20 December 2015

I Don’t Care How ‘Efficient’ It Is, It’s Still Infringement!

Lipstick on a pigOn 23 October 2015, New York Times op-ed columnist Joe Nocera published a piece entitled The Patent Troll Smokescreen, in which he wrote that ‘according to Robert Taylor, a patent lawyer who has represented the National Venture Capital Association, a new phrase has emerged in Silicon Valley: “efficient infringing.”’

In fact, as we shall see, the term ‘efficient infringing’ is not new – it first emerged in 1998 – and, furthermore, there have been ‘efficient infringers’ outside the realm of patents for much longer than this.  Indeed, I personally know people who have indulged in a little efficient infringements, and maybe you do too.

As one everyday example of efficient infringing, consider an office-worker in an area with limited free on-street parking, restricted to a maximum stay of one hour.  If the local paid parking garage charges $12 per day, and the fine for exceeding the maximum on-street parking time is $120, it does not take an Einstein to work out that it is cheaper overall to park on the street every day if the average frequency with which parking inspectors patrol the area is less than once every 10 business days.  That is efficient infringement!  There are, no doubt, other areas of everyday experience in which a similar analysis can be applied, e.g. payment of fares on public transport.

In some cases – such as the trouble-plagued electronic transport ticketing system in Victoria, Australia – well-advised efficient infringers may be able to tip the scales further in their favour by challenging the validity of their fines.

Of course, for most people this economic rationale cannot be taken too far.  For example, stealing your groceries rather than paying for them might well pay off in the long term from a purely financial perspective, but is liable to land you with a criminal record and possible jail-time.  Efficient infringement, as an economic strategy, is effective only when the worst consequences of getting caught can themselves be expressed in purely economic terms.

Efficient patent infringement is just the same.  As described by Nocera:

That’s the relatively new practice of using a technology that infringes on someone’s patent, while ignoring the patent holder entirely. And when the patent holder discovers the infringement and seeks recompense, the infringer responds by challenging the patent’s validity.

I object less to the practice of so-called ‘efficient’ patent infringement, at least in some of its more benign forms, than I do to the terminology itself, and the way it is being used by some very powerful organisations.  And here is why.

Words Matter

We all know – because economists, politicians and our employers have told us time and time again – that ‘efficiency’, like its close cousin ‘productivity’, is good.  Of course economies and businesses function most effectively and successfully when they are most efficient and productive.  To suggest otherwise in this day and age will probably see you labelled (pejoratively) as a bleeding-heart lefty. 

Indeed, even the remaining social welfare programs operating in capitalist societies are generally assessed according to these standards.  And unless you are an actual card-carrying socialist, you are probably reading this and thinking ‘well, of course they are – how else can we ensure that public money is spent most effectively?’  Now, I am not saying that is necessarily incorrect, but even if it is right, in this place and time, it is still an example of ideology at work.  Not all individuals or societies, in all places and at all times, share these beliefs.  They are not universal truths.  It is important to keep this in mind when thinking about what that phrase ’efficient infringement’ really means.

Just as ‘the greatest trick the devil ever pulled was convincing the world he didn’t exist’, advocates of efficient infringement want to trick you by taking something ‘bad’ – infringement – and imbuing it with ‘goodness’ – efficiency.  That word is so ideologically-loaded that it flies right past your defences, taking ‘infringement’ with it.  On the economic ledger, efficiency trumps all.  And if you are a shareholder looking for maximum value from your investments, ‘efficiency’ is music to your ears.

Don’t you believe it!  The ‘infringement’ part of the term is important.  That is why words matter.

The Origins of ‘Efficient Infringement’

The earliest usage I have found of the term ‘efficient infringement’ is in a 1998 article by Julie S. Turner, appearing in the California Law Review, The Nonmanufacturing Patent Owner: Toward a Theory of Efficient Infringement, 86 Cal. L. Rev. 179 (1998).

Turner’s argument is not unreasonable and, if anything, is even more pertinent today than it was in 1998.  Essentially her proposal is that ‘nonmanufacturing patent owners’ (a class which includes, though is not limited to, the entities that we would today call ‘non-practising entities’, or NPEs, along with the bad actors deserving of the label ‘patent trolls’) should not be entitled to injunctive relief if their patents are found to be infringed, but rather only to a reasonable royalty. 

Turner’s starting point, however, was not a case of an NPE pursuing a licensing model to monetise its patent assets, it was a case in which one practising entity (du Pont) employed a patent that it held on a colour proofing process to prevent a competitor (Polaroid) from using the patented process to compete.  The thing was that du Pont’s commercial colour proofing process was different from the process covered by the patent that was infringed by Polaroid.  In effect, du Pont was ‘sitting on’ a patent for a process that it was not using, primarily to keep Polaroid out of the market.  At the time, du Pont and 3M between them had 90% of the US colour proofing market tied up, making it an effective duopoly.

Turner’s concern was that large corporations with big R&D budgets could use patents primarily as barriers to market entry by new, smaller, players.  She proposed a limited doctrine of ‘efficient infringement’, whereby the courts would decline to issue injunctions – thereby allowing accused infringers to continue their activities – in cases in which the patent-owner was not providing its own products or services in accordance with its patent.

‘Efficient Infringement’ in the 21st Century

If Google’s databanks are anything to go by, the term ‘efficient infringement’ was not subsequently used in many publications, outside of the occasional academic article citing Turner, until it turned up in 2010 in a Huffington Post blog piece by economist, author and public policy commentator Pat Choate.  His article Patent Theft as a Business Strategy explained that:

America's largest big tech corporations are now using a business technique called “efficient infringement,” which means that they calculate the benefits of stealing someone else's patented technology against the possibility of getting caught, tried in court and being forced to pay damages and penalties. If the benefits exceed the costs, they steal.

Choate counted Cisco, Intel, IBM, Microsoft and HP among the leading proponents of this strategy, and noted that:

The principal victims of these big corporations’ “efficient infringement” approach are America's independent inventors, small businesses and universities - the source of most breakthrough innovations and the creators of two-thirds of all new jobs in America.

It is notable that this is the complete opposite of Turner’s conception of efficient infringement.  Where Turner would have the courts employ it as a legal doctrine to limit the power of large corporations to use ‘thickets’ of unemployed patents to stifle the entry of competitors, the 21st century version of ‘efficient infringement’ is an economic strategy which sees large corporations using their market power and deep pockets to maximise shareholder value at the expense of smaller innovators.

Wilfully Efficient Infringement?

It is, however, one thing to ignore patents altogether, and then pay up only when – and if – legally compelled to do so.  This is, in fact, an almost unavoidable strategy in fields, such as software-based technologies, where a comprehensive patent infringement search across all relevant jurisdictions and all components of a commercial offering is a practical impossibility.  It is, indeed, more ‘efficient’ in such circumstances to focus patent research on core areas of product differentiation, and rely on patent owners to give notice of rights in non-core areas.  In most cases, such patent owners will not be direct competitors, and will be very happy to negotiate a licence agreement.

However, this perfectly reasonable scenario is not what animated Joe Nocera in his recent New York Times column, with which I opened this article.  Rather, he was concerned about Apple’s apparently deliberate refusal even to speak to University of Wisconsin commercialisation arm WARF about licensing a patent on

… an innovation that Apple uses to help speed the processing time of several versions of the iPhone and iPad. Apple not only couldn’t be bothered to license the patent; it wouldn’t even let WARF in the door to negotiate. Instead, Apple sent the foundation a link to a page on the Apple website, which says that the company can lay claim to any unsolicited idea.

Ultimately, WARF sued Apple and, in October a jury found the patent valid and infringed, and ordered Apple to pay damages of around $234 million.  While this may sound pretty good for WARF, as Nocera points out,

… Apple is actually the big winner. Thanks to efficient infringing, WARF never had the chance to grant an exclusive license to an Apple competitor, which could have hurt Apple while maximizing WARF’s financial gain.

The same big corporations, including Apple, Amazon, Facebook and Google, have been lobbying the US government intensively  over further reforms to the patent system, including proposed legislation supposedly targeted at cutting down on the number of abusive lawsuits initiated by so-called patent trolls.  As Nocera’s column points out, however, the ‘troll’ narrative provides these companies with a very convenient bogeyman.  But the reforms that have been (unsuccessfully) pushed to date would not just target abusive litigation, they would improve the efficiency of ‘efficient infringement’ strategies against all patent owners without the financial might to take on an Apple or a Microsoft on their own terms.

Conclusion – Efficient Infringers, or Big Bullies?

Slapping ‘efficient’ in front of ‘infringement’ should be no more effective than slapping lipstick on a pig.  However you dress it up, it is still infringement.

And ‘efficient infringement’ is not a victimless ‘crime’.  Whether you are ‘efficiently’ overstaying in free parking spots, evading fares on public transport, or infringing somebody’s patent, your economic benefit comes at someone else’s expense.  Reduced turnover and availability of parking spaces harms the local community, including retailers and consumers.  ‘Efficient’ fare evasion reduces the income to public transport authorities which (in Melbourne, at least) results in taxpayers making up for the shortfall.  And when a large corporation infringes a patent owned by an individual inventor, a small company or a startup, the corporation is robbing the patentee of the benefit and incentive that the patent system was intended to provide.

When you get right down to it, ‘efficient infringement’ is nothing more than another way for the 900 pound gorillas to behave like bullies.


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