By Kevin Wagner and Theodore Budd
Most businesses go about their day-to-day routine without too much focus on intellectual property issues. But then one day an accusation of patent infringement arrives.
This accusation could be in the form of a formal complaint filed in Federal District Court, an aggressive cease and desist letter, or a more “friendly” notice letter identifying a patent that may be relevant to the company’s business and is available for licensing. Once a communication of this sort arrives, concerns about potential patent infringement are no longer a back-burner issue.
This article will provide a road map for companies facing these circumstances for the first time (or for the first time in a long time), outlining the steps that should be taken in the first days and weeks after receiving an accusation of patent infringement to maximize odds of success going forward.
1. Know your deadline for responding
If you have been formally served with a summons and a complaint, then your default deadline under the Federal Rules of Civil Procedure is 21 days to file an answer or otherwise respond with a motion filed in Federal Court. Those 21 days pass quickly, so you will want to take action right away. Often as a courtesy, the plaintiff will agree to extend this initial deadline by a few weeks, but that is not guaranteed, so don’t count on it.
If you have not been formally served, you have more time. One tactic plaintiffs sometimes use is to file a complaint with the Court, but not serve it right away. In this scenario, the plaintiff will ordinarily send a copy of the filed complaint together with a cover letter asking to engage in settlement discussions. Federal Rules provide a plaintiff 90 days after filing a complaint to accomplish service. Often, plaintiffs use this time to attempt to engage in settlement discussions before either party needs to invest substantial resources in actual litigation. At the end of this 90-day window, if no agreement has been reached, the plaintiff will either need to dismiss the case, formally serve the complaint, or move the Court for an extension of the service deadline.
If the accusation of infringement comes in the form of a letter, whether an aggressive cease and desist letter or the more friendly kind, this probably means the patent holder wants to talk before filing a lawsuit. These letters often include a self-imposed deadline for a response, but that deadline is almost always a soft one. If you write back to say you are reviewing the letter and will respond after completing your analysis, the patent holder will likely sit tight for longer than initially indicated. But you cannot delay forever, and you’ll have to decide what to do next, so keep reading.
2. Implement a legal hold
Once a company reasonably anticipates litigation, it has a duty to preserve all potentially relevant information for discovery. Failing to do so can have big consequences on the case. The most egregious violations occur when someone actively destroys documents to shield them from discovery. But in today’s world of electronic documents, email, and automatic deletion policies, violations can occur unless immediate action is taken.
The best practice is to identify employees likely to have information relevant to the case, notify those employees of the infringement accusation, and make sure they preserve all potentially relevant documents in any form. You will also need to work with your IT department to turn off any automatic deletions for the emails of those employees and any other affected electronic document collections. Ask your counsel to prepare an appropriate legal hold memo and help you put together a plan for implementing the hold as soon as possible.
3. Understand your potential exposure
One of the first things you should do after receiving an accusation of patent infringement is to understand your potential exposure. Patent litigation may feel like uncharted territory, but at its core, it is just another business dispute. To effectively plan and negotiate, you need to know what you have at risk.
As a first step, identify the product or products accused of infringement. If you have other products that also include the feature that has been accused of infringement, be sure to include those as well because they may eventually become part of the dispute. Then pull basic accounting information (unit sales, revenue, and gross margin percentage) for those products, going back to either the issue date of the asserted patent or six years, whichever is later in time. This should give you a good initial sense of how important the accused products are to your business.
Next, you need to understand the potential remedies the patent holder may seek in a litigation. If a patent holder succeeds in an infringement case, there are three primary remedies that could result: (1) a reasonable royalty, (2) lost profits, and (3) an injunction.
A reasonable royalty constitutes reasonable compensation for use of the patented technology, and is the baseline remedy available in every case. In general, it is determined by considering what a reasonable patentee and a reasonable accused infringer would have agreed to as a licensing fee just before the alleged infringement began.
There is no set formula for determining a reasonable royalty, and both the form of the royalty (lump sum, revenue percentage, or per-unit fee) and amount can vary widely depending on industry. If you have other similar agreements at your disposal, they may give you a good estimate. Otherwise, take 25% of your gross profit margin on the accused product(s) to get a ballpark number.
Lost profits are an alternative to a reasonable royalty, available where the patent holder can show that it lost sales due to the alleged infringement. If the patent holder is not selling any products of its own, then there is no risk of lost profits. Lost profits are calculated by multiplying the number of the patent holder’s lost sales by the patent holder’s (not your company’s) profit margin.
Lost profits can be difficult to calculate with precision, but to get a rough estimate, multiply your company’s total accused sales by the patent holder’s share of the market, excluding your sales (e.g., if you and the patent holder each have a 1/3 share of the actual market as it exists today, then 1/2 is the patent holder’s share of the relevant market). Then multiply that amount of estimated lost sales by the patent holder’s estimate profit margin.
A lost profits-based damages award can lead to significant exposure for your company, especially when the patent holder enjoys high profit margins and a substantial market share.
An injunction is a court order prohibiting the defendant from continuing to infringe the patent, and can be issued preliminarily at the beginning of a case or permanently at the end of a case. An injunction is not automatic even if the patent holder wins the case. Courts decide whether to issue an injunction by considering (1) whether the patent holder suffered an irreparable injury, (2) whether financial remedies are adequate compensation, (3) the balance of hardships between the parties, and (4) the public interest.
In general, there is much less risk of an injunction if the patent holder is not directly competing with the accused infringer in the marketplace. If the patent holder is a direct competitor, however, the risk of injunction increases substantially. And if you’re a new entrant to the market, the patent was recently issued, or the product is very important, the chances of a preliminary injunction also increase.
Finally, be aware that if the patent holder can show your company was aware of the patent and willfully chose to infringe it, any monetary damages can be multiplied up to three times their original amount.
It is never fun to think about your worst-case scenario, but understanding your potential exposure is critical. Maybe you’ve only sold a few of the accused products, and you can use that information to convince the patent holder you aren’t worth bothering with. Or maybe this analysis will tell you that the accused products are critical to your business and you need to invest all available resources in defeating the patent holder’s allegations. Either way, this exposure analysis will drive your decision-making going forward.
4. Investigate the patent holder
After estimating your potential exposure, you should have a good sense of what your company has at stake. But in any good negotiation, it is also important to know what is important to the party on the other side of the table. Information is power, so the more intelligence you can gather about the patent holder, the better.
Here are 10 of the most important pieces of information to gather:
1. How big are they? Patent litigation is expensive. Will they be able to fund a litigation?
2. Are they selling a competing product? Without a competing product a reasonable royalty is likely the only available remedy.
3. Do they sell any products? Non-practicing entities (aka “patent trolls”) are usually motivated only by monetary returns.
4. How important is this asserted patent to their business? Bringing a patent infringement case puts the validity of the asserted patent at risk. Emerging from the litigation with their patent intact may be an important consideration for the patent holder.
5. Have they litigated patent cases before? This can tell you how familiar the patent holder is with the process, and how likely they are to take a case to trial.
6. Has this patent been litigated before? Prior litigation records can give clues to how the patent will be interpreted and often highlight potential defenses.
7. How did they acquire the asserted patent? You might find they don’t really own the asserted patent. Whether the patent was homegrown or not can impact the availability of key witnesses (e.g., the inventors) in the litigation. And the price paid to acquire the patent is a big factor in evaluating potential remedies.
8. Who did they hire as their counsel? Patent litigation is highly specialized. If they are using a national firm with a reputation for patent litigation, then you know they are serious.
9. Does your company have a business relationship with them? Your best leverage may come from outside the litigation. Are you an important customer of the patent holder? Do you supply the patent holder with a component critical to their business? Is there any good will from past business dealings?
10. Are there any potential offensive claims your company could bring against them? Is the patent holder infringing any patents or other intellectual property owned by your company? Are there any contracts they might be in breach of? Anything else?
5. Engage competent counsel
Patent litigation is highly specialized. All patent cases are litigated in Federal Court under a unique body of Federal Law that governs patent disputes. Those laws are interpreted by a specialized appellate court, the Federal Circuit, that often changes the rules in nuanced ways that may impact your case.
If you have a local business litigator who you have been working with on other matters, that’s great. That lawyer may have relationships with others in their firm or in the legal community who specialize in patent litigation and might be able to offer you some good referrals. But regardless, you will want to find someone with a deep knowledge of this specific area of the law to handle your patent defense.
Engaging competent counsel early on can be key to achieving a successful outcome in your case. They can help you assess risk, decide on a strategy for settlement negotiations, and set the course for litigating the case on the merits. If you wait to engage good litigation counsel until later in the process, they may have a different view of your case than prior counsel, and would then face additional hurdles in attempting to change direction than if they had been involved from the get-go.
Important factors to consider in evaluating counsel include experience, track record for success, comfort level with your technology, and of course, price. Many patent cases these days are litigated on an alternative fee basis rather than standard hourly rates. Ask about these options and try to negotiate a fee arrangement that works for both your company and the firm you are working with. Ultimately, you want to arrive at a partnership between your company and your counsel, so that all involved are heavily invested in achieving the best possible outcome in your case.
6. Evaluate the merits of the infringement allegations
Working with your counsel, you should evaluate the merits of the patent holder’s infringement allegations. Your potential exposure is an important factor in your decision-making process, but you also need to understand the patent holder’s likelihood of success in proving infringement to truly be able to calibrate your company’s risk.
To assess infringement, you will need to compare the numbered claims found at the back of the asserted patent to your accused product. Infringement only occurs if every single word of a claim applies to your product (either literally or by equivalents), but infringement of even one claim is enough for the patent holder to prevail in a lawsuit.
Infringement, and therefore your potential liability, generally turns on how the words of the claims are interpreted. And that interpretation is impacted by how the words of the claim are used throughout the patent, what the patentee said to the U.S. Patent Office when arguing that it should be granted the patent, dictionary definitions, and other pertinent technical references. Think of interpreting patent claims (commonly called “claim construction”) as trying to draw the boundary lines around the scope of the patented invention. Not surprisingly, just as with real property, the process can be complicated and subject to disagreement.
There is a whole body of law on claim construction, so you will want to work with your counsel closely on this issue—and don’t be surprised if the answer isn’t definitive. Often infringement cannot be determined until the Court rules on how the claims should be interpreted, and even then, there may be lingering disputes that require further determinations.
For example, if the claims seem very broad, the patent holder could have overstepped and claimed something that already exists, rending the claim invalid. What you are hoping to identify at this stage are potential non-infringement arguments, together with a general sense of how likely you are to prevail on each of those non-infringement arguments.
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7. Consider potential design-around options
Often, future liability will be an important factor in your case. For example, if you just launched the accused product, the patent was just issued, the patent holder recently acquired the patent, or the patent holder failed to mark its products with the patent number, there may not be any past damages at stake whatsoever.
In other cases, past damages may be available for only a short period of time, but the bulk of potential liability stretches out into the future until expiration of the asserted patent. In these cases, you should consider whether there are any changes you could make to the accused product to avoid infringement in the future. If there is such a design-around option readily available, you can use it to cut off future liability, and the cost of implementing the design around may even cap damages for past infringement.
Identifying a design around requires a consideration of both the legal non-infringement analysis discussed earlier, and business considerations of whether the redesigned non-infringing product can be technically implemented, economically built, and commercially successful. If you can find a design that checks all of these boxes, it may be your golden ticket to avoiding a protracted and expensive patent litigation.
8. Assess your invalidity arguments
In addition to non-infringement arguments, the other major defense in patent litigation is to argue that the asserted patent is invalid and should never have been issued by the U.S. Patent Office in the first place. This is an uphill battle, because issued patents are presumed to be valid, but it also is not insurmountable.
Invalidity can come in a variety of forms, including arguments that:
- The patent claims cannot be understood (indefiniteness)
- The patent claims capture more than what was invented (written description and enablement)
- The patent claims are directed to an abstract idea or naturally occurring phenomena (section 101 invalidity)
- Prior art anticipates or renders obvious the claimed invention.
Prior art attacks are the most common invalidity defense. To mount an effective prior art defense you will want to search for art dated before the earliest alleged filing date of the asserted patent. Prior art can include other patents, printed publications, prior product sales, and in some cases, prior inventive work of anyone other than the named inventor of the asserted patent. Your counsel will be able to help you run a prior art search for prior patents and printed publications, but you should also consider investigating the following sources:
- Internal sources
- Sales of your company’s accused product that predate the asserted patent
- Records showing your accused product was designed before the filing date of the asserted patent
- Your company’s patents and publications that relate to the accused product
- Industry sources
- Publications familiar to the engineers and/or scientists who developed your product
- Industry experts who have a friendly relationship with your company
- Publications by industry groups your company associates with
- The patent holder
- Sales by the patent holder that predate the asserted patent
- Publications by the inventors that predate the asserted patent
- Other patents and patent applications filed by the inventors before the asserted patent
The most effective prior art will be art that was not considered by the Patent Office before issuing the asserted patent. After identifying the best available prior art and considering your other invalidity defenses, you should ask your counsel for a realistic assessment of your likelihood of success on an invalidity defense. This information, together with an assessment of your non-infringement defenses and an understanding of your potential exposure, will put you in the best possible position to respond to the infringement allegations you are facing.
If your only defense to an accusation of patent infringement is invalidity, it is important to remember that you will need to prove each claim of the patent that applies to your product is invalid. That can be a daunting task when numerous patents or patent claims are involved. Claims within a single patent vary in scope, and so you may need several different invalidity theories even for the same patent.
Patents are also presumed valid; consequently, it will be your burden to establish invalidity, whether in court or before the Patent Office. In sum, don’t bank on the patent claims asserted against you being invalid; instead, look for a pragmatic assessment of the patent’s validity.
9. Draft a non-privileged response or obtain an opinion of counsel
If the complaint against you has already been filed, you will probably skip this step. But if the initial accusation came in the form of a letter, you should seriously consider either (1) having your counsel prepare a non-privileged responsive letter outlining some of your defenses, or (2) obtaining an opinion of counsel that you keep privileged.
Patent holder’s send letters before filing a complaint in part to test the settlement waters, and in part to put your company on notice of the asserted patent so that they can later allege willful infringement. As noted earlier, willful infringement carries with it the risk of trebled damages. To mitigate this risk, it is advisable to build a record of your company’s good faith defenses to the infringement allegations, either in a responsive communication to the patent holder or in a confidential and privileged opinion of counsel.
In most cases, the preferred tactic will be to draft a non-privileged responsive letter to the patent holder expressing a good faith belief that your company does not infringe and/or that the patent is invalid. This letter does not need to be all-inclusive, but stating your good faith belief and highlighting a few of the defenses you plan to rely on later will give you something to point back to if the plaintiff alleges willful infringement. Without this marker, it can be difficult to establish your non-willfulness at a later date.
One alternative strategy that has been historically popular is to obtain a privileged opinion of counsel. This generally involves a patent specialist drafting a confidential memorandum outlining arguments for non-infringement and/or invalidity. If your company is then later sued for willful patent infringement, you can decide whether to disclose this privileged opinion of counsel as part of your willfulness defense.
While this can be an effective strategy to defend against willfulness, often opinion counsel may have a different view of the case than your litigation counsel. Issues can also arise regarding whether the opinion is accurate, and whether your company actually relied on it in deciding to continue selling the accused product. Finally, choosing to disclose such an opinion results in a waiver of the attorney-client privilege, and while the scope of that waiver is uncertain, it will likely involve disclosing other privileged information that relates to the same subject matter of the opinion.
Consequently, in most circumstances, drafting a non-privileged responsive communication to the patent holder is the preferred route.
10. Consider going on the offensive
Receiving an accusation of infringement will put you into a defensive posture, but you don’t have to stay that way. Rather than waiting to be sued, there are a number of paths you can pursue to go on the offensive. The most aggressive move would be filing a complaint alleging infringement of your own company’s patents, or some other offensive claim. If those sorts of claims aren’t available, you could consider a declaratory judgment action, affirmatively asking a Federal Court to declare either that your company doesn’t infringe or that the asserted patent is invalid. Either of these actions give you some measure of control over when and where the litigation occurs, and may provide significant leverage in a negotiation to resolve the allegations against your company.
Another approach is to consider asking the U.S. Patent Office to take a second look at the validity of the asserted patent. You can do this relatively inexpensively through an ex parte reexamination, but this option limits your ability to participate in the proceedings beyond an initial submission of prior art. A better option may be to petition for inter partes review, or IPR. An IPR allows you to actively argue for the invalidity of the asserted patent based on prior art consisting of patents and printed publications, and can be an effective way to limit your cost of defense while still putting the asserted patent at risk.
Note that once you are served with a complaint alleging infringement of a patent, you only have one year to file an IPR on that patent.
Being accused of patent infringement is not a fun experience, but following these steps will take the mystery out of how you should respond, and will help put your company in the best position to defend against the infringement allegation and move on with your business. Taking such an accusation seriously and diligently investigating can save your company from significant exposure in the long run.
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