Originally Published MDDI March 2004
With the right business strategy, it is possible to avoid, manage, or reduce patent litigation costs.
Merriann M. Panarella
From drug-coated heart artery stents, to digital mammography, to novel imaging systems for the early detection of cancer, innovations in medical devices occur at a rapid pace. For companies in very competitive markets, innovation is necessary not just for success, but also for survival. And, as companies invest millions of dollars in research and development to produce new or better products, they are increasingly devoting resources to protecting their intellectual property. In 1990, over 176,000 patent applications were filed in the United States; that number skyrocketed to over 315,000 patent applications in 2000. The number of patents granted also followed suit—from 99,000 patents in 1990 to 176,000 in 2000.1
Medical device companies are no exception; for example, in 2000, Medtronic Inc. received 233 patents on its inventions, compared with 32 patents in 1990.2 Given the pressure to bring better, more cost-efficient products to market, this increase will continue, if not accelerate.
Companies Aggressively Protect Their Intellectual Property
But companies are not only filing patent applications. As with any asset, businesses are seeking to maximize the value of their intellectual property, and they are increasingly turning to the courts to do so. From 1991 through 2002, the number of patent infringement cases filed in the United States has steadily increased from approximately 1100 to more than 2600.3 Given the growth in patent applications, an increase in patent litigation seems inevitable. Moreover, in industries where an established player with a patent portfolio sees its market share eroded by a newcomer, it often wages competition on two fronts—in the marketplace and in the courts.
It should come as no surprise that patent litigation is not for the financially timid. According to a 2001 economic survey conducted by the American Intellectual Property Law Association (AIPLA), the median cost to try a patent case with $1 million to $25 million at risk was almost $1.5 million.4 By 2003, this amount had increased to $2 million.5 Moreover, as the amount at risk increases, litigation becomes more expensive. In cases with more than $25 million at risk, the litigation costs were $3 million in 2001,4 and $4 million in 2003.5 Such expenses are not only staggering, but may well be expenses that neither company can afford.
Why Is Patent Litigation So Expensive?
In many ways, patent litigation is unique. Patent cases often involve very complex technology, the exclusive rights to which are defined—often somewhat obscurely—by patent claims. When a party resorts to litigation, chances are it will sue on multiple patents and on multiple claims within those patents.
Before the court or jury can begin to determine whether the accused products infringe one or more of the claims or patents at issue, the court must analyze what the patent claims actually mean. According to the landmark decision in Markman v. Westview Instruments, Inc., the construction of the claims is a question of law for the court to determine.6 To do so, courts conduct what are commonly called Markman hearings, at which the parties present to the court their requested claim interpretations, supported by briefs, tutorials, and expert testimony. More complex and numerous claims result in higher costs.
Originally, experts predicted that the court's pretrial ruling on claim construction would lead to an increase in settlements.7 Not surprisingly, the parties take differing views on the meaning of the claims in issue. The plaintiffs usually favor broad claim construction consistent with avoiding the prior art, and the defendants favor a narrower construction to avoid having the claims read on their products.
Once the court had interpreted the claims, the reasoning went, the parties would be in a better position to determine whether the claims in issue covered the accused products or the prior art. However, since claim construction is a question of law, it is reviewed de novo by the Federal Circuit, giving no deference to the district court's decision or reasoning. And historically, in the course of reviewing claim construction decisions, the Federal Circuit has liberally reversed the lower courts, resulting in less certainty and inclination toward settlement. As Judge Rader pointed out in his dissent in the Cybor Corp. v. FAS Technologies, Inc. decision, “the meaning of a claim is not certain (and the parties are not prepared to settle) until nearly the last step in the process—decision by the Court of Appeals for the Federal Circuit.”8
The discovery process also adds to the cost of litigation. Pretrial discovery in patent matters is very expensive, because it is technically complex and proceeds on a number of fronts. The parties will seek discovery not only on whether the accused products infringe the claims in issue, but also on whether prior art exists which may invalidate the patent, when the patented invention was first offered for sale, and whether the inventor withheld any material references from the patent office. Often the patent was filed years earlier, and efforts to discover the state of the art at the time, contact other inventors, and actually find an earlier invention can be substantial. In the 2003 AIPLA study, the cost of preparing a matter through the end of discovery, with a medium amount at risk, was over $1 million.5
Litigation costs also increase in relation to the parties' business strategies. For a large player in the market, money spent on litigation may not be as important as shutting down an aggressive competitor that has fewer funds to spend on lawsuits. However, with survival on the line, a scrappy competitor in the market will often be a scrappy litigant in court. Added to this mix is the cost of experts. Litigators use experts at virtually every step in the process, on both technical matters and on damages. All of these factors contribute to the high litigation costs reflected in the AIPLA study.
The best way to avoid spending money on litigation is to avoid litigation altogether. While that may be easier said than done, there are several strategies that minimize the risk of being sued and, if sued, provide negotiating muscle. At the outset, it is important to know the competition. What are their current products? What are they touting in the market as the next generation? What do they have in their patent portfolio? A company's business, legal, and technical personnel should all participate in an ongoing review of key competitors. This allows a patent strategy to reflect the company's marketing initiatives, product plans, and technical expertise, as well as legal concerns.
To avoid potential infringement claims, it is crucial to evaluate the risk posed by patents that may potentially cover a company's products. If the patent is problematic, consider whether there are available design changes that would reduce the risk of an infringement suit. At the same time, engage in a search for invalidating prior art. Design changes that bring the product under review closer to the prior art may reduce the risk of suit or, ultimately, of liability.
Developing the right patent portfolio also minimizes the risk of an infringement claim. What would such a portfolio include? To the extent possible, a company should seek patents that cover not only its products but what others in the market are likely to do. By having both marketing and technical personnel periodically review the products and marketing literature of the competition, a company can make efforts to patent innovations that may not necessarily be technological breakthroughs. The right patent portfolio may discourage others from bringing suit: who wants to sue IBM, with a record 3415 patents issued in 2003 alone? And, if a competitor threatens suit, the right patent portfolio allows a company to negotiate a cross-license rather than pay for technology it might have developed itself.
Resolving Litigation Economically
So what happens if, despite its best efforts, a company finds itself on the receiving end of a complaint? Trying to resolve the litigation as economically as possible is consistent with the strategy to avoid patent litigation. Over 95% of patent cases settle before trial, so it is better to resolve the matter as early as possible in the litigation.
Paradoxically, in order to negotiate from a position of strength, a company must signal its willingness to go to trial. The first step to that end is to hire experienced trial counsel. This not only signals a party's seriousness to go the distance, if necessary, but in the long run will save money. While the facts of every case are unique, a firm that has done extensive patent litigation is likely to have faced similar issues previously and will be able to draw on a substantial knowledge base.
Second, formulate a litigation strategy with counsel that reflects the level of legal services necessary and desirable, and request a detailed budget that reflects the chosen strategy. Within the context of litigation, companies certainly have some room to maneuver to control costs, although the amount of room often depends on the opposing counsel, the judge, the complexity of the matter, and the amount at stake. For example, the parties might agree that discovery be limited, that a few representative claims be tried, and that certain dispositive issues be tried first. However, whether such agreements are possible or even desirable depends on the specifics of the case and are not always within a company's control.
Finally, insist that resolving the matter be part of the litigation strategy. To do so, a company must understand the strength of its position. Request that counsel prepare a detailed comparison of the asserted claims—construed according to their plain meaning, if not defined in the patent—with the accused product. In-house counsel should play devil's advocate and challenge developing noninfringement positions. For problematic claims, search diligently for invalidating prior art. An early assessment of the strength of the allegations and defenses, before a headlong dive into discovery, enables the company to determine an early optimal settlement position.
Settlement often works, but do not give up if the lawyers are not successful in resolving the matter. The field of alternative dispute resolution is expanding rapidly. While there are a variety of out-of-court procedures to resolve matters short of adjudication, mediation is employed most frequently. In-house counsel should suggest mediation as an alternative before the parties incur significant discovery expenses.
Why might mediation resolve a dispute in the early stages when settlement negotiations cannot? When a party has reached the point of filing suit or has just been sued, conciliatory gestures are not on anyone's mind. The patent holder wants to get the alleged infringing product off the market, while the alleged infringer is convinced the patents are invalid. Moreover, the party who reveals its real interests first in settlement negotiations gives the opposing side a tactical advantage. Thus, each side seeks to maximize its position at the expense of the other, often resulting in a stalemate.
A mediator can break this stalemate and get the parties talking. Mediation generally begins with a joint session in which each company's principal has the opportunity to hear firsthand the other side's best case. This often infuses a bit of reality in the matter for both sides. In subsequent individual sessions, the mediator seeks to learn the parties' real needs and interests.
Thus armed, the mediator is in a position to facilitate a creative solution that neither the parties nor the litigation process could devise. This is especially true in patent litigation, where the complexity of the dispute provides many opportunities for negotiation, including cross-licenses, paid-up licenses, covenants not to compete, and differing terms upon merger or acquisition.
While not every case can be settled, most are. Magistrate Judge Thynge, who mediates patent cases in the U.S. District Court in Delaware, observed, “Principals frequently are chomping at the bit to talk to one another face to face because they want to get to the economic issues.” She believes that “the earlier the mediation, the better.”9
Litigation comes at a high price, with each party likely to spend millions on the process, win or lose. The best way to control litigation costs is to avoid litigation altogether. Knowing a competitor's patents can help a company avoid their reach; simultaneously developing the right patent portfolio should include patents that can be asserted against competitors.
If avoidance fails, manage litigation by requesting a budget that reflects an agreed-upon litigation strategy, assessing the case early to evaluate risk, and preparing the matter for a negotiated settlement. If the parties cannot settle the matter, engage a mediator. Mediation can result in creative solutions that would not be possible with an adjudicated outcome. Engage in a litigation strategy that includes early resolution as an objective, to ensure that no opportunities to avoid continuing litigation, and costs, are missed.
1. “U.S. Patent Statistics, Calendar Years 1963-2001.” Information Products Division/Technology Assessment and Forecast Branch. U.S. Patent and Trademark Office, Washington, DC, March 2002.
2. TAF Special Report, All Patents, All Types, January 1977—December 2001. Information Products Division/Technology Assessment and Forecast Branch, U.S. Patent and Trademark Office, Washington, DC, April 2002, B-13.
3. Copyright, Patent and Trademark Cases Filed. Copyright, Patent and Trademark, http://www.uscourts.gov/judicialfactsfigures/
4. AIPLA Report of Economic Survey 2001. Law Practice Management Committee, American Intellectual Property Law Association, 2001, 84–85.
5. AIPLA Report of Economic Survey 2003. Law Practice Management Committee, American Intellectual Property Law Association, 2003, 93.
6. Markman v. Westview Inst. Inc. 317 U.S. 370; 116 Sup. Ct 1384 (1996).
7. Judicial Conference, 170 F.R.D. 534, 590 (Fed. Cir. 1997).
8. Cybor Corp. v. Fas Tech. Inc. 138 F.ed 1448, 1476 (Fed. Cir. 1998).
9. “Patent Litigation in the District of Delaware: The Judges' Perspective,” Delaware Lawyer, v.18, pgs. 6, 8–9, 12 (Winter, 2000/2001).
Merriann Panarella is a senior partner located in the Boston office of the law firm Hale and Dorr LLP.
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