The $68 million was peanuts. At stake was the very existence of the company. Included in the District Court's judgment, based on a finding that RIM had violated patents for wireless communications in e-mail systems, was a crippling injunction preventing RIM from selling handheld wireless devices in the US, the company's largest market, until 2012.
"IP litigation doesn't just revolve around damages," explains Scott Jolliffe at Gowling Lafleur Henderson. "From a market perspective, owners of patents are trying to maintain a monopoly and users are looking for a way to break that monopoly." To illustrate Jolliffe's point it is useful to note that RIM's shares have bounced back, largely because a stay of the injunction pending RIM's appeal allowed the company to continue business in the US as usual.
It may be a tired cliché, but "IP is the bricks and mortar of the 21st century." As Donald Cameron in the Toronto office of Ogilvy Renault points out, "For some time now business has known that if you can't control the right to the know-how, you're going to lose the company. The people at Amgen (the California biotechnology giant) say that if it wasn't for the success of their IP litigation, they would have two or three buildings in their complex instead of five."
While US courts get the limelight, Canadian IP litigation is big league business. In fact the demand is so great that senior counsel rates in Canada are higher than in the US. Top-ranked IP litigators like Ron Dimock, Roger Hughes, Q.C., James Kokonis, Q.C., David Morrow, François Guay and Alexander Macklin, Q.C., command hourly rates that average $675 and go as high as $750. In contrast, the Washington-based American Intellectual Property Law Association (AIPLA) reports that hourly rates for US counsel with over 40 years experience is approximately $475 and tops out at $725 (all figures in Canadian dollars).
Jolliffe, who as national managing partner directed Gowlings' recent growth to become the second largest firm in Canada, is also among the Canadian IP litigation elite, as is his partner Anthony Creber. Also members of this magic circle are Donald Cameron, Patrick Kierans, Robert MacFarlane, Douglas Deeth, Donald MacOdrum, David Aitken, Glen Bloom, Nicholas Fyfe, Q.C., David Scott, Q.C., and Harry Radomski. (For an overview of leading IP litigators see the 2004 Lexpert Directory league tables on page 98.)
"An income of $1 million is within reach of top counsel," Dimock notes. It's no surprise, then, that Canada's national full-service law firms-yet again-are making a concerted effort to build first-rate IP litigation practices.
"THE IP GROUP AT OSLERS has recently focused on litigation." David Aitken goes on to point out that "It is one of the most profitable practice areas in the firm and a strategic area in which we will continue to invest." As befits the current legal market, "invest" is a polite way of referring to the expensive poaching of legal talent from other firms. McCarthy Tétrault recently raided the IP group at Blake, Cassels & Graydon and came up with Brian Gray, Ken Bousfield and Alfred Macchione. Gray's litigation experience will help support a client list that includes Merck and Abbott, the giant pharmaceuticals. Shortly thereafter Blakes returned the compliment, plucking a number of patent agents from McCarthys.
Blakes has a dozen lawyers who practise IP litigation exclusively or as a major part of their practice. "The IP group remains the largest specialty group in the firm," notes Tony Prenol, co-chair of the firm's IP department.
The list goes on. Ogilvy Renault has recently added Donald Cameron from Aird & Berlis. Torys-with designs on health science and pharmaceutical clients-is benefiting from the synergies between litigator Andrew Shaughnessy (a Dimock Stratton and Gowlings alumnus) and the former Donahue IP group led by Conor McCourt and Eileen McMahon. The firm's IP litigation group-which includes senior commercial litigation counsel Sheila Block and Barry Leon-has been generating about 10,000 docketed hours annually. At IP litigation rates this translates into a practice in the $5 to $7 million range.
"I joined Torys on the understanding that if things worked out they'd make me a partner in 18 months," Shaughnessy says. "I was the only partner the firm made that year. That's got to tell you something." For similar reasons the Toronto office of Bennett Jones recently added Dino Clarizio, a well known IP litigator and former name partner at Dimock Stratton, to its lineup.
Nevertheless, Gowlings remains the only national firm whose brand is anchored in IP. The 65 lawyers in its IP litigation group generate between 10 and 15 per cent of the firm's revenue. In a country where much of the IP litigation has been conducted by boutiques such as Smart & Biggar (where IP litigation accounts for approximately one-third of the revenues generated by the firm's 55 lawyers, patent agents and trademark agents), Sim, Hughes, Ashton & McKay, Dimock Stratton (whose 10 IP counsel have been involved in one out of every four Canadian patent cases in the last 25 years), and Léger Robic Richard, only Ogilvy Renault among the majors has an IP litigation practice with a profile that approaches that of Gowlings.
But the full-service national firms are intent on changing this. "There's no doubt that bigger firms are making more of an effort to attract the work," says Douglas Deeth. "Most have some IP litigation capacity and are doing work they haven't done in the past. The referrals from large firms, except in the case of conflicts, has dropped off recently."
The market has become much more competitive. As Aitken at Oslers points out, "With the explosion of and the money involved in pharmaceutical litigation, more firms are going after the business. The spate of international drug firm mergers, however, means there is a shrinking client base on the brand side."
But, before examining the market further, it is important to ascertain what it is the large firms are chasing, and why it's so worth their while.
THE EARTH FIRST MOVED when the Federal Circuit of the United States Court of Appeals awarded $1.5 billion against Eastman Kodak in the late 1980s after concluding that Kodak had infringed several Polaroid patents. This marked the entry of IP to the big leagues. The award, and subsequent awards, caught the attention of investors in the high-tech industry who were looking for identifiable assets by which they could value companies. They latched onto patent rights and began valuing companies on the basis of patents held.
"Intellectual assets have value because IP rights have given them a semblance of property," Patrick Kierans explains. The premium on patents led to a huge increase in the number of patent filings. As Cynthia Rowden at Bereskin & Parr notes, "Even when the high-tech bubble burst, patents continued to be a staple of valuation in emerging areas like biotech."
Important companies like IBM now devote significant attention to their patent inventory. They profit handsomely from licensing patent rights. For obvious reasons they vigorously protect these rights, which has resulted in a huge increase in IP litigation.
The numbers are jarring. 8,254 new US IP cases were commenced 2002. Pharmaceutical patent litigation, including suits described in the cover story for this issue of Lexpert, and generic drug litigation-which has doubled in the last three years-have received much of the attention. However, litigation over business processes, hardware, software, and telecom patents has also proliferated.
Given the importance of intellectual property to the New Economy, it is no surprise that financial markets have taken a keen interest in IP litigation. It only took a court's sanction last July against Samsung Electronics, for failing to hand over documents and destroying e-mails in an infringement suit brought by Ottawa-based Mosaid Technologies, to drive Mosaid's shares up more than 37 per cent overnight.
Capital markets are so sensitive to IP litigation that even the July announcement by Toronto-based Cinram, a compact-disc and DVD maker, that it had settled the patent suit brought by Matsushita Electric initially drove Cinram's stock down more than five per cent. Investors temporarily panicked because the terms of the settlement remained confidential.
Quite apart from patent litigation, trademark and copyright litigation has also become big-ticket work, making headlines and stunning the business world. The judicial shutdown of Napster, the peer-to-peer (P2P) music downloading enterprise, is perhaps the most dramatic example. Nevertheless, according to Big Champagne, a US research firm that tracks Internet-related copyright statistics, almost one billion songs remain available online. This is despite the fact that the Recording Industry Association of America has launched approximately 3,500 lawsuits against alleged MP3 traders. Internet service providers and telecoms were visibly relieved last August when the US Court of Appeals held that Grokster and StreamCast Networks were not liable for the billions of dollars of music, movies and other copyrighted works swapped online by users.
From rock 'n roll to high-end retailers, IP litigation is rampant. Tiffany & Co., the New York jeweler, has launched a lawsuit against eBay, the world's largest online auctioneer, to prevent the sale of counterfeits sporting the Tiffany name. Underlining the international scope of IP litigation, much of the motivation for the suit comes from eBay's successful expansion into China and current foray into India, countries where IP ambiguity is rampant and IP enforcement lax.
IN CANADA, pharmaceutical IP litigation dominates in terms of profile and sheer size. But, in terms of volume of work, generic drug litigation is the clear frontrunner. As Brian Gray at McCarthys notes, "If you don't have some market share in pharmaceuticals, it is difficult to be a player in patent litigation of any kind."
The numbers speak for themselves. Generics constitute at least 60 per cent of all patent cases and consume at least 75 per cent of all legal fees spent on patent litigation. One day last summer 17 of the 20 motions on the Federal Court List in Toronto were pharmaceutical cases. This was not an uncommon day.
As Scott Jolliffe jokes, "IP litigation lawyers should erect a monument to Barry Sherman." Sherman is the founder of Apotex, Canada's largest pharmaceuticals manufacturer and maker of generic drugs that fill 42 million prescriptions annually. As one IP litigator quips, off the record, Sherman is "the devil incarnate to the brands." The growth of generic drugs will not abate. Low cost drugs are an integral part of the modern medical emphasis on pharmaceutical as opposed to invasive treatment or hospitalization. "There are more and more new products," Jolliffe explains. "We are dependent on the wonder drugs to keep us healthy."
With costs of $100 million to $1 billion to bring a drug to market, major pharmaceuticals have a huge investment to recoup. But generics don't have to make that investment. As Jolliffe points out, "The pure profit of the generics is one thousand fold that of the brands, so there's huge money at stake for both parties."
The end result is obvious. It pays the generic companies to engage in high-risk litigation in the hope that one suit will pay off. As Jolliffe again points out, "Barry Sherman will tell you that he needs to win only one case in a hundred for his company to stay very profitable."
Also facilitating litigation is the fact that the generic drug opposition procedure-known as the Patented Medicines (Notice of Compliance) Regulation (PMNOC) system-offers very little, if any, incentive to settle. Since the system creates a stay on the introduction of a generic drug during the two years it allows a case to get to trial, it is almost always in the interest of the brands to seek to maintain this monopoly during the entire period.
What generic drug litigation offers is high demand, high stakes, high fees, leveraged billing, deep pocketed clients, high volume, no incentive to settle, and cases that must turn over within two years. Depending on your perspective, it is either a godsend or, as David Aitken at Oslers puts it, "a witches' brew for litigation."
One of the prime beneficiaries is Goodmans, where Harry Radomski is lead counsel for Apotex. PMNOC cases constitute 90 per cent of the firm's IP litigation, generating more than $10 million in annual billings. If that isn't impressive enough, IP litigation has much more to offer than "just" the generic work.
SOMEWHAT LESS OVERWHELMING than the generic cases, but as profitable, are traditional patent infringement cases. As Donald Cameron notes, "Whatever the shape it takes, patent litigation is where the money is."
Indeed. When Procter & Gamble and Unilever clashed over Bounce fabric softener, the case went on for years before finally settling for over $100 million on the eve of a damages reference. "These cases are so expensive to litigate that you'll never see one with less than $5 million at stake," says Roger Hughes. "And even there the legal fees can reach $2 to $3 million."
It gets better. In the Harvard Mouse litigation the Supreme Court of Canada practically handed IP litigators an annuity. The Court held that the genetically altered rodent-the "oncomouse"-could not be patented in Canada. The end result is that Canada is one of a handful of Western countries where higher life forms cannot be patented.
The Harvard Mouse decision left Canada's 400 biotech companies, second in number only to the US, and a host of agricultural companies wondering about the future of their 1,700 outstanding patent applications for genetically altered plants and animals. If even a small number of these applicants invest as much time and money as Harvard Medical School did during its 17 year battle over the oncomouse, IP litigators are looking at a gold mine.
The waters are already murky. In May of this year, Monsanto persuaded the Supreme Court (Monsanto v. Schmeiser) to uphold the patent on a gene that gives plants a tolerance to herbicides.
But it's not just high-tech or bio-tech IP work that's booming. According to the authors of the Canadian Intellectual Property Office's (CIPO) 2002-3 Annual Report, "There has been a general upward trend in the volume of applications for all patent disciplines, suggesting that the research and development culture in traditional fields such as mechanical engineering and organic chemistry is as robust as that of such newcomers as biotechnology and artificial intelligence."
Of more than passing interest to the major law firms is the fact that multinationals-Procter & Gamble, Bayer, BASF, Honda, 3M, GE, Unilever and DuPont-are the top eight filers of the 40,000 patent applications that arrived in Ottawa in 2002-3. Underscoring the strong cross-border aspects of IP, 35,000 of these patents came from outside Canada. The US was the biggest player with 18,316. 2,845 came from Japan, 2,841 from Germany, 1,720 from France and 1,629 from the UK. Canada placed second with 5,405 applications.
TRADEMARK activity is also enjoying significant growth. The 53,368 trademarks awaiting examination at CIPO at the end of 2002-3 was triple the inventory of 17,919 at the end of 1999-2000. CIPO's Copyright Office received 7,965 copyright applications in 2002-3, a 26 per cent increase over the previous year.
Trademark and copyright litigation has kept pace, with much more at stake than ever before. Danish toy giant Lego, for example, spends millions each year on IP litigation over imitations of the famous Lego building blocks. The Supreme Court recently granted Lego leave to appeal a judgment of the Federal Court of Appeal permitting Mega Bloks to sell its micro bricks in Canada. As Jolliffe points out, "Brand image and preference influence buying habits on an international scale. So the importance of brand litigation has increased dramatically."
Copyright has evolved from its traditional role of protecting the arts, music and literary works to becoming the principal source of property rights in the Information Age, extending protection to new technology such as software and information databases while at the same time warding off new technology threats to the arts. "Music was previously disseminated in analog format and copyright holders could assert control because the cost of reproduction was formidable," Jolliffe explains. "Now the capabilities of electronic media make it possible to do extensive copying and distribution at no cost."
The situation is such that the Supreme Court of Canada has handed down an "IP trilogy" of decisions-Society of Composers, Authors and Music Publishers of Canada v. Canadian Association of Internet Providers; CCH Canadian Ltd. v. Law Society of Upper Canada; and Galerie d'Art du Petit Champlain v. Théberge-in a seemingly unending need to respond to innovation. For David Aitken the explanation is straight forward. "In Canada technology is outpacing the law, which is a recipe for an active litigation culture. That's why all areas of IP litigation are booming."
Underscoring the point, in March of this year Federal Court Justice Konrad von Finckenstein dismissed the Canadian Recording Industry Association's (CRIA) application to prosecute online file swappers. Rock 'n roll is big business. Five of Canada's largest communications companies-Bell, Rogers, Shaw, Telus and Vidéotron -were drawn into the fray when CRIA (unsuccessfully) tried to get them to turn over the identities of customers involved in file-sharing. CRIA has appealed.
With so much at stake, IP considerations and IP litigation are now at the heart of corporate strategy. As Jolliffe notes, "IP is one of the most sensitive areas on the corporate agenda. It requires IP counsel to work closely with senior corporate executives in matters that are getting the attention of the board."
In other words, IP has gone corporate. And when practice areas go corporate the large full-service firms want in.
CANADA'S MAJOR LAW FIRMS have periodically attempted to enlarge their share of the IP market. The most recent effort came during the dot.com boom when firms saw IP as essential to a successful e-commerce practice. The emphasis, however, was on the corporate transactional aspects of IP.
The current attention is different. At $675 an hour, it takes under 1,500 docketed hours to generate $1 million in fees. IP litigation can provide thousands of leveraged billable hours for a firm. Patent litigation in particular generates a huge number of docketed hours. The stakes are enormous, the cases very technical, the documentation voluminous, the analysis intensive, and the use of expert witnesses liberal. As Cynthia Rowden at Bereskin & Parr points out, "I know people who have spent a significant part of their career on a single patent case."
According to AIPLA's 2003 Economic Survey, even a minor patent infringement suit with less than $1.3 million at risk costs $650,000 through trial and appeal. Trademark suits of the same size weigh-in at $390,000 and copyright litigation at $325,000.
When the stakes rise above $1.3 million and up to $32.5 million, costs grow to $2.6 million for patent cases, $780,000 for trademark litigation, and $650,000 for copyright suits. Above $32.5 million, the numbers are $5.2 million for patent, $1.3 million for trademark, and $1.2 million for copyright actions.
"Big firms want IP litigation because it is a terrific profit centre," says Roger Hughes, who-as one of the deans of the IP bar-ought to know. All the more so if a firm already has an infrastructure set up for large commercial litigation, including class actions. And IP litigation is not cyclical. As Rowden explains, "When times are good, companies are innovating, and when times are bad they're protecting innovation."
Small wonder that the large firms are doing everything they can to capture the IP litigation generated by their corporate clients. The primary argument is that big cases need big firms. They appear confident and determined. Much of their confidence comes from the US experience.
IN 1983, THE US COURT of appeals for the Federal Circuit became the final appellate court for IP cases. Over the next decade the Court's jurisprudence strengthened patents generally and made infringement cases easier to bring. The number of jury trials grew rapidly. In 1968, only 2 per cent of US IP cases were tried by juries. Today the figure is 70 per cent.
As the number of jury trials grew so did the damage awards, culminating in the Kodak decision in the late 1980s. "Damages of $1.5 billion caught the attention of the big firms," recalls James Foster, a senior litigator with the Boston-based IP boutique Wolf, Greenfield & Sacks. "As more cases went before juries and the damages got bigger, the clients got bigger-and big clients have a historical preference for large full-service firms."
Initially, however, the large firms only had modest success. They had difficulty recruiting marque names as well as problems developing the necessary talent internally. It was only when they merged with IP boutiques that the large firms became a real force. As Foster points out, "The number of sizeable IP boutiques is shrinking and they no longer have more than 90 per cent of the litigation. The pie is getting larger but the boutique's percentage of the pie is slipping."
Indeed a survey conducted by IP Law & Business found that five of the 10 firms that handled the most patent cases in 2003 were full-service firms with between 1,000 and 1,400 lawyers. Kirkland & Ellis was third, Pillsbury Winthrop sixth, Morrison & Foerster seventh, Sidley Austin Brown & Wood eighth, and Morgan, Lewis & Bockius tenth. Morris, Nichols, Arsht & Tunnell, an 80-lawyer Delaware-based full-service firm, was fourth.
As recently as five years ago, boutiques would have dominated the list. Nevertheless, there are four boutiques in the top 10. And, in three of the last four years, the number one slot has been held by Boston's 325-attorney Fish & Richardson. And the major clients still turn to the boutiques. Microsoft, Intel and DuPont are but three of Fish & Richardson's stable of first-tier clients.
The other boutiques in the top ten are 160-lawyer Knobbe, Martens, Olson & Bear, 600-lawyer Howrey Simon Arnold & White, and 300-lawyer Finnegan, Henderson, Farabow, Garrett & Dunner.
However, there is a caveat. It is arguable that Fish & Richardson and Howrey Simon are not boutiques in terms of how this term is commonly understood. Fish & Richardson offers a full IP service that includes corporate and securities law for high-tech clients. Howrey Simon has ranked first in the Global Competition Review survey of leading US competition firms since 1999. The firm also has an extensive international corporate commercial litigation practice, trial and appellate.
The point is that only Knobbe, Martens and Finnegan, Henderson are IP boutiques as that term is commonly understood. Fish & Richardson and Howrey Simon, it appears, see their future at the intersection of IP with other practice areas. So do the big firms. It's just that they have a larger vision of what intersects.
THE LEADING IP FIRMS IN CANADA are a large national boutique (Smart & Biggar), three of the 20 largest full-service firms (Gowlings, Ogilvy Renault and Lang Michener), and a small group of mid-sized Toronto and Montreal boutiques (Dimock Stratton; Sim, Hughes; Bereskin & Parr; Deeth Williams Wall; and Léger Robic Richard).
The notion that boutiques have dominated IP litigation in Canada is not correct. What is correct is that the powerhouse transactional firms-such as McCarthys, Blakes, Davies Ward, Bennett Jones and so on-have not dominated. From time to time some of them-McCarthys, Blakes and Oslers in particular-have had a meaningful but not a towering presence.
Torys, Goodmans and perhaps Bennett Jones (with the Clarizio lateral hire) have now stepped up to the plate. Stikeman Elliott and Davies Ward Phillips & Vineberg appear to have little interest. This is in marked contrast, for example, to the position at Blakes where Chairman James Christie is clearly of the view that "IP litigation is a necessary part of a full-service menu."
Gowlings and Ogilvy Renault have the depth and strength that gives them a significant head start on their full-service competitors. Jolliffe at Gowlings is confident that "No one is emerging as a real threat to our market position." Torys, with the synergistic combination of Shaughnessy, McCourt and McMahon, may be best positioned to cover ground quickly. However, the reality is that all the large firms have the client base and resources to take a run at the market leaders. The problem, in Canada as it was in the US, is recruiting the marque names who will provide market credibility.
As well, Canadian IP litigation does not take place before a jury. Unlike the US, where jury-hardened commercial litigators could credibly claim an advantage over their boutique counterparts when IP jury trials became the norm, Canada's commercial litigators have no such advantage. In fact, boutique litigators generally have considerably more experience in Federal Court, where most high-stakes IP litigation takes place.
Also contrary to the US experience, the boutiques and their star litigators have shown little inclination to join the major full-service firms. And there has been no lack of interest on the part of the majors. "We've been approached by a dozen large firms with merger propositions," Ron Dimock advises. The situation is the same at Deeth Williams Wall.
Things may change if the boutiques start to feel the heat. And there is no doubt that competition is heating up. As Roger Hughes at Sim, Hughes reports, "You get beauty contests now where we never had them before. We may have been caught off guard for a while, but now we can deliver the same glossy marketing materials that the large firms churn out."
Among the boutiques, Smart & Biggar is uniquely positioned, because of its depth of numbers, to counter arguments that the firm lacks the resources to shoulder the more complex IP cases. The situation may change, however, as IP increasingly raises important related corporate issues. Regulatory and competition matters may loom large. This is what happened in the US and there is no reason to believe it won't be repeated in Canada.
Another consideration are the professional contacts that drive high-stakes IP litigation referrals. The all-important in-house corporate IP legal departments usually function autonomously. Their professional contacts are with other IP lawyers, frequently at the boutiques. But as IP grows in importance, corporations are moving in-house IP lawyers under the organizational umbrella of general counsel, and general counsel are generally more familiar with the large full-service firms.
THE MOST IMPORTANT EDGE that Gowlings and Ogilvy Renault or top-ranked boutiques such as Bereskin & Parr and Smart & Biggar have may be their powerful patent and trademark prosecution resources, which means that a client's first contact in the IP area is with them. As Douglas Deeth at Deeth Williams points out, "The firms with active patent and trademark prosecution practices tend to get the referrals from outside the country. That's important because IP is an international practice."
The commercial litigators at Torys built IP expertise by acting as counsel to Bereskin & Parr before the boutique brought litigators on board. Lang Michener used to enjoy a close relationship with Ridout & Maybee until the latter established its own IP litigation practice. On this analysis the full-service firms who intend to compete in IP litigation should be looking at building their prosecution base-as many have already done.
Nevertheless, building an IP litigation powerhouse is easier said than done. Putting aside the relatively small number of marque litigators and the firm grip the leading firms have on prosecution work, the major firms will have to deal with the growing problem of conflicts in the post-Neil era. This single issue may well ensure the survival of a strong IP boutique sector.
What does seem likely is that the large firms will increasingly undertake IP litigation on behalf of a greater proportion of their existing corporate clients. The contest will be harder, however, respecting new international clients and clients whose sophisticated patent and trademark maintenance systems are currently being managed by the boutiques.
For the time being, IP counsel at boutiques seem more harried than worried. When asked about increased competition from the majors, Robert MacFarlane at Bereskin & Parr retorts, "I was busy as hell in 1977 and I'm busy as hell right now."
But the battle is just beginning. It will be hard-fought. As Ron Dimock observes: "The full-service firms recognize the lucrative nature of IP litigation and, in my experience, they'll go to any ends to compete and go after someone else's clients." Welcome to the big leagues.
Julius Melnitzer is a Toronto-based legal affairs writer.