“I’m astonished to have to admit that the U.S. patent system is so fundamentally broken on so many levels that the DAFC may be the only venue available to most inventors.”
In yet another pathetic result of the U.S. government crashing the patent system, Amazon announces it is a patent infringement court. I guess we can call it the District of Amazon Federal Court (DAFC). They claim a cheaper, faster alternative to traditional patent lawsuits. Ring a bell? The last time I heard that we got the PTAB.
This irony is judiciously served. First, Amazon used the patent system to differentiate themselves from their competitors with the one-click patent, thus gaining market share. Then the U.S. government crashed the patent system so that no small inventor or startup could challenge Amazon with improved technologies. With no challengers, Amazon monopolized.
An Impressive Defeat of a Fictional Problem
You must applaud Amazon and the rest of the big tech bullies. It is an amazing feat for this gang of monopolies to make up a false narrative that convinces the entire U.S. government that fictional patent trolls are destroying the world with fictional bad patents. And it is an even greater feat to convince the government to legislate (in Congress, in the USPTO and in the courts) that any patent capable of challenging the core technology of any big tech business never gets issued. And if it somehow slips through the USPTO, the government invalidates it. Now the whole gang is safe from the fictional creatures they themselves created.
Today, inventions in Amazon’s technology space are not patentable subject matter under Section 101. (Congress says they would like to fix that, but it they plan to make it worse.) Instead, inventions that could create competition to Amazon are deemed abstract ideas. Abstract in the sense that they cannot be patented, but not abstract in the sense that they generate billions of dollars in annual revenue and underpin the largest monopolies to ever inhabit earth.
While nobody can define an abstract idea, over 64% of inventions challenged as abstract ideas are invalidated by the courts as abstract ideas. Countless more are never granted patent protection. As a result, Amazon’s monopoly is untouchable by creative destruction served by innovative startups. Amazon is permitted to rampantly steal the inventions of small inventors and startups, thus running them out of business. The government’s actions that destroyed the patent system are perpetuating Amazon’s monopoly.
Amazon Gallops to Its Own Rescue
Now Amazon, a renowned world expert at stealing patented inventions, gallops to the rescue of small companies by replacing the U.S. government as the venue to fight patent infringement battles in the United States. They claim they can do it faster and cheaper. The sad truth is that Amazon can perform as a patent court due to their scale and the market control they exert, and they will replace the federal courts in most cases.
Amazon is a market monopoly with complete control of who can and cannot sell in their market. In the patent world, an injunction removes an infringer from the market of the country where the injunction is granted. In Amazon’s world, denying an infringer access to their market removes them from Amazon’s market, which is akin to an injunction. In the patent world, invalidating a patent allows others to copy it. In Amazon’s world, permitting an infringer to access the market is akin to invalidating the patent because it allows others to copy it.
Portrait of a Broken System
But will the DAFC be a faster and cheaper alternative to the U.S. government’s various courts and tribunals? The PTAB is not cheap and not fast even though politicians and big tech lobbyists said it would when they made it law in the Leahy/Smith American Invents Act of 2011. In fact, a single PTAB challenge will burn three to five years of your patent’s life along with about $500,000. If you are gang tackled, just multiply those numbers by the number of members in the gang.
The federal courts are embarrassingly long and prohibitively expensive. In Josh Malone’s case, he’s spent around $20 million dollars over four years and is still not done. He will fight for several more years and spend millions more just to get paid damages already awarded to him. In the end, he will spend millions of dollars more than he receives in damages. The federal courts are truly a scam.
When deciding whether to defend a patent, you engage in a risk/reward analysis. The likelihood of winning, the amount invested, the time it takes to get investment returned, and the amount returned, all factor into your decision.
If you are like most inventors and startups, you need contingent attorneys and investors. They are paid around half of damages awarded to you. Most lawyers and investors estimate investment into the suit to be somewhere around $3 million. It could easily go above that, so sometimes they price it higher, especially if the infringer is a big tech company known to litigate frivolously.
Because lawyers and investors take half of damages, potential damages must be more than double the investment to earn a profit. Most will require that potential damages of least 5X estimated investment. Many put the number at 10X due to the number of years it takes to get a return and the extraordinary invalidation rates at the PTAB and under Section 101’s abstract idea. But we can take the low numbers for our example: if the number is 5X and with $3 million invested then potential damages must be $30 million.
Prior to eBay v. MercExchange, which eliminated most injunctive relief, damages were determined by the market because an injunction enabled a buyer and a seller to arrive at a market price. Now damages are determined by a liberal arts major in a robe performing some sort of voodoo. Lawyers and investors make their best guess at a percentage of infringing sales revenue that will be awarded as damages, perhaps 1% to 3%. So, putting it all together, returning a $3 million investment at a profit requires a damages award of $30 million, which is 3% of total infringing sales revenue, therefore infringing sales revenue must be $1 billion.
Very few products bring in a billion dollars in sales. So, most inventions cannot justify defending a patent in the federal courts. But since the DAFC charges only $4,000 per infringer, I’m astonished to have to admit that the U.S. patent system is so fundamentally broken on so many levels that the DAFC may be the only venue available to most inventors.
The Dangers of the DAFC
However, there are some very real problems with a private monopoly adjudicating patent disputes. The DAFC is obviously beholden to the interests of Amazon. The judges (I think we can now call Amazon attorneys judges; after all, we call USPTO employees judges) are Amazon employees.*
It is in Amazon’s interest to have infringing products on their captured market because it increases consumer choice and lowers prices, which keeps consumers coming back. There is incentive for DAFC to delay adjudication for as long as possible to keep all products selling on their captured market. The incentive is to invalidate patents by not finding infringement and therefore allowing all infringing products into their market.
Amazon answers to consumers who buy products in their closed market, and to its vendors who provide the products for their consumers to buy. No doubt there will be conflicts between vendors when one accuses another of patent infringement. These conflicts will rise through the legal department to upper management where decisions will be made for the benefit of Amazon—not the inventor, not the integrity of the patent system.
There is no due process at the DAFC. There is no independence, no jury, no rules, and no appeal. There will be no justice, no fairness, no equity. Decisions will be made in the interest of Amazon and Amazon alone.
What a pathetic mess. It would be amusing if it were not so destructive to our economy and national security. Nobody in Congress really wants to fix it. They say the words that make it seem like they want to fix it, but they put forth changes that will make it even worse. This is a very sad era for America and a very sad era for Congress.
*It is unclear if Amazon is using its own attorneys or is hiring outside attorneys, but that is a distinction without a difference. Whether the attorney is a direct employee or contracted, the client is still Amazon.