What is Contingency Fee Patent Litigation?
Patent litigation is expensive. According to the American Intellectual Property Law Association, the median cost to litigate through trial a patent case with $1-$10 million at risk is $1.5 million. (AIPLA, Report of the Economic Survey 2019). Even for cases with less that $1 Million at risk, the median cost is $700,000. But patent owners need to be able to enforce their patents. After all, without the means to enforce them, patents have no value. However, upon learning that their patent is infringed, patent owners quickly become aware of the hurdles they face in enforcing their patents.
Contingency fees make patent enforcement accessible
Many patent owners do not have the resources to enforce their patents against a larger well-funded infringer. Contingent fee patent litigation helps level the playing field by shifting some of the enforcement risk on to the law firm. Instead of being compensated on an hourly basis, the lawyer agrees to enforce the patents in exchange for sharing in a recovery on a contingent fee basis. If there is no recovery, then the patent owner’s attorney does not receive a fee. Thus, the interest between the patent owner and the lawyer are aligned.
Patent litigation cases are often more costly and time consuming than other types of civil litigation. For example, in some patent cases, products must be obtained and subjected to disassembly, testing, or analysis, often in a laboratory, to detect whether such products infringe the claims of the patent. During a patent infringement case, paid experts are usually retained to testify to prove infringement of the patents (a technical expert) and to establish the amount of damages (a damages expert) that should be awarded to compensate for the infringement. Furthermore, patent cases may require years to resolve, and determinations of liability and damages may be far from certain.
The patent owner’s and law firm’s resolution interests are aligned.
A law firm retained on a contingent fee basis is incentivized to settle a case when it is in the best interests of the patent owner. When a law firm is retained by a patent owner on an hourly basis, the law firm has no inventive to control costs. Instead, the pressure on attorneys some firms for billable hours means that the attorney is incentivized to bill hours for work that may bear little relation to the outcome of the case. The amounts owed to an hourly-charge law firm by the conclusion of a case may be out of proportion with the eventual outcome of the case. Bills from law firms may leave a client questioning which side the law firm is on. An hourly-charge firm’s bills may get to a point at which they become unaffordable to the patent owner, who then may be forced to exit the case on unfavorable terms. On the other hand, sometimes a defendant may offer to settle a case on reasonable terms, and it may be in the patent owner’s interest to forgo the possibility of a larger damages award at trial in exchange for the certainty of a compromise settlement. However, an hourly-charge law firm receiving a reasonable settlement proposal from a defendant may not have an incentive to encourage settlement on reasonable terms.
A lawyer receiving contingent fee compensation may urge a client to settle if weaknesses have appeared in the case. Conversely, if the contingent fee lawyer remains confident in the patent owner’s case, the lawyer will counsel his client to negotiate accordingly. After all, a large damages award at trial benefits both the contingent fee lawyer and his client. On the other hand, a contingency fee agreement should never encourage a lawyer to “sell out” a patent owner’s claims for less than full value. Any decision regarding settlement remains solely within the patent owner’s discretion.
Management of time and costs
Law firms compensated on an hourly basis often have no inventive to manage time or costs. An hourly charge law firm is incentivized to earn more by billing more time on a case. As a result, hourly-charge attorneys will sometimes staff a case with more lawyers than necessary, may spend time creating disputes that are not outcome-dispositive, may draft meritless motions, may needlessly travel to hearings that can be handled using remote means, and may have multiple attorneys attend hearings and other proceedings when only one attorney is needed (and in most proceedings, only one attorney does all of the speaking on behalf of the client). There are numerous other practices by hourly-charge attorneys that increase costs to their clients. Often, the companies who are infringing patents give little thought to the fees because the legal bills are being paid by suppliers through indemnification agreements, or are being paid by insurance companies.
Contingency fee patent litigation works differently. There is no incentive for a law firm working on contingency to overstaff a case, or to spend time on issues that do not lead case outcomes. The contingency fee law firm focuses on the outcome-dispositive issues to determine the merits of the case as part of its diligence – before accepting and filing the case. Further, there is no motivation to increase case costs, complexity, or duration.
Agreeing on strategies
Patent owners often believe that the companies who are using their inventions will voluntarily pay the patent owner for a license, if the patents are brought to the companies’ attention. If the patent owner accuses a company of infringing its patents, the company could, under some circumstances, sue the patent owner, seeking a declaration from a court that the company does not infringe, or that the patent(s) are invalid, or both. Therefore, the patent owner who prefers to “invite” companies to voluntarily license their patents could consider retaining an attorney to do contingency fee licensing. That is, the law firm would be paid if it was successful in licensing the patents. Patent monetization techniques can be viewed as using either a “carrot” or “stick” approach. The approach that invites voluntary licensees is often referred to as the “carrot” approach, while filing a lawsuit is referred to as the “stick” approach. A patent owner who prefers to initiate contact with a potential licensee using a “carrot” approach would want to consider retaining counsel who was prepared to the the “stick” approach for two reasons. First, the company who receives a licensing invitation letter from a law firm who has never filed a patent infringement lawsuit is not going to take the letter as seriously, as compared with the letter from a firm that focuses on patent litigation. Second, if the recipient of the letter files a declaratory judgment lawsuit against the patent owner, the patent owner may need to move forward with a patent infringement counterclaim rather quickly.
Planning for IPR challenges
A patent owner engaging in patent assertion in today’s environment is aware that a defendant may file one or more IPRs against the patents. The inter partes review procedure was enacted in 2012 as part of the America Invents Act. The prudent patent owner plans for this possibility in advance of filing suit. Once an IPR is filed, the patent owner has a limited time (roughly three months) to file a preliminary response. Thus, the patent owner should prepare for the possibility, and to know how it will pay for the IPR defense of its patents. Some law firms may provide for IPR defense in its contingent fee agreement. Because the law firm enforcing the patent is in a position to be familiar with the patent and is prepared to defend against invalidity challenges in district court, the same law firm may be in an advantageous position to defend against invalidity challenges in the IPR proceeding before the Patent Trial and Appeal Board (PTAB). For a lawyer to practice before the PTAB, the lawyer must be registered to practice at the U.S. Patent and Trademark Office, or must be accompanied by someone who is registered. In sum, a patent owner’s selection of a contingency fee law firm should include the consideration of how IPRs will be handled.
What makes a good case for contingency fee litigation?
Not all patent infringement cases are good candidates for contingent fee arrangements.
Evidence of infringement: There needs to be credible evidence of infringement. A law firm will need to rely on information in the public domain in considering whether to accept a case on contingency. After a lawsuit is filed, the patent owner can force the defendant to disclose non-public information, e.g., software or processes, regarding the accused products or services. However, it may be difficult for a law firm to perform initial diligence on a case involving infringement that is difficult to ascertain from public sources.
Sufficient damages: The damages attributable to the infringement must be sufficient to compensate for the attorney’s time and risk. There should be evidence of substantial past sales that can provide the basis for a meaningful “royalty base” against which a patent owner can claim a “reasonable royalty”. There are sometimes other considerations other than royalties at issue. For example, larger companies may sue a small newcomer into their market in an effort to force them out of a key market, even if its competitor’s sales have reached a point to make the royalties owed sufficient to offset the cost of the lawsuit. In such cases, there are business reasons to enforce patents that are not related to the compensable damages. Such a case would likely not be a good candidate for contingency fee representation.
Good patent claims: The best patent claims are drafted so that they clearly define the boundaries of patent protection. In addition, good claims do not narrow the scope of the protected aspects any more than necessary. If the claims are narrow, an accused infringer can more easily argue that the claims are not infringed or, if they are, the infringer may be able to make minor changes the accused products to avoid further infringement.
Flexible contingency fee arrangements
When looking for a law firm that accepts patent litigation cases on a contingent fee basis, each case is unique. Alternative billing arrangements may be beneficial to the patent owner, and flexible customization is key. The terms of a contingent fee retainer agreement should be in writing, and should state the contingent fee, and whether the fee depends upon the stage at which the case is resolved. For example, a patent owner may want to negotiate a smaller attorney fee for a case which is settled shortly after litigation is commenced. The agreement should state the duration of the diligence period for the law firm before the law firm must agree to take the case or, better yet, file a lawsuit. If the law firm decides to not file suit, the patent owner needs to know as quickly as possible so that another firm may be consulted. A patent owner does not want to be “married” to a law firm that is “sitting on” a case for an unreasonable period of time. The agreement should identify who pays for expenses, including travel expenses, expert witness fees, deposition fees, and other costs. The agreement should explain who fronts the costs, as well as how and when the expenses are reimbursed upon collection of any recoveries. The agreement should also address how IPR challenges should be covered.
Where to file a patent case?
In the United States, the patent system is ingrained in our constitution (U.S. Const. art. 1, § 8, cl. 8). Patent owners have a constitutional right to exclude others from infringing their invention and to enforce that right in federal court. Patent lawsuits are filed in U.S. district courts. When asserting a patent, the patent owner may choose the district in which to file, subject to certain requirements. The court must have jurisdiction over the defendant, and the venue must be proper. Generally, venue is proper where the defendant resides, e.g., is incorporated or where it maintains a physical presence. (TC Heartland LLC v. Kraft Food Group Brands, LLC., 137 S.Ct. 1514 (2017)). Some districts have local rules that are intended to streamline patent cases, so that the cases get to trial sooner. Some districts are viewed as more fair to patent owners than other districts. The selection of a law firm should include the consideration of the districts in which the law firm is comfortable litigating.
Options to minimize publicity
Some patent owners prefer to avoid the publicity that may come with asserting their patents. In such cases, it may make sense for the patent owner to assign its patents to a Patent Assertion Entity (PAE) for enforcement. A PAE an entity that acquires patents from others and attempted to obtain proceeds by asserting the patents against infringers. Sometime a PAE is referred to as a non-practicing entity (NPE) because the entity does not practice the patents that it owns, for example by producing or selling products that embody the patented inventions. By assigning its patents to a PAE, the patent owner has an opportunity to share in the monetization of the patents, but need not directly assert the patents against a defendant. The sale of patents to a PAE is way that a patent owner can avoid incurring expenses in the process of monetizing their patents. However, the patent owner needs to weigh their risk tolerance and goals to determine whether this is an appropriate option. A patent owner who sells patents to a PAE relinquishes control of the enforcement activity. This is much different from directly enforcing the patents though a contingency fee arrangement, in which the patent owner has a voice regarding enforcement decisions and strategies. A PAE is sometimes well-suited to a practicing entity that would be subject to a retaliatory lawsuit for patent infringement. If the practicing entity sells its patents to a PAE, the PAE can bring suit without fear of an infringement counterclaim, because the PAE does not make or sell any products.
Partnering with other law firms
Patent owners often have trusted relationships with law firms who do not provide contingency fee patent enforcement. In these situations, it is beneficial to find a law firm that is open to partnering with the patent owner’s current counsel in the enforcement activity. This arrangement allows continuity to the patent owner’s ongoing interests, while providing the specific skills needed to successfully enforce the patents. Our law firm is open to partnering with another law firm as co-counsel on a contingency fee patent infringement case. Of course, the patent owner would need to consent to the collaboration and the fee split. However, the patent owner’s share of recoveries would not be affected.
Our firm is proud to represent its clients on a contingent fee basis in intellectual property cases. We do not seek to be compensated on an “hourly” business model. Our law firm prefers to align its interests with those of its clients. Our experience allows us to evaluate the strength of a client’s intellectual property and the strength of its claims, and to appropriately represent clients on a contingency fee arrangement. We are very selective as to the engagements we choose to accept. We approach every case with the attitude that winning is the only option. Our law firm benefits side-by-side with the client, and as part of that relationship, is prepared to go the distance to achieve a favorable result for our client. See some of the results we achieved for other clients.
We only accept meritorious cases. Our firm has devoted a substantial portion of its practice to representing patent owners on contingency fees. We have obtained for our clients millions of dollars in verdicts and settlements in which our clients did not have to pay us any fees until we generated a recovery for them. That is, we don’t get paid unless you get paid. Some firms may risk the value of their attorney’s time. On a selective basis, we go one step further by also advancing the costs of litigation including expert fees, deposition costs, and other out-of-pocket costs. Of course, no one can guarantee outcomes. Taking a patent infringement case on contingency requires the skill of an experienced attorney. A good working relationship between attorney and client is key.
Our firm provides nationwide representation for patent infringement in all fifty states. While we are based in Dallas and regularly file cases in the Eastern District of Texas, Western District of Texas, and Northern District of Texas, we also regularly file cases in California and other states. In those states in which we are not admitted, we team with local counsel experienced in the district’s local patent rules, allowing us to provide nationwide representation for patent infringement. Fewer than 5% of all patent infringement cases go to trial. But many cases settle “on the courthouse steps” just before trial. Therefore, we are always prepared to take a case to trial, and we begin our preparations for trial on the day we file your case. Without aggressive and practical representation, you may not receive full value from your intellectual property. You probably spent good money to obtain your patents. When it’s time to talk about enforcing them, contact us to allow us to earn the privilege of representing you. Our law firm provides a consultation at no charge.