Face the patent trolls and fight is the message that Bob Cote of Orrick, Herrington & Sutcliffe LLP gives in the Patent Focus 2005 supplement of Managing Intellectual Property. Mr. Cote's article is the most detailed discussion of patent trolls that I have seen. His focus is on the financial industry, but he provides context from the gold rush of large patent damage awards, settlements or royalties from the technology sector.
He begins by stating that, "The growth in patents and the resulting increase in patent licensing and litigation follow a clarification in the patent laws in the well-known State Street Bank case, in which the US Court of Appeals for the Federal Circuit made it clear that business methods, products, and services in the financial industry could be patented. Following that ruling, financial institutions have applied for, and have been granted, business method patents and software patents in much greater numbers and frequency."
Mr Cote continues:
The rising tide of patent litigation in the financial industry is not only a function of the new IP economy and the value and power of patents, but is also a function of what some target companies have referred to as patent trolls - companies or individuals whose primary business model is the licensing and litigation of patent assets, and who assert patents without regard to validity, solely for multimillion-dollar cost-of-litigation settlements.
The driving force behind this surge in patent litigation is gold fever caused by early success stories, and the win-win business model created by a willingness to engage in cost-of-litigation settlements.
He provides some details on each of the following patent litigation success stories in the tech sector:
Mr. Cote outlines three principles for improving the chance of success when taking the hard line approach with patent trolls. They are:
- One must understand that patent trolls threaten industries and not just individual defendants and that lawyers with strong people skills are essential for convincing competitors to support a strong defence, including with access to prior art and other resources.
- It is imperative that defence counsel seize control of the case at the outset, by investing up front in preparing the case to win.
- The recognition that even with a more aggressive, take-control strategy, litigation costs can and should be managed through an emphasis on informal discovery, rather than the overbroad and less effective formal discovery, stone-walling, bulldog tactics, and repeated motion practice that is in widespread use.
He discusses the impact of three cases in different sectors of the financial services industry: Datamize (online broker dealers); DataTreasury (banks); and Trading Technologies (futures brokers).
As I read the article, I was struck with the complexity of the decision on whether to proceed to litigation when faced with a patent infringement suit or instead attempt to reach a settlement. The decision must reach beyond just the cost of the litigation (Mr. Cote indicates this can be in the range of $5 million) and the risk of losing and paying a large damage award. As he properly points out, a settlement can have large precedential value for your company and your industry. The same is true of a large damage award. In numerous complex cases, patent infringement as well as others, I have often worked with counsel to use decision analysis (the building of a decision tree that outlines the potential choices, ultimate outcomes and their probabilities and value) to assess whether to settle or litigate the case. The resulting numbers are not always as important as getting the client's decision makers, outside counsel and experts (if they have been retained) to sit down together and frame the case issues, the potential outcomes and the associated costs. On more than one occasion, I have seen two people involved in this process debating the chance of success on one aspect of the litigation. One says, "I think our chances of success are only fair" and the second person says, "I think we have a decent shot." When pushed to quantify their opinions, Mr. Fair estimates a 55% chance and Ms. Decent Shot estimates a 60% chance. They look at each other a little puzzled and both conclude they have been wasting a lot of energy debating something that they are both in near agreement on because they had gotten bogged down in language.
So, if you are planning to take the hard line approach, take time to think through the ramifications of both litigation and settlement whether you use decision analysis as a tool or not. And take the time to read all of Mr. Cote's article.