Rethinking Defense in 'Patent Troll' Cases
Consider this scenario: Your company is sued for patent infringement by a non-practicing entity (aka, a patent troll), a holding company whose only assets are patents, and whose sole business is to file lawsuits in the hope of extracting money from the patents. To defend the case, even if the case is bogus, can be quite expensive, potentially costing your company millions of dollars.
In fact, according to a 2011 survey by the American Intellectual Property Owners Association, the average cost to defend a patent case is about $1 million when the amount at risk is less than $1 million, about $3 million when $1 million to $25 million is at risk, and about $6 million when over $25 million is at risk.
These amounts are staggering. And patent trolls know this.
They know that they have tremendous leverage at the beginning of a case, when defendants in patent cases are faced with the prospect of spending millions of dollars on defense. They know the thought process that companies go through when assessing a newly filed patent lawsuit: What is the amount at risk? How much will it cost us to defend the case? Can we settle the case for less than it will cost to defend the case?
With this in mind, many patent trolls put together settlement offers that range from nuisance value (five to six figures) to cost of litigation (seven figures). Faced with the daunting prospect of spending millions of dollars to defend a patent troll suit, companies often make a business decision to pay nuisance-value or cost-of-litigation settlements to the troll at the beginning of a case, even if they are convincedand could ultimately prove after years of litigationthat theres no infringement or that the patents are invalid.
Because of these tactics, patent trolls receive a lot of criticism. Many blame trolls for inhibiting innovation, for taxing research and development, and for driving up the cost of doing business. Others complain that trolls have an unfair advantage in patent litigation because it costs an accused infringer exponentially more to litigate a patent case than it does for a troll. These complaints all have a common underpinning: the high cost of patent defense.
Why are patent cases so expensive to defend? Much of the high cost can be attributed to the billing rates charged by firms hired to defend these cases. Indeed, partners at AmLaw 50 firms typically charge in the range of $600 to $900 per hour, and their associates bill out in the range of $300 to $600 per hour. At these rates, it is nearly impossible to litigate a patent case efficiently.
Patent trolls salivate when companies hire expensive lawyers to defend patent lawsuits. They know that discovery alone will cost hundreds of thousands, if not millions, of dollars. They know that companies will feel the financial sting of defending these cases. And, because almost all patent cases settle before trial, any patent troll knows (or assumes) it is only a matter of time before defendants will settle. The greatest incentive to do so, sooner rather than later, is the high rate charged by defendants outside counsel.
Companies often hire big firms with the goal of trying to send a message to the patent trolls: Were tough, we hired Firm X, and this is going to be a battle. But this approach doesnt work with trolls. They arent afraid of going up against any firm, and usually interpret the hiring of expensive counsel to mean: If youre willing to pay high billing rates to outside counsel, then youre more likely to pay our high settlement demands.
Consider the following real-life example: A technology company was sued by a patent troll and hired a big firm to defend it in the lawsuit. The company was interested in settling the case but was loath to pay the trolls proposed settlement figure. The company sensed that the troll had bloated settlement expectations premised on what it would cost to defend the case.
At that point, the company decided to find a firm with much lower billing rates to handle the matter going forward. Before moving the matter, though, the company asked counsel to make one last call to the troll to try to settle the case. When the troll was informed that the case was going to be moved to another firm with much lower billing rates, the trolls settlement demand came down substantiallyto less than a quarter of the amount they initially demandedand the case quickly settled.
This example highlights the fact that the cost of defense is a major and significant factor considered by patent trolls when valuing a case. Whether your company is looking to resolve a patent troll case cheaply and efficiently, or whether you want to fight back and take the case to trial, the best way to level the playing field against a patent troll is to lower the cost of defense from the outset. Not only does lowering the cost of defense take away the substantial leverage held by a patent troll, it allows a company to better weigh the pros and cons of settling the case or fighting forward to trial, and to focus on the merits of the case.
Big firms do not have a monopoly on patent trial lawyers. Having worked with and gone up against patent trial lawyers from firms of all sizes across the country, I know that excellent patent trial lawyers can be found at reasonable rates. Also, alternative fee arrangementssuch as fixed monthly fees, capped fees, and performance-based hold-backscan help bring down the cost of defense in patent troll cases.
By reining in the cost of defense, your company will cut down on the substantial leverage held by patent trolls, who almost always are represented by contingent fee counsel and dont feel the same pain of legal costs. Whether your companys goal in a troll case is to obtain a fair settlement or to go to trial, lowering the cost of defense will help your company fend off the trolls.
Jeremy P. Oczek is a partner in the Intellectual Property and Technology Group at Bond, Schoeneck & King. His practice is focused on intellectual property litigation, counseling, and strategic advice.