S. Boothe* and John D. Kendzior**

I. Introduction

Under the United States Patent Act, “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.”[1]  A finding of willful patent infringement allows the court, at its discretion, to “increase the damages up to three times the amount found or assessed.”[2]  While a finding of willfulness is a sufficient basis for awarding enhanced damages, it does not compel such an award.[3]  Additionally, the court may award reasonable attorney fees to the prevailing party for willful infringement.[4]

Willful infringement significantly affects the technology that patents protect.  In the recent high-profile Apple v. Samsung trial, the patents at issue concerned smartphones and tablets.  The San Jose, California nine-person jury found that Samsung infringed six of seven Apple patents.[4]  The jury awarded Apple $1,049,393,540 in damages—one of the largest awards in an intellectual property case to date.[5]  Moreover, the jury found that Samsung willfully infringed on five of six Apple patents.  Thus, presiding Judge Koh can grant Apple’s request to treble the $1.05 billion jury award and to award attorney fees under 35 U.S.C. §§ 284, 285.

II. Background

The Court of Appeals for the Federal Circuit articulated a standard for evaluating willful infringement in Underwater Devices, Inc. v. Morrison-Knudsen Co.  “Where . . . a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing.”[6]  The affirmative duty of a potential infringer included, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.  Ensuing case law shaped the willfulness landscape and evaluates willfulness under the totality of the circumstances.

III. Seagate’s Willfulness Standard

Twenty-four years later, the Federal Circuit overruled Underwater Devices and established a two-prong test for proving willful infringement in In re Seagate Technology, LCC.  First, “a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.”[7]  This first prong is a threshold objective standard in which the state of mind of the accused infringer is not relevant.  If the threshold objective prong is satisfied, the patentee must also demonstrate the second prong: “that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer.”[8] This second prong is a subjective inquiry.  The Court left the development and application of Seagate’s willfulness standard to future cases.  Subsequent case law established that the objective prong tends not to be met where an accused infringer relies on a reasonable defense to a charge of infringement.[9]  Examples of defenses that negate the objective prong of willfulness include invalidity and noninfringement assertions.[10]

Seagate significantly altered two aspects of the willfulness landscape.  First, it elevated the previously lower threshold for establishing willfulness.  Seagate moved away from Underwater Device’s affirmative duty of care—which was akin to negligence—and adopted a more rigorous objective recklessness standard.  The Federal Circuit reasoned that a higher standard of recklessness permitting enhanced damages comports with Supreme Court precedent requiring a showing of recklessness before civil punitive damages are allowed.[11]  Seagate’s heightened standard has made it more difficult for a prevailing party to recover enhanced damages.[12]>  Second, resulting from Seagate’s abandonment of an affirmative duty of care, potential infringers are no longer required to obtain opinion of counsel in order to avoid liability for willful infringement.

IV. Willfulness As a Question of Law

Under Seagate precedent, the willfulness two-pronged inquiry has long been treated as a question of fact.[13]  On June 14, 2012, the Federal Circuit once again transformed the landscape of willfulness by announcing, in Bard Peripheral Vascular, Inc. v. Gore & Associates, Inc., that the threshold prong is henceforth a question of law.  The Bard Court held, “the objective determination of recklessness, even though predicated on underlying mixed questions of law and fact, is best decided by the judge as a question of law subject to de novo review.”[14]  In Bard, the Federal Circuit delineated a rule for two distinct circumstances.  When a defense or noninfringement theory asserted by an accused infringer is purely legal, the objective recklessness of such a theory is a purely legal question to be determined by the judge.  Such purely legal defenses include claim construction and reexamination.  Alternatively, when the objective prong turns on fact questions or on legal questions dependent on the underlying facts, the judge remains the final arbiter of whether the defense was reasonable, even when the underlying fact question is sent to a jury.  Such underlying factual defenses include anticipation or obviousness.  Under the second circumstance, if the defense is a question of fact or a mixed question of law and fact, the court may allow the jury to determine the underlying facts relevant to the defense first, and then it would determine the reasonableness of the defense as a matter of law.

The Bard Court reasoned that the judge is in the best position to determine whether an accused infringer’s defenses are reasonable.[15]  Furthermore, judges have the discretion to award enhanced damages and attorneys fees for willful infringement; therefore, it is logical for judges also to decide the objective prong of willfulness.  To support its holding, the Bard Court also relied upon the Supreme Court’s conclusion that objective baselessness should be a question of law through analogizing objective baselessness for sham litigation to a finding of lack of probable cause to institute an unsuccessful civil law suit—which subjects mixed questions of fact and law to a de novo review.  Bard extended the Supreme Court’s analogy to encompass objective recklessness because Seagate’s objective recklessness and objective baselessness are identical under Federal Circuit precedent.

V. Bards Effect on the Willfulness Landscape

This most recent change to willfulness as a question of law substantially affects the overall willfulness landscape in two respects.  First, a question of law is determined by the court, either on a pretrial motion for partial summary judgment or on a motion for judgment as a matter of law at the close of the evidence.[16]  Prior to Bard, few of these motions were granted because willfulness was ultimately a question of fact to be decided by the jury after trial.  Now that willfulness is a question of law, an avenue is created for disposing of willfulness allegations by judicial decision prior to trial.   Therefore, courts will likely experience increased filings of such motions due to this new avenue, and movants likely will experience greater success—not necessarily on the merits of the motion but on the sheer ability of courts to grant the motions without needing to submit the issue to the jury.

Secondly, the decision in Bard creates a disjointed pairing of a question of law with a standard for proving facts.  Seagate requires that the threshold prong of objective recklessness be proven by clear and convincing evidence.  Typically, clear and convincing evidence is the standard for proving questions of fact, which was consistent when willfulness was a question of fact.  In holding that the threshold prong of objective recklessness is a question of law, the Bard court failed to address or change the standard of proof required for this prong.  Thus, Seagate and Bard, understood together, create an issue of law that still must be proven by the standard for an issue of fact.

In an earlier concurring opinion, Justice Breyer addressed the exact problem we now face with Seagate and Bard.[17] Justice Breyer, in his concurring opinion in Microsoft Corp. v. i4i Limited Partnership, firmly stated that the clear and convincing evidentiary standard should only apply to questions of fact and not to questions of law.  Additionally, Justice Breyer instructed courts to prevent “the ‘clear and convincing’ standard from roaming outside its fact-related reservations . . . .”[18]  One does not have to make a significant inferential leap to conclude that Justice Breyer would admonish the Federal Circuit for establishing willfulness as a question of law that applies the clear and convincing evidence standard of proof.  Although both remain “good” law, there is undeniable tension between Seagate and Bard that will likely be addressed in subsequent case law.

VI.       Conclusion

The willfulness landscape has undergone two significant changes within the last five years.  First, the willfulness standard in Underwater Devices was replaced by the standard set forth in Seagate, which heightens the burden of proving willfulness by requiring objective recklessness as opposed to negligence.  Additionally, Seagate abandoned Underwater Devices’ duty of care and duty to seek opinion of counsel.  However, no change could be more significant than the change that occurred in Bard, which held that willfulness is as a question of law rather than a question of fact.  As a question of law, judges may determine the threshold prong of willfulness without submitting the issue to the jury.  The judge could dispose of a willfulness allegation by granting a motion for summary judgment or judgment as a matter of law.  Thus, the authors posit that the courts will see an increase in such motions, and movants will experience greater success solely because of the new avenue to dispose of willfulness allegations.  Another effect of the change in Bard is the tension created by joining a question of law with the burden of proving a question of fact—clear and convincing evidence.  The authors posit that Justice Breyer would strongly disapprove of such joining based on his special concurrence in i4i, and the tension will be resolved in subsequent case law.

* J.D. Candidate, University of Illinois College of Law, expected 2013. B.A., Mathematics and Philosophy, University of Saint Thomas, 2010.  Firstly, I would like to thank James Hanft at Schiff Hardin LLP for his insights and guidance during the 2012 summer associate program, which sparked my interest in this topic.  Secondly, I am grateful to the editors of the Journal of Law, Technology, and Policy for their support while writing this piece.  Lastly and most importantly, I would like to thank my family for their continued support throughout the years.

** J.D. Candidate, University of Illinois College of Law, expected 2013. B.S., Finance and Information Technology, Marquette University, 2010.  Firstly, I would like to thank my co-author for introducing me to this topic and being a pleasure to work with.  I would also like to thank my fellow Journal of Law, Technology, and Policy editors and members for their insights and advice throughout the writing and publication process.  Lastly, I would like to thank my family for their encouragement of my legal education.

[1] 35 U.S.C. § 271 (2010).

[2] 35 U.S.C. § 284 (2011); e.g., In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007) (“Absent a statutory guide, we have held that an award of enhanced damages requires a showing of willful infringement.”).

[3] State Indus., Inc. v. Mor-Flo Indus., Inc., 948 F.2d 1573, 1576 (1991) (citing Modine Mfg. Co. v. Allen Grp., Inc., 917 F.2d 538, 542–43 (Fed. Cir. 1990)).

[4] 35 U.S.C. § 285 (1952).

[5] Apple, Inc. v. Samsung Elecs. Co., No. 11-cv-01846-LHK at 2–7 (N.D. Cal. Aug. 24, 2012) (amended verdict form), available at http://cdn.slashgear.com/wp-content/uploads/2012/08/ApplevSamsung-1931.pdf; Jessica E. Vascellaro, Apple Wins Big in Patent Case, Wall St. J. (Aug. 25, 2012, 1:41 PM), http://online.wsj.com/article/SB10000872396390444358404577609810658082898.html.

 [6] Apple, No. 11-cv-01846-LHK at 15.

[7] Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380, 1389–90 (Fed. Cir. 1983).

[8] > In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007).

[9] Id.

[10] Spine Solutions, Inc. v. Medtronic Sofamor Danek USA, Inc., 620 F.3d 1305, 1319 (Fed. Cir. 2010).

[11] Advanced Fiber Techs. (AFT) Trust v. J & L Fiber Servs., Inc., 674 F.3d 1365, 1377 (Fed. Cir. 2012).

[12]See Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 71 (2007) (noting that a reckless disregard of a requirement of the Fair Credit Reporting Act would qualify as a willful violation that makes a person civilly liable to the consumer).

[13] Siraj Husain, Note, The Willfulness Pendulum Swings Back: How Seagate Helps Level the Playing Field, 28 Loy. L.A. Ent. L. Rev. 239, 239–240 (2008).

[14] Cohesive Techs., Inc. v. Waters Corp., 543 F.3d 1351, 1374 (Fed. Cir. 2008); Stryker Corp. v. Intermedics Orthopedics, Inc., 96 F.3d 1409, 1413 (Fed. Cir. 1996).

[15] Bard Peripheral Vascular, Inc. v. Gore & Assocs., Inc., 682 F.3d 1003, 1007 (Fed. Cir. 2012).

[16] > Id. at 1006.

[17] DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 567 F.3d 1314, 1324 (Fed. Cir. 2009) (quoting Warner Jenkinson Co., Inc. v. Hilton Davis Chem. Co., 520 U.S. 17, 39 n.8 (1997)).

[18] Microsoft Corp. v. i4i Ltd. P’ship, 131 S.Ct. 2238, 2253 (2011) (Breyer, J., concurring).

[19] Id.