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Small Claims Won't Fix Rising Patent Litigation Costs
There has been an immense surge in the number of patent-related lawsuits filed in the federal district courts and in the International Trade Commission in the past decade. The costs of responding to this wave of litigation are staggering: With about 4,000 lawsuits filed annually and an average cost of $5,500,000 per lawsuit, American companies spend about $22 billion per year on direct patent litigation costs. Many of these cases are brought by nonpracticing entities entities that have no products, only patents on which to demand licenses and bring suit. No wonder there seems to be a growing consensus that something needs to be done particularly for startups and thinly capitalized businesses that cannot afford to defend against these sorts of lawsuits.
One proposal to limit these costs that has received increasing attention lately is the "patent small claims proceeding." The U.S. Patent and Trademark Office recently requested comments from the bar on whether and how a PSCP should and could be implemented. See 77 Fed. Reg. 74, 830-31. In its Platonic form, this PSCP would be a forum that would hear small patent claims e.g., claims under $1 million or $2 million and strive to keep litigation costs low and in proportion with the diminished value of the claim. This would be an Article III judge operating under special rules, or perhaps an Article I judge operating under special statutory authority. The PSCP would be streamlined, with the cost cutting coming from having bench trials instead of jury trials and from streamlined discovery.
The proposed PSCP, however, is the wrong response to a real problem. Consider the two possible forms of the PSCP: (1) a mandatory PSCP, where the qualifying small-claim patentee would file suit and the accused infringer would, as in a conventional Article III setting, have no choice but to see the case to resolution; or (2) a voluntary PSCP, where a patentee could file an infringement claim, but the accused infringer could opt to remove the claim to federal court. Each is unworkable.
Mandatory Small-Patent-Claims Court Would Be Unconstitutional
A mandatory PSCP would not comport with the U.S. Constitution. The Seventh Amendment requires patent cases to be tried before a jury unless all parties waive that right. As the Supreme Court has recognized, "there is no dispute that [patent] infringement cases today must be tried to a jury, as their predecessors were more than two centuries ago." Markman v. Westview Instruments, 517 U.S. 370, 377 (1996).
Some have proposed that the decisions of any mandatory non-Article III PSCP be subject to ostensibly de novo review by a federal district court, thereby allowing a party initially denied its Seventh Amendment rights to exercise them in a new proceeding. This supposed "cure," however, would be more expensive than the underlying ailment. Litigants would be subject to the current costs of a federal court case plus the costs of a prior PSCP proceeding. Recognizing this problem, some have alternatively proposed that any party that lost the PSCP proceeding and then opted for the de novo jury trial and lost again would have to pay the prevailing party's attorney fees and costs. But that would not solve the Seventh Amendment issue because it would create such an extreme financial disincentive to exercise one's Seventh Amendment right to a jury trial that it would effectively deprive a litigant of that right.
Voluntary Small-Patent-Claims Court Has No Advantages
Because any mandatory PSCP outside of the Article III court system would raise serious constitutional problems, the lead proposal has been a voluntary PSCP. But it is far from clear that there is any need for such a voluntary system. Moreover, this system and any alternative voluntary PSCP system would be more likely to drive litigation costs up.
There is no need for a voluntary PSCP because equally effective alternatives already exist. If both the patentee and alleged infringer are willing to forgo a jury trial and the Federal Rules of Civil Procedure, they can agree to streamlined arbitration before any of a number of existing tribunals. In such tribunals, the parties can nominate experienced patent practitioners as their arbitrators and choose any level of discovery appropriate to their budgets.
Even if a party desires to stay in federal court, the parties can agree to limit costs in many ways. District courts can already impose limits on discovery to curb excessive litigation expenses. District courts can tailor case schedules to provide for early claim construction, with other discovery stayed until after issuance of the claim construction order, which may move many cases toward an early resolution before either party incurs significant litigation expenses. And the parties themselves further can, as litigants have in the past: agree to forgo certain discovery to reduce costs; empower the court to decide the case on the papers without live witnesses; waive the right to a jury and agree to a bench trial; limit trial to certain representative claims or products; stay district court litigation during the pendency of proceedings before the USPTO; and stipulate to the amount of damages.
Furthermore, there is no unmet demand for a voluntary PSCP that would justify creating and implementing a whole new patent forum. The real question is how often small-claim actions have failed to proceed for lack of a voluntary PSCP, meaning the litigants were ready and willing to accept streamlined PSCP proceedings. As discussed above, cost-conscious adversaries have numerous ways to save costs under the existing system. There is no evidence that the lack of yet another alternative cost-saving option has been the missing element that has kept agreeable adversaries from resolving a substantial number of disputes or any disputes for that matter. To the contrary, with the number of law firms willing to represent undercapitalized patentees on a contingency fee basis, and the number of NPEs seeking to buy patents from individuals for assertion in litigation, it seems unlikely that any inventor with a valuable (or even less valuable) patent lacks a means to assert that patent in litigation.
Finally, and ironically, a voluntary PSCP may actually increase costs and complexity for litigants that choose to participate. For example:
These are just a few examples of how proceedings in the proposed PSCP could lead to greater transaction costs than if the action had started and remained in federal court.
Patent litigation is too expensive, but there are better and more practical solutions to this problem than the creation of yet another venue to handle patent litigation. There is no basis to expect that the creation of a 96th patent litigation venue will make patent litigation less expensive than the procedures that litigants and the courts are already focused on identifying and implementing. The better solution is to continue to make changes within the existing system to streamline patent litigation, especially before the courts in the new patent pilot program. Such streamlining, or even creation of additional "small claim procedures" that could be voluntarily agreed to, within existing courts, will decrease costs for both plaintiffs and defendants; those costs are significant and real for all, and implementing the right solution will benefit all.
A PSCP, although well-intentioned, is neither a workable nor a needed solution, and it would serve only to draw attention and resources from other solutions that are more likely to provide real benefit.
Alex Chachkes is a partner in Orrick, Herrington & Sutcliffe's New York office, where he is a member of the intellectual property, Supreme Court and appellate litigation groups. He focuses on complex IP litigation, primarily patent actions.
This article originally appeared in The Recorder.