Steps to follow when sued for patent infringement

June 2017 | LEGAL & REGULATORY | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

June 2017 Issue

It is almost inevitable that any company in the technology or financial industry will be confronted with a patent dispute during the course of its business. In today’s era, a company, regardless of its size, puts itself at risk of patent infringement by simply conducting commerce over conventional marketing channels of the global economy.

A good part of the increased risk can be attributed to the emergence of so-called patent trolls, or non-practicing entities (NPE) – a company that derives its revenue solely by enforcing patents that it does not use. The term ‘patent troll’ usually refers to a company that purchases its patents at a discount and then asks for a premium to use the technology covered by those patents, while the less pejorative term, NPE, may cover companies that developed, but do not practice the underlying technology. Of course, many companies are often hit with a patent infringement suit by direct competitors seeking to limit competition in the marketplace.

Regardless of the source, allegations of patent infringement may seem daunting and overwhelming. How should a company proceed after being served with a summons and complaint alleging patent infringement? This article outlines some important steps that a company should take in responding to a patent infringement suit in the US.

Determine the impact of the lawsuit and the chances of prevailing at trial

Before taking any proactive steps in responding to the complaint, management must first comprehend a lawsuit’s impact on its business and potential consequences of choosing to litigate the case. To reach these understandings, management must evaluate the asserted patent, identify the plaintiff bringing the lawsuit, and determine the costs of litigating the case, without losing sight of its business objectives and finances.

Executives should start out by determining the meaning and scope of protection afforded by the claims of the asserted patent and comparing their accused devices or services to that scope of protection. To determine the meaning of the claims, someone that understands the technology should review the specification and the prosecution history – the administrative records from the corresponding patent office – of the patent.

Management should look at the date of the asserted patent and try to determine whether their technology predates the asserted patent or whether they are aware of evidence (prior art) that someone else came up with the technology first, which could be used to invalidate the asserted patent. From such an analysis, management should at least be able to get a sense of the seriousness of the accusations of infringement. Gaining a thorough understanding of the asserted patent will give management comfort and allows them to begin forming defences for their case.

Equally important is the need to understand one’s adversary. Management should immediately look into the background of the plaintiff to learn, among other things, the plaintiff’s motive in bringing the lawsuit. Understanding the plaintiff’s objective in bringing the lawsuit helps inform management of the seriousness of the allegations and the strategies for moving forward. For example, lawsuits could be brought by a direct competitor to influence licensing discussions or to attempt to prevent a competing product from coming to market. Depending on the importance of a product, an injunction could be catastrophic to business. Conversely, lawsuits from patent trolls are generally brought only to extort money from companies in the form of an up-front, lump-sum cash payment, i.e., a quick settlement. Here, understand that quickly settling may allow your company to avoid the immediate costs of litigating the case but may also make your company appear weak and vulnerable to future patent infringement lawsuits.

Management must also assess the cost of litigating the patent infringement lawsuit. Due to the technical subject matter underlying the case and the burdens of discovery and trial, patent litigation lawsuits are complex, time consuming and expensive. In 2015, the median litigation costs for patent infringement cases in the US ranged from $600,000 for a low-stakes lawsuit (i.e., less than $1m at risk) to $5m for a high-stakes lawsuit (i.e., more than $25m dollars at risk). In addition, the median damages award for patent infringement cases in the US was $10.2m.

In light of these potential costs, choosing to litigate the lawsuit will not make sense if, for example, the practicalities of designing a product around the asserted patent are miniscule. Other companies, however, may not have a choice if the viability of their business is at stake. Executives should, therefore, keep in mind their business goals and the costs of litigation when determining whether to challenge the patent infringement allegations in court.

Coordinate a team to minimise exposure and preserve evidence

In order to respond quickly yet effectively to an infringement lawsuit, management should have a team in place ready to meet on short notice to evaluate the asserted patent, to determine and minimise exposure and to preserve relevant evidence. The most effective way to carry out these tasks is delegating specific roles to each department of your company. For example, in-house counsel and applicable product managers can and should play a lead role in analysing an asserted patent and determining likelihood of infringement. Sale and marketing representatives can and should track distribution of accused services or products to determine the level of exposure.

Depending on early assessment of the seriousness of the allegations, management should decide whether to cease delivery of accused products or services to truncate the risk of future infringement and minimise the risk of paying enhanced damages for wilful infringement. Discovery in the US is complicated and for a number of reasons, companies threatened with a lawsuit must implement procedure called a ‘document hold’ to preserve any relevant evidence, such as emails, product specifications and invoices, for potential use in the litigation. The IT department is ideal for implementing the document hold but in-house counsel should also send a memorandum to key stakeholders explaining that a document hold is in effect. If your company lacks the personnel and resources to handle these duties, outside patent litigation counsel is very familiar with these activities and can manage them for you.

Retain outside and local counsel

After assessing the impact of the lawsuit, management should retain outside counsel to manage the case. Litigation counsel is responsible for all aspects of the lawsuit, such as formulating a legal strategy, pleading and responding to opposing party’s motions, conducting discovery and trying the case. Litigation counsel will also be critical to settlement and licensing discussions. Accordingly, great care should be exercised in selecting outside counsel for your case.

Many factors should be considered when selecting outside counsel, including the experience and background of the trial team, the size and location of the law firm, the bandwidth and availability of the firm to handle the entire case, billing and expenses and any conflict of interest. A common mistake in selecting counsel is making the decision strictly based on the size of the firm. A large firm will not assign every attorney on its staff to your case. Instead, most firms typically assign a team of personnel for each particular client matter. You should, therefore, compare among firms each trial team that is being offered to handle your case. Moreover, due to the demands of a patent litigation case, the lead chair attorney for each trial team will not likely handle each aspect of the case. Accordingly, you need to select a trial team with a strong supporting cast. There are many high quality boutique law firms in the US that only have between 25 to 100 lawyers but still provide exceptional trial teams that possess the experience, infrastructure and depth to handle the most complex patent litigation cases.

Executives should seek outside counsel that will understand its company’s objectives, appreciate the expectations of the client and work within an agreed budget. One way to ensure that your chosen counsel is willing to control costs is to solicit proposals from multiple firms. A typical proposal from a law firm should include its recommended legal strategy, firm biographies of the trial team, and a detailed estimation of all costs and expenses to litigate the case. Not only can management appraise the costs and expenses of all the potential firms by soliciting proposals, but management can obtain ‘free’ legal advice based on the suggested strategies that come with a proposal. Larger companies should have no problem soliciting detailed proposals from a number of firms, and it is highly recommended that such proposals be sought.

Once outside counsel has been retained, local counsel should also be chosen. Local counsel is responsible for ensuring that all trial documents, such as the answer and motions, are in compliance with local rules and practices before filing. It behooves you to select local counsel who routinely handles cases in the governing jurisdiction and is familiar with the presiding judge. There may be a desire to use a law firm that has an office where the litigation is brought so that a separate law firm need not be engaged. You must resist this temptation and retain local counsel whom the presiding judge trusts and respects.

Formulate a legal strategy

Next, management and outside counsel should collaborate together to form a cohesive legal strategy that implements the client’s short and long-term goals. Management should, therefore, convey their business goals and expectations upfront to outside counsel, and especially how aggressive outside counsel is authorised to be. Primary considerations for devising an effective legal strategy include jurisdiction and venue, defences and possible counterclaims. Aggressiveness will dictate whether to file motions to dismiss or take other actions. Because defendants under US practice only have days to answer a complaint, these strategic considerations must be implemented quickly.

First, outside counsel should help management determine if jurisdiction is proper. Under US law, jurisdiction is derived by subject matter jurisdiction, which is the authority of the court to preside over a dispute, and personal jurisdiction, which is the authority of the court over the parties in the case. A complaint may be dismissed in the immediate stages of litigation for lack of either subject matter or personal jurisdiction.

Next, executives and counsel should determine whether to request a change of venue to a different US district court. That is, even though a court may have authority to hear a matter, it may not be a proper place to have a trial. Some US district courts have local rules that are friendly to the plaintiff. If the complaint has been filed in a plaintiff-friendly district, you should request a transfer of venue based on convenience of the parties or witnesses.

Executives and counsel should also develop their defences, such as non-infringement, invalidity and unenforceability of the asserted patent. In forming a non-infringement defence, identify any differences between your product or service with the patented product or process. Moreover, any available prior art that defeats the novelty of the asserted patent should be implemented in an invalidity challenge, which may be raised in district court or an administrative proceeding, such as a re-examination procedure held by the United States Patent and Trademark Office. Management may also avoid infringement by challenging the enforceability of the patent due to the patent owner’s inequitable conduct or misuse or raising affirmative defences, such as laches and equitable estoppel.

Management on the receiving end of a lawsuit should never disregard raising a valid counterclaim against the plaintiff. If the company owns rights to any intellectual property assets that may be infringed by the plaintiff, then executives and counsel should assert those rights against the plaintiff to leverage their bargaining position. Lastly, management should consider other strategies to avoid costs, such as joining other defendants being sued by the same plaintiff or seeking alternative dispute resolution.

Conclusion

Every patent infringement lawsuit presents a unique set of circumstances. In response, not all companies share the same goals or pursue the same course of action. Nevertheless, there is a common path that all companies should follow when first responding to a patent infringement lawsuit. This path includes devising and executing a legal strategy that is aligned with the business goals of the company. Assessing the impact of the lawsuit, minimising exposure and retaining quality outside counsel are all steps that a company should take to stay on that path.

Brian A. Tollefson is a partner and John D. Higgins is an associate at Rothwell, Figg, Ernst & Manbeck. Mr Tollefson can be contacted on +1 (202) 783 6040 or by email: btollefson@rfem.com. Mr Higgins can be contacted on +1 (202) 763 6040 or by email: jhiggins@rfem.com.

Brian A. Tollefson and John D. Higgins

Rothwell, Figg, Ernst & Manbeck