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Managing Costs of Patent Litigation

Written by Chris Neumeyer
Managing Partner of Asia Law
Blog: International Technology Law Blog
Posted: February 5, 2013 @ 10:30 am
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For several years I was the lead attorney at a Taiwan company that manufactures technology and consumer electronic products, from light-emitting diodes to liquid-crystal displays.  Every month we received a new demand for patent licensing or indemnification and it was my job to dispose of them at no cost, without licensing, litigation, or outside counsel.  Usually it was possible, but occasionally we found ourselves mired in full-blown litigation.

It’s no secret patent litigation costs are immense.  According to the American Intellectual Property Law Association, the cost of an average patent lawsuit, where $1 million to $25 million is at risk, is $1.6 million through the end of discovery and $2.8 million through final disposition.  Adding insult to injury, more than 60% of all patent suits are filed by non-practicing entities (NPEs) that manufacture no products and rely on litigation as a key part of their business model.

However, whether one represents a plaintiff or defendant, manufacturer or NPE, there are actions one can take to help manage the costs.  Below are some general guidelines.

Preliminary Matters

As always, it starts with precautions.  A company should investigate the patent landscape when designing new products and consider developing its own portfolio of patents that can be asserted defensively in the event of actions by competitors.  It should establish a sound document retention policy, keeping documents only as long as reasonably necessary or required by law; then discarding them to avoid potential costs of gathering, reviewing and producing them in future litigation.  It should treat demand letters seriously and respond to them with the utmost of care.

Prior to filing suit, a patent owner or its agent should carefully examine the defendant’s products, prepare detailed claim charts, investigate defendant’s sales and confirm that jurisdiction is proper, to avoid meritless claims and wasteful motions.  Better yet, consider attempting to negotiate a license without filing litigation.

Upon being sued, defendant should promptly investigate internally to determine its relevant sales volumes (past and future), the date it first received notice, whether the accused technology was supplied by vendors (in which case indemnification demands should be sent), and the feasibility of switching to licensed or non-infringing suppliers or designing around the patent.  Business solutions, if they exist, will invariably be cheaper than litigation.

The client should consult with several law firms before selecting one.  Request preliminary opinions and suggested strategies.  Ask which attorneys would be assigned to the case.  A lean team with relevant experience and varying levels of seniority is best, and client approval should be required before changes are made to the team.  Ask for their hourly rates; then negotiate the rates down and request the rates to remain fixed for the duration of the suit.  Inquire about alternative fee arrangements, such as fixed monthly fees, contingency, hourly with a cap for each stage of the proceedings, or a discounted rate with potential success fee.

Budget, Strategy & Cooperation

Sound budget and billing practices are critical.  Client and counsel should work together to develop a realistic budget, with firm figures for each stage of the proceedings; then review it together regularly as the case proceeds, to update as needed and ensure there will be no surprises.  Counsel should make clear which budget items are mandatory and which are discretionary, so the client can make informed choices.  Counsel should be required to provide timely, detailed invoices and the client should promptly review each invoice and voice any questions or objections.

A thorough case evaluation should be performed, developing strategy early and updating periodically.  Client and counsel should review patents and other documents, interview witnesses, investigate related lawsuits and licenses, investigate infringement, validity and damages, and calculate potential exposure, in order to evaluate settlement or litigation strategies, establish themes and priorities, and narrow the dispute, to keep the team focused on key issues and reduce the expenditure of time and money on low priority tasks.

In-house counsel should play an active role, appointing a contact window for outside counsel and assembling a designated team of internal legal, technical and IT staff to assist with discovery and support the litigation.  Client approval should be required before any motion is prepared, and attorney/client discussions should take place regularly to discuss the status and ensure the case is on track.

In the event of multiple defendants, a joint defense agreement can result in substantial cost savings, by allowing the parties to share legal counsel and split the costs of shared tasks.  It may also contribute to a more favorable outcome by allowing the parties to share strategy and present a unified defense.

Despite the adversarial relationship, attorneys should strive to develop cooperative relations with opposing counsel and seek to reach agreement whenever possible, from granting extensions of time and establishing discovery parameters, through good faith settlement discussions and stipulations at trial, in order to minimize costly motions and disagreements.

Early Resolution

Both sides should seriously explore the possibility of settlement, initially and throughout the case.  Sharing evidence relating to validity, infringement and damages may help the parties to re-assess the value of the case and decide litigation is not worth the cost.  Counsel should attempt to get claim construction hearings scheduled early, as claim construction often facilitates settlement.  Additionally, scheduling such hearings prior to the exchange of expert reports may save costs by eliminating the need for experts to prepare alternate reports (in case of alternate rulings), or amend reports that were based on a rejected construction.

Defendants should investigate invalidating the patent.  Whether one files a request with the USPTO for ex-parte re-examination or inter-partes review, either option will be considerably cheaper than litigation.  Moreover, in such proceedings there is no presumption of validity, as there is in court, and a lesser, preponderance of the evidence standard applies.  Even if one fails to invalidate the patent completely, it still may be possible to cancel or modify a few claims, which could simplify the litigation or lead to settlement.

Summary judgment and other motions for early disposition can be great, but only if the motion will likely prevail and won’t result in a comparable action being filed in an equally unfavorable forum.  Client and counsel should investigate all potential motions to end the case early, but carefully evaluate the likely outcome and whether the benefits will outweigh the costs.

Discovery

Discovery, in general, and e-discovery in particular, is widely blamed for most of the excess costs of litigation.  As Federal Circuit Chief Judge Randall Rader explained in a 2011 speech, “I saw one analysis that concluded that .0074% of the documents produced actually made their way onto the trial exhibit list – less than one document in ten thousand.  And for all the thousands of appeals I’ve evaluated, email appears even more rarely as relevant evidence.”

Consequently, Judge Rader endorsed a model order drafted by the Federal Circuit Advisory Council, containing measures intended to help rein in the costs of discovery, such as excluding e-mail and metadata from FRCP Rule 34 and 45 requests, absent good cause; imposing presumptive limits of five custodians and five search terms for e-mail requests; and shifting costs for disproportionate e-discovery requests.  Courts in Texas, Illinois, California, Colorado, Delaware and other jurisdictions have adopted that model order or variations of it and prudent counsel will urge their court to do the same.

Even without a court order, one can reduce discovery costs by tailoring requests precisely (and narrowly) to avoid creating discovery disputes or receiving overly voluminous responses, much of which will be of limited relevance and usefulness, but all of which will require costly hosting, processing and reviewing the documents.

According to a Rand Corporation study, $0.73 of every dollar spent on e-discovery goes to document review.  Review costs can be reduced by outsourcing or using contract counsel with low billing rates.  Additionally, voluminous responses can be winnowed down using predictive coding or other computerized methods that employ algorithms to determine the likelihood that documents are relevant, responsive or privileged, so humans will then have a more manageable stack of documents to examine.  The Rand Corporation study found such methods at least as accurate as humans for large-scale review.  Consequently, one Delaware court ordered the use of predictive coding to enhance the efficiency of e-discovery (EORHB, Inc. v. HOA Holdings, LLC (Del. Ch. 2012)), despite no attorney having raised the subject.  Clients should inquire with their counsel about all such options and seek explanations and justifications.

Conclusion

Patent litigation will always be costly, in particular when at least one participant favors aggression or believes the stakes are especially great.  However, even in such hard-fought cases, by taking the sorts of actions described above – planning, preparing, assessing, narrowing and focusing – the attentive client or counsel may succeed in achieving some predictability and keeping costs to a minimum.


About the Author

Chris Neumeyer is Managing Partner of Asia Law, a Taipei law firm that handles commercial and corporate transactions and disputes involving technology and intellectual property, including patent licensing, litigation and monetization. Chris has been admitted since 1991 in the State of California, U.S. District Court for the Northern District of California and Ninth Circuit Court of Appeals and is registered in Taiwan as an Attorney of Foreign Legal Affairs. Since 2000, Chris has lived in Taiwan, where he has been employed with Texas Instruments and as Director of the Legal Department at Lite-On Technology Corp, a $7 billion OEM manufacturer of diverse technology products. Prior to that he practiced litigation in California.

4 comments
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  1. Chris,
    I feel for you man. I don’t see how you do it!
    I’ve practiced IP law, as a private firm IP litigator/prosecutor/counselor, for 30 years. One of the sad realities of this is that guys like you understandably feel compelled to go out and hire what you believe to be the “best IP litigation firm money can buy.” Spoken or unspoken, this seems to be the driving force for decision-making when in-house counsel hires a US firm to represent them in patent/IP litigation. Why? Two words-“job security”!
    In your situation, I might do the same thing; that is, if I had not been “in the trenches” all these years where I have seen, first hand, how all these alleged “top-notch” IP litigators screw up, over and over again, doing stupid stuff I can use to help my clients leverage a reasonable settlement or win a case.
    Anyway, in most cases, If the matter goes bad, in-house counsel can almost always go back to management and say, in essence, “Hey, guys, I hired the ‘best’ IP litigation firm money can buy, under the circumstances.” Then in-house counsel is almost always off the hook.
    But if you dig deeply, you should find that most of the alleged “top” IP litigation firms are said to be the “best” because, long ago, they started a very subtle campaign of spreading the word that they are “the best” and, of course, doing so in just the right way. Then, when what started as pure “myth” becomes reality, they are off to the promised land–with what is akin to a money-printing machine. AND ITS YOUR COMPANY’S MONEY THEY ARE PRINTING! I’m sure you know how that works.
    The truth is those simply are NOT the best IP litigators money can buy–nowhere close. They might be the best at throwing scores of overpaid associates/junior partners at a patent/IP case on a so-called litigation “team” who, in reality, have little or no idea what they are doing (but who are deluded into thinking they do), so their firm can bill YOU hundreds of thousands or even millions of dollars doing largely wasteful or unnecessary stuff that does not meaningfully advance your company’s position in the case, especially on the MERITS, to help enhance your prospects for a reasonable settlement or to “win” the case on the merits, if necessary.
    It is a shame, really.
    I’ve done lots of so-called “big-time” patent/IP litigation all over the country, and I have usually been quite successful. Its just not that complicated. I have found that it often takes people who don’t know what they are doing (or who are trying to gin up fees) many hundreds of thousands of dollars to figure out how simple and straightforward a patent case is, if they EVER do!
    The people managing “big business” in Corporate America need to be educated about these facts. Excellent quality IP litigators exist all over the place in small or even solo practice firms. It is simply NOT necessary to hire these mega-IP firms to handle even seemingly substantial or complex IP litigation–absolutely not! Again, these cases are never really that complex–they almost always end up being about a few relatively simple issues where the outcome is driven by relatively clear legal principles applied to a few relatively straightforward facts. Ask the Federal Circuit (I’ve been there many times). The “best” IP litigators are able to figure this out very QUICKLY! Then they can sit back and watch their adversaries go off on tangent after wasteful tangent, spending untold amounts of the other side’s money.
    Excellent, experienced IP litigators in small or even solo IP law firms, who really know what they are doing, can attain superb patent/IP litigation results for a small fraction of what it costs to hire these mega-IP firms. The sooner management learns this and gives guys like you the freedom to seek out competent, experienced IP/patent litigators, without feeling you have to hire these ultra-expensive, IP mega-firms, the sooner these stupid “fee-fests” will stop!
    Mark S. Graham, Esq.-Knoxville, TN

  2. Mark,

    Thanks for the comments. Actually, you misjudged me. When assisting my Asian clients in retaining litigation counsel, I often recommend small firms rather than mega-firms. I fully agree that one can find equally talented attorneys in a small firm, who will charge substantially less, may be more attentive to the case, more genuinely concerned about obtaining a good outcome for the client, and won’t pass it off to a colleague who knows nothing about the case and never spoke with me.

    Despite their higher rates, I’ve had good experiences with mega-firms, too, in particular with joint representation. But, like you, I tend to prefer smaller firms and have several that I work with regularly, whose attorneys previously worked for top-notch global firms, but now perform the same services for substantially reduced rates.

    I’ve also heard of the practice you describe, of some in-house counsel hiring top brand-name firms, so if things go badly they can inform management “we hired the best; there was nothing more we could have done.” In fact, I had a former boss who was always talking of “cover your ass” and sometimes employed the above strategy, but I prefer to cover my ass by doing a great job: by carefully reviewing the facts and law, doing research, writing precise correspondence and documents, retaining skilled, honest, counsel who genuinely care, working with them closely, reviewing their work, and communicating regularly with them and with management.

    It’s the lazy, unskilled approach for in-house counsel to hand a case over to a mega-firm, or any attorney or expert, and expect them to constantly look out for the client’s best interest, only performing tasks that truly advance the objective in the most effective and cost-efficient manner. It’s not that outside counsel are dishonest, but it’s surprising how many very bright, experienced lawyers, experts at their particular legal field, are too busy or don’t seem to understand that most companies struggle extremely hard to make every dollar, are constantly seeking to minimize all costs, and don’t want to get caught up in legal maneuvering, instead wanting only the end objective at the lowest possible cost.

    Consequently, in-house counsel should hire the lawyer, not the firm. They should obtain fee quotes and preliminary advice from several attorneys. They should evaluate which one seems to best understand the client’s objectives and how to best achieve them. They should demand that the attorney provide fee caps or some other means of certainty, because it may be true that “it’s difficult to estimate how much time will be required,” but that doesn’t matter one bit to the client, because companies require foreseeability. And they should work closely with outside counsel to ensure the most effective, cost-efficient strategy and sound execution of the strategy.

    So, I guess we agree. Regrettably, sometimes one does get forced into patent litigation and it”s invariably expensive, but careful management of the case and counsel can make a difference.

    Chris

  3. When we consider purchase of an automobile, we have some regard to economy in terms of miles per gallon. When an aircraft is designed, economy in terms of passenger miles per gallon is of paramount importance.

    In the UK in recent years, the courts have given consideration to cost reduction and rule changes have been made for that purpose. In particular, the value of discovery has been found by experience to be issue-related, although on occasions discuvered documents have had a decisive influence. But in many cases litigation bloat and large teams rule. The US suffers from this problem to a greater degree than us, and the disproportionate cost of discovery was commented on at the Florida Experts Conference only two days ago.

    So who do we get more bangs per buck in litigation, or more decisions of practical utility to the parties for each invested $?

  4. I should have said how do we get…