Should You Litigate? What To Do When A Patent Infringement Action Appears On The Horizon
By: Michael N. Rader
Executive Counsel Magazine
The decision whether to litigate a patent infringement case should be subject to the same rigorous evaluation process as any other multi-million dollar business decision. Established procedures should be agreed upon in advance and followed uniformly so that a portfolio of cases (whether offensive, defensive, or both) can be managed in accordance with overall business strategy.
In some situations the procedures can be very simple, i.e., always litigate or strive never to litigate. Alternatively, a nuanced case-by-case analysis can be employed, so long as case-specific decisions are made in a uniform manner to collectively further business goals.
An example of a blanket approach is a company that aggressively asserts its patents against all perceived infringers. This kind of aggressive strategy can make sense for a startup company in a market that presents low barriers to entry. The credible threat of patent litigation may be the only thing preventing the startup from being overrun by larger and better-funded competitors with the ability to quickly enter the space and squeeze out the original innovator.
Other companies choose never to assert their patents, instead utilizing their IP portfolios as a defensive buffer by making those portfolios available for “barter” in sweeping cross-licensing deals with competitors. This more conservative strategy is often employed by companies operating in crowded, heavily-patented fields. The cross-licensing model recognizes that in such fields, it is inevitable that major participants will end up utilizing technology patented by another party. Cross-licensing enables an industry to transfer the fight from the courts into the marketplace, where companies compete on features, service, price or other factors, rather than patents.
What about when companies find themselves on the receiving end of patent lawsuits? Some companies pay to settle patent cases early (at least the cases that have any merit). They believe that doing so saves money in the long run since early settlements often (though not always) are available for considerably less than the cost of litigation. Other companies take a different view, declining to settle even when doing so would be cheap, and forcing patent plaintiffs to take their cases all the way to trial. These companies believe that an uncompromising strategy discourages plaintiffs and decreases the overall number of patent lawsuits filed against them.
Such blanket approaches – to either filing or defending patent litigation – involve decision-making standards that are straightforward to apply and require the organization to do little evaluation in deciding how to handle a particular case. Relatively few companies, though, take such a blanket approach. Most do their evaluations on a case-by-case basis in which every potential or actual patent infringement action is reviewed individually. That review hopefully occurs against the backdrop of an overall business strategy within which patent litigation is just one component.
There are numerous considerations that go into deciding whether to file a patent infringement lawsuit:
Most importantly, how strong is the case? Winning a patent infringement case is not easy. To prevail, a patent-holder must not only establish infringement, but must also overcome numerous defenses that may be available to the defendant. The first point (the need to establish infringement) seems obvious, but must often be emphasized: having a patent does not guarantee infringement. The claims of the patent may be narrower than business executives realize. The patent claims may also be subject to design-arounds that avoid infringement.
Likewise, just having a patent does not mean it is valid. Indeed, as of the writing of this article, the Supreme Court is reconsidering (and will potentially lower) the appropriate burden of proof to find a patent invalid under certain circumstances. A patent can be found invalid on multiple grounds (e.g., that someone else invented the technology first, or that the patent specification provides insufficient detail to support a proprietary claim to the invention, or based on other technical defects).
Other equitable defenses are also routinely pled by infringement defendants, including inequitable conduct, laches and estoppel.
A careful pre-suit investigation – including infringement claim charts, a prior art search, a review of the parties’ prior commercial activities and contacts, and interviews of key witnesses like the inventors, will help flesh out the strengths and weaknesses of the case and the overall likelihood of success.
Of course, because most cases settle, the likelihood of success often is not ultimately tested. But the terms of settlement are dictated largely by the merits, and therefore it is critical to know these details before filing suit for the additional reason that they will be raised by the defendant in an ensuing settlement negotiation.
When deciding whether to sue, another critical piece of information is the availability of remedies. What remedy or combination of remedies is desirable (and achievable) with respect to the infringer’s product – e.g., a preliminary injunction at the beginning of the case, a permanent injunction at the end of the case, past damages, or an ongoing royalty for the future? Each of these remedies presents unique legal issues that must be evaluated separately and in addition to the merits of the patent infringement and validity issues. For example, a preliminary injunction is only available if the case is strong on the merits and the patentee will be “irreparably harmed” by the defendant’s ongoing sales. Preliminary injunctions rarely issue in patent cases. If damages are the goal, what measure of damages will be available? The patent-holder may be able to recover profits it has lost due to the infringement, but proving those can be difficult. The alternative remedy, a reasonable royalty, tends to be lower than lost profits, but is easier to prove.
A third important consideration is the relationship of the parties and products in question. As a patent holder, it is worthwhile to engage in a candid assessment of the extent to which the infringing product adversely affects your business. Strong first reactions to the introduction of a new product by a competitor can be emotional and do not necessarily reflect the true extent of the competitive effect. The value of filing a patent infringement lawsuit will vary depending on whether the infringer’s product and yours are aimed at the same or different market segments, and are priced or otherwise positioned differently. Likewise, is the infringer likely to be able to grow and do more damage in the future, such that immediate corrective action has great value? Or is the infringing product likely to fail for reasons unrelated to your patented technology (e.g., wrong price point, poor marketing, or poor execution by your competitor).
The damage the infringing product is doing (and is likely to do in the future) should be weighed against the cost of litigation and the uncertainties involved (based on the strength of the case as discussed above). In many cases, filing suit will be the right decision even if the merits evaluation is lukewarm, because the competitive product is doing significant damage. In other cases, though, filing suit is the wrong strategy no matter how strong the merits evaluation is, because the commercial impact of the product is small compared to the expense and distraction of litigation. A serious attempt, however crude, should be made to quantify these factors. Sophisticated companies track the success or failure of their predictions on these issues, and learn over time to improve the ways in which they evaluate the importance of potential patent infringement lawsuits.
Don’t forget that patent infringement lawsuits can be used for purposes unrelated to securing an injunction or damages. Although inherently antagonistic, the filing of a patent infringement lawsuit is often the beginning of a business discussion, with the advantage that the patent-holder starts from a position of strength. In lieu of an injunction or damages, a patent case can be settled by establishing a business relationship such as a distribution arrangement or a technical collaboration. Be careful, however, because litigation is emotional. Some companies (particularly less sophisticated ones) on the receiving end of a patent lawsuit may not be inclined to such a resolution, and furthermore may decide to fight the case rather than settle on any terms that the plaintiff would find acceptable. Whatever the true goal, every case should be filed with the understanding – and commitment – that trial is a real possibility.
What about the reverse scenario, in which your company is sued for patent infringement? Should you fight (litigate) or try to settle the case quickly? Many of the same considerations discussed above apply in reverse. How strong are the defenses to the plaintiff’s allegations? How much is at stake? What is the likelihood of an injunction? What is the patent-holder’s goal in the first place? To many clients’ surprise, some of these questions can be answered with reasonable accuracy based on nothing more than a phone call to the plaintiff or its counsel after being notified of the lawsuit. The simple question “what do you hope to achieve through this lawsuit?” often yields a candid response that can help you position your company for quick resolution on acceptable terms.
Alternative strategies should also be included in the equation. For example, for patents that are susceptible to validity challenges, reexamination before the Patent Office is often an effective alternative to litigation. Many courts will stay litigation activity pending the outcome of reexamination proceedings, if the reexamination is filed and prosecuted quickly enough. Even the credible threat of reexamination can change the settlement dynamic, in a favorable way, when dealing with an otherwise aggressive patent-holder.
Additionally, when deciding whether to sue (or how to respond after being sued) for patent infringement, it is important to consider ways to reduce the cost of litigation to make involvement in patent litigation more beneficial (or, at least, less detrimental) to the company. The best way to reduce the cost of patent litigation is to treat it like any other part of your business – subjecting it to reasonable constraints that are consistent with the overall goal of the case. For example, keep the litigation team very lean (two or at most three lawyers) except in the largest and most complex cases. Identify, from the outset, and with specificity, your “paths to victory” – i.e., the legal arguments and trial themes that will win the case. Pursue those relentlessly and with great focus. Employing outside lawyers to chase down leads that do not relate to how you plan to win is not a luxury that most companies can afford in today’s economy. Finally, stay involved and make decisions. Being in constant telephone or in-person (not just email) communication with outside counsel is guaranteed to reduce legal fees. Controlling cost will help leverage the value of patent litigation to further business goals in cases that might otherwise have been prohibitively expensive to pursue or defend.
Finally, develop an internal procedure for tracking all of your patent infringement litigation and determining how it matches up against your overall business strategy. Having the “big picture” at hand at all times will help you decide, the next time a patent case appears on the horizon, whether and how you should fight or settle.
Michael Rader co-chairs the Wolf, Greenfield & Sacks IP litigation group. He can be reached at mrader@wolfgreenfield.com.
