The Cost Of Bad Patents: It’s Not Just The Lawsuit

The cost of bad patents is not just the cost of lawsuits.  

This may seem obvious, but apparently it isn’t. I’ve recently noticed a trend from the anti-reform lobby: someone testifies in front of Congress about patent reform, they complain that “they’ve only been sued once or twice, why are they being asked to testify, what would they know?”  They base their dismissal of the witnesses’ experience purely on the number of times that they’ve been sued.  If you haven’t been sued enough times, in the mind of the anti-reform lobby, then you don’t know anything.

But any patent attorney with any experience knows that just isn’t true.

Most Assertion Activity Doesn’t Show Up In Court

At the DOJ/FTC hearing on Patent Assertion Entities back in 2012, Colleen Chien provided two estimates of the number of times a company will see a demand based on a patent compared to the number of times they see a lawsuit.  A general estimate, provided by a sell-side patent broker (i.e., someone who sells patents for a living) is that there are between 25 and 50 patent demands made for each lawsuit actually filed.  Another, based on the behavior of a real NPE, noted that the NPE sent out more than 8,000 demand letters, but only filed 26 lawsuits.  That’s 307 demand letters for each filed lawsuit.  

These demand letters are essentially invisible—they don’t show up in court and companies rarely publicize them.  In other words, there’s a lot more than just lawsuits.  You can face trolls any number of times without ever actually having a suit filed against you.

And it’ll cost you a meaningful amount of money every single time.

Invisible, But Not Free

A little while back, Silicon Valley had an episode that focused on patent trolls.  It nailed a few things, and in particular, it nailed how, all too often, things start.  You get a letter, or a phone call.  It says “I think your product infringes my patent.  Call me.”1

The Investigation

Cost to this point: only your own time and stress.

At this point, if you’re not a character on a TV show, you’re going to hire a lawyer.  (At now it starts to cost money.)

That lawyer is going to take some time to look at the patent.  They’ll research its history—both the Patent Office file history as well as the chain of title after issue—and they’ll compare the claims to your products (which isn’t necessarily easy, given that the other side almost certainly hasn’t outlined how they think your product infringes, and claims are often unclear).  

In order to do all that, you’ll likely have to task some of your engineers to take time out of research and development and put it into educating a lawyer instead.  It costs you twice—once for the lawyer, and once for lost productivity.

The lawyer is also going to consider whether you might be able to succeed in a defense based on § 101, or in some other early stage defense.  To do this, they’ll consider (and talk to you about) the success of recent motions of that type in likely jurisdictions.  (Usually the Eastern District of Texas, because—until TC Heartland—that was where cases were most likely to be filed.)

At a conservative estimate, you’re looking at somewhere between 10 and 30 hours of time from the lawyer (depending on patent and product complexity).  Even at a significant discount from my old hourly rate,2 that’s still somewhere between $3000 and $9000 you have to spend.  At this point, you haven’t even investigated the patent’s validity beyond, at most, a cursory search for prior art.  All of that is in the future.

All of that so you can decide whether you want to negotiate a settlement or whether you’d prefer to fight, so that you can properly respond to that initial contact.  

The Response

Cost to this point:

Bill for $9,000 in legal services.

Plus time taken away from your engineers, plus your own time and stress.

When I said “so you can respond”, I really meant so that the counsel you’ve hired can respond on your behalf.  (Another couple hours to write and communicate with opposing counsel.  Call it $500-$1000.)

Now, it’s up to the patent troll whether they actually want to file a lawsuit, or whether they’d rather try to negotiate some kind of settlement.  The answer depends on their read of whether you will settle for enough money to be worth their while, or whether they think litigation is a more profitable route (whether through an eventual judgment or through forcing a more generous settlement.)

If they file the lawsuit, it shows up.  But if they decide to try to negotiate payment, then they’re going to get involved in discussing their patents with you.

The Negotiations

Cost to this point:

Bill for $9,600 in legal services.

Plus time taken away from your engineers, plus your own time and stress.

Your counsel has already developed an initial view on the infringement aspects of the patents.  But they’re going to need to see if the patents are valid in order to present a full argument to the other side.  A prior art search firm will take a look at a patent for somewhere between $1000 and $5000 (again, depending on the patent’s complexity).  Then your counsel is going to spend a significant amount of time, another 10 to 50 hours ($3000 to $15000) depending on the complexity of the technology and the quality of the prior art, reviewing the results the searchers produce to see whether the patent might be invalid.

In some areas of litigation, particularly in cellular, your counsel would also investigate the standardization history to determine if there are any enforceability or invalidity issues to be found there.  That’s as time-consuming and expensive as investigating the prior art.  But, since it isn’t present in all cases, we will omit it here.

All so that your counsel can have a solid initial analysis of non-infringement and invalidity to present to the other side.  (Several hours of preparation from your lawyers, plus a meeting — add in another $2000-$3000.)  The other side will then respond with their own reasons why they disagree with your non-infringement and invalidity, which your lawyers have to review ($3000-$4000, or even more, depending on complexity) and respond to ($3000-$4000, or more if there’s a need for new prior art.)

Even Walking Away Costs Money

Cost to this point: let’s assume only the single round of negotiation on a single patent.  Additional rounds and additional patents will add up quickly.

Bill for $31,600 in legal services.

Plus time taken away from your engineers, plus your own time and stress.  That’s a good chunk of an engineer’s salary that you can’t spend on a new hire.

Even if you’re successful in convincing the other side that they don’t have a case, you’re still out the money and the time.  You’ve still paid for the privilege of not having a lawsuit filed against you, and you’ve still learned about how trolls (and the Eastern District of Texas) operate.

None of which will ever show up in a lawsuit—or in the news.

  1.  Sometimes you don’t get that call—you just get sued.  That’s a mark of a true patent troll, according to Conversant IP (a notable NPE).  Ironic, given that Conversant itself sometimes sues before any discussions.  But sometimes trolls do contact a target prior to filing a lawsuit to negotiate; I’ve personally seen both strategies employed.
  2. I’ve discounted my previous hourly rate because I worked at a highly regarded firm that charged the concomitant higher than average rates.  While the $300/hr rate I’ve used here may be higher than some firms charge, I’ve also left out any estimate for time spent coordinating work and communicating results, which likely more than makes up that difference.  In addition, this estimate is for a single patent.  There’s often more than one patent involved, and the costs scale essentially linearly with number of patents.

Joshua Landau

Joshua Landau is the Patent Counsel at the Computer & Communications Industry Association (CCIA), where he represents and advises the association regarding patent issues.  Mr. Landau joined CCIA from WilmerHale in 2017, where he represented clients in patent litigation, counseling, and prosecution, including trials in both district courts and before the PTAB.

Prior to his time at WilmerHale, Mr. Landau was a Legal Fellow on Senator Al Franken’s Judiciary staff, focusing on privacy and technology issues.  Mr. Landau received his J.D. from Georgetown University Law Center and his B.S.E.E. from the University of Michigan.  Before law school, he spent several years as an automotive engineer, during which time he co-invented technology leading to U.S. Patent No. 6,934,140.

Follow @PatentJosh on Twitter.