Why plaintiffs in US patent cases who understand the odds of victory are almost always best off settling

The US - it’s the land of opportunity, including for inventors who protect their dreams with patent protection.  In 2016, the US government granted more than 325,000 patents to inventors.

Inventors enforce their patent rights through litigation, when they believe a corporation is practising their protected idea.  In 2016 there were 5,100 patent litigation lawsuit filings. The vast majority of patent lawsuits settle before trial—95% to 97% of them. 

Some policy makers and corporations strongly criticise patent enforcement practices that favour early settlement.  They argue early settlements to avoid testing the merits on patent disputes are an abusive litigation practice. 

In June 2013, I worked on a case that showed me early settlement isn’t an abusive practice, but rather a prudent business decision. 

The inventor, who I’ll refer to as Michael to maintain confidentiality, believed corporations had taken his database-algorithm invention. 

Michael is not your average inventor.  He served as an officer in the military and, after retiring and returning to civilian life, became an entrepreneur. 

He developed an algorithm to improve database operation, created a patented software product and founded a company.  Michael invested more than $100,000 to protect his idea with numerous patents.

Though his company failed, he believed he could license his patents to corporations that were using his technology.

When he approached us, we agreed.  Our team filed a patent litigation lawsuit on his behalf. 

Fast forward to the pertinent part of the story: we came to a critical point in his litigation - the claim construction hearing. 

This is where a judge interprets the patent’s protected property: the claims.  A judge’s determination in claim construction reveals what technology areas a patent does and does not cover.

Our position was strong.  On each claim term, we could rely on a plain meaning of the words.  The defendants, on the other hand, needed to weave convoluted interpretations to support their defence. 

When strategising with Michael, we presented why we believed he would win at claim construction. 

At that point he asked a question: “Is there risk?”

We informed him there was risk. 

He followed: “What’s the best- and worst-case scenario?”    

We explained the best case would be the judge ruling in our favour on each of the four claim terms.  That did mean, we said, that Michael would actually “win”, but that he would live to fight to another stage in the litigation. 

On the other hand, we said, the worst case would be the judge ruling against us on any one of the four claim terms. In that case we’d not only lose the current litigation, but all future litigations as well. 

Michael didn’t find the risk profile very appetising. 

He directed us take an offer on the table, thereby settling the case and avoiding any risk associated with claim construction. 

Though it was puzzling at the time, I learned years later why his decision to minimise risk was the right one.

First, patent litigation is structured like a video game.  You must win every level to end up the winner.  If you lose any one level, no matter how far you’ve come, then it’s game over.

And like a video game, every level has its own gatekeeper.

The table below describes each level of litigation, the gatekeeper, and provides the 2017 statistics of winning at each level. 

* PwC, 2017 Patent Litigation Study, page 15

** Gibson Dunn, Federal Circuit Year in Review 2015/2016, page 2

In level one, you must convince a judge why you have a winnable case.  If you reach level 2, you present your case to a jury.  If you win there then at level 3, you must convince an appeals panel to uphold a favourable jury verdict. 

What are your overall chances of winning at every level, to win at patent litigation?  It’s just 9% to 14%.

Second, at every level you must perform a flawless juggling routine. 

In every patent litigation, as a baseline you must prove a corporation infringes your patent.  This is one ball to juggle in every patent litigation.

But a corporation can defend itself by raising up to 27 patent defences, each representing an additional ball to juggle.

A corporation has 17 validity defences to invalidate your patent, two enforceability defences to render it unenforceable, four damages defences to prevent you from recovering the money you want and four infringement defences to be excused for infringing. 

If you drop the ball on any one of the 27 defences, then you lose and the defendant wins. 

The chart below illustrates the chances of winning this juggling routine.  It is pulled from a 2000-2013 composite study from the University of Houston on the win/loss rate per legal issue in patent litigation.