New federal court filings of patent infringement lawsuits, often considered an area of law relatively immune from a recession, dropped significantly in the last five months of 2008.

Last year, 2,605 patent infringement cases were filed, down by about 8% from 2007, according to Stanford Law School’s IP Litigation Clearinghouse, which tracks new filings. Filings had been on the rise since 2005.

Most of the decrease occurred in the last five months of 2008, when filings plunged by 23% from the same period one year earlier.

Several patent litigators attributed the decrease to clients clamping down on legal costs associated with some patent cases, which tend to be more costly than standard lawsuits. But other factors could have contributed to the decline, including a general shift from federal district court to filing patent cases before the U.S. International Trade Commission (ITC), as well as longer times to trial in some of the nation’s traditionally busiest districts, the Central District of California and the Eastern District of Texas.

Some patent litigators brushed off the statistics, noting that in past recessions companies have looked to patent litigation as a means to gain market share while their competitors financially struggle.

“The IP litigation practice won’t be immune from the economic downturn,” said Douglas Cawley, a shareholder at McKool Smith in Dallas. “On the other hand, innovation is the most important product that America has today, so I think that in the long run the prospects are still bright for IP litigation.”

A 23% dive

Joshua Walker, executive director of the Stanford IP Litigation Clearinghouse, which launched last month, said the group’s statistics weed out false filings that often appear in regular district court searches. For instance, a comparable search on the Pacer Service Center, which provides public access to federal courts, found that more than 2,800 patent infringement cases were filed in federal courts in 2008, down by 3.5% from 2007.

The declines were most pronounced in the last five months of the year. Through July 31, filings last year had been up by 2% from the year earlier, according to the Stanford IP Litigation Clearinghouse. From Aug. 1 until the end of the year, they fell by 23%.

“That’s clearly, without question, the economy collapsing,” said Claude Stern, chairman of the intellectual property litigation practice at Los Angeles’ Quinn Emanuel Urquhart Oliver & Hedges.

Stern said that inventors and patent holders, as opposed to businesses, have continued to file cases, ostensibly because these plaintiffs believe that defendants might be more likely to settle in order to avoid the substantial expense involved in IP litigation during a recession, he said.

But his firm has noticed “a substantial change” in recent months as law departments of companies in various industries cut their budgets by up to 20%, he said. While some are continuing to file IP suits, clients also are asking for price reductions, which include lower hourly rates, fixed prices and monthly maximum payments, he said. “There is much greater consideration being given on how those cases should be run and be brought.”

Also, the average number of defendants in patent infringement cases last year dropped back to two following a record average of three per case in 2007, according to the Stanford Clearinghouse.

The changes come as many firms, some of which have seen a slowdown in their corporate practices, have created or bolstered their IP practices.

“There are going to be some challenges for some firms,” Stern said. “There are some firms that have really decided to invest in, or bet on, depending on your point of view, their future in IP litigation. And I hope they’re right.”

Roderick McKelvie, co-head of IP litigation at Washington’s Covington & Burling, which hired 50 patent litigators from defunct Heller Ehrman last fall, agreed that clients are tightening their belts. He said “clients are calling all the law firms that represent them in defending patent infringement cases to be more careful in drawing up budgets.”

But filings haven’t slowed at the firm so far, he said. In fact, filings nationwide began to edge up in December, with 193 cases, down by 6.7% from December 2007 but only five cases shy of 2006 levels for that month. Several patent litigators said their firms had not witnessed a decrease in filings and predicted that the number of cases could increase in 2009 as more companies attempt to maintain their market share in a competitive marketplace.

A cost decision

A.C. Johnston, co-head of the IP litigation group at Morrison & Foerster, said his firm’s clients are continuing to file suits, in part because they are finding ways to monetize their intellectual property.

Yet that might not be enough. “That will be more than offset by companies that decide this is not a good time to be biting off a multimillion-dollar investment in patent litigation,” Cawley of McKool Smith said.

And, while patent litigation has remained strong during past recessions, the statistics could reflect how the recent downturn is unlike anything firms have experienced in recent years, said Chris Hughes, head of the intellectual property group at New York’s Cadwalader, Wickersham & Taft, which this month reported a 30% drop in profits for 2008.

Some IP litigators said other factors could have contributed to the decline in new patent filings.

Morgan Chu, a partner at Los Angeles-based Irell & Manella, said the past year has seen a dramatic increase in ITC filings. For the past six years, filings before the ITC have been on the rise, according to the ITC. Last year, it agreed to conduct investigations of 42 cases, up from 35 in 2007.

The most dramatic declines occurred in two of the nation’s busiest districts for reasons that could be unrelated to the recession, said some IP litigators.

In the Central District of California, 2008 filings plummeted by nearly 39% from 2007 to 198, according to the Stanford Clearinghouse. In the Eastern District of Texas, filings dropped by 21% during that same time frame to 291.

Walker of the Clearinghouse noted that the Northern District of California, for the first time, had more patent infringement filings than the Central District of California. He attributed the change to an increase in declaratory judgment lawsuits and a perception that the Northern District is more “defendant-friendly.”

Chu said the drop in cases filed in the Central District of California might also be due to uniform rules, which are more attractive in other districts, such as the Northern District of California.

In the past, plaintiffs filed in venues such as the Central District of California because cases could go to trial more quickly, said Stern. But more recently, that district has slowed down, he said.