For US lawyers, the patent party is most definitely over

In 10 years of legislative changes, judicial tweaks and precedential decisions from the highest courts in the land, patent litigation in the United States has been turned on its head.

Patent owners and their advisers have the Supreme Court to blame – or thank, depending on their point of view – for many of these changes. As a result of eBay and the way that it has been interpreted by lower courts, for example, the prospect of winning an injunction is now largely off the table for many. Judgments such as those issued in Mayo and Alice mean that determining what is patentable has become more art than science, while Octane has made the risk of fees being awarded against losing plaintiffs (and, on rare occasions, defendants) far higher. Most recently, TC Heartland has reduced plaintiff choice in terms of where to bring a case.

More generally, these days damages are calculated in far greater detail and plaintiffs are now required to provide more information when filing a complaint. In addition, the introduction of inter partes reviews means that patent owners need to dodge potentially multiple validity challenges before they can be confident of being able to assert their rights.

Paradoxically, while fighting a patent dispute has become more complex it also appears to have become much cheaper for the parties involved. According to data from the American Intellectual Property Law Association (AIPLA), the average cost of a patent infringement case has plummeted in recent years. The number of new suits is also dropping and, on a like-for-like basis, is in line this year to hit levels last seen a decade ago.

Speak to patent specialists in private practice and a picture emerges of a market which has lost much of its gloss. Up until a few years ago patent litigation was one of the boom areas for law firms as intellectual property became both more important and also riskier for much of corporate America. That trend saw full-service firms beef up their practices and compete more aggressively with IP boutiques, several of which, such as Kenyon & Kenyon, were muscled out of the market.

Today, there is a torrent of lower value lawsuits, often filed by non-practising entities (NPEs), in large part because the litany of changes to the US system has made it so much harder to assert patents. At the top end of the market, litigators working for the likes of Apple or Samsung or big-name pharmaceutical companies insist that the lawsuits remain extremely remunerative. However, there are relatively few of those blockbuster cases to go round.

“It’s much more competitive and much of the litigation that was feeding a lot people has gone away,” Sterne Kessler Goldstein & Fox director Robert Sterne explains. “I think the general practice firms no longer view their patent defence work as a goldmine, while firms that are set up to defend lawsuits involving a $2 million to $4 million settlement are feeling the heat.”

Figure 1. Q1 2014-Q3 2017: district court litigation

Source: Unified Patents

By numbers

Every two years the AIPLA carries out a deep dive into the costs of IP litigation and prosecution and salary levels in the sector for a comprehensive overview of the economic state of the market. If there is one conclusion to be drawn from its most recent economic survey, it is that when it comes to legal services, it is a buyer’s market.

This year the median cost for pre and post-trial and appeal (where applicable) for a patent infringement dispute with less than $1 million at risk was $500,000, down from $600,000 two years ago. That may still seem rich for a relatively small case but it is the lowest level since 2005 (the earliest data point in the survey) and was down from a 2013 peak of $700,000.

This fall in costs has been far more dramatic in larger lawsuits. For a case with between $1 million and $10 million at stake the cost to appeal (where applicable) has halved from $2 million to $1 million, while for a case in the $10 million to $25 million range it has dropped from $3.3 million in 2013 to $3.1 million in 2015 and $2 million in 2017. For blockbuster cases with more than $25 million at stake the typical cost of a case had hovered between $4.5 million and $5.5 million since 2005 – this year it plummeted to $3 million.

These numbers provide a snapshot based on a small dataset only (eg, most high-value disputes typically settle well before reaching a conclusion in court) which means that one or two outliers can skew the numbers. That said, the drop in costs is also reflected in the AIPLA survey for Hatch-Waxman litigation relating to pharmaceutical disputes, in the typical cost of defending against an NPE lawsuit and in bringing a Section 337 case at the International Trade Commission (ITC). On top of these figures, it becomes clear after speaking to patent litigators that the market is a long way from its heyday of a few years ago.

“I think there’s a shortage of actual patent litigation work that people are willing to pay for and I think firms are low-balling one another,” comments Michael Renaud, a Boston-based partner of Mintz Levin. Such competition, he claims, has led to capped fee agreements for the majority of cases, meaning that the costs cannot exceed an agreed level.

Robert Heath

Chief strategy officer, RPX

“The big change in NPE settlements has been felt in the middle market”

This move to alternative fee arrangements, which is affecting most major specialisms not just intellectual property, has been pushed aggressively by some of the largest US companies over the last decade as they have used their buying power to bring costs under control. However, it is eating into the top and bottom lines of patent practices across the United States.

More and more operating companies have abandoned traditional billing practices where the cost of a dispute is determined largely by the number of hours spent working on it. Earlier this year Microsoft announced a major move to alternative fee arrangements for its litigation work to include fixed fee or other alternative arrangements where a law firm typically agrees a price for a piece of work upfront. The software giant’s shift applies to all of its dispute work but as with most large tech businesses, patent litigation has traditionally resulted in a steady stream of work for the company’s preferred law firms.

Like many large tech businesses, Microsoft has seen the number of patent cases in which it is involved decline steadily in recent years – from 35 in 2014 to 19 last year (according to Lex Machina). Even so, the company’s buying power ensures that it holds considerable sway over its advisers.

For many private practice lawyers, alternative fee arrangements can be a synonym for lower fees and there is no doubt that the trend is having an impact. “At 3M, we have seen – and led – a major shift away from the hourly billing model for patent infringement litigation (and other types of litigation as well) in the past several years,” comments 3M chief IP officer Kevin Rhodes. “We bring and defend patent infringement actions using custom fee agreements with our outside counsel that focus on results, not activity, and work better to align our business objectives and the firm’s incentives to work both effectively and efficiently.”

While some private practice lawyers insist that a surprising proportion of their cases are still costed using billable hours, it is clear that the trend is moving towards more alternative fee arrangements. However, this does not include full contingency deals in which the fee for a firm representing a plaintiff depends on whether it is successful in a case. At the height of the patent boom several firms – including McKool Smith and Robins Kaplan – became known for scooping millions of dollars representing plaintiffs in infringement suits on contingency deals.

Changes to the US patent litigation system have made representing plaintiffs a far riskier proposition and dragging out the time it takes to reach a resolution – most lawyers now balk at having so much on the line. “The costs of monetisation are high enough these days that we will no longer consider full contingency cases,” Renaud admits. “The usual arrangement for monetisation is discounted fees up to a cap that represents a good portion of our expected fees in the agreed-upon litigation, usually in the ITC, plus all costs paid by the client.” On the defence side, Renaud explains that Mintz Levin will often cap fees by the phase or task of litigation. This gives clients certainty on how much a case will cost up until, say, an early court motion such as a challenge on the grounds of patent-eligible subject matter.

Michael Renaud

Partner, Mintz Levin

“Defendants have become emboldened to take their chances in killing patents”

Lowest in a decade

The AIPLA’s cost numbers are not the only dataset which points to a declining market. Since early last year the number of new patent cases filed in district court has also been on a steady downwards trajectory. According to Lex Machina, in 2016 the number of new cases was 4,527, down from 5,823 in 2015. By mid-October, the total for 2017 so far was 3,270 – with Lex Machina forecasting 4,300 for the whole year.

The litigation numbers for 2016 and 2017 show that the volume of new cases has fallen to levels not seen since 2011. However, from the lawyers’ perspective it just gets worse. On a like-for-like basis the number of new suits is even lower, as changes introduced by the America Invents Act six years ago mean that more suits involving the same patents are now filed separately rather than grouped together. On that basis, litigation is at a low not seen for more than a decade.

According to data from RPX, the total number of new defendants in patent litigation cases was 4,756 in 2016, down from just over 6,000 in 2015 and a little over 5,000 in 2014. As of mid-October 2017, slightly more than 2,800 new defendants had been added – suggesting that 2017 will see another fall to levels last seen in 2006.

If current trends in new cases continue, costs probably have further to fall. “Ten years ago there was so much at risk for companies that they were willing to pay anything in a patent case,” comments one in-house lawyer who was previously in private practice. “Not surprisingly, those companies looked at that and said ‘that’s a problem, how do we manage the risk?’” The way this in-houser sees it, the patent disputes market crested in 2013 before the America Invents Act and inter partes reviews took full effect and before the Supreme Court breathed life into early district court motions to challenge a patent’s validity.

NPE decline

For law firms that were hit hard by the 2008 economic crisis, patent litigation had provided one bright spot. While their corporate and finance peers struggled for work in the downturn, patent lawyers became far more significant revenue drivers. In terms of volume, lawsuits filed by NPEs helped to fuel that boom. Now, though, they are falling steeply. At their peak in the second quarter of 2015, NPEs initiated more than 1,200 new cases, according to data from Unified Patents. That fell to just less than 500 lawsuits in the third quarter of 2017 – still a big chunk of the market but a highly significant drop nonetheless.

Katharine Wolanyk

IP principal, Burford

“There has been a big surge of interest in litigation funding for the largest patent cases”

“The decrease in the price of cases in my view has to do primarily with NPEs,” comments Hogan Lovells partner Jeffrey Whittle. He says that more law firms have been willing to take large discounts to represent either a plaintiff or defendant in NPE suits. The effect of fewer NPE cases is also highlighted by some patent owners. “A lot of patent litigation work relating to claims brought by certain types of NPEs has dried up or at least slowed considerably, so the firms that were involved on either side of the ‘v’ in those kinds of cases are not as busy as before and all those practices that were focused on, for example, defending large corporate clients in certain kinds of NPE cases have had to be cut or become more competitive to have a shot at winning the more limited amount of work now available,” observes Ron Antush head of US litigation for Nokia’s patent business.

Large volume, low-value settlement cases – the type filed by many NPEs – are hardly the way to bump up the profits per partner for most firms, while the pejorative narrative around patent trolls means that many will not even touch this type of work. However, the boom in NPE litigation has had a significant inflationary effect on the market. In the late 2000s it was not unheard of for a major tech giant such as Google to spend several hundred million dollars annually on defending itself against NPE cases. Include plaintiffs’ costs in these calculations and it is easy to imagine legal costs of more than half a billion dollars just related to lawsuits against the search giant from various assertion entities.

Factor in the spate of blockbuster smartphone litigation cases which pitted the giants of the mobile space against one another and it is easy to see why patent litigation became such a boom area. Some of that high-value work remains, such as the ongoing fight between Apple and Samsung, but not at the levels seen five or six years ago.

Determining how the volume of operating company on operating company cases has changed is tricky. Data from Unified Patents does at least show that non-NPE litigation has not dropped as steeply as NPE cases, with 367 new lawsuits filed in the third quarter of 2017 compared to a recent high of 519 in the last three months of 2015.

Non-NPE litigation may have become far more prized in the current climate but even this has been affected by the changes in the market. “It really depends on who your adversary is,” reflects Antush. “If you’re against a sophisticated and well-funded party, for example companies like Apple or Samsung, then you shouldn’t expect the fees and costs to come down dramatically because those kinds of companies will fight using every available means. In other cases, however, the fees and costs have come down because of changes to the litigation system such as new rules governing discovery or because of more intense competition among law firms for the work.”

Figure 2. Defendants added to patent campaigns

Source: RPX

Boutiques get defensive

Just how hard firms have been hit by the drop in new patent cases and the pressure on legal fees can be difficult to measure – they do not tend to split out their revenues by practice area. However, it is possible to track the financial performance of the handful of predominantly IP-focused practices that feature in The American Lawyer’s ranking of firms by revenue (The Am Law 100 and 200). In the last five years Finnegan, Henderson, Farabow, Garrett & Dunner and Fitzpatrick, Cella, Harper & Scinto for instance, have both seen their revenues plateau. Finnegan’s top line reached $310 million in 2016, up just $1 million from 2014, while Fitzpatrick’s slumped from $119.5 million in 2012 to $98 million in 2015 (the last year it made The Am Law 200 of US largest firms).

Robert Sterne

director, Sterne Kessler Goldstein & Fox

“General practice firms no longer view patent litigation as a goldmine”

While the largest specialist IP practice Fish & Richardson has managed to grow its revenues – in part by maintaining a vice-like grip on the patent litigation market (last year it featured in 17% of all patent suits in the United States) – there is no doubt that many boutiques have found themselves squeezed in a much changed legal market.

Kenyon & Kenyon, a New York headquartered firm which at its height had around 300 IP lawyers, saw a steady stream of departures from its partnership before, in 2016, the remaining team of around 50 lawyers joined Andrews Kurth, a Texas-based firm known more for its connections in the oil and gas industry than its IP expertise.

Jeffrey Whittle

Partner, Hogan Lovells

“The fall in the cost of cases is primarily due to NPEs”

According to legacy Kenyon & Kenyon partner Michael Lennon, the firm was hit by changes that have affected the whole legal sector in the last decade. “The 2008 economic crisis had a huge impact,” he explains. “Companies cut back legal budgets significantly and many are still cutting.” That means that one of the few avenues for growth for many firms is to take business away from competitors, including by hiring partners and other lawyers. As many boutiques have lower profits per partner than the larger firms which have aggressively grown their IP practices (eg, Kirkland & Ellis and Winston & Strawn) this makes them particularly susceptible.

However, Lennon – who was part of the move to Andrews Kurth – also points to another factor that he says has worked against the smaller, specialist IP practices. He claims that as the stakes in patent litigation became much higher for large operating companies, responsibility for disputes in many businesses moved to general in-house legal teams from specialist IP groups. “That changed all the dynamics,” Lennon asserts. “Most of them didn’t have relationships with IP boutiques, but with larger, general practice firms.”

Some cause for optimism

While boutiques have been feeling the heat and the patent practices of most firms have been grappling with a very different litigation market, the rise of inter partes reviews has at least given some of them a new way of making up lost revenues.

The AIPLA survey pegs the average cost of an inter partes review at $250,000 through to a hearing at the Patent Trial and Appeal Board (PTAB) – slightly down from two years ago, when it stood at $275,000. Take an inter partes review decision to appeal and that total ticks up to $350,000.

According to one experienced PTAB practitioner, it requires between 150 and 200 hours to prepare a typical petition. With filing fees, search fees and expert declarations a firm might expect to bill $100,000 on the low end before a review is actually instituted. If one is instituted then a client is looking at an additional $50,000 to $150,000 in fees. In the grand scheme of things this is a small price for the petitioner to pay if the review knocks out crucial claims in a patent. The average cost of an inter partes review can also be skewed by pharmaceutical cases, where a generics company can often pay as much as $600,000 while a brand name drug business would fight tooth and nail to protect its intellectual property. For the patent owner the cost of an inter partes review can vary wildly but is typically less than what a petitioner is expected to pay.

Figure 3. Q1 2014-Q3 2017: PTAB petitions filed

Source: Unified Patents

The cost of inter partes reviews may not be enough to make up for a shortfall in billings from district court cases but such has been the volume of reviews (in some quarters as many as 500 have been filed) that they have provided a valuable revenue source in an otherwise shrinking market. A book of business of $2 million for a busy PTAB practitioner is not beyond the realms of possibility.

In terms of the cost of patent litigation overall, inter partes reviews are something of a double-edged sword. There is some evidence that when a review is filed in parallel with district court litigation (as happens in most cases) then it can help to drive earlier settlements or can invalidate the patent in question and therefore bring any associated lawsuit to a relatively swift end.

Inter partes reviews have attracted plenty of criticism from patent owners since they were introduced in 2012; but, on the flip side, supporters of post-issuance reviews contend that they are forcing earlier settlements and so bringing down the overall cost of litigation. There is also evidence that inter partes reviews are causing NPEs to shift their horizons. Instead of looking to bring low-value infringement lawsuits and demand a settlement for a few hundred thousand dollars (ie, far less than a district court case would cost), high-volume filers now use the cost of an inter partes review as their reference point and ask for as little as a high five-figure sum.

According to data from RPX the median settlement for NPE cases dropped from $375,000 in 2010 to $100,000 in 2014 and $80,000 in 2015. “There has been a bifurcation of settlement costs,” comments Emily Hostage, senior director for strategic analytics and policy counsel at the defensive patent aggregator. She explains that a few years ago more cases settled in the range of $500,000 to a few million. These have since dried up, although there remains a “persistent group” of lawsuits that settle for above $10 million. “The big change is in the middle market,” adds Robert Heath, RPX’s chief strategy officer. “A [dollar] settlement that a few years ago would have been mid-six figures to low seven figures might now be in the low six figures to high five figures.”

If a patent owner approaches a potential licensee and offers a licence for $500,000, a defendant might opt to challenge the validity of the patent and file two inter partes reviews for the same cost. “You might make the patent go away so why wouldn’t you pay that?” Heath asks.

Top end

For a patent owner who survives a validity challenge at the PTAB – a process which takes around 18 months – then an inter partes review is just another hurdle that they must overcome and another cost they must pay. To many, the reviews and other popular, relatively new defendant tactics (eg, challenging a patent’s validity on subject matter grounds), drive up costs by dragging out the time it takes to litigate a case. “We assume there will be an inter partes review in any of our cases so that’s driving budgets up and then we assume the case will be stayed and a longer duration tends to mean higher costs,” Katharine Wolanyk of litigation funder Burford Capital explains.

With defendants now able to use a much greater range of tactics to fight off an infringement suit, disputes featuring large businesses that can afford to fight remain highly lucrative. To give some sense of how that part of the market is faring, Wolanyk points out that she has seen a big surge of interest in funding big-ticket cases.

A recent Burford survey found that in-house counsel in the United States were most likely to seek funding for a patent case. The London listed funder, which generally backs disputes worth more than $25 million in damages, also analysed all the financing queries it received in the 12 months from August 2016 (those queries may not have led to a deal but were at least an expression of interest) and found that patent cases were the leading area of interest. “Big companies, that can self fund, have realised the benefits of taking legal costs off the balance sheet,” argues Wolanyk.

For the largest, US-based cases such as Apple v Samsung or the iPhone maker’s spat with Qualcomm, a fairly select group of law firms typically gets involved. These tend to be the ones with the leading IP litigation practices (eg, Quinn Emanuel, Kirkland or Wilmer Hale) or those with the most impressive corporate clients bases (eg, Sullivan & Cromwell and Cravath Swaine & Moore).

Increasingly, the largest lawsuits also feature an international angle – either because a patent owner is looking for leverage in a jurisdiction deemed more favourable than the hostile US market (eg, Germany) or because it is asserting against an overseas business or as part of a worldwide licensing campaign.

“As injunctions have become more difficult in the United States after the decision in eBay, the attractiveness of non-US jurisdictions has increased,” comments Sullivan & Cromwell partner Garrard Beeney. “That has coincided with some favourable decisions for patent holders in places like Germany, the Netherlands and – based on a smaller set of data so I say ‘perhaps’ – India.”

Those cases with an international element mean that the largest global firms such as Hogan Lovells, which can call on their own lawyers in multiple countries, have a clear advantage; as do those such as Sullivan, which have a long track record of advising on multi-jurisdictional matters. It is an area where, again, the smaller IP specialists can struggle to keep up.

The party’s over

However, whichever type of firm they practise in, patent litigators in the United States have been hit by the twin forces of a rapidly evolving market for legal services and a patent landscape that has been radically remade thanks to the courts and Congress. As the fate of Kenyon & Kenyon demonstrates, this has led to an existential crisis for some firms and a far tougher market for many.

As IP enforcement and licensing become much more global businesses, the relative importance of US litigation is likely to continue to fall. It seems unlikely that the United States will lose all of its allure as a jurisdiction in which to bring disputes – it is simply too large and has too long a history as a patent venue to be completely discounted. However, all of the trend lines continue to point to a far more competitive market for law firms’ patent practices and more downward pressure on fees.

For patent plaintiffs and defendants alike, there has arguably never been a better time to drive down legal costs and demand an even better service from their advisers. However, for law firms, the patent party is most definitely over.