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Patents And The Video Game Industry: What You Don't Know Could Hurt You
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Patents And The Video Game Industry: What You Don't Know Could Hurt You

January 13, 2011 Article Start Page 1 of 3 Next

[IP lawyers take a look at recent precedent to unpack exactly what U.S. patent law says about and to the game industry -- including how you should defend yourself, how you might approach patents, and what damages and other sticky situations might arise if challenged.]

Patents have often been looked on unfavorably by some in the video game industry. But passing by the philosophical question of whether patents are "good" or "bad" on the whole, it is important as a practical matter to understand the answers to two questions for any particular patent -- what does that patent cover, and what happens if that patent is infringed?

Although patents may not cover anything close to what some patent owners may claim, and damages may not approach what some patent owners may demand, a patent may nevertheless be extremely valuable to its owners -- and extremely dangerous to accused infringers.

The perceived strength of patents has shifted over the years, like a pendulum, as courts have ruled on new cases involving new technologies, changing the landscape of patent protection.

Several recent developments in patent law are likely to have a significant impact on the video game industry, affecting the acquisition and assertion of patents by their owners and the defense against patents asserted by others. We explore some of the most relevant issues below.

Keeping A Lid On Damages -- How Much Is Too Much?

Many patents are directed to a single feature that may be included in a much larger, complex system. In recent years, some juries have awarded royalties on the entire system, resulting in a very high royalty for the patented feature. Indeed, sometimes the royalties have exceeded the cost of the patented feature.

A number of recent decisions have addressed this issue and held that royalties should be based on the value of the patented component of a system, not on the value of the entire system. This is significant to the video game industry because many of the patents that have been asserted are directed to limited aspects of video game systems. In those cases, the potential reward for asserting a patent -- and the potential risk if a patent is found to infringe -- may have decreased.

An example of courts imposing limits on such jury awards is Lucent Technologies v. Gateway, in which Lucent accused the date-picker feature in Microsoft Outlook of infringing Lucent's patent. The jury awarded $357 million in royalties, but the appeals court rejected that award because the infringing use of Outlook's date-picker feature was a minor aspect of the much larger Outlook program, and the portion of the profit attributable to the date-picker was small.

Indeed, there was no evidence that anyone bought Outlook because of the date-picker feature. Thus, the appeals court sent the case back for a new trial on the issue of damages to determine the value of the patented feature, which was but one feature among many in Outlook, and to determine what royalty the parties would have negotiated for that feature.

This refocus is important to video game developers because video game patents are often directed to a limited aspect of a complete game system. If the patented feature is a substantial driver of the demand for the system, it is still possible to obtain a substantial royalty. However, if the patented feature is just one of many relatively insignificant features, the royalty would likely be much lower because it would be based only on the value attributable to that patented feature.

Can't Stop This -- When Is Injunctive Relief Available?

Until recently, prevailing patent owners were almost certain to obtain an injunction, forbidding any further use of the patented invention. An injunction could force the infringer out of business, force the infringer to modify its products, or force the infringer to take a license from the patent owner -- typically with a high royalty because the patent owner had all the leverage in the post-injunction license negotiation.

Since the Supreme Court's 2006 ruling in eBay v MercExchange, the issuance of injunctions has become less certain, particularly where the patent owner is not a competitor of the infringer. But that does not mean that infringers are free and clear to continue using the patented invention.

Even if a court does not award an injunction, the patent owner is still entitled to a "compulsory royalty." That royalty may be so substantial that the infringer may be forced to modify or discontinue selling its product because it cannot afford to pay.

An example of a court awarding a relatively high compulsory royalty is Paice v. Toyota, which involved hybrid vehicle technology. The jury awarded a "reasonable royalty" of $25 per vehicle. The trial court concluded that an injunction should not issue, and set an ongoing royalty of $25 per vehicle for the remainder of the life of the infringed patent -- the same royalty that the jury had awarded as damages.

The appeals court sent the case back for further review because the trial court had not explained how it arrived at the $25 compulsory royalty. In reconsidering the compulsory royalty rate, the trial court looked at changed factual and legal circumstances, and concluded that, unlike at trial, Toyota was an adjudged infringer and chose to continue infringing Paice's patent. The court determined that the appropriate royalty was $98 per vehicle -- nearly four times the royalty the jury had found to be the "reasonable" measure of damages for Toyota's infringing sales.

The good news for video game developers facing claims of patent infringement is injunctions do not automatically follow from a finding of infringement -- although injunctions are more likely to be awarded if the patent owner is a competitor. The bad news is a compulsory license is likely to be awarded if there is no injunction, and that compulsory license may have the same practical effect as an injunction.

In the case of an injunction, the infringer is forced to modify or to remove its product by the court's order; in the case of a high cost compulsory license, the infringer may likewise be forced to modify or to remove its product, this time because of the unfavorable economics of the compulsory license. Thus, the need for early consideration of potential alternative strategies to avoid any business interruption in the event of an unfavorable jury verdict has not changed, regardless of the likelihood an injunction may issue.

Article Start Page 1 of 3 Next

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