Strategies for Patent Holders Contemplating Litigation

Reprinted with permission of Managing Intellectual Property: Patent Yearbook 1999
© Copyright 1999.  All rights reserved.

During the last several years, intellectual property rights, including patents, have become an increasingly important consideration in all competitive markets. The impact of patents on corporate America has become front-page news. One can hardly open a business newspaper today without reading about high-stakes patent litigation. The front page of the Wall Street Journal recently featured a story about the fight over patent rights to vision-correction laser surgery, a procedure that is estimated to be used on 850,000 eyes in the United States this year (Laura Johannes, "Patent Challenges Face Leader in Laser Surgery for Nearsightedness," Wall St. J., May 26, 1999, at 1). In federal court in San Francisco, Genentech Inc and the University of California are engaged in a fiercely contested patent battle over a human growth hormone called "one of the most lucrative biotech inventions of the century," with damages of up to $1.2 billion at stake (Mike Mckee, "Hot-Button Battle Between UC, Genentech Goes To Jury" (visited June 2 1999) http://www.lawnewsnetwork.com/practice/IPlaw/news/A16 4-1999May20.html>; IPO Daily News, Monday May 24 1999 visited June 2 1999) c hron.htm>).

The cover of a recent issue of Forbes touts the success of the initial public offering of Priceline.com, the Internet business that sells airline tickets (Dyan Machan, "An Edison for a new Age?" Forbes, May 17 1999, at 178). Priceline.com, which was recently valued at $18.5 billion (id), has at its foundation two business method patents, one of which is the focus of a bitter dispute (Josh McHugh, "Barbed Wire on the Internet," Forbes, May 17 1999, at 183). Interest in business method patents has been fueled lately by a growing awareness of Internet-based "e-commerce" and a ruling by the United States Court of Appeals for the federal circuit that acknowledges the validity of such patents. (State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed Cir 1998), cert denied, 119 S Ct 851 (1999).)

For businesses competing in an environment where patent rights are at issue, the significance of these rights cannot be overstated. It is essential that businesses recognize the value of their own patents while at the same time understanding the threats that their competitors' patents present. Only with this clear understanding of respective intellectual property rights can business people make wise choices about enforcing their patent rights.

To sue or not to sue–weighing the costs

The overriding strategic decision facing patent owners is how to enforce their rights. Enforcement options range from simply offering licenses in a patent to full-blown patent infringement litigation. Before bringing in infringement action, however, several factors must be addressed. Major considerations include whether there is a good faith basis for an infringement lawsuit, whether the patent is valid and enforceable, and what types of damages are available.

For the plaintiff in a patent infringement suit, it is critical that the patent be "deconstructed" well before suit is brought. Trial counsel should intimately familiarize themselves with the claims, specification and the prosecution history and have their proposed claim interpretation well in mind prior to bringing suit. This is especially true in judicial districts such as the District of Delaware and the Western District of New York, where patent cases are routinely being tried within 12 to 15 months of the filing of the complaint. It is even more true in the Northern District of California, where recently-enacted local rules for patent cases require that a patent infringement plaintiff provide a disclosure of those claims which are infringed within 45 days after filing a complaint and must provide a proposed claim construction within six months of filing a complaint (see ND Cal Civil LR 16-7, 16-10).

To satisfy themselves that a patent will be valid and enforceable, trial counsel may need to update whatever patentability searches were made concerning the invention to see if any additional prior art could be found to be material. Likewise, the prosecution of the patent should be carefully examined to determine if there is any basis for an inequitable conduct defense. Have a good-faith basis for bringing a lawsuit requires that an attorney has made a reasonable inquiry to determine that the patent claims "read on" the accused device–a conclusion that often cannot be reached without testing or reversing engineering (see Judin v. United States, 110 F.3d 780, 784 (Fed Cir 1997)).

Once the legal and technical questions about the strength of the patent and likelihood of infringement are answered, a patent holder must make a business decision by weighing the costs of litigation against the benefits that may be obtained from damages or in injunction. This requires detailed estimates of the costs of litigation as well as potential damages. One of the most important, yet often overlooked, litigation strategies concerns budget considerations. Analyzing potential litigation costs early is critical to determining whether litigation is the most prudent course. Simply put, one must determine whether it makes economic sense. Obviously, there may be business strategies, such as injunctive relief, that dictate that litigation be brought even when the recoverable damages alone would suggest otherwise. Nevertheless, a review of the overall litigation costs is paramount to a full discussion regarding the risks and benefits of litigation (or continued litigation) and the reasonableness of available alternatives to resolution. Time should be set aside in early strategy sessions to discuss the range of alternative actions, potential costs and likely scenarios. One of the best ways to help shape discussion between lawyers and business people and to prevent surprises is to outline a potential budget prior to commencing suit. As part of this consultation, companies should be reminded that insurance may be available to cover the litigation costs.

In making this business decision it is vital that a patent holder have an appreciation of the staggering costs of patent litigation. Litigation should not be considered lightly: Patent cases are almost always complex, difficult, expensive, and often take a long time to settle or take to trial. Patent litigation often entails extensive, time-consuming discovery. Moreover, experts–which can be very expensive–are necessary in almost all patent cases to explain the technology to the jury. Serious thought should also be given to the use of demonstrative exhibits because they almost always help the jury understand the technology. With today's vast technological resources, this often entails tools such as computer animation, which is costly. The American Intellectual Property Law Association estimates that the median cost to each party in a patent trial is $1.2 million (R. Korman, "Lo! Here Come the Technology Patents. Lo! Here Come the Lawsuits," NY Times, December 27 1998, at BU4). In addition to the monetary costs, a patent holder should also consider the intrusiveness the suit will bring to the company. Employees of the company will be required to search for documents, may be deposed, and often will take part in strategic meetings. In short, workers–including high-level managers–will be diverted from their regular work.

Although patent litigation carries a high price tag and is time-consuming, the risks of patent litigation are often outweighed by the potential benefits of a successful suit. Patent infringement cases can result in enormous damage awards. In addition, patent cases can force a competitor into a license agreement. Further, patent litigation may be necessary to halt the continuing harm that can result from unchecked infringement such as long-term lost profits and lost shelf space.

In any event, no matter what enforcement strategy a patent holder employs, the patentee needs to decide the objectives it seeks from the litigation–is the objective to obtain an injunction to maintain the patentee's exclusivity in the market, or is the objective to force the accused infringer to pay past damages and/or to enter into a license agreement? The objective must be firmly established so that major decisions can be made effectively.

Picking the defendant

Selecting whom to sue is a pivotal decision in any patent infringement case. In some cases, there may be dozens, hundreds, or even more potential defendants. Once a universe of suspected infringers is identified, a plaintiff must make a series of strategic decisions about whom to sue. Nothing obligates a patent holder to pursue all infringers at the same time.

Under the patent statute, not only manufacturers are liable for infringement, but rather anyone who, without authority, makes, uses, offers for sale or sells a patented invention in the United States or imports into the United States any patented invention (see 35 USC §271(a)). In sum, the scope of infringers often includes a vertical chain from manufacturer to distributor, to retailer, to end user. Additionally, those who contributorily infringe or induce others to infringe should not be overlooked (see 35 USC §271(b),(c)). In appropriate cases, a plaintiff should include as defendants corporate officials who have induced infringement of the patent (see 35 USC §271(b); Power Lift, Inc. v. Lang Tools, Inc., 774 F.2d 478,481 (Fed Cir 1985) (citing legislative history that suggest broad reading of §271(b) which, "in our view, may include liability of corporate officials who actively aid and abet their corporation's infringements"). Plaintiffs should be cautioned, however, that proving inducement of infringement is not an easy task, as both active and knowing inducement must be shown (see Water Techs Crop v. Calco, Ltd., 850 F.2d 660,668 (Fed Cir), cert denied, 488 US 968 (1988).

A number of factors go into the decision of whom to sue. There may be one infringing competitor who is the obvious defendant, and in those cases, the plaintiff need not spend any time choosing the defendant(s). If, on the other hand, there are a number of parties that could be sued, a plaintiff must employ a more analytical approach in picking its targets. Depending on the long-term strategy of the case, choosing the defendant whose infringement would be the easiest to prove and proceeding against that defendant may be wise. Other infringers may be more likely to take a license at a royalty favorable to the plaintiff if the patent has already been enforced successfully and has withstood a challenge to its validity. If this strategy is pursued, however, the issue of laches should not be overlooked. A laches problem can usually be avoided by notifying other infringers that they are guilty of infringement and that they can expect to be sued after the termination of the first litigation.

Another consideration is the size and the resources of a potential defendant. A large company that competes in the same industry as the plaintiff and is savvy in intellectual property matters may have its own patent portfolio from which it can launch retaliatory suits. A defendant with seemingly unlimited resources may also have greater ability to scour the globe for prior art in an attempt to invalidate the plaintiff's patent. On the other hand, it is also important to evaluate a potential defendant's ability to satisfy the judgment that the plaintiff hopes to achieve.

A plaintiff should look at what kinds of business pressures its suit will put on a defendant. A publicly-held company that must answer to its shareholders may be a better target for a plaintiff looking for a quick resolution. And, even when the manufacturer is the ultimate target, including distributors and retailers in the action may be prudent, because it drives them to exert additional pressure on the manufacturer. Finally, counsel should not overlook an evaluation of jury bias. Some jurors tend to be biased against large companies. A recent survey established that jurors feel "cynical and mistrustful of large corporations and their executives" (see Peter Aronson et al, "Jurors: A Biased, Independent Lot," Nat'l LJ, November 2 1998, at A1).

Actions initiated against the final link in the distribution chain–the party who purchases the infringing device and puts it to its intended use–are not uncommon (see E. Horwitz & L. Horwitz, Patent Litigation: Procedure & Tactics §1.02(2) (Matthew Bender 1995)). Usually in such cases, the maker of the device will appear and defend, either because it is obligated to do so by contract, such as an indemnity provision, or an expressed or implied warranty against patent infringement, or because it cannot risk a limited defense by one who lacks real incentive to bear the expensive costs of litigation (see Id).

Looking forward

The importance of patent rights in the competitive business world is not likely to diminish any time soon. The number of patent applications is increasing at an average of 5% a year (Victor G Savikas & Marsha E Durko, "Bills to Make PTO Government Corporation Stall," The Nat'l LJ, May 18, 1998 at C38). Furthermore, the combination of the surge in on-line business with the viability of business process patents will undoubtedly add to the significance of patent rights to businesses competing in the information age. With the technological revolution well underway, the business and legal communities may be witnessing only the beginning of the rising tide of patent litigation.