Intellectual Property

Tools For Change

What is behind those incentives to condone, if not encourage, infringement at large retailers?

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intellectual property law

(Image via Getty)

I love a good interview, especially about IP litigation, a subject that still fascinates me 20 years into my professional career. Thankfully, we live in a time when there is no dearth of podcasters having interesting conversations with thought leaders, including in the IP space. One of my favorites, of course, is Eli Mazour’s Clause 8 podcast, part of the burgeoning IP Watchdog podcast network. I was pleased, therefore, to see a new episode drop a few weeks ago after a half-year hiatus. The new episode is a doozy that I enjoyed; I recommend that anyone involved in IP litigation listen as well. As you can see from the episode summary, Eli has given voice to one of the least-heard-from segments of the IP ecosystem — the inventors, the entrepreneurs, (i.e., the folks crazy enough to imagine that they could build a successful business around an innovative consumer product).

In the case of the father-son duo of Professor Dan and Dan Jr., it was a combination of IP awareness, business-savvy, and desire to create that led to them trying to buck the odds. With great effort and ingenuity, they pulled it off, with a made-in-the-USA product, no less. Their Bionic Wrench was an immediate commercial success, leading to an exclusive relationship with then mega-retailer Sears. For a while, things were great, with the Browns selling a premium-priced, patent-protected product that was profitable for both them and Sears. But Sears was looking for more profit and leaned on the Browns to produce the wrench at a cheaper cost in China. And when they refused, Sears had no compunction about going to another of its tool suppliers to manufacture an alternative for its shelves. That action forced the Browns’ hand, leading to a multiyear litigation battle that culminated in a dispiriting loss for them in the Federal Circuit, even though the initial rulings in the case had been in their favor.

In truth, the Browns deserve to be heard in their own words. What follows is a modest set of observations from their compelling retelling of their story that resonated with me.

First, while I would have a hard time agreeing to amending the patent law to add criminal liability for willful patent infringement — as suggested by Professor Brown — I do sympathize with his argument that in a general way today’s mega-retailers are incentivized to sponsor the importation of infringing products. They are so incentivized even though those decisions can have a direct impact on American manufacturing jobs. Moreover, that activity can cause tremendous harm to small American innovator companies.

What is behind those incentives to condone, if not encourage, infringement at large retailers? For one, their own employees, including their product sourcing teams, are under pressure to squeeze every drop of margin from what is on sale on the shelves. Next, the declining number of mega-retailers still in business puts pressure on wholesalers to try to satisfy those retailers in order to get their products considered, even if it means engaging in infringing activity in the process. Add in that retailers continue to demand indemnification from those suppliers — and there is a measurable lack of accountability for retailers in encouraging infringement. It all results in a state-of-play where even profitable innovative items are considered ripe for copying, irrespective of any considerations around the potential legal consequences.

Again, the problem is real, even as there are surely many retailers that are respectful of intellectual property rights. Consumers benefit from fair competition as well, so the trick lies in figuring out how to best disincentivize willful infringement, which is at once both rare and inordinately harmful. In my view, criminal penalties may be a bit too drastic, especially considering that it is those very same mega-retailer buyers that can be the biggest boosters to an innovative company’s prospects — by giving the chance to market their wares in the first place.

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As much as we want to stop willful infringement, we should also be wary of chilling interest in innovative products in the first place. In my view, a more fruitful area of consideration for dealing with this problem might lie with the idea of limiting or refusing to enforce indemnification obligations where the retailer was proven to have pressured the manufacturer to import or market an infringing product. At a minimum, I hope that the Browns’ experience in this regard helps drive more attention to potential approaches for curbing abusive retailer behavior when it comes to IP rights.

As for the litigation insights from the podcast episode, there are a number of interesting insights to those of us that see value in hearing about IP litigation from a litigant’s perspective. For one, Professor Brown admits that had IPRs been available during the time of his fight with Sears and its supplier, things would have been much harder for him as the patent owner. Likewise, the cost of litigation made even getting a case going dependent on finding both contingency counsel and expense funding from an outside litigation funder. The amount of expense and effort expended to get to the Federal Circuit’s affirmance of the District Court’s finding of no infringement on summary judgment was, as typical, staggering — especially from the perspective of outsiders to the legal system like the Browns.

This staggering costs may appear wasteful in hindsight. Remember, however, that while it may seem apparent to some of us now that Sears and its manufacturing partner designed around the Bionic Wrench, there were moments in the case where the Browns felt that they were close to victory. For litigants like them, perhaps the idea of a more streamlined adjudication process for discrete infringement questions in consumer products — a system akin to how Amazon uses neutrals to adjudicate select patent infringement disputes for third-party sellers on its store — deserves more attention. Even a directional view from a neutral on the infringement question in the Browns’ case could have saved them a lot of emotional energy, while also allowing them to focus on pivoting their business more quickly to deal with the threat posed by Sears’ actions.

Lastly, it was hard not to sympathize with the Browns’ disappointment at the Federal Circuit’s use of Rule 36 to dispose of their appeal. I admit that when I see a Rule 36 affirmance, my inclination is to believe that the appeal lacked merit or at least that the issue presented was so easy to decide that it would have been a waste of time for the Federal Circuit to lay out its reasoning. At the same time, the impact of a Rule 36 affirmance that is adverse to the interests of small business or inventor litigants can have an outsized negative impact, both in terms of reducing faith in the integrity of the judicial process, as well as in terms of equipping those litigants with a tool for finding closure at the end of an emotional and expensive process. I know I am not the only one that has commented on this issue, but hearing the Browns’ story and reaction to their treatment in this respect made an impact on me.

Ultimately, we all benefit from getting the perspective of litigants on the IP litigation process. I salute the Browns for their willingness to share their story and continued efforts to try and strengthen our patent system. Likewise, I applaud Eli for creating a forum where compelling stories like that of the Browns can be shared with the IP community. Because no tool for change is as valuable as dialogue — and Clause 8 is helping to lead the way with bringing smart, compelling discussion to our little corner of the legal world.

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Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.

Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

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