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
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.
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.
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, 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.
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.