Originally published by IP Review (Summer 2009)
Reports that the number of patent infringement lawsuits filed in the US in 2008 decreased by more than 8% from 2007 came as a surprise to some observers. Many view patent litigation as a practice that remains steady – or even thrives – during economic downturns. Conventional wisdom holds that when times are tight, companies look for ways to generate new revenue using existing assets. Since intellectual property (IP) is one of the most important categories of assets held by many businesses, it is natural that corporations looking for new sources of revenue may seek to monetise their existing IP assets – especially patents.
Short of selling off IP, companies can realise revenue from these intangible assets in only two ways: licensing rights in exchange for royalties or enforcing them through litigation. Rather than reducing the number of patent lawsuits, therefore, economic downturns generally result in increased patent litigation as companies try to find ways to grab a larger share of shrinking markets.
This view is consistent with recent history. After the extraordinary growth in patent litigation in the 1990s, the number of patent lawsuits filed annually continued to grow through 2004 despite the burst of the 'technology bubble' in 2000 and the worldwide recession that followed. And following an 11% dip in 2005 (likely attributable to a corresponding 12% drop in utility patents issued that year due to backlogs at patent and trademark offices), patent litigation resumed its upward trend until 2008.
In view of the relative resilience of patent litigation to past economic downturns, the 8% decrease in patent lawsuits filed in 2008 may lead some to wonder whether the decline portends a protracted downturn in patent litigation activity – or even more significantly – the beginning of a widespread shift in attitudes towards the value of patent litigation to companies' business strategies. It is reasonable to question whether the downward trend will continue until a recovery occurs in the broader economy, or whether the decrease in lawsuits filed was merely a temporary blip (like the 11% decrease in 2005) attributable to the severe uncertainty that permeated the financial markets in the latter part of 2008.
Only time will tell, but several factors suggest the drop in patent litigation activity in 2008 is a temporary lull, rather than a widespread shift in attitudes towards the value of enforcing IP. First, even though the total number of patent lawsuits filed in 2008 was 8% lower than the number filed in 2007, filings actually increased at a 2% rate year over year for the first seven months of 2008, despite a general softening in the economy. The decrease for the year is entirely attributable to a dramatic 23% decrease in patent cases filed during the extremely uncertain economic climate of the last five months of 2008. This suggests that the decline in patent litigation activity was driven by a short-term reluctance by companies to commit the substantial resources required over a two-to-three-year period necessary to wage an effective patent lawsuit.
IP Enforcement
As the immediate crisis and initial uncertainty pass, it seems likely that companies will return to the tried-and-tested practice of using existing IP as a weapon to generate revenue and increase market share in highly competitive industries. Indeed, this trend may have already begun; according to Stanford IP Litigation Clearinghouse, 194 patent lawsuits were filed in December 2008, a substantial increase over the 114 lawsuits filed in November 2008 and only a small decline from the 206 patent lawsuits filed in December 2007.
Moreover, the number of patent applications filed with the US Patent and Trademark Office (USPTO) has steadily increased each year since 1996, reflecting continued and growing emphasis on (and investment in) protecting innovation with patent rights. Despite the growing number of applications, however, the rate of applications granted has declined from about 72% in 2000 to 51% in 2007. According to the USPTO, this decline is a result of efforts to improve patent quality. If patent quality has indeed improved, one would naturally expect the relative number of higher-quality patents to result in increased licensing and litigation activity.
The USPTO's efforts to improve patent quality also contribute to higher costs to obtain patents as prosecutors respond to the increasing number of rejections by filing more appeals and more requests for continued examination. Each patent represents a significant investment, typically in the range of tens of thousands of dollars per application. Thus, whether or not the USPTO's efforts to improve quality have been successful, companies (and their shareholders) will likely demand improved returns from their increasingly expensive patents. In the current climate, it is more important than ever for companies to realise value from IP assets through licensing and enforcement. It is equally important that patent owners be particularly judicious in selecting the right opportunities to generate revenue from their existing portfolios. Below are some key considerations to maximise this value.
1. Know What You Have
The first step a company must take to realise value from its patent portfolio is to recognise and evaluate what it owns. Many companies invest significant resources in developing IP assets but fail to get the most out of those assets by missing opportunities to analyse what they own or ways to monetise their rights. A company's own scientists and engineers can be a great resource in accomplishing this task – they generally know the most about what technologies the company is practising and what technologies are important to their competitors. Sometimes a company may find that it owns rights to technology which, if successfully enforced, could block competitors from an entire market segment.
2. Assert Your Quality Patents
The analysis described above may turn up many patents that are relevant to the products of multiple competitors. It is essential to select the right defendants – typically strategically important competitors who have the ability to pay a damages award. And although all patents enjoy a statutory presumption of validity, they are not all created equal. Experienced patent counsel can assess the scope of the patent claims based on the legal fundamentals of claim construction and compare the claims to the information known about the potentially infringing activity.
In addition, patent counsel should evaluate the strength of the patent by analysing its prosecution history (the negotiation between the applicant and the relevant patent and trademark office that results in the issued patent) and reviewing potential prior art. These steps are important even if the patent owner desires only to license (rather than litigate) its patent. Unless carefully managed, attempts to extract a licence may result in a declaratory judgement action asserting that the patent is invalid and not infringed – leaving the patent owner to defend the validity of its patent in a venue selected by the competitor.
3. Select The Best Forum
If a patent owner desires to seek damages and/or an injunction rather than license its IP Rights (or if licence negotiations break down), it must determine the most favourable forum and venue for bringing a claim. In the US, initiating an investigation at the International Trade Commission (ITC) is becoming a more popular option for domestic manufacturers or distributors competing in imported goods. In 2008, 42 such investigations were initiated – up from 35 in 2007.
The ITC provides the advantages of speedy resolution – complex cases are required to be decided in 18 months – and exclusionary relief is available if the patentee is successful on the merits of its claims and proves that it is practising the patent domestically. Because ITC claimants cannot collect damages, however, many patent owners choose to file parallel actions in federal court.
For the vast majority of claimants who elect to proceed in federal court, selecting the district in which to file can be of great importance. Although certain districts have developed reputations as having a shorter time to trial or as being more patentee-friendly than other districts, these statistics change constantly and should be analysed at the time of filing.
More importantly in view of recent Federal Circuit precedents, patentees should choose a venue that has some connection to the facts at issue (for example, a venue where key witnesses or evidence are located), since local sales of a nationally available product are likely insufficient to prevent a case from being transferred to another district. Thus, careful pre-filing analysis of the proper venue can avoid the cost and delay associated with transfer and the risk of being transferred to the defendant's preferred location. The same applies to patent strategies outside the US.
It is clear that patent litigation is not immune from tightened spending in the current economic climate. But even in the midst of an economic downturn, patent holders can continue to realise value from their patent assets by evaluating their portfolio, selectively asserting strong patents against strategically chosen defendants, and selecting the best forum and venue for their claims.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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