I write this post only to address certain false statements and mischaracterizations raised by Netflix and their co-defendants in their recent briefs to the Federal Circuit requesting an en banc consideration of the question of defendant’s entitlement to attorney’s fees in patent cases. This blog seems like the natural place to put this explanation as it gets a decent amount of traffic from people that I care about anyway.
Instead of course Netflix has to convince the CAFC that they have to change the game entirely so that under the rules they should have won the game. Not surprisingly their request is supported by the usual cast of corporate characters that likes to whine loudly now whenever an IP decision that goes against their interests.
I simply have no doubt that if and ever the CAFC has to consider the issue of “exceptional” here, Netflix’s proof on this point will fail by a wide margin. More importantly I don’t think it will ever reach that point, as I am very confident they will reverse the underlying SJ determination on infringement.
This Court's mandatory scheme in its section 285 jurisprudence is fundamentally inconsistent with an equitable inquiry into the fairness of denying fees to a prevailing accused infringer.
I welcome this invitation by Netflix to have an “equitable inquiry” here. Because Netflix wants to portray itself as the victim and some kind of savior for the public interest, it devotes a lot of space in its briefs casting subtle aspersions on my character or my conduct is more likely to gain them favorable review by the Federal Circuit. And since they decided to put their dealings with me into the mix as germane to the question of this “equitable inquiry” it is necessary to set the record straight and get a complete picture of these interactions.
Media Queue's conduct in this lawsuit establishes that the case was objectively reckless. The patentee, a disgruntled Netflix customer, drafted claims to a purported improvement on the admitted prior art Netflix system. His patent explicitly references the existing Netflix service. (See 40032-64 (citing Netflix no fewer than eleven times, e.g., A0045,2:51-60: "Thus, from a fundamental perspective, the Netflix system (and other prior art systems like it) do not permit any significant user interaction, control or monitoring of selections presented in a rental queue").) He then opportunistically used the disclaimer of that subject matter to advance its prosecution. (A2325.) Once he obtained his patent, the patentee then tried to sell his patent to Netflix. When he failed, he sold the patent to Media Queue, a nonpracticing entity created for the single purpose of the present lawsuit.
“… the patentee, a disgruntled Netflix customer.”
Like a lot of inventors (including Netflix’s own personnel) I saw certain fundamental flaws in the early service – particularly in customer service - that merited improvement. I was certainly not alone in these observations as one can read from early reviews of the service. While I’m happy they have improved over time, I don’t think it’s unreasonable to ask for compensation if they happen to use my inventions in the process.
“He then opportunistically used the disclaimer of that subject matter to advance its prosecution.”
“Once he obtained his patent, the patentee then tried to sell his patent to Netflix. When he failed, he sold the patent to Media Queue, a nonpracticing entity created for the single purpose of the present lawsuit.”
Beginning at the beginning, Netflix tries to engage in some revisionist history. The implication is that I simply got a patent and then tried to force them to buy it from me. Nothing could be further from the truth.
The real facts are that in early 2006, before I had any patent whatsoever, a friend of mine familiar with my then dozen plus pending applications on the subject indicated that he knew one of the original founders at Netflix, and that this person might be interested in buying the whole portfolio. After some initial exchanges, we entered into a formal evaluation agreement with Netflix to have further discussions about their purchase of the portfolio.
While this may seem like a minor point (patent issued versus patent pending), it is in fact rather rare for a large company to evaluate, assess and purchase a portfolio that only consists of pending applications. To generate any kind of nibble they must be highly interested in the inventions, and this behavior then directly contradicts Netflix’s suggestions now in their materials that they believe(d) this patent is not valid or not worthwhile.
In late spring Netflix made a 6 figure cash bid for the pending applications to be paid as one lump sum. What is remarkable is that they made this offer without my ever showing them a single claim chart, or explaining to them how it would read on their technology. In other words, they had discovered this value all by themselves.
I turned it down and made a counteroffer through my friend. Some weeks later, they came back with a new bid that was twice their prior offer, but I turned them down again because we were still too far apart. Based on the lack of further progress and the gap in valuation, we did not make any further inquiries to Netflix.
Then some months later in early August 2006 - after we thought the deal was dead - we were approached out of the blue again by Netflix’s counsel. They agreed to increase their offer of upfront money; while it was not as large as our offer to close the gap, their counsel asked us if I would do a deal in which the money was not all paid upfront, but, rather, would be paid over time based on certain milestones. For example if a pending application did issue and become a patent, that would be worth $X. If they happened to license the patent to a third party, that would be worth another $Y, and so on. This was an idea we had floated before, but now they seemed serious.
After only a few more days back and forth, the parties came to a final deal on the material terms of the portfolio purchase. Given the number of potential patents and potential licenses the agreement was easily 7 figures in total compensation. The only item that gave me any pause was that a lot of the $$ was backended and conditioned on their attorneys securing patents in the PTO. Netflix wanted to have complete control over the prosecution of the cases, and while their representative insisted that would of course they would pursue them vigorously, I was unsure of how to protect this substantial downstream income.
In any event after a few drafts of the final agreement were circulated and some time passed, Netflix unexpectedly informed me in November that they had reconsidered details of the deal, and wanted to alter some of the financials, including reducing the up front payment. I did not think the changes were that dramatic, and might have otherwise accepted their offer; accompanying their request also however were changes it wanted to make to the agreement that would have made it impossible for me to police their compliance with the back end provisions concerning their obligation to pursue the pending applications in good faith to fruition.
After considering what Netflix wanted, I expressed to them that the deal was not acceptable because under the terms they proposed they could theoretically buy my pending applications, and then simply let them go abandoned so they would not have to pay me another nickel. What they were now offering was effectively a potentially illusory promise. To resolve the impasse, I proposed to them some neutral language that stated that they at least could not abandon cases that the PTO objectively decided had patentable subject matter.
To my surprise, they balked at this suggestion, signaling to me that they probably never intended to honor the agreement in good faith. Since we could not reach agreement on this last point, the sale fell apart.
….the patentee then tried to sell his patent to Netflix. When he failed,
The standstill agreement with Netflix expired in November 2006. Consequently some weeks later in January 2007 (and in a followup a month later since they did not respond) I sent Netflix’s inhouse counsel an official notice under 35 USC §154 explaining why their system at that time was infringing several claims of the fifteen (15) pending applications in the portfolio. As Netflix had never seen these analyses before, I hoped that they would finally understand my perspective on the scope of their potential liability, and re-invited them to discuss the agreement again.
Instead of responding substantively to my letter, Netflix’s counsel instead sent me a letter with an enclosed “declaration” on March 23, 2007 signed by their chief technology officer, Neil D. Hunt, which they purported showed “prior art” to my pending cases. The letter made unqualified assertions that Mr. Hunt’s declaration demonstrated Netflix’s “public use” of my patented inventions and contained “publications” that were prior art, and that I “was required” to disclose this material to the PTO for my pending cases.
It was apparent to me that having failed to buy the applications, Netflix was now desperately resorting to a weak effort to try and persuade the PTO to kill them before they matured into patents. The one glaring problem in Netflix’s strategy, however, was the inescapable fact that most of the supporting evidence presented in Mr. Hunt’s “prior art” declaration was plainly defective, or worse simply false.
As an example, some of the documents that Mr. Hunt claimed were “printed publications” in late 2002 simply could not have existed at the time. This was apparent because the “publications” were purportedly emails dating from in June 2002, but in the body of the email they made reference to movies that were not released until November 2002. It would not be possible to have an actual offer in an email to a real customer so early for a movie that did not yet exist in inventory. The only logical explanation was that these “prior art” printed publications were nothing of the sort – they had been manufactured by Netflix after the fact.
In addition Mr. Hunt further claimed unequivocally that Netflix had stopped monitoring customer queues and alerting customers when they were empty in 2003. Yet I had examples in hand of Netflix’s sytem doing exactly this in 2007, right at the same time Mr. Hunt provided his declaration. His statement was completely inaccurate again, if not simply false.
I was extremely shocked that Netflix would resort to this level of deception. Nonetheless I took the high road and gave them a chance to abort this abomination before it got out. Out of professional courtesy, I pointed out the glaring problems to Netflix’s counsel in a formal letter and offered him a chance to check with his client about the contents of the declaration and at least get the facts and documents corrected. Otherwise, according to his explicit request to me, I would be forced to show it to the PTO and the latter would now be in possession of what was obviously a document of questionable veracity designed solely to mislead the PTO on the merits of my invention.
Netflix’s counsel never took the opportunity to correct the declaration. On June 7 2007 I sent in the Neil Hunt “declaration” to the PTO as part of an information disclosure statement (IDS). As part of the IDS I also provided an explanation to the PTO of the circumstances by which the documents came into my possession, and why I believed many of them could not possibly be authentic “printed publications,” let alone prior art.
The PTO then reviewed the substance of Mr. Hunt’s declaration and needless to say rejected it unceremoniously. They found nothing about his statements or documents to be credible. Here are the Examiner’s words, verbatim:
The examiner finds the declaration to be insufficient to establish a showing of public use of the claimed invention….
Each exhibit is stated as showing a composition that was included in emails sent to actual customers. None of the exhibits have any dates. With no dates on the exhibits it cannot be accepted that they are in fact printed publications that were in the public prior to 12/16/2002. The lack of dates on the exhibits is a critical deficiency. The examiner also does not see any evidence that supports the assertion that any emails were sent to customers as alleged. The compositions that make up Exhibits 1-3 do not show an actual email that was in public use and there is no evidence to support the statement that thousands of emails were sent out that contained the compositions of Exhibits 1-3. The examiner notes that what Mr. Hunt has submitted is not an email and there is no evidence that shows the actual compositions of each exhibit were actually known in the public or used in the public domain.
The Examiner further picked up on the questionable authenticity of the so-called “emails” that were supposedly attached to Mr. Hunt’s declaration:
The examiner questions where copies of the emails are if they were sent out to actual customers as alleged. The evidence does not support the statement that emails were sent that contained the composition shown in Exhibits 1-3 because there are no emails of evidence to consider. Turning to the exhibits themselves, there are some issues that the examiner feels puts the credibility of the Exhibits in question. For Exhibit 3, the Spider-Man movie was not released on DVD until November of 2002. This movie was not available at the end of June. The language in the exhibit that says that Spider-Man is arriving on or around June 27, 2002 is contradicted by the fact that this movie was not released on DVD until November of 2002. The examiner personally verified this information on the Internet by looking up the DVD release date for this movie. This discrepancy is not addressed by Mr. Hunt and there appears to be no explanation for this incorrect date. Also, the spelling is wrong for this movie. Netflix actually sent out emails that called it "Spinder- Man" instead of "Spider-Man"? This is hard to believe and has no reasonable explanation as far as the examiner can tell. Also, none of the movies listed in the New Releases portion of the Exhibit were even released yet. This inaccuracy concerns the examiner as well as the other issues with this Exhibit. Exhibit 1 also says that Spider- Man is arriving on or around June 27, 2002, which is contradicted by the fact that this movie was not released on DVD until November of 2002.
He also found Mr. Hunt’s credibility was further called into the question by his statement that Netflix was no longer using the technology, when there recent emails to the contrary:
With respect to statement #10 Mr. Hunt stated that Netflix stopped using notification messages after 2003 and is not presently using such messages. The instant applicant has provided copies of 3 emails that are dated from the years 2005, 2006, and 2007. The emails show that a sender (email@example.com) sent an email to a customer to inform them that their queue was empty. This suggests and calls into question the credibility of statement #10.
When considering a 132 declaration such as executed by Mr. Hunt, one must take into account any bias that the declarant may have. The examiner notes that although not a determining factor alone, it must be taken into account that the declarant is an employee of Netflix and that Netflix may benefit if the current application does not issue as a patent. There are obviously things happening between Netflix and the instant inventor that involve attorneys and legal matters that the examiner is not fully aware of. Taking this potential bias into account, taking the issues outlined by the examiner for the exhibits into account (dates, spelling error), and taking into account that there is evidence in the record that directly contradicts statement number 10, the examiner finds the 132 declaration to be insufficient to show that the claimed invention (in any pending claim) was in public use before the invention by applicant as Mr. Hunt alleges. The examiner does not find that the evidence supports the allegation of prior public use by Netflix and does not find it persuasive that the submitted Exhibits 1-3 are in fact printed publications that were in the public domain.
This is the pedigree of the patent that Netflix now tries to malign or suggest that they no interest in at the time. For a patent that they now assert is not relevant to their business, or is no good, they sure spent a lot of $$ trying to buy it, and when that failed, labored to see it would never see the light of day.
What is telling as well is the fact that Netflix, on their own, have cited my patents and applications as relevant against several of their own patents and pending applications. See e.g., the references they provided for US Patent No. 7,617,127 which you can see at http://tinyurl.com/275jspc. Again their objective behavior belies their words now.
The portfolio did not end up with Mediaqueue until more than a year after my last contact with Netflix. The insinuation in their briefs therefore that I somehow turned around and sued them right away after the failed negotiations and their fiasco at the PTO is completely false.
As the icing on the cake, I invite the interested reader to review the apology document filed by Netflix in the PTO - some two years after the fact and almost a year after the patent issued – which belatedly admits to the errors and tries to rehabilitate Mr. Hunt’s reputation. Here is an excerpt:
May 15, 2009
Commissioner of Patents
I am Chief Product Officer for Netflix, Inc. A declaration signed by me on March
16, 2007 (the "Declaration", Attachment 1 to this letter) was
submitted during prosecution of a patent application, U.S. No. 101771,049,
"Notification System and Method for Media Queue," which has since
issued as United States Patent No. 7,389,243. This letter is to inform the
Patent and Trademark Office that I have
recently determined that certain information in the Declaration is incorrect.
The Declaration erred, however, in stating that as
early as December 16, 2002, a computer system that generated electronic
messages to subscribers based on the compositions was placed in public use. The
owner of the '243 patent has sued Netflix, alleging that Netflix infringes the
'243 patent. As part of Netflix's
preparation to defend the lawsuit, I have learned that the Declaration was
inaccurate. While Netflix utilized a computer system to send many different
kinds of emails to subscribers for some time prior to December 16, 2002, my
declaration should have reflected that the emails based on the compositions
attached as Exhibits 1, 2 and 3 were sent to subscribers no later than March
I apologize for the inaccuracies in my Declaration and submit this letter to correct the record.
Neil D. Hunt
Chief Product Officer
Mr. Hunt’s apology admits now, some two years after the fact, that the so-called public use by Netflix was not in fact prior art, because it did not occur until March 2003, after the effective filing date of my patent. The rest of his letter (this time not under oath you will note) tries to downplay and undo the obvious damage to Netflix’s credibility resulting from their defective declaration of “prior art.” More interesting of course is that it raises more questions than it answers, given that Mr. Hunt states that he only “recently” learned of the problem (in 2009). This of course is completely contradicted by the fact that his own counsel was informed on more than on occasion of the substantial defects in the document two years earlier.
It is simply amazing that Netflix would let these false papers sit in the PTO until they realized they would become a liability. It was only after being sued for infringement that they suddenly develop a newfound respect for the PTO process and tried belatedly to cure their bad behavior.
Lest anyone thinks this story is too surreal to be believed, I invite you to view the contents of the file history of US Patent No. 7,289,343 through the Public PAIR system site offered by the USPTO. You can access it here:
Just solve the CAPTCHA and punch in 10/771049 as the serial number.
To make it easier, however, I have uploaded copies of several key documents to corroborate my story, which can be viewed by clicking on the links below:
Thus if and when the CAFC gets to review this farce of a filing, I want to see how they treat Netflix’s contention that they have “….vindicated an important public interest in this case” as they assert on page 72 of their brief. I can’t remember the last time I read a case holding that it was in the “public interest” to negotiate in bad faith to try and buy a patent, or worse try to mislead the PTO with false documents into thinking something is prior art to interfere with said patent. I really want to see their citations on this one.
In closing let me just say I know it’s the job of high paid lawyers to try and denigrate patents covering features their clients are using, and Netflix’s lawyers are no exception. What is disappointing is that I know some of theses lawyers personally, and in fact have referred them business. Seeing what a hatchet job they did on the facts on this one now makes me seriously question their ethics and judgement. It’s depressing to see people of that caliber stoop so low to try and gain a few moments of fame.
Coming now full circle to the main question that Netflix says they want the Court to review I ask:
does Netflix really want to have a full blown investigation into their conduct in this case and have the Court decide who behaved “equitably” and who did not?
I’m ready when they are.