How Asking One Fundamental Business Question Can Reduce Expense and Improve Business Outcome of Patent Litigation

Ask the right business questions
Ask the right business questions

While a majority of companies consider the cost of obtaining patent protection an essential element of the product and technology development process, few of these same organizations favor the prospect of asserting their patent rights against potential infringers. Moreover, no company relishes the prospect of being a defendant in a patent lawsuit. That most do not readily welcome patent litigation is not surprising given that the average cost of large case (i.e., over $25 MM at stake) patent litigation through trial in 2007 was about $5MM per party in 2007. For disposition of smaller cases, the total amount per party was about $1MM in 2004 dollars.

Why does it cost so much for a patent owner to assert her patent rights against an alleged infringer? Put simply, patent litigation at its core is an adversarial undertaking in which lawyers typically define the meaning of a successful outcome. In this context, each discovery battle or brief writing episode serves as an essential battle that must be won in the overall patent litigation “war.” The patent litigation process itself can become an end unto itself, and the business interests of the parties become secondary to validation of the party’s legal positions by the judge.In my experience, even the most sophisticated business managers can lose objectivity and become emotionally involved in the patent litigation process. As one example, I once heard a general counsel of a large manufacturing company exclaim using profanity that there was no way his company would settle a patent lawsuit brought by my client, even when the judge made it clear that his company would lose the case at trial. The case eventually settled, but not before both sides spent several weeks in preparing for trial at considerable extra expense.

In another example, a prestigious New York City patent litigation firm convinced a patent holder that its case against my client was a guaranteed win and that a court would like award many millions in damages and my client would also be required to remove its supposedly infringing product from the market. As a result, the patent owner threw every legal argument it could against my client, which required my client to pay several $100K per month in legal fees. Understandably upset about the cost and concerned about an adverse litigation outcome, my client attempted to settle with the patent owner on several occasions. However, because the patent owner had been assured by their counsel that the lawsuit was a winner and that damages and market supremacy were inevitable, no settlement was possible. At trial, the patent owner lost and no damages were awarded. While my client did ultimately prevail, the cost to do so greatly affected its profits for that year. Indeed, the only winners in the patent litigation were the lawyers, who were rewarded handsomely for taking the case to trial.

While I previously benefited both financially and professionally from the adversarial nature of patent litigation as both a law firm and corporate IP lawyer, I now believe that patent litigation rarely benefits any of the participants other than the legal professionals involved. I believe a significant reason for this is that when faced with a patent litigation matter even the most highly skilled managers seem to check their business pragmatism at the door. These otherwise engaged and hands-on businesspeople typically pass over all or almost all responsibility for managing expensive and time consuming patent litigation to their lawyers. Certainly, these lawyers have the best interest of their clients as the primary motivation for their actions. Nonetheless, no matter how well-intentioned a patent professional may be, putting her in charge of managing a patent litigation is akin to “putting the fox in charge of guarding the henhouse.”

To put business interests ahead of legal ones, corporate managers must begin to engage with their company’s patent litigation just as they would any other aspect of their business costing $1MM or more and that also have potential to affect their company’s competitive position in the marketplace. This does not mean that business people must insert themselves in the day-to-day decision-making aspects of patent litigation. Rather, I believe that corporate managers must apply the same type of business process control to patent litigation matters as they do to other parts of their business.

It is beyond the scope of this writing to suggest a business process design for patent litigation as a whole. Each situation will also present different issues and, as such, no single business process will be appropriate for all patent litigation. Instead, the fundamental premise of my argument is that corporate business managers must resist their typical reaction of “call my lawyer” when faced with a patent litigation issue. I believe that patent litigation should be treated first and foremost as a concern for the business. Of course, patent litigators should manage the day to day operational aspects of the litigation, but business management oversight is a critical function to ensure that the legal aspects do not quickly overshadow the business interests at stake in the litigation.

Many corporate business leaders no doubt are reluctant to become involved in patent litigation because even the most basic cases involve highly complex and even arcane issues. However, when one cuts through these issues, the basic question that a corporate manager should ask when faced with patent litigation is no different from the question forming the basis of any other significant business decision:

Should we be in this business?

That is, the first thing a corporate manager should ask when faced with a patent litigation question is “should we be in the business of litigating this patent matter or issue?” This should be asked not just when the patent litigation matter arises, but also when any significant decision point occurs in the process. Moreover, this question should be posed to those without a vested interest in the outcome of the litigation; specifically, lawyers involved in the process should not be the primary source of validation of whether the lawsuit should be pursued vigorously.

Notably, the above question differs from the usual patent litigation questions asked by business managers which generally comprise: “what is our chance of winning this litigation?” and “how much will this lawsuit cost us”? These more common inquiries pre-suppose that the litigation battle is inevitable and, as such, are directed toward mitigating the damage caused to a company by a patent lawsuit. In contrast, the “should we be in the business of litigating this patent matter or issue?” question sets up a threshold inquiry of whether the litigation process should occur at all, the answer to which should serve a gate keeping function at all significant points in the patent litigation process.

Admittedly, at least two sides must be assuaged in any patent litigation matter. Application of rational business considerations by one side may therefore be met with resistance by the other participants. Nonetheless, there can only be benefits to applying objective business considerations to a process that often can seem somewhat irrational from a business perspective. Assuming equally competent legal representation, I strongly believe that the party who approaches their role as a patent litigant as it does other objective business situations will end up spending considerably less than the other litigants on legal fees.

No doubt, many patent litigation professionals will find my analysis an over-simplification of the complex issues typically involved in patent litigation. This may be true, however, there is no question that most high-level corporate managers believe that patent litigation is a highly unpleasant process that should be avoided as much as possible. At any rate, the patent litigation process is undeniably broken, and any modification in how it is managed by should be welcomed by the participants. It can therefore do little harm for corporate managers to input some fundamental business process controls of the patent litigation process prior to letting their lawyers loose to beat their opponents into the ground.

4 thoughts on “How Asking One Fundamental Business Question Can Reduce Expense and Improve Business Outcome of Patent Litigation

  1. Great post, great questions for businesses/managers to ask. Although the overall sense I get is that this is geared towards mid-large companies. What question should tiny companies ask with regards to patents and the possibility of larger competitor that may one day infringe? …afterall, it seems one main reason for patents was to protect against infringement but it seems larger company’s have all sorts of advantages when it gets into court – or is your experience different?

    In other words, a tiny company really only has one chance (patents) and so your question “should I be in this business” doesn’t exactly apply.

  2. JodiB your question is a very real issue and its answer would definitely be very fact specific. In the case where your small company was the patentee, I would invest the time and money to (1) substantiate its validity, and (2) to confirm that the other party was indeed infringing.

    With that information in hand I would seek out someone likely to be respected by the infringing company for the purpose of bringing the matter to their attention (through the back door if you will) for the purpose of introductions and the negotiation of a license.

    I realize this is easier said than done, but as Jackie says once the litigators have it, the system takes over and it can become a monster. Of course if the patent has so much value to you that licensing is not desired, litigation (with full recognition of the costs and time involved)is your only realistic option.

    The 50,000 foot answer is to make a business decision as to what your best courses of action may be and begin to work down those paths toward their outcome.

  3. JodiB, Scott gave you a great response. I will add that most mid-large companies have no desire to infringe another’s patent. Indeed, they have an obligation to protect shareholder value and they shouldn’t be in the business of litigating a case where they are on the wrong side of the law.

    From the other side, if a small company’s patent rights are really being infringed, I agree with Scott that the first course should be to try to work out a business solution to the conflict. At the end of the day, litigation may be necessary, but one must enter into this option with a full understanding of the costs and other issues involved. For those with limited resources, there are a number of companies and law firms that assist small companies with good cases to litigate against deep pocket companies. Please feel free to contact me if you need more information in this regard.

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