The Problem of High Costs in Defending Patent Infringement Cases

One common tool used by patent trolls and NPEs (Non-Practicing Entities) to extract higher settlements is the exorbitant cost of defending patent infringement cases versus an early settlement offer.  The average fee through trial for even medium-sized cases (measured by damages sought) can exceed millions of dollars. These cases also frequently involve expensive damages and technical experts, mock trials, and jury consultants.  Defendants face additional risks of the case being deemed “exceptional” under 35 U.S.C. § 287 entitling the plaintiff to recover its attorney’s fees and costs.  Or worse, a finding of willful infringement resulting into up to 3 times the damage award. 

Large companies face a potentially larger problem than a single patent troll case: like the Viking raiders a millennium ago, once gold is found, the trolls will come back again and again having learned that a company is an easy target for a high ROI settlement.  We have seen this firsthand with clients and have even seen the same basic form settlement agreement used over different campaigns with different targets by different plaintiff’s counsel.  Faced with high defense costs as well as risk of repeat claims by other trolls in the future, what options do companies have to mitigate risk and loss? 

Are Single-Firm Joint Defense Groups the Answer to Patent Litigation Costs?

For many years, companies have been led to believe that costs and risk are best contained by joining a “joint defense group” with a single firm.  This pitch is typically sold with benefits such as:

 (1) the firm is experienced in handling these types of patent infringement cases, this technology, and possibly even this particular patent troll or its counsel; 

(2) the client will save money by pooling resources with other clients of the firm, in other words there is a “group discount”;

(3) the client may also save money by joining into a global settlement involving multiple defendants, sort of a “volume discount” on the settlement value; and

(4) the firm has a proven track record of winning IPR (inter partes review) proceedings at the U.S. Patent and Trademark Office resulting in invalidating patents or summary judgment wins of invalidity.  

Do Single-Firm Joint Defense Groups in Patent Litigation Serve Clients’ Best Interests?

The following address potential issues that can arise in a single-firm joint defense group and are worthy of discussion and analysis before litigation defense strategy is chosen.  This list serves as a set of questions to ask and consider before deciding on whether to join a patent infringement joint defense group.  Ultimately, the question posed is one for each prospective member of the joint defense group to answer independently.  

Are you really going to save costs by joining the group?  

A “group discount” on defense costs for patent infringement cases sounds like a great deal, particularly since a client can expect to spend hundreds of thousands of dollars to just get through infringement and invalidity contentions and claim construction briefing.  But in practice do clients actually realize a cost savings?  As discussed below, the cost of defending a patent infringement lawsuit involves several factors.  Focusing on one of the factors without considering the others distorts the true cost of a litigation strategy.  

A client’s perception of the group discount at the time the engagement letter is signed can also not take into consideration the true litigation costs that will be incurred.  These factors include the rates charged by the various timekeepers and their experience level, whether a blended rate is chosen and whether junior attorneys are employed to do the bulk of the work driving up costs, the vigorousness of the defense in terms of the volume of potential defenses pursued all of which add to the group cost, and how costs will be actually divided within the group for common tasks versus client-specific tasks.  

Who is championing your interest in the group above all others?  

Often, the single-firm joint defense group sales pitch will mention X number of clients have already signed on so if you were to choose this firm you would benefit from the group discount.  If the firm represents 6 different clients against the same patent troll, who is the dedicated and experienced attorney at the firm is that is the dedicated champion for each client watching out for their interests without regard to the interests of the other clients?   

How will conflicts of interest be disclosed and handled?  

Conflicts of interest in patent infringement litigation can arise in a number of ways, some of which are subtle and can involve more of a business conflict.  Examples of conflicts can include:

• What happens if one client wishes to settle early after receiving a favorable settlement offer and other clients wish to fight it out?

• What happens if a proposed claim construction favors one client over another?

• What happens if a proposed invalidity construction favors one client over another?

• What happens if the claim construction briefing affects client differently?

• What happens if there are business reasons why one client may wish to settle and keep the patent valid to ward off competitors and another client wishes to invalidate the patent?

• What happens if one client wishes to minimize defense efforts with a goal of settling pretrial and another client wishes to defend on all points, including going to trial?

What happens if there is a disagreement about patent litigation strategy?  

Early in a patent infringement case, defense counsel need to make strategic decisions about whether to file an inter partes review proceeding with the U.S. Patent and Trademark Office, a motion to dismiss under 35 U.S.C. § 101 for being unpatentable subject matter, motion to dismiss for lack of personal jurisdiction and venue, and/or a motion to transfer for a more convenient venue.  It is foreseeable that a group of clients may not agree on these decision points causing a potential conflict.  For example, a client may want to pursue the IPR and seek a stay in the case whereas another client may wish to proceed with the merits of its defense. Similarly, one group of clients may wish to file a motion to dismiss under 101 while others may not.  If one client wins the 101 motion, the advantages will be felt by the other clients, who can seek a similar dismissal in their cases later.  

What if a client or group of clients wish to settle and others go to trial?  

This conflict can creep up at mediation and the pre-trial stages where some clients may wish for business or legal reasons to make a quicker exit from the case.  This can cause the remaining clients to bear an ever greater cost going forward since the group part of the “group discount” just got smaller. This conflict can also affect the settlement strategy pursued by the firm.  

Who bears the cost of trial when members settle out early?  

Similarly, a company can find itself as the lone survivor of the original group on the eve of trial facing substantial trial defense costs itself.  

These issues can and should be addressed up front before the single-firm joint defense group is formed.  This summary is intended to raise a number of potential issues to provoke a proactive discussion before any of the issues arise unexpectedly.  

Is a “walkaway” settlement worth $200,000 in defense costs?

The total cost of defending against a patent infringement case involves at least four separate costs: 

(1)   legal fees and expenses; 

(2)   expert fees;

(3)   settlement payment; and 

(4)   client’s internal costs of managing litigation.

A full evaluation of the defense strategy should take into account all of these factors.  Is being sold that spending $200,000 defending the case to avoid a settlement payment a win when all of these factors are considered?  It’s possible that an early settlement involving a modest payment could be substantially less expensive than a “walkaway” when all factors are added together.  

Patent litigation frequently follows a series of events, each of which involve costs and risk, that naturally create settlement opportunities.  These trigger points can include pre-answer, motion to dismiss under Section 101 for not being eligible patent subject matter or a motion to dismiss for lack of jurisdiction or venue, infringement contentions, invalidity contentions, claim construction briefing, summary judgment, expert designation and discovery, and pretrial.  These points represent a sliding scale of increasing legal costs (#1 above), expert fees (2), and internal costs (4), which should be balanced against the settlement payment (3) demanded.  

It is generally in a law firm’s best interest to pursue a vigorous defense and hence more attorney’s fees in a patent infringement case.  This is why a “walkaway” settlement or invalidating a patent’s claims are sold as “wins” to joint defense group clients.  But a full analysis of a win should take all of the factors into account since each contributes to the true cost of the litigation strategy.   

Alternatives to Single-Firm Joint Defense Groups in Patent Litigation

Many of the concerns above can be addressed without the complications of conflicts and split loyalties by choosing a similar, but different structure for a patent infringement case joint defense group.  By way of example, let’s assume 8 companies are sued by the same troll on the same patent infringement campaign in separate lawsuits.  Let’s further assume that five of the defendants join a single-firm joint defense group leaving three defendants to choose alternative defense counsel.  In this situation, there could be a “multi-firm joint defense group” involving four different law firms representing the group of 8 defendants.  

Cost savings can still be achieved by the multi-firm joint defense group since they can jointly commission prior art searches and other patent invalidity defenses with the costs shared across the group.  In some cases, even experts can be shared by the group.  Care should be exercised to ensure no conflicts exist and further, an adequate consideration of what happens if members of the group settle pretrial.  Put another way, it is not wise for a patent infringement defendant to rely on the expert report of another defendant without retaining the expert to ensure he/she is available to testify at trial.  

Further savings can be achieved by the joint defense firms splitting up common tasks, such as expert depositions, invalidity contentions, Markman briefing, between the group rather than having each client pay its firm to replicate the same work.  This approach can even occur at trial where the firms divide responsibility for witness examination.  The key to success is having a talented and functional team of lawyers, even though the team is made of individual lawyers from different firms.  

Probably the biggest advantage of the multi-firm joint defense group approach is that each client can have a dedicated “champion” for the client’s interest free from the possibility of conflicts of interest while participating on cost sharing.  This makes it simpler for a member of the group to settle out early or employ a strategy of seeking a complete win, even if that involves a costly trial.  

Finally, cost savings can likely be achieved by at least considering IP litigation boutiques versus large firms.   

Final Thoughts on Patent Infringement Joint Defense Groups

The allure of a “group discount” for an expensive defense to a patent infringement case can be very attractive, particularly for in-house counsel trying to manage costs.  But as we discussed above, is there really a substantial savings when taking into account the four primary defense costs – legal fees and expenses, expert fees, settlement payment, and internal costs of managing litigation?  Is it a win to spend $200,000 defending a case to settle for a “walkaway” when the case could have been settled months earlier for $50,000, including the settlement payment and defense costs?  The litigation strategy should consider all these factors.  

Also, who is the champion of the company within the joint defense group and do they owe allegiance to any other company, particularly a competitor?  As discussed above, conflicts of interests, both business and legal, can subtly creep into single-firm joint defense groups in patent infringement cases.  It is possible that a non-infringement argument for one client is not as attractive as an alternative non-infringement argument for a different client.  Having a champion whose sole focus is a company’s interest is critical to avoid the disadvantages of these potential conflicts.  

Cost savings is typically the biggest selling point of the single-firm joint defense group.  But will there be substantial savings when the experience level, billing rates, and leverage used by the law firm are taken into account?  Can the group operate efficiently and fairly when some members of the group desire to pursue all known rabbit trails for defense versus other clients that may wish a focused approach on the few defenses with the greatest chances of success? 

Many of the advantages of the single-firm joint defense group can be achieved by a true joint defense group comprised of multiple law firms all with a fiduciary duty to their clients, yet work together to share costs and leverage the knowledge of a broad group of attorneys.  

For more information on patent litigation, see our Intellectual Property Litigation Services and Industry Focused Legal Solutions pages. For information on patent litigation in Texas, see our Local Counsel page.