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PersonalWeb, customer suits, and what it means for startups
A recent Federal Circuit decision, In re PersonalWeb Technologies LLC, highlights ways companies can protect their customers against abusive patent litigation. There are various legal doctrines, rooted in fairness and efficiency, that can apply—including to protect startups that are accused of infringement based on buying or using someone else’s product or service.
As the PersonalWeb case shows, startups are sometimes accused of patent infringement by virtue of their use of another company’s technology. Startups are often customers or end-users of, e.g., cloud computing or online payment services. And when those services are accused of infringement, patent owners may also try to exploit startup-customers for settlements or licenses. In this recent Federal Circuit case, companies that used certain Amazon Web Services were sued by a patent assertion entity (“PAE”) based on their use of Amazon’s service.
But this recent case also shows one way the law allows companies to step in and defend their customers against frivolous litigation. While there are multiple avenues for protecting customers accused of infringement, here Amazon had already won a patent case, establishing that its service was not liable for infringement of the patents-in-suit. So when the patent owner turned around and tried to sue numerous customers for using the service, the court ultimately rejected the case. This decision shields a large number of smaller, tech-enabled companies from repeated accusations of infringement over their use of Amazon’s services. It should also make it more difficult for PAEs in future cases to pursue successive, similar claims against companies and their customers and end-users.
A brief primer on customer suits and preclusion.
In order to understand the PersonalWeb decision, it is helpful to have some context about so-called “customer suits” and a basic understanding of the law’s preclusion doctrines.
First, a “customer suit” involves a patent owner—often a patent assertion entity (“PAE”), also known as a patent troll—threatening to sue many end-users or resellers of a product. In one example, a PAE claimed to own a patent covering any use of WiFi, and sued small shops and hotels for making WiFi available to their patrons. Another PAE threatened to sue individual users of podcasting software. Instead of targeting the company that develops or manufactures the accused technology, some PAEs will target that company’s customers. In other cases, PAEs will start by suing the primary company, and then—dissatisfied with the result of the first case—pursue successive cases against customers.
By focusing on end-users and customers, PAEs can multiply the number of accused infringers. Moreover, by suing end-users and customers, PAEs are often targeting less sophisticated entities or those who do not know the technical details of the product they bought. This gives PAEs in customer suits more leverage and can increase each accused infringers’ willingness to settle for less than the cost of litigation.
The second key to understanding this case is preclusion, which refers to a collection of legal doctrines designed to prevent a plaintiff from effectively bringing the same lawsuit over and over again. It is motivated by fairness—to prevent courts from being used to repeatedly harass defendants—and by efficiency—it is a waste of time and resources to relitigate the same issues. In patent law, for example, preclusion can protect accused infringers: if they prove that a patent is invalid or not infringed, then preclusion should bar patentees from later asserting the same patent against the same product.
The Kessler doctrine is one specific example of preclusion which can apply in customer suits. Over 100 years ago the Supreme Court decided Kessler v. Eldred. There, both parties manufactured electric cigar lighters, and Eldred accused Kessler of infringement. But Kessler proved that its lighters were non-infringing. Then Eldred, after losing its first suit, sued one of Kessler’s customers for infringing the same patent. Kessler intervened to protect its customer, arguing that Eldred should not be allowed to sue customers for use of a (non-infringing) Kessler lighter. The Supreme Court agreed. The Court noted that allowing Eldred to harass Kessler’s customers with repeated lawsuits would scare customers away and require Kessler to keep defending its customers and its product in later lawsuits. The Court concluded that Kessler had a right to continue selling its non-infringing product to customers, and Eldred’s attempts to relitigate infringement with customers impinged on that right.
In re PersonalWeb Technologies LLC.
This case began in 2011, when PersonalWeb sued Amazon and one of its customers for patent infringement. In that case, PersonalWeb asserted five patents pertaining to assigning “true names” to data items through the use of a hash function. PersonalWeb said that Amazon’s S3 product and service—part of AWS—was infringing. In brief, PersonalWeb contended that Amazon and a customer infringed because the customer was able to use S3 to upload and store files, assign identifying tags to those files, and request and download those files.
That first case proceeded through claim construction. After the court construed the disputed patent claim terms, some in favor of Amazon, PersonalWeb dismissed all of its allegations with prejudice.
Then, in 2018, PersonalWeb filed several lawsuits accusing dozens of Amazon’s customers of infringing the same patents. In total, PersonalWeb accused over 50 of Amazon’s customers, including many smaller, tech-enabled companies such as Patreon, BuzzFeed, Venmo, and Kickstarter. PersonalWeb was accusing those customers of infringement based on the fact that they used S3.
Amazon stepped in to those subsequent cases on behalf of its customers, and also filed a declaratory judgment action against PersonalWeb. Amazon argued that those later-filed cases were barred by PersonalWeb’s prior, related case against Amazon directly. The district court, applying the principles of claim preclusion and the Kessler doctrine, agreed that PersonalWeb could not pursue later claims against Amazon’s customers.
The Federal Circuit agreed, holding that the Kessler doctrine and claim preclusion applied, thus barring PersonalWeb’s cases. The court concluded that in dismissing its first case with prejudice, PersonalWeb “conferred upon Amazon a limited trade right to continue producing, using, and selling Amazon S3 without further harassment from PersonalWeb, either directly or through suits against Amazon’s customers for using that product.”
What PersonalWeb means for startups.
At the outset, the PersonalWeb case reveals the customer suit tactic that startups should be on the lookout for. If a startup receives a demand letter accusing it of infringement, where that accusation is based on a product or service it buys from another company—it should consider investigating whether the supplier has already resolved that threat of infringement. If so, there may be no basis for a lawsuit against the startup-customer.
The PersonalWeb case also shows one way larger companies can (and do) defend their customers in patent litigation, and how startups can benefit when a larger company defeats a patent accusation. In this case, Amazon won an earlier victory in court, and could therefore step in and ensure that its victory was also applied to its customers.
Other examples show ways startup-customers can benefit from another’s patent litigation victories, validity challenges, and licenses. For example, in one case, several Android app developers were accused of infringement based on their use of in-app payments. Google responded by filing a request with the patent office, challenging the validity of the asserted patents. In another example, when numerous small businesses were accused of infringement based on their use of WiFi, Cisco, Motorola, and Netgear stepped in. Each of those WiFi providers had licensed the patents-in-suit, and those licenses also covered the smaller customers. Similarly, when a PAE threatened a lot of app developers with infringement, Apple responded that it had a license to the asserted patent which protected the developers.
Finally, the PersonalWeb decision should make it harder for PAEs to file numerous customer suits. Once a product or service is adjudged to be non-infringing, other customers that use the product or service should be able to seek the same protection from the Kessler doctrine. This will hopefully reduce the incentives for PAEs to file customer suits, because they are less-likely to prevail.
Disclaimer: This post provides general information related to the law. It does not, and is not intended to, provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
