There has been a steady decline in number of contingency litigation law firms, attorneys, and even cases filed, which continues to greatly impact the intellectual property industry. To get to story behind declining contingency litigation, IPWatchdog recently sat down with Paul Storm, partner in Gardere’s Intellectual Property Practice, and Edward C. Kwok, partner in VLP Law Group’s Intellectual Property Practice.
According to Storm, the decline in contingency representation over the last few years can be explained by weakened patents making success on the merits less likely. Even if the patent owner does prevail, what will the win? After a win at trial, the law of damages has made large damages less and likely to achieve in the first place, and keep even if awarded after trial.
“The net effect is that all patents are less valuable and weaker patents are much less likely to be asserted,” Storm explained. “The overall reduction of contingency law firms and attorneys has led to a reduction of all cases and to earlier, lower settlements.”
Storm makes an excellent observation. Contingency representation is monetarily feasible for attorneys and law firms if and only if there is a high likelihood of success. Even in the best case scenario attorneys will sometimes make bad judgment calls when taking a contingency case, but when the underlying asset is under attack — as patents have been — it makes it all the more difficult to justify the risk of putting in all that work and ultimately receiving nothing in return.
For Kwok, there are three separate factors that explain the decline in contingency law firms, attorneys and number of cases. First is the supply of patents. Between 2003 – 2008, the USPTO had a “quality” campaign where Examiners were told to be tough. KSR v. Teleflex also helped make getting patents harder and invalidating patents easier.
“In the meantime, the U.S. electronics/computer industry shifted to much more software-intensive technologies, which allows companies to become dominant extremely rapidly,” he explained. “One result of quick dominance is early entry barrier. Less start-up competitions means less patents that can be picked up by NPEs from failed startups and less plaintiffs.”
Second, adversarial proceedings at the PTAB are quicker, perceived less burdensome and less costly option for defendants to litigate patent validity on the merits. Defendants are more willing to engage plaintiffs in the PTAB. “PTAB litigation raises the stakes for NPEs significantly,” Kwok said.
Finding contingency representation, where the attorney or law firm only get paid if money is recovered through settlement or successful litigation, becomes extremely difficult in a world where nearly every substantial patent litigation winds up having an inter partes review (IPR) filed to challenge the patents involved. When one needs to first fight validity to get a ticket to the courtroom it has a way of making contingency representation far less attractive.
Third, hardware manufacturers moved overseas, so component products now rarely touch U.S. soil. Components, such as integrated circuits, are often designed, manufactured, sold, and delivered to system integrators overseas. The number of defendants can be sued on U.S. soil has shrunk significantly.
“Suing a foreign component entity presents jurisdictional and discovery uncertainties,” he said. “The end-product manufacturers are typically few and large enough to be able to negotiate hard and not settle early, which has also significantly raised the NPE stakes.”
Today, financing for patent enforcement campaigns has become even harder to come by for individuals, per Kwok. For instance, large NPE organizations like Intellectual Ventures, Rambus and Acacia are not growing as much. Instead of buying, many of the large NPEs are adopting the Rambus model, i.e., developing the patents in-house. In fact, Kowk has been told that many financing companies have left the field.
What about the value of patents post-PTAB? “Still too early to tell,” said Kwok. But, a couple of cases (e.g., Oil States) pending before the U.S. Supreme Court can potentially change the landscape. “Otherwise, I think people will adjust over time and new case law and strategies will emerge to mitigate the patent-unfriendly character of the PTAB,” he added. “The more significant factor is really the direction of U.S. industries. Technology monopolies are a much greater factor that makes patents less valuable.”
As those with patents in the industry know, it has been very difficult to get contingency representation for software-based patents for some time. Kwok provided an anecdotal data point from a colleague shopping a software-based patent to several plaintiff’s firms. Every potential firm has a different and contradictory take on how the claims would be litigated by the potential defendant, and everybody claims to know how to litigate under Alice, but nobody does. The only common belief is that nobody wants to put the case before a jury. Regardless of whether the case is prosecuted contingency or not, Alice will eventually have to be overturned, according to Kwok.
“The decision was irrational and self-contradictory, as borne out by the subsequent case law development. The uncertainty in the law makes meritorious patents difficult to get or enforce in such future technological development along the lines of artificial intelligence, fintech and data sciences, and even in some conventional system integration technologies,” he explained. “Whether that impedes the advance of science and useful art is debatable, but U.S. based companies, being high-cost technology developers, have lost a significant entry barrier.”
So exactly, how much have NPEs declined lately? This is difficult to quantify, Storm explains, the number of NPEs may not have changed much but the number of lawsuits filed by NPEs has dropped for the reasons discussed above. In general, there are much fewer weak cases filed so less defense work on such cases.
“The drop in weaker cases is a welcome relief from the patent troll plague, but the changes in the law that has lead to this has also weakened all patents,” he said.
These days, the overall value of all patents have been reduced by the AIA. According to Storm, while patents are still presumed valid, the likelihood that a patent will be invalidated in an AIA proceeding weakens all patents, so all patents have less value.