Prepare for litigation and avoid it where possible

If litigation is war then patent litigation is certainly one of the most devastating forms of litigation warfare. It is well known that US patent litigation can cost millions of dollars on top of court costs. US patent litigation is also:

• time-consuming;
• distracting to the core business;
• harmful to public image; and
• unpredictable.

The high risks involved in patent litigation mean that it should be a seldom-used tool of a successful patent licensing programme. Today, a successful patent owner must consider a more global and nuanced approach to patent monetisation.

If a patent owner wishes to succeed in licensing patents in 2020 and beyond, it must carefully develop and execute a global licensing campaign that prepares for litigation but avoids it where possible. Lobbing legal grenades at the enemy is no longer a viable tactic. Now, the strategy must be to apply suitable pressure in the most appropriate places to facilitate a resolution within the desired value range, but without invoking full-blown patent litigation. Nevertheless, sometimes a resolution may be possible only through war. However, as Sun Tzu once wrote in the Art of War: “To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting.”

From 2020 onwards, ‘supreme excellence’ in patent monetisation requires that patent owners develop global strategies to successfully license intellectual property. This includes obtaining patents in strategic foreign jurisdictions but also tactically licensing and enforcing such patents concurrently around the world. This is best accomplished through a global patent monetisation campaign coordinated by an experienced and knowledgeable firm capable of managing the complexity associated with such a campaign that is closely tailored to the client’s needs and the characteristics of the intellectual property.

Synergies from coordinating patent monetisation in multiple jurisdictions

The United States, Germany and China have differences in patent law and patent litigation procedure, while their market conditions offer unique benefits to and confer different risks on patent owners (see Table 1).

A party pursuing monetisation and/or litigation in only a single country, regardless of which country, is likely to encounter at least one unique challenge. For example, in the United States, a patent owner may be unable to obtain an injunction, or face inter partes reviews or early motions to dismiss based on patent invalidity that stops litigation in its tracks, thus removing the ‘stick’ for monetisation. In Germany, a patent owner may be unable to obtain discovery needed to prove its case, or to obtain punitive damages, providing a weak stick that limits the return on investment. In both the United States and China, even if an injunction is obtained, it may not affect manufacturing that occurs elsewhere. Some enforcement challenges are shared between Germany and China, such as the likelihood of a lower damages award than might be awarded in the United States (eg, median damages in China in patent litigations brought after 2014 were less than $5,000, although maximum damages of approximately $50 million have been awarded there more recently). Although typical Chinese damages have historically been low, the current trend in damages is drastically and quickly increasing, with the average damages award from the Beijing IP Court increasing from $52,000 to $162,000 between 2015 and 2017. By coordinating a global monetisation campaign, a business’ patent portfolio may collectively benefit from each jurisdiction’s unique characteristics by initiating concurrent licensing and/or litigation activities in all three places.

One important aspect of deriving synergies from concurrent patent lawsuits is to engage a law firm capable of not only enforcing in its home country, but also capable of strategising and coordinating in the various other possible countries, their courts and agencies: a complex task.

Comparison of patent litigation in the United States, China and Germany

Challenges and advantages of patent litigation in United States

The United States has historically occupied centre stage in international patent litigation activity. One major reason for this is the fact that the United States is home to the majority of patents in force. In Figure 1 (generated from the World Intellectual Property Data Centre), the number of US patents in force is much greater than that of, for example, Germany or China, although China’s numbers are trending upwards very rapidly.

The United States is also an obvious location for litigation when a client seeks to maximise litigation damages. From 2012 to 2016 the median damages award in cases that went to trial was $8.9 million – far greater than the median damages award in China of less than $5,000, but less than the recent maximum. Moreover, in the United States, a court can award triple damages if there is wilful infringement, in addition to attorney fees. By contrast, punitive damages are not available in Germany or China.

Unlike most foreign jurisdictions, US patent litigation also allows liberal pre-trial discovery. The liberal discovery contemplated by the US Federal Rules of Civil Procedure allows extensive discovery of an accused infringer’s electronic communications, sales numbers, manufacturing processes and any other information “relevant to any party’s claim or defense and proportional to the needs of the case” (Fed R Civ P 26(b)(1)). Such liberal discovery is largely responsible for significantly higher costs of litigation and longer periods of time between filing and trial, but allows a plaintiff to obtain information it otherwise might struggle to obtain in jurisdictions without a similar scope of pretrial discovery.

Nonetheless, patent litigation in the United States seems to be trending downwards; likely due to US patent law changes that resulted in the consensus view that US patent litigation is now a riskier and more expensive proposition for patent owners. Contributing factors likely include the following:

• The America Invents Act (2011) created new post-grant review processes: inter partes review and covered business method review. An accused infringer uses these post-grant proceedings to invalidate patents and delay district court litigation.
• eBay Inc v MercExchange LLC (547 US 388, 391 (2006)) is a Supreme Court decision reversing a decade-long presumption that a successful patent plaintiff is entitled to a permanent injunction to prevent continued infringement. After eBay, patent owners who do not practise their patent or are not in direct competition with the infringer only rarely obtain an injunction.
• The patentable subject matter trio of Supreme Court cases, Bilski v Kappos (561 US 593 (2007)), Mayo Collaborative Servs v Prometheus Labs Inc (566 US 66 (2012)) and Alice Corp Pty Ltd v CLS Bank Int’l (134 S Ct 2347 (2014)), have made it far harder to enforce software and business method patents and has limited the pharmaceutical method of treatment patents.
• Octane Fitness LLC v ICON Health & Fitness Inc (134 S Ct 1749 (2014)), increased the danger to patent plaintiffs of being forced to pay attorney fees if they lose.

However, Congress may overturn many of these decisions.

Senators Tillis and Coons, the chairman and ranking member of the IP sub-committee, recently held three days of Congressional hearings on a bill that would revise 35 USC Sections 100, 101 and 112 to overrule Mayo and Alice by abrogating the judicially created exceptions to patent eligibility. The bill is still in the early stages but has garnered bipartisan support and a new draft should be proposed later in 2019.

Senator Coons also recently re-introduced the STRONGER Patents Act, which would overrule eBay and substantially weaken post-grant proceedings by standardising requirements for challenging a patent and heightening the standard of review to “clear and convincing evidence”, which is highly deferential to examiners. While it does not seem likely that it will pass through Congress, it demonstrates a growing trend to restore stronger patent protections in the United States.

One thing that has not changed in US litigation is the availability of contingency arrangements to pay for attorney fees and/or costs. Patent owners routinely pay for US legal services by agreeing to non-recourse contingency arrangements; nothing is paid to the attorneys or law firms unless the patent owner wins, in which case the attorney or firm receives a percentage of the award or settlement. In principle, such arrangements enable greater access to justice; patent owners without the financial means can retain quality litigation counsel by effectively paying for such counsel with a share of future enforcement and/or licensing proceeds, if any. In foreign jurisdictions that do not permit such contingency arrangements, a patent owner must be able to pay the attorney’s hourly fee plus costs to enforce a patent; although lower than in the United States, it can still be prohibitive. Thus, another potential global patent litigation strategy is for a patent owner to retain a US firm on contingency to combine patent litigation with lower cost enforcement activities outside of the United States, to increase the leverage and potentially increase the likelihood of a higher settlement payment likely to fairly value a portfolio of asserted patents.

Challenges and advantages of patent litigation in Germany

Germany operates a dual patent litigation system in which different courts handle invalidity and infringement separately. Validity challenges are handled either through opposition proceedings at the same patent office that granted the patent or at the German Federal Patent Court, where cases are heard by technically trained judges. Currently, the biggest challenge for the German patent system is whether the Unified Patent Court (UPC) Agreement ratification will be upheld. The German Constitutional Court is scheduled to hear arguments and render a decision on the issue between July and September 2019. The UPC and unitary patent will broaden the scope of the patent and any patent litigation decision to cover all signatory nations, which encompasses the European Union except Spain and Poland; but is unlikely to affect damages significantly.

German patent litigation remains popular because of the strong injunctive powers of German courts. Injunctions in German courts are granted as a matter of right under law, so long as the court finds infringement. This provides a patent owner with significant leverage, for post-injunction settlement discussions, and against competitors who cannot afford to suffer a shut down. The settlement leverage often includes local products or processes, as well as worldwide products or services given today’s European Union as a major market for defendants brought into German proceedings. Moreover, German courts are more likely to issue injunctions on standard-essential patents for a cost. True contingency arrangements are unavailable in German proceedings.

In addition to the injunctive power of the German Courts and patents, the jurisdictional reach that Germany exercises over patent infringement is greater than most nations. Before the mid-2000s, German courts held that if a process or machine patent is at least partially infringed within the territorial limits of Germany and then exported for the completion of the infringement, the actions will be treated as if the entirety of the infringement occurred in Germany. In some cases, the jurisdiction has applied so broadly to even cover internet advertisements written in German as offers for a good that infringes a German patent even if the product may not be actually purchased in Germany. For now, these jurisdictional bounds provide a valuable tool in global monetisation and litigation strategies.

Finally, a potential challenge in German patent litigation is the risk that a losing party may be ordered to pay court fees and attorney fees. While these payments are unlikely to rise to US levels, German litigation can still be costly compared to other less expensive jurisdictions.

Challenges and advantages of patent litigation in Asia

Like Germany, China also maintains a dual system where patent infringement is separately determined by courts and patent invalidity proceedings are determined at the patent office. Chinese patent law is largely based on German patent law. China established three specialised IP courts between 2014 to 2015, in addition to the 50 Intermediate People’s Courts, to try infringement cases. Challenges to validity, on the other hand, are handled by the China National Intellectual Property Administration.

Recent statistics indicate that Chinese courts may be far friendlier to foreign patent owners than previously thought. A 4 July 2016 IAM blog post (www.iam-media.com/blog/detail.aspx?g=8dc59dc8-6405-4b86-b241-27e89afc60…) reported that in 2015, foreign plaintiffs won 100% of the 65 cases that they filed in Beijing’s IP court, although about 75% of those cases concerned trademarks. Notably, foreign plaintiffs continue to prevail in China’s courts at least as much as Chinese plaintiffs.

With rapid timelines in Chinese courts, a plaintiff that files suit without having its evidence lined up may find itself in trouble, but a defendant may feel even more rushed, without warning of the lawsuit beforehand. Although plaintiffs in China cannot obtain pre-trial discovery, plaintiffs can hire private investigators in China who go far beyond private investigators in the United States or Europe.

Although Chinese patent litigation may result in damages awards seemingly lower than those available in the United States, Chinese courts almost always grant injunctions to prevailing plaintiffs similar to Germany. Moreover, damages in Chinese patent infringement lawsuits seem to be trending upwards. China’s highly anticipated Fourth Amendment of the Patent Law will include several key revisions which will certainly make foreign patent litigation and monetarisation more attractive. The amendment will increase the statutory damages range from Rmb10,000 to Rmb1 million, to Rmb100,000 to Rmb5 million. In addition, the amendment will raise punitive damages against wilful infringement to up to five times the awarded statutory damages. There will be an additional clause shifting the burden of proof onto the alleged infringer once the plaintiff produces prima facie evidence.

The revised Japanese Patent Act 2019 (recently signed into law and expected to take effect in 2020) has significant re-formulations to damages calculations. Revised Article 102 allows the Japanese courts to factor over-hanging lost profits in final damages calculations, as well as allowing them to determine the potential monetary amount if the infringer and patent owner entered into a contractual agreement.

The Korean Intellectual Property Office (KIPO) recently indicated that there are proposals to amend the Korean Patent Act, specifically focusing on increasing monetary damages as a remedy for patent infringement. With the addition of enhanced damages, the KIPO hopes that this will incentivise both the protection and litigation of intellectual property in South Korea, to make it a lucrative country to engage in a patent monetisation strategy.

More recently, Singapore is in the nascent stages of implementing significant amendments to its own IP acts (eg, capping the length of trial and limiting damages parties may claim). The most striking modification would come in the form of a specialised litigation track where Singapore’s High Court would handle all litigation disputes. Further, according to the US Chamber of Commerce Global Innovation Policy Centre’s 2019 International IP Index, Singapore ranks number one in the world for patent protection, strengthening Singapore’s marketability relative to patent monetisation.

Comparison of cost and time for patent litigation between jurisdictions

US patent litigation is significantly more expensive and drawn-out than German patent litigation, which in turn is more expensive and drawn-out than Chinese patent litigation. Statistics reported by Global Patent Litigation: How and Where to Win confirm the expected trend (see Figure 2).

When it comes to damages, you get what you pay for. The median damages amount for the United States (about $8.9 million) are so significantly larger than those in China (about $5,000) that a similar graph comparing these damages is not needed.

Comment

Due to variances in the patent laws of different countries, businesses are wise to carefully consider the potential benefits of strategically coordinating concurrent patent monetisation across multiple countries. As a first step, businesses should carefully plan how to develop or acquire key assets that can comprise a global patent portfolio, either through foreign patent prosecution or through aggressive purchasing of foreign patents, perhaps with an eye towards combining with an existing US patent portfolio. Once a global patent portfolio is compiled, businesses will likely benefit most from a centrally coordinated global enforcement strategy. Careful consideration should be given when selecting the right law firm to coordinate your patent monetisation strategy, discover the synergies particular to your factual scenario and leverage both to the greatest benefit.