But what is the appropriate remedy if the court holds that a permanent injunction is not warranted, but that infringement has occurred and may occur in the future? 

One response is simply to assess damages as to past infringement, leaving any future use of the patent for a voluntary agreement of the parties (a license) or a subsequent infringement suit for the subsequent infringements. That is clearly the preferable option, although it does raise limited issues of judicial economy.

A second alternative is to permit subsequent use by the defendant subject to the payment of a reasonable royalty imposed by the court. This is a form of compulsory licensing that rewards the wrongdoer, unless the remedy has been requested by the patent owner. Nevertheless, a panel of the Federal Circuit indicated that such a remedy may be appropriate. One wonders why.

In Paice LLC v. Toyota Motor Corp., 2007 WL 3024994 (Fed. Cir. 2007), after a finding of infringement and damages of $25 per use of infringing drive trains for hybrid motors, the District Court denied the patent holder’s request for a permanent injunction, and instead sua sponte issued an order permitting Toyota to continue to produce the infringing items subject to payment of a $25 per motor royalty. The refusal to grant an injunction was not appealed, but the Federal Circuit noted that the court’s decision was based on at least the following factors:

• In context, the absence of an injunction would not adversely affect the patent holder’s ability to license the patent to others. 
• The patent holder did not actually manufacture any goods, and there was no threat that it would lose name recognition or market share without an injunction.
• Monetary damages were adequate as suggested by the fact that the patent owner had offered to license Toyota during the post-trial period.
• The balance of hardships favored Toyota since issuing an injunction would disrupt not only its business, but that of suppliers, dealers and others.

This gives you some idea of the type of issues likely to adversely influence a patent owner’s ability to obtain injunctive relief. They depict a plaintiff company whose only interest in control of the patent is to obtain licenses or judgments of infringement, rather than to build or protect an existing or potential market.

Should a denial of permanent injunctive relief automatically require judicially forced licensing? The answer is no.

The Federal Circuit suggested that courts have long had the ability to order ongoing royalties as a remedy in appropriate cases, but carefully said that the District Court may do so, not that this result is ever required. Even then, the cases it cited – an antitrust remedies case and an infringement case in which the ongoing royalty was not contested – do not support the conclusion that broad judicial power exists to make an award that effectively takes away the winning party’s property without being requested by the prevailing party. Indeed, the Patent Act talks about granting injunctions to prevent violation of the property rights, while this remedy permits use of the invention.

But even if a court has power to make such an award, what is an appropriate case? The one “appropriate” case the Federal Circuit mentioned was where, after the judgment of infringement, the parties attempt but fail to agree on a license for future use. The court commented that that this may be a case for granting ongoing royalties as a remedy, not that this was required. The court commented:

But, awarding an ongoing royalty where “necessary” to effectuate a remedy … does not justify … such relief … whenever a permanent injunction is not imposed. In most cases, where … a permanent injunction is not warranted, the district court may wish to allow the parties to negotiate a license amongst themselves … before imposing an ongoing royalty. Should the parties fail to come to an agreement, the district court could step in to assess a reasonable royalty in light of the ongoing infringement.

But why is a failed bargain as to future conduct grounds for the court to step in and impose a bargain of its own forcing the injured party to allow continued use of its property, even though the owner did not request that remedy? The court did not explain this strange reversal or comment on whether a rights owner who does not want the court to control its future income would be better off not negotiating an attempted license at all.

In Paice, the court remanded because the lower court’s order contained nothing to show why the selected royalty was appropriate. But there is a more fundamental issue. Judge Radar, writing a concurrence, directly approached that issue. To him, giving the parties an opportunity to negotiate a license should be a precondition to the court having any power to impose an ongoing royalty. He commented:

[This] court should require the district court to remand this issue to the parties, or to obtain the permission of both parties before setting the ongoing royalty rate itself. District courts have considerable discretion in crafting equitable remedies, and in a limited number of cases, as here, imposition of an ongoing royalty may be appropriate. Nonetheless, calling a compulsory license an “ongoing royalty” does not make it any less a compulsory license.

The preconditions should be both an opportunity to negotiate a license and, failing a bargain, a request by both parties for the court to impose a royalty as part of the remedy for infringement. A patent creates a right to exclude and, where the patent owner prefers to exercise that right, it should not be forced into a licensing arrangement resulting from a case in which it prevailed on the infringement claim. There may be some cases in which vital public policy interests justify this result, but those cannot be grounded simply in the fact that the court denied a permanent injunction or the parties have not agreed to license terms. A remedy should not penalize the person to whom the remedy is awarded.

            While much has been written about standards-setting organizations (SSO), most of the law literature concentrates on antitrust law, or on the relationship between SSO rules and intellectual property rights. The issues there, however, are merely symptomatic of a broader issue. SSO standards are market-shaping forces. Because of this, competing firms must inevitably engage in the SSO process seeking a result that benefits them or, at least, a result that does not harm their competitive position. When this occurs, the broader question is what role an SSO should play in a market that has not yet selected a winner.

            The appropriate role should be facilitative of competition, rather than to resolve technological competition before the market chooses. Where two (or more) technologies or products have viable market presence, the proper place to resolve that competition lies in the marketplace, not on the technologist’s computer screen or the bureaucrat’s regulations. 

This calls for deference to the market with respect to standards not associated with safety, health or other over-riding public policy issues. Standards imposed by an SSO in a competitive market should occur only based on true consensus, including among all competing firms, or one’s framed in a manner that does not alter the competitive balance. This can be accomplished in numerous ways, including by recognizing that competing approaches exist and adopting only standards for individual competitors or by adopting standards that reflect both (all) competing systems, leaving the separate standards compete in the same fashion as the basic products and technologies compete.

            The closer a standard moves toward resolving an existing, competitive issue in a mandatory or quasi-mandatory way, the more predictable it is that the standards-setting will in fact be driven by competition issues. Resolving such issues is not an appropriate role for standards setting organizations.

            The intrusive impact of standards into competitive contexts is directly related to the type of standard involved. As the standard moves more toward a permissive framework, its competitive impact lessens and the likelihood of competitive influences diminishes. 

          The SSO process potentially displaces the market in choosing preferred technology. In many circumstances, however, rather than being neutral, adopting a standard may advantage one competitor over another without allowing the market to judge the competing approaches. Standards-setting has become (perhaps always has been) a competition environment that impacts commercial markets, but that functions outside their influence.

            Why is it wrong, one might ask, to have technocrats deciding for a market based on technical criteria, rather than the market deciding. The answer in part lies in faith in the market and in innovation that is not prematurely channeled into a particular path by a “standard.” The simple fact is that the market is the best guide to consumer value. A standards-based choice risks choosing the wrong one and foreclosing alternatives. Once implemented, the switching costs to an alternative are high and perhaps insurmountable.

But the question is not simply why it is wrong to have technocrats decide. A pure technological decision in ongoing market competition is impossible to achieve. Any standards-setting will draw competition-based reactions. And so it should. SSO procedures should attempt to exclude competitive themes in a “neutral” SSO process, but that is likely to be impossible to enforce when significant competitive issues are involved.

The true question is – how should SSOs deal with the fact that for important standards there will competitive advocacy based on obtaining market advantage? The SSO setting is not a market, but a company whose competitive position may be affected by a standard will act to protect that position or enhance it.

SSOs should take the following steps:

·         First, SSOs must recognize the inevitability of competition issues whenever a proposed standard would resolve current competition in the market place.

·         Second, consensus standards-setting should in fact reflect a true consensus and, particularly, agreement among all major competing firms in the affected market before a mandatory or quasi-mandatory standard is promulgated. This gives veto power to all competitors and runs counter to the goal of those who seek expansive scope for standards drafted on the basis of pure technology, but it recognizes the inevitable competition impact that such mandatory standards may have.

·         Third, where standards are proposed in environments where two or more approaches are in active competition, any standard adopted should be permissive by focusing on only characteristics shared among the competitors, are unlikely to adversely affect one or another of the competitors, or are formulated solely for one of the approaches and not mandated for the others.

We wake up one morning and discover that a question we have been asking for the last decade or two may now be the wrong one. The question was: how can we use law to enable businesses to use e-commerce? The question now seems to be: how can we shape law to support e-commerce without over-regulating it?

Here’s how things have changed over the years about the idea of “electronic commercial law.” Courts and commercial parties have recognized that electronic commercial transactions and licensing are now a central part of commerce, but legislatures and agencies seem to want a "regulatory world” for this form commerce. We need to fight that tendency.

Electronic commerce refers to the use of digital systems to create or perform transactions and enforce rights in digital information.  The term covers a wide variety of commercial practices that were once new in ordinary commerce; today, the have become staple elements of it.

What does that mean for law? 

For contract law, the meaning should be clear.  Contract law is a practical discipline that supports the marketplace and should respond supportively to changes in commercial methods and subject matter. We have a different transactional framework (licensing), a new subject matter (digital information), and a new way of doing business (electronic interactions). Contract law needs to continue to adjust to support this new environment.

The relationships have changed, not just the mechanics. Ethan Katsh once commented: “[A] new system of communication … leads to the creation of new relationships and, most importantly, changes our attitudes, expectations, and ways of thinking about law.” M. Ethan Katsh, The Electronic Media and the Transformation of Law 22 (1989). He was right. New relationships. New attitudes. New expectations. These are the grist for the mill of contract law and practice. The new technologies have fundamentally changed the character of relationships. These new relationships need to be governed by new supportive contract law themes, not by themes developed from an old, now gone era.

Where does all that leave contract law?

Contract law creates (or denies) legal obligations associated with voluntary interactions. When the interactions and their subject matter change, contract law serves the same function but its tools and outcomes must differ from the past.

In our world, significant change seldom flows smoothly. While many embrace change, others resist it. Some of the resistance is due to what Lewellyn explained years ago: “You wake up then to the fact that the throne your subject matter once occupied is overshadowed” – and that is a fearful situation for many. The costs imposed on commerce by reaction to that fear are extravagant and harmful.

In my view, rather than protecting the status quo, the role of law generally should be to establish a responsive body of rules that support change and that limit regulation to cases where actual clear abuse otherwise exists. This has been the tradition of U.S. commercial law – but it has not consistently been the way in which law related to electronic commercial transactions has evolved. Instead, we have seen an explosion of new law, often regulatory in nature, dealing with data security breaches, “spyware”, privacy policies, “spam”, etc. Too often, political arguments and interest-group politics weigh in toward the view that the proper role of law is to regulate commerce, rather than to support it. Much of this lies simply in a grab for position enforced through law, rather than in the marketplace. Also, this stems in part from the regulators’ view that preexisting regulations were already inadequate to safeguard consumer interests, and that the transition to a new commerce provides an opportunity to impose more extensive regulation. In addition, some believe that there are enhanced risks of abuse in e-commerce that require proactive regulation even before abuse actually occurs, 

But when a regulatory approach is taken in a period of rapid social change, the result is an enormous expansion of new law … and we pay a huge price for this. Its short-term effect lies in the creation of an often-bewildering array of new rules and regulations with which commercial entities must deal, and which seldom reflect sound or considered legal or social policy.

Digital media have enabled a wide range of new ways of doing business and new commercial subject matter. There are numerous instances in which the balance between technological capability to engage in new transactions, and legal infrastructure that permits or impedes implementing aspects of the new technologies is being drawn. We need to exercise care in such contexts.

The messages are simple ones.

·        Electronic commercial transactions have engaged a fundamental change in commercial and consumer relationships, expectations and subject matter. The relationship between a licensor and licensee, an access provider and its clients, and other modern information-based transactional relationships does not flow from models of relationships between the buyer and seller of a toaster or television set, or from a desire to regulate and impede change.

·        Electronic commerce might once have been reasonably treated as a small sub-part of contract law and commercial practice. That is no longer true. This is, indeed, modern commercial law and needs to be respected on its own terms with its own unique demands.

·        The business of law in our market economy is not to comprehensively regulate and control, but to support technological and commercial evolution, limiting regulation to cases of proven and palpable abuse.

More on these themes later.

RTN

      Actually, contracts control. I can have a privilege to do something, but then can waive that privilege. So too the privilege to make limited copies for purposes of some forms of reverse engineering.

      Actually, contracts control. I can have a privilege to do something, but then can waive that privilege. So too the privilege to make limited copies for purposes of some forms of reverse engineering.

            “Reverse engineering” is the process by which the owner of a copy or a product takes the product apart in order to discover how it works. This has been an important feature of business practice in industries where much technology is not protected by patents or copyrights – if I sell you a product and you can find my secrets by dismantling it, so be it. You are entitled to do so.

            But – what if the reverse engineering requires that you make copies of my copyrighted work? Different story. That is permitted only if the copies are fair use. It is fair use in some cases. But not all cases. There are cases on this, but I will leave discussion of them and that issue for another time. The cases allow making copies only if and as needed to obtain information not protected by copyright.

            What if the contract you agreed to says you can’t do it? Should that contract be enforced? Of course. If I can agree to waive my Constitutional privilege against self-incrimination, my right to speech, and other fundamental rights, certainly I can contractually waive the privilege to reverse engineer a product.

            While some lawyers, such as Jonathon Band, and some organizations, such as the EFF, claim that reverse engineering is an inalienable right, that viewpoint really comes from companies that need to do reverse engineering in order to stay competitive. Is Sun Microsystems listening to this?

           Several federal statutes protect limited reverse engineering, but they do not over-ride contractual agreements to the contrary. The recent Altera case Altera Corp. v. Clear Logic, Inc., 2005 WL 2233252 (9^th Cir. 2005). said the same thing in reference to the SCPA. The court held that a claim for interference with contract was not preempted because the contract itself provided an extra element. The contract here limited licensees to sole use of the chip, but the defendant allegedly induced a licensee to allow reverse engineering. The court commented: “If a state law claim includes an "extra element" that makes the right asserted qualitatively different from those protected under the Copyright Act, the state law claim is not preempted by the Copyright Act.Most courts have held that the Copyright Act does not preempt the enforcement of contractual rights.We find the logic of these cases persuasive here.”

        Furthermore, the court held that allegations of copyright misuse were not applicable to the contract claim:

      When copyright misuse applies, we do not allow enforcement of the copyright for the period of misuse. Because the remedy for copyright misuse is equitable, it makes little sense to allow Clear Logic to proceed on an independent claim for copyright misuse when there has been no allegation of copyright infringement. We have already rejected Clear Logic's copyright preemption argument. We cannot now void the license agreements under the pretext of refusing to enforce a copyright that has not been asserted. Copyright misuse is not a defense to the state law claims asserted by Altera.

      In this, the court set an appropriate boundary. We should pay attention to it.

The Davidson case and the Bowers case reach the same conclusion.

      It is time to recognize the difference between contract obligation and property rights. The only statute that addresses reverse engineering as a contract law issue is the 2002 Draft of UCITA.   It gives special protection for a limited range of reverse engineering notwithstanding contrary contract terms. But, like many political compromises, it was probably a mistake to do so.

The agreement should and does control in most modern law in the U.S.