Patent Contingent Fee Litigation
|Written by David L. Schwartz
Assistant Professor Chicago-Kent College of Law
Posted: March 25, 2012 @ 2:04 pm
In the last decade, a substantial market has begun to develop for contingent fee representation in patent litigation. Wiley Rein — a traditional general practice law firm with hundreds of attorneys practicing all areas of law — represented a small company, NTP, Inc., in its patent infringement lawsuit against Research in Motion, the manufacturer of the Blackberry line of devices. The lawsuit famously settled in 2006 for $612.5 million, and the press reported Wiley Rein received over $200 million because it handled the lawsuit on a contingent fee basis. And Wiley Rein is not alone in doing so. Many patent litigators around the country have migrated toward handling patent cases on a contingent fee basis.
In the past, patent litigation was almost entirely performed on an hourly fee basis rather than on a contingent fee basis. That made sense because patent litigation appeared a poor candidate for contingent representation. Among other reasons, patent cases were expensive to litigate, took years to resolve, and outcomes on liability and damages were considered uncertain and unpredictable. In contrast, personal injury cases are relatively inexpensive to litigate, are adjudicated quicker, and often the liability of the defendant is not seriously disputed.
With these impediments, why has a substantial market for contingent fee patent litigation developed? In my article The Rise of Contingent Fee Representation in Patent Litigation, I offer several reasons based upon extensive interviews of patent attorneys. First, there have been several high profile contingent lawyer successes in the last twenty years, especially in the last ten years. These successes include those highlighted in a 1993 American Lawyer cover story about patent contingency litigator Gerald Hosier, who made over $150 million in a single year, and the Blackberry case previously mentioned. These highly visible victories encouraged hourly billing lawyers to consider transitioning into contingent practice. Separately, the press coverage encouraged small clients to attempt to monetize their patents, either by assertion in litigation or sale to others.
Second, a new market for the sale and purchase of patents emerged. Unlike causes of action in other contingent areas, patents and the right to recover past damages are freely assignable. If patent owners are unable to or uninterested in filing a lawsuit to recover money, they can instead sell and assign the patents and related causes of action to another entity. While historically there had not been a significant amount of buying and selling of freestanding patents, there is substantial evidence that the market for patents has recently grown. In the past few years, there has been an explosion of patent transactions in the news. In December 2009, Micron Technology sold approximately 3,400 patents to Round Rock Research, LLC, a non-practicing entity. In August 2011, Google announced that it intended to purchase a division of Motorola for $12.5 billion, and the primary reason for the transaction was Motorola’s patent portfolio. The month before, in July 2011, Nortel sold its patent portfolio to a consortium of major IT companies for $4.5 billion. This publicity highlighted the value of patents, thereby encouraging even the largest multinational corporations to carefully consider how to monetize value from their patents, including evaluating selling a portion of their patent portfolios.
What is the nascent marketplace of patent contingent fee litigators like? Because the market for contingent fee lawyers is still emerging, it is not transparent yet. The inner workings of the market are not well known to academics nor are they even fully understood by the lawyers who are litigating the patent cases. To illuminate the market, I ventured into previously untapped resources. Instead of relying on traditional academic sources like case law and theory, I drew upon mostly unexplored sources of data, including in-depth interviews with over forty lawyers involved in contingent representation in patent litigation and analysis of more than forty contingent fee agreements. By learning from the direct participants, I believe that I am able to provide a rich and detailed description of the major players in the market including their incentives and their business models. Surprisingly, the market relating to patent contingent fee representation is extremely diverse. The market includes experienced and highly reputable trial lawyers; small contingent firms; and dabblers who mainly work on hourly-billing cases. Several types of entities that work with (and at times compete against) patent contingent fee lawyers also fill out the patent contingent fee landscape. These entities include patent aggregators, which purchase patents from other entities, and financing entities, which invest in both patents and patent litigation.
For simplicity, based upon the empirical information collected and described in the full article, the market of contingent lawyers can be broken down into the following segments.
- Elite trial lawyers, including (i) former big firm patent trial lawyers and (ii) top trial lawyers from other contingent areas of practice such as tobacco litigation;
- Big firm lawyers who work at national general practice firms or IP boutiques that traditionally have used hourly billing, dabbling in patent contingent litigation;
- A large number of both new and established patent contingent law firms who rely on the portfolio manager theory of contingent fee litigation — overseeing a large number of cases to ‘risk pool’ and reduce the risks of each individual case; and
- Small groups of lawyers who recently entered the market and litigate patent infringement suits on behalf of single non-practicing entity clients against a large number of defendants, seeking a relatively smaller payout from each defendant.
Predicting the future of contingent patent litigation is difficult. The market for contingent fee representation in patent law will become more mature in the next several years. As markets mature, they generally become more efficient and competitive. Currently the patent contingent market supports a diversity of lawyers, litigation strategies, and patentees, but competition may change this. There will always be individual and small corporate inventors who are unable to pay legal bills on an hourly basis, and these are natural clients of a contingent fee lawyer. But higher quality patent lawyers with substantial litigation experience are being drawn into the market. They are entering the market because there are stronger patents, both in terms of infringement and validity, available for contingent litigation. These stronger patents are available for litigation because of the increased fluidity of the patent transaction market. The fluidity often results in patents being assigned to entities more likely to sue. On the other hand, there have been a series of court decisions in the last few years which have substantially weakened patent rights and remedies. Weaker patent rights lower the value of cases, which in turn decreases the number of patents that are desirable to lawyers to litigate on a contingent basis. The America Invents Act, adopted in September of 2011, also changes the law in a way that may discourage contingent practice for lower value cases, by prohibiting joinder of multiple unrelated defendants in most circumstances. The vast majority of the interviews I conducted were before the adoption of the America Invents Act. At present, it is difficult to foresee what resolution these contradictory forces will meet.
For a more complete account of contingent fee practice in patent litigation, please read a draft of my article The Rise of Contingent Fee Representation in Patent Litigation. Because the article is still in draft format, I welcome any comments or suggestions via e-mail.
About the Author
David Schwartz is an Assistant Professor at the Chicago-Kent College of Law. He teaches patent law, patent litigation, and other intellectual property classes. Prior to entering academics in 2006, he spent more than a decade in private practice. He has a law degree from the University of Michigan Law School and a chemical engineering degree from the University of Illinois at Champaign-Urbana. He is a registered patent attorney.