Intellectual Property

      Patent litigation regularly makes headlines in the legal press and on the technology pages of daily newspapers. In this month's roundtable, our panel of experts discuss some of the challenges that counsel and companies face today, including the increasing cost of patent litigation; the implications of patent trolls on such litigation; and the intellectual property issues that arise as we move toward a more global economy.
     
      The panelists are Tom Kuhnle and Beth Parker of Bingham McCutchen; Brian Keating of Farella Braun + Martel; Kevin McBride and Behrooz Shariati of Jones Day; and Ron Lemieux of Paul Hastings. The roundtable was moderated by San Francisco lawyer Susie Berg and reported for Barkley Court Reporters by Krishanna DeRita.
     
      Moderator: Why are patent litigation costs skyrocketing?
     
      Shariati: It does not seem that they are skyrocketing. It has always been a very expensive endeavor. My experience is that it has not significantly increased in the last three years.
     
      Parker: The median costs through trial for patent cases where more than $25 million is at risk went from less than $3 million in 2001 to over $4.5 million in 2005. The median was $2.2 million in 1999. So they really have skyrocketed over the last few years, and the costs aren't justified by the damages. If you look at the median damage awards during the same time frame, they are in the $3.5 to $4.5 million range, with very few very high awards skewing the numbers upward.
     
      Lemieux: Part of the reason is that we are seeing more multi-patent, and therefore more complicated, cases. Faster local rules in certain venues like the Eastern District of Texas also accelerate the costs. Costs that in the past may have been spread over three or four years are now being incurred in 14 to 16 months. We are also seeing more cases filed by investment partnerships or patent trolls that do not have any of their own products at risk for counterclaims, thereby increasing the likelihood of the case going to trial.
     
      Kuhnle: When a case is before the ITC [International Trade Commission], we have a one-year sleigh ride, and costs are incurred almost immediately without clients being able to reflect on whether they want to settle the case, litigate it, or assert certain defenses. Without agile counsel, these cases snowball very quickly, causing them to become quite expensive.
     
      McBride: Some other factors for increased litigation are a rise in the number of defendants in each case. We have a lot of matters now that have large groups of defendants, whereas before you might only have had one or two closely related defendants. The cost of coordination and making sure positions are consistent is pretty substantial. Another factor increasing costs is that many cases we are now seeing are software-based or tangentially business-method-based patents, which-if you are going to develop a prior art defense-require tremendous investment in looking at actual systems and digging up witnesses as opposed to merely going to the patent literature or published literature and having a fairly efficient defense developed.
     
      Keating: Just analyzing prior art in software patents and the method-of-doing-business patents can often be a more complicated analysis than some of the other technologies in that you can have documents or source code that are hundreds of pages long. You then have to work your way through that and analyze it relative to the claims in the patent, which can add a huge amount of time and expense.
     
      Lemieux: For certain industries, like pharmaceuticals, the value of what's at stake is so large that the legal fees, even though they are increasing, are relatively insignificant compared to the future profits at issue. In that kind of dynamic, the business pressures on both the parties and their counsel to do everything possible to try to win the case are much greater. Moreover, patent litigation is a specialized field with a higher rate structure, generally, than other types of litigation.
     
      Shariati: The big chunk of that cost is experts, and that certainly means getting more and more experts involved because of the kind of technologies we are talking about and the need to analyze all the source codes. Another side of it is damage experts. Just damage experts alone could cost you hundreds of thousands of dollars.
     
      Moderator: What are the implications of patent trolls on patent litigation today?
     
      McBride: Well, the first question is, what is a patent troll? There are companies out there who act more like the Tony Sopranos of the IP world than good corporate citizens. Those companies have patents that are not commercialized. They are applying claims against the industries that the original disclosure was never really meant to cover. So those types of patent owners fall into this category of companies that really are misusing the patent system for their own benefit, instead of contributing to the advance of art, science, or technology. The rewards to the inventors are meager in relation to the huge gains that trolls attempt to realize on their patents. Some very entrepreneurial companies think trolling is a great business to be in. Probably most of the rest of the corporate world doesn't really care for trolls.
     
      Keating: The patent troll is probably the biggest beneficiary of the high cost of patent litigation because they can show up with a relatively thin patent and attempt to expand the claims onto a particular industry, but the cost of litigating is so substantial that people will consider taking a license under the patent rather than fighting it. Thus, the patent trolls are squarely situated to benefit from the substantial litigation costs.
     
      Lemieux: Kevin [McBride] raises an interesting issue. Who really are the trolls? I'm involved in a case now where an old portfolio was bought in bankruptcy by a multinational company that is now trying to assert the portfolio against an entire industry. This company doesn't make a competitive product. Is it really any different than a patent troll in that circumstance? Probably not.
     
      And you have companies like Intellectual Ventures in Seattle, which is funded by several heavy hitters in technology-including Intel, Apple, Microsoft, and Sony-whose sole alleged purpose is to generate ideas to accumulate in a new patent portfolio. At the same time, however, it has put together a $400 million fund to acquire patents-over 4,000 patents was the last reported number I saw-and everybody wonders, what happens if it starts its own licensing campaign?
     
      McBride: What you just described is the marketplace solution, where you have companies who otherwise would be victimized by trolls getting together-forming a fund, in essence-to essentially act like a troll and outbid the other trolls to buy the portfolios for themselves. Presumably, the investors, then, have some sort of a license to that portfolio, so they've taken it out of the hands of the traditional trolls. But the question is, do they then become trolls themselves? And we haven't really seen that next phase, but it's going to be really interesting to watch how that develops.
     
      Parker: It's also going to be interesting to see what the Supreme Court does with the eBay case. [Editor's note: Our discussion took place before the U.S. Supreme Court decided MercExchange v. eBay in favor of eBay, sending the case back to the U.S. District Court for the Eastern District of Virginia.] Is a troll entitled to a permanent injunction, which creates enormous leverage and inducement to settle those cases for fear of being enjoined?
     
      Lemieux: You've got to go back to the fundamental purpose of patent law-to promote the useful arts and sciences for the public good. What public good is created when a company that is not otherwise using the patent threatens to shut down companies that are actually practicing the technology and providing goods for the marketplace? Both Congress and the Supreme Court are looking at whether we should treat those situations differently.
     
      Kuhnle: There is a dialogue about whether patent rights are akin to property rights or alternatively, monopoly rights granted to foster innovation. The judges that take the property rights perspective, usually favor a stronger form of injunctive relief.
     
      The threat of the injunction adds unfairly to the value of the patent rights that are created. Many companies wouldn't mind going to trial disputing a patent assertion and then ultimately if the jury finds that they are an infringer and some reasonable royalty is assessed, pay the reasonable royalty-that's a reasonable business model. But when you are faced with the injunctive threat, you have to make a decision, "Can we afford to go to trial and really lose," and what's the value, then, of that injunctive threat?
     
      Another aspect of dealing with trolls is in the PTO. With the recent reorganization of the reexamination branch, hopefully we will be seeing much higher quality reexaminations. The problem now is that the history of reexams is not good from a quality standpoint and they take so long that they just can't keep pace with the litigation.
     
      Keating: But one issue with a reexam is that the patent owner has so much opportunity to go back and add new claims, supposedly narrower claims, to existing claims. However, through claim differentiation, the patentee can potentially come out with broader claims, or claims specifically targeted to the allegedly infringing device. After putting your best prior art forward in the reexamination, you may then have to go back and litigate it. In some ways, this process could inoculate the patent to a lot of the best invalidity arguments and allow the patentee to target the claims. So a defendant could be putting a lot of faith in the USPTO to get that process right without a lot of recourse if they don't.
     
      Shariati: Shouldn't they be doing that during the initial examination phase? Why do you have to go back to the patent office?
     
      Keating: A lot of times during the initial examination, the USPTO and the applicant don't have some of the best prior art. Sometimes it is not until possible litigation that significant time is spent searching for prior art. Once in litigation parties can spend $50,000 or more looking for the prior art, and frequently they will find some great prior art. Then the question is, do you give it to the patent office and let them review it in reexamination or would you rather take it to court and argue about the prior art there where you can fully participate in the process?
     
      Shariati: Given the cost and the time it takes to get the patent in the first place, you lose on both ends. If you are a patent holder, you end up spending a lot of money and time getting a patent portfolio. You have to start all over again essentially. So maybe we just give up on examination and fight it out in court when the time comes.
     
      Moderator: Finally, what type of patent issues are arising as we move towards a more global economy?
     
      Kuhnle: The Blackberry case [NTP, Inc. v. Research in Motion, Ltd.], involved a wireless messaging system with components in different countries-the servers were in Canada, but many of the people using devices were here in the United States. With more and more patents involving the Internet, we are going to have more questions about where the control and beneficial use of the patents are and whether U.S. patent law applies. In the Blackberry case, the Federal Circuit said, "Well, when you have a method patent, all the steps in the method have to occur within the United States," but when you have a system patent, you need to look at the control and beneficial use test. This test was somewhat applicable in the Blackberry case, but in some other cases it may not be applicable because the control and beneficial use cannot be pinpointed in any one geographic location.
     
      Parker: Another issue arises when you have components manufactured by different companies in different countries that are all combined into a product that is ultimately imported into the United States. There's recent case law that suggests you could have an inducement to infringe that occurs solely outside of the United States, and get damages in the form of profits earned outside of the United States. This takes the reach of U.S. patent law far beyond the borders of the United States. And that starts coming into direct conflict with the global economy.
     
      Keating: One concern I have with some cases in this area is that you could actually start creating incentives for companies to start spending more of their research and development dollars outside of the United States. If you are developing your software and products outside of the United States, you will reduce the risk of exporting problematic code from the United States to another country. Once you start exporting that disk or whatever it might be outside of the United States, some would argue that any copy that is made, even if made outside of the U.S., is then a basis for damages calculations. This situation could give companies a significant incentive to reduce risk by moving R&D outside the U.S.
     
      Kuhnle: In the software context, you have the AT&T v. Microsoft case and Eolas Technologies v. Microsoft. In both instances the Federal Circuit found inducement. They contrast with Pellegrini v. Analog Devices, a hardware case, where the Federal Circuit found that a party can export blueprints and even software instructions for making infringing products, and yet that doesn't amount to inducement. So there is a distinction between software and hardware-right now the rules are quite different.
     
      Shariati: We had a case where the accused instrumentality was a component that was needed to create the claimed invention. The claimed invention was a system, and our client built a component of it, which was assembled into actual networks overseas. The question became whether or not we were inducing an infringement by shipping out this general-purpose device to Taiwan or Belize or wherever someone put it into a network. Luckily for us, the court held that foreign sales were excluded, but the way the cases are going, the section 271(f) liability seems to be getting closer and closer to "as long as you tell them how to use your product, you are liable," and that's really reaching too far, in my opinion.
     
      Parker: But I'm talking even further. You are talking about activity within the United States going outside, and I'm talking about activity that is occurring 100 percent outside of the United States.
     
      Keating: But then it comes into the U.S.
     
      Parker: So the question is how many steps removed?
     
      Keating: In some respects, that seems less problematic. They are bringing that product into the U.S. economy and they're getting benefits from the U.S. market.
     
      Parker: No, what I'm talking about is-to use an example from Thomas Friedman's recent book The World Is Flat-if you have a computer that has a hundred components from a hundred different companies and a first component is manufactured, say, in China, and then sent to Japan and it's incorporated into a different component that's sent to Taiwan and then ultimately ends up in the U.S., should the Chinese manufacturer be liable? If they knew that at some point in time the product ultimately was going to end up in the U.S., should their profits in China for the manufacture in China be awarded for U.S. patent infringement?
     
      Lemieux: Because of that, we are also seeing an increase in the number of multiple-forum fights where you have U.S. patent litigation going on at the same time as litigation in Europe and Japan. Coordination of these efforts is tricky. The remedies and procedural advantages or requirements in different jurisdictions vary considerably. For example, it's much easier to get injunctive relief in the Netherlands than in other countries. Very thin affidavits can stop the distribution of products throughout the rest of Europe. So there's an increased importance on knowing what is available in other jurisdictions and how you coordinate those possibilities with your overall strategy.
     
      Shariati: And if it's a process by which you have to ship a component to multiple places, as long as it is stopped at one place in the chain, the whole thing falls apart. So if there's a critical step being done in the Netherlands and you can't manufacture your product without it, you are basically out of luck at that point.
     
      Lemieux: In China, for example, there are special courts set up where you can get injunctive relief to prevent the export of products from China if you have a Chinese patent covering the products. I share Beth's concern, however. If it is a U.S. patent at issue, and you have situation where it's just a Chinese company selling parts to a Malaysian company, that sells its products to a Japanese company, which integrates the products in Singapore, and ships it to the U.S., should you be able to reach back to the Chinese company in a U.S. court? Personally, I think that should be beyond the reach of U.S. law, but perhaps under recent decisions, that might not be the case anymore.
     
      Kuhnle: Well, if you go to the ITC, do you end up with a satisfactory result? Do those cases settle, perhaps, with a licensing agreement that lets the patentee receive some of the benefits that the Chinese company reaped from producing the product that was later found to be infringing? The ITC is a very blunt tool for working your way up the manufacturing chain, but it can generate a resolution consistent with the infringing party's contribution.
     
      Shariati: Certainly when my clients try to decide where to put their manufacturing operations, they don't really think about the patent aspect of it very much. It's all about cost and skilled labor being available and so on. So that's not going to be the primary driver of where they are going to do their manufacturing. I don't really think that's a strong enough force to push R&D out of the country. Ideally, there's got to be some sort of international body that lets you figure these things out worldwide.
     
     
      Tom Kuhnle is a litigation partner in Bingham McCutchen's Silicon Valley office. Mr. Kuhnle's work focuses on intellectual property litigation and complex commercial disputes. He has significant experience litigating matters involving patent and trade secret law, primarily for technology clients. Recent intellectual property disputes on which he has worked have concerned chipset components, test equipment, software, firmware, and business methods. Mr. Kuhnle has also litigated a series of cases involving trade secret claims arising from changes in employment.
      tom.kuhnle@bingham.com
     
      Beth Parker, a civil litigator, is a partner in Bingham McCutchen's San Francisco office. She has regularly litigated cases involving patent invalidity and infringement; unfair competition; copyright, trademark, service mark, and trade dress infringement; trade disparagement; privacy and First Amendment rights; antitrust issues; misappropriation of trade secrets and employees; and violation of constitutional rights. She has negotiated and drafted licenses, agreements and policies involving intellectual properties and privacy; and handled trademark clearance, registrations, cancellation, and opposition proceedings in the PTO.
      beth.parker@bingham.com
     
      Brian Keating is a partner with Farella Braun + Martel LLP, and is a registered patent attorney, with a degree in electrical engineering. He has litigated patent infringement and trade secret cases. Mr. Keating counsels clients in the development of patent portfolios, analyzing patents, licensing patents, and developing strategies to reduce risk with respect to patents. He has prosecuted patent applications across a range of technologies, including software, semiconductor devices, memory devices, computer networks, communication systems, fiber optics, lasers, medical devices, and mechanical devices.
      bkeating@fbm.com
     
      Kevin McBride is a partner in the Los Angeles office of Jones Day. His practice is concentrated on complex patent litigation involving subjects such as digital signal processing, software, medical devices, semiconductors, and satellites. Mr. McBride has appeared in many state and federal courts, and before the ITC. He has published articles and speaks regularly on intellectual property. In addition to his JD from Northwestern University, he holds two degrees in engineering. His full biography is available at www.jonesday.com.
      kgmcbride@jonesday.com
     
      Behrooz Shariati is a partner in the Menlo Park office of Jones Day. A computer scientist and a trial lawyer, he focuses his practice on patent and other IP in the areas of software, networking, and other computer-related technologies. His practice includes litigation, strategic counseling, and licensing, providing his clients a strong combination of technical, business, and legal experience. His full biography is available at www.jonesday.com.
      bshariati@jonesday.com.
     
      Ron Lemieux is a partner in the Palo Alto office of Paul Hastings. He represents clients in patent, trademark, trade dress, unfair competition, and other complex business matters in state and federal courts, as well as in domestic and international arbitrations. Mr. Lemieux has extensive experience with applications for preliminary injunctive relief and has handled matters involving hardware, software, semiconductor manufacturing processes, software development, integrated circuit designs, consumer electronics, technical, financial, and marketing-related trade secrets, as well as trademark and trade dress disputes.
      ronaldlemieux@paulhastings.com
     

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