I. PPRELIMINARY CONSIDERATIONS
It is easy to say that successful resolution of Intellectual Property disputes depends on strategic management. It is much harder to implement during intensely fought litigation. The most effective management is achieved by anticipating key issues before they arise. IP disputes arise in countless different scenarios. What works in the dynamics of one situation will not necessarily work in another. Claims for patent, trademark or copyright infringement may or may not be combined with breach of contract, tort and other non-IP claims. A trade secret misappropriation case may involve unique issues of timing and disclosure of the purported trade secrets. Nevertheless, some themes and issues recur. In every case, the prospect of litigation presents both potential benefits and very real costs, which can and should be evaluated in the same fashion as any other important business decision.
A. Business objectives should drive the decision-making. For most businesses in litigation, whether as a potential plaintiff or defendant, the ultimate corporate objective is to enhance net profits. Potential IP litigation should be viewed as an additional tool or device designed to achieve, or at least not to undermine, that goal. The fundamental decision of whether to litigate, license, or cease and desist requires a broad view of corporate objectives. What does the business really seek and how can litigation help achieve that objective? The question is pragmatic--where does the company hope to be in the foreseeable future and how does the potential litigation fit within the company's effort to achieve the goal.
In-house counsel and business people are typically in the best position to make these key judgments. Pertinent questions include:
- Does the business seek exclusivity in the market for the product in question?
- If so, is the business capable of being the sole supplier?
- What is the projected market size and growth?
- Will there be adequate sales force to meet market needs?
- What are the profit margins today and projections for the future?
- How are these affected by securing market exclusivity?
- Can prices be enhanced legally via exclusivity?
- Is there a threat of price erosion?
- What is the availability of noninfringing alternative products?
- Are there many existing competitors? Are there barriers to market entry?
- What is the expected product life cycle--will it be obsolete in the near future?
- Is money or exclusivity the only target of the projected litigation?
- Does the company need to "send a message" that it will protect IP rights?
- Is there a broader "don't tread on me" goal of protecting intellectual property?
These questions probe where the business wants to be two, three, or five years out and how the outcome of potential litigation may affect those goals. It does little good to spend a million dollars fighting about a product that will never generate that much in profit no matter how strong the legal position. Conversely, a company may have no choice but to engage in a "bet-your-company" litigation struggle over a key product if a viable settlement is not available. Once business objectives are identified, it is time to weigh the costs of litigation.
B.The costs and burdens of litigation are well-known. Litigation, of course, is far from cost-free. Anyone who has been through the experience, knows that litigation expenses incurred in bringing or defending IP litigation can be huge. According to one recent survey conducted by the AIPLA, medianU.S. patent litigation expenses averaged about $500,000 through trial in 1991. Attorneys' fees in major intellectual property suits through trial often exceed $2 to $4 million. Further, it is difficult to predict the attorneys' fees in advance because the amount of time required to be spent by counsel varies in proportion to the effort put forth by the adversary. Other expenses of trial include expert witness fees, travel and lodging expenses for counsel, parties, and witnesses, and, in large stakes cases graphics or animation charges and jury consultants. Use of in-house counsel may help to reduce the out-of-pocket expenses, but their participation may be limited by protective order prohibitions against disclosure of an adversary's confidential business information or time constraints. There are also very many real non-monetary costs to consider.
1. Time commitments. In addition to legal fees and expenses, litigation imposes an extraordinary burden on officers and employees of a party-litigant. Large amounts of time are required for consultation with counsel on strategic matters and to respond to discovery demands from the adverse party. Depending on what the local rules allow, parties in important litigation often propound extensive discovery requests all too often calculated in part to impose a substantial burden and expense on the adversary. An adversary may target, for deposition, officers and directors who can least afford to take time away from their regular duties and responsibilities for depositions. A deposition of a corporate officer may last many days, with at least as much time required for preparation. Depositions of engineers and technicians will take many more days, often requiring the time of a party's expert witness(es) as well as lawyers.
2. Cost of inadequate preparation. On the other hand, it is vitally important that the discovery responses be complete and consistent with the overall strategy in the case. Early consultation with officers and employees will be required not only for preparing for depositions and responding to discovery requests (e.g., interrogatories, requests for admission, etc.), but also in anticipating and protecting the attorney client privilege and attorney/work product. Early identification of problem documents is of paramount importance. Off-hand comments about an adversary's intellectual property based on incomplete information can surface as key admissions at trial. This problem is aggravated by the informality of email and voicemail--and the often inaccurate assumption that messages are not preserved. Where resources permit, a company is well-advised to dedicate one or more professionals to serve as a liaison with outside counsel to ensure effective and timely communication and preparation.
3. Production and inspection of documents requires special attention. The search, compilation, identification, and assembly of the requested documents should be performed early and carefully. Searching for and copying voluminous documents may take weeks, and will disrupt files and work in progress. Counsel or the party's staff must also screen company documents to mark and/or classify confidential business and technical information, and where permitted to redact wholly irrelevant and sensitive business information, as well as categorize attorney-client and work-product privileged information. It is not uncommon that tens or even hundreds of thousands of documents to be processed for production to opposing counsel in an important patent infringement action, especially between head-to-head competitors. No matter how damaging a document may be, nothing is worse for the trial lawyer than dealing with deliberate destruction of documents. The jury is quite literally allowed to infer that any such document was as harmful as possible to the destroying party, thereby ensuring that it is even more damaging than if it had been produced.
A litigant's counsel and expert witness may also be permitted to enter the adversary's production plant to inspect and photograph equipment or products as related to the patent claim. This unwanted intrusion may exposes trade secret and production facilities to persons adverse to the disclosing party. Although a protective order will normally be in place theoretically to prohibit against unauthorized disclosure, there will remain a risk of disclosure of valuable trade secrets or know how.
4. Third-party relationships. The business relationships with vendors and customers may also be affected by discovery intrusions. Third-party vendors or customers may be subpoenaed for depositions and document production. Even friendly or cooperative third parties will often need to be subpoenaed by the requesting party to maintain an "arms-length" appearance. Proving a case through ones customers may sometimes not be worth the effort.
In sum, the burden of litigation is not easily understated. It will unavoidably interfere with regular business activities, require commitment of substantial time of key personnel, disrupt files and work-in-progress, potentially damage customer and vendor relations, and, not least of all, require significant attorneys' fees and costs. (Only certain costs may be recoverable in litigation if the party is successful, and possibly attorneys' fees if the case is "exceptional.")
II. PREPARING FOR BATTLE ON THE MERITS.
Careful preparation before the lawsuit is crucial to success. This is as true for potential defendants as for plaintiffs. Indeed, because of the prevalence of declaratory relief actions, the nominal "plaintiff" may occupy the role of the accused infringer. There are several things that should be done, if possible, before filing any action in Court. First, in patent litigation, and to some degree other IP litigation, an opinion of counsel plays an early and often pivotal role. When a potential litigant learns of a patent infringement issue, it should promptly consider obtaining advice of counsel.
A. The need for pre-litigation opinions of counsel. The Federal Circuit first addressed the "exceptional case" and "willful infringement" issues in 1983. In Underwater Devices, Inc.v. Morrison-Knudsen Co., 717F.2d 1380, 1389-91, 219U.S.P.Q. 569, 576-77 (Fed.Cir. 1983), the Court set forth the requirement that when,
as here, a potential infringer has actual notice of another's patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing. [citing authority] Such an affirmative duty includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity. (Emphasis added.)
Id. at 1389-90. This case established the "affirmative duty" rule and the required timing for the opinion of counsel. This timing requirement is a bright-line rule. Under the duty of due care, there is no "grace period" after knowledge of a patentee's rights during which one may engage in infringing activity prior to seeking an opinion of counsel.
1. Actual awareness of the patent may occur before infringement threats. In Stryker Corp.v. Intermedics Orthopedics, Inc., 891F.Supp. 751, 815 (E.D.N.Y. 1995), aff'd, 96F.3d 1403 (Fed.Cir. 1996) the defendant argued at the district court that it obtained a competent opinion of counsel after the plaintiff threatened a lawsuit and, therefore, could not have willfully infringed the plaintiff's patent. The court, while presumably agreeing that the opinion was competent, nonetheless held that the defendant willfully infringed the plaintiff's patent. The court reasoned:
However, in January, 1990, prior to being notified by plaintiff's counsel, [defendant] concedes that Merkling, [defendant's counsel,] had already been made aware of the 023 patent. In the defendant's supplemental responses to the plaintiff's discovery requests it is conceded that Merkling saw a reference to the 023 patent, including a drawing, on or about January5, 1990. Despite his knowledge of the 023 patent on January5, 1990, Merkling did not conduct any investigation as to possible infringement of the [defendant's product] . . . . Merkling caused no investigation to be made in January 1990, despite the fact that, with knowledge of the 023 patent, he also knew that the [accused product] was the first time that [defendant] used a [structure similar to plaintiff's patented product.]
On appeal, the defendant argued that while defendant's counsel knew of the `023 patent, he "was not aware that the `023 patent raised an infringement issue," and therefore, did not have "actual notice" of the `023 patent. 96F.3d at 1415. In affirming the finding of willful infringement, the Federal Circuit found that defendant's counsel knew of defendant's product at the time he had knowledge of the `023 patent--i.e., before initiation of the lawsuit. Id. at 1416.
2. The basic principle is that patent litigants should obtain pre-infringement and pre-litigation opinions from competent counsel. This rule is tempered only by a requirement that the infringing defendant first have had knowledge of the patent. See State Indus. Inc.v. A.O. Smith Corp., 751F.2d 1226, 224U.S.P.Q. 418, 426 (Fed.Cir. 1985). Merely having an opinion does not necessarily avoid a finding of willful infringement. In In re Hayes Microcomputer Prods. Patent Litigation, 982F.2d 1527, 1543, 25U.S.P.Q.2d 1241, 1252-54 (Fed.Cir. 1992), the court stated:
[The] opinion letter makes broad and conclusory statements with little, if any, support. The tenor of the letter describes a scenario in which "the lawyers' invented a patent' ... rather than `patenting an invention'" made by an engineer. The letter ... discusses concepts rather than analyzing the patent claims whatsoever.
The decision further states:
Although a competent counsel's opinion is evidence of good faith, it is not conclusive. In this case, substantial evidence exists to support the conclusion of willfulness, irrespective of the opinion letter. [Hayes' expert witness] testified in detail that the letter did not give [the defendant] a reasonable basis for believing in good faith the ... patent was invalid.
3. The client bears the responsibility to determine whether or not its counsel's opinion is sufficient to be "authoritative". In Ortho Pharmaceutical Corp.v. Smith, 959F.2d 936, 944, 22U.S.P.Q.2d 1119, 1126 (Fed.Cir. 1992) the court affirmed the trial court's finding of non-willfulness and held:
Counsel's opinion must be thorough enough, or combined with other factors, to instill a belief in the infringer that a court might reasonably hold the patent invalid, not infringed, or unenforceable. Thus, [the infringer's] intent and reasonable beliefs are the primary focus of a willful infringement inquiry. (emphasis added)
Of equal importance is the client's duty to inform patent counsel of all relevant facts within his knowledge that might reasonably impact counsel's opinion. Goodwell Const. Co.v. Beers Const. Co., 991F.2d 751, 758, 26U.S.P.Q.2d 1420, 1426 (Fed.Cir. 1993), affirmed a finding of willfulness upon evidence that the infringer attempted "to conceal information from its patent attorney when seeking an infringement opinion." In light of Ortho and Goodwell, a wise client will provide counsel with all relevant information and assure himself that the opinion reasonably "instills a belief" of invalidity, non-infringement, or unenforceability before proceeding with possible infringing activity.
Obtaining a second opinion can help demonstrate diligence. In Read Corp.v. Portec Inc., 17U.S.P.Q.2d 1243 (D. Del. 1990), rev'd, 970F.2d 816, 23U.S.P.Q.2d 1426 (Fed.Cir. 1992), the case was tried to a jury which found willful infringement, and which was noted as "binding on the court" for a determination of multiple damages and attorney fees. Accordingly, the district court awarded treble damages in the total amount of $3,974,346 plus interest and attorney fees. Portec had obtained successive opinions from two different, independent counsel. The second counsel provided multiple opinions which partly conflicted with the first counsel's views and notably ignored the doctrine of equivalents which the first counsel had considered. The trial judge considered various design changes by the infringer to have been a "manipulative strategy" and particularly noted that Portec had failed to give the second counsel the first counsel's opinion which it held violated the principle that, `the infringer must supply all pertinent facts to counsel as a basis for a reliable opinion.'"
The Federal Circuit reversed, stating that a verdict of willful infringement does not "mandate" an enhanced damages award but that all surrounding circumstances must first be evaluated. In so doing, the Federal Circuit specifically commended Portec's efforts at "designing around" the patent stating that while those efforts ultimately failed, they nonetheless showed a good faith effort not to infringe if based upon good faith opinions of counsel. As to not supplying the second counsel with the first counsel's opinion, the court said,
Further, the failure to give the [first] opinion to the [second] lawyer is a plus, not a minus. [The second lawyer] was not influenced thereby and was able to make his own independent evaluation. (original emphasis).
4. A patentee's duty to obtain a pre-litigation opinion. Federal Circuit decisions have also pointed out that a patentee is likewise charged with the duty of bringing an infringement suit with a "good faith" basis. Machinery Corp. of Americav. Gullfiber AB, 774F.2d 467, 471-74, 227U.S.P.Q. 368, 371-74 (Fed.Cir. 1985), reversed a district court's award of attorneys' fees to an accused infringer even though the evidence demonstrated the patentee's failure to obtain an opinion from outside counsel. The Federal Circuit did not then address the question of whether different standards should apply to patentees and infringers on issues of bad faith litigation.
In Eltech Systems Corp.v. PPG Indus., Inc., 903F.2d 805, 14U.S.P.Q.2d 1965, 1970 (Fed.Cir. 1990) the court did reach, and answer, that question (which Machinery Corp. had left open), by stating:
we now reach the question and determine that there is and should be no difference in the standards applicable to patentees and infringers who engage in bad faith litigation. 903F.2d at 811 (emphasis added).
Eltech not only affirmed the award of attorney's fees by the district court to the winning accused infringer, but also imposed sanctions, in the form of appellate attorney's fees and double costs, against the patent owner for a frivolous appeal.
B. Identifying and selecting expert witnesses. It is never too soon in the litigation process to locate and consult with suitable expert witnesses. They play a pivotal role in shaping intellectual property litigation. General categories of expertise required in intellectual property litigation are technical, legal, and economic. Experts may be used as consultants and/or testifying witnesses. It is important to identify and segregate these roles to minimize the risk of waiver of work product materials.
In a patent suit, a technical expert is a virtual necessity at trial to testify on such issues as whether an accused device or process falls within the scope of a patent claim, or whether an invention is obvious to skilled artisans in view of the prior art. Engineering professionals, such as those employed by the party involved in the litigation, are in a good position to identify potential technical experts, and as such, they normally assist trial counsel in the selection process. Technical experts may be practicing engineers specialized in the patented technology. In some cases, the inventor himself or an engineer employed by the party may effectively serve as a technical expert.
In years past, legal experts often addressed complex patent law issues. A legal expert may be permitted by the court to testify on such matters as PTO patent practice. As these are purely legal issues, however, some judges do not permit use of such legal experts. The need for legal experts on claim interpretation has been reduced by Markman. When technical or scientific terms in the claims require definition or explanation to describe whether the claims are infringed, it is the duty of the judge, not the jury, to do so. Markmanv. Westview Instruments, Inc., 116S.Ct. 1384, 1387, 38U.S.P.Q.2d 1461, 1463 (1996) ("We hold that the construction of a patent, including terms of art within its claim, is exclusively within the province of the court"). And judges generally do not need or want help from legal experts. Technical experts are sometimes allowed at Markman hearings; legal experts have been allowed sparingly.
Economic experts may be employed for either one of two reasons. On patent validity questions, they may testify about "commercial success" of the invention--that is, sales and sales trends, sales of competing products, industry growth trends and projections in the product area, and the like. This evidence will be submitted to demonstrate whether features of the patented invention are responsible for the commercial success. Assuming liability is found, i.e., the patent is held valid and infringed, an economic expert as well as experts in marketing, manufacturing, licensing, accounting, and/or financing may testify in the damage phase. Testimony on damages may embrace lost profits, reasonable royalties, price erosion, pre-judgment and post-judgment interests, and the like.
C. Cease-and-desist letters, jurisdiction and damages. The first shot fired in an intellectual property dispute is often a cease-and-desist letter demanding that the accused party stop specified offensive conduct. On its face, the desired result is for a quick end to the controversy, when the accused becomes aware of the accusers rights. Quite often, however, the cease-and-desist letter is carefully couched in code phrases with an eye to its impact on the eventual litigation. The wording of a cease-and-desist letter, the choice of where and to whom it is sent, as well as the response from the accused, may play a role in determining the forum in which the dispute will be waged.
1. A real case or controversy is a prerequisite to declaratory relief jurisdiction. A not infrequent response to an aggressive cease-and-desist letter, is a declaratory judgment action, seeking exoneration of the accused (i.e., for non-infringement or invalidity of a patent, trademark or copyright or other declaration of rights) filed in a forum most advantageous to the accused. Not surprisingly, counsel for the accuser, in anticipation of that response, typically seeks to avoid creating the requisite justiciable controversy through careful wording of the cease-and-desist letter.
The courts are aware of this and because "of the subtleties in lawyer language . . . courts have not required an express infringement charge." Arrowhead Indus. Water, Inc.v. Ecolochem, Inc., 846F.2d 731, 736. Even if a defendant has not expressly threatened suit, a court has jurisdiction to entertain a declaratory judgment suit if the plaintiff had a reasonable apprehension of suit under the "totality of the circumstances." See Arrowhead, 846F.2d at 736, 6U.S.P.Q.2d at 1689. The "totality of the circumstances" analysis is pragmatic and looks to substance rather than form "because in many instances (as in this case) the parties are sensitive to the prospect of a declaratory judgment action and couch their exchanges in terms designed either to create or defeat declaratory judgment jurisdiction." EMC Corp.v. Norand Corp., 89F.3d at 807, 811-12, 39U.S.P.Q.2d at 1454 (Fed.Cir. 1996).
The patent owner may prefer not to go through the expense and risks of litigation and to instead enjoy the benefits of "extra judicial" patent infringement. In Judge Markey's oft-quoted parlance: the patent owner engages in a "danse macabre"--where the patentee "brandish[es] a Damoclean threat [of patent litigation] with a sheathed sword" and, "guerrilla-like," "attempts extra-judicial enforcement with scare-the-customer-and-run tactics that infect the competitive environment of the business community with uncertainty and insecurity." Arrowhead at 735.
The Declaratory Judgment Act was designed to enable those threatened with action to remove such a cloud on their commercial activities, "instead of being obliged to await the convenience of the threatening party." Id.
The purpose of the Act is to enable a person who is reasonably at legal risk because of an unresolved dispute, to obtain judicial resolution of that dispute without having to await the commencement of legal action by the other side. It accommodates the practical situation wherein the interests of one side to the dispute may be served by delay in taking legal action.
BP Chemicals Ltd.v. Union Carbide Corp., 4F.3d 975, 977, 28U.S.P.Q.2d 1124, 1126 (Fed.Cir. 1993) (emphasis supplied).
2. A carefully worded letter may serve as notice for damages purposes while still not creating a case or controversy. The cease-and-desist letter may place the accused on notice of the patent, thereby triggering the damages period under 35U.S.C. section 287(a), and the obligation to obtain an opinion of counsel. The trick for the patent owner who is to phrase the letter so as to avoid instilling in the recipient a objectively reasonable apprehension of a lawsuit, while nonetheless placing the accused on notice of the patent. Walking this line is not an easy task, but it is possible. The Federal Circuit has recently rejected the argument that the same cease-and-desist letter could not fall short of creating a case or controversy and still satisfy the ' 287(a) notice requirement. SRI International, Inc.v. Advanced Technology Laboratories, Inc., 127F.3d 1462, 1469-70 (FedCir. 1997).
3. Personal jurisdiction over the patentee may be closely linked to declaratory relief. In a series of recent cases, the Federal Court has established its own body of jurisprudence for determining whether the exercise of personal jurisdiction in a patent case is consistent with due process limitations. Whether there is jurisdiction over an accused defendant depends on application of familiar long-arm and minimum contact standards. But the issue of personal jurisdiction over the patentee in a declaratory relief action may turn on what has been said and by whom in the cease-and-desist letters. Most recently, in Genetic Implant Systems, Inc.v. Core-Vent, 123F.3d 1455, 1458, 43U.S.P.Q.2d 1786, 1789 (Fed.Cir. 1997), that court held, in relevant part, that the requirements of due process are satisfied when an out-of-state defendant: (1)enters into a license agreement or exclusive distributorship agreement with another out-of-state party doing business in the forum state, and (2) conducts negotiations in the forum state and directs letters and telephone calls into the forum state threatening to sue for infringement.
III. AFTER SUIT IS FILED--MANAGING IP LAWSUITS.
Once an IP lawsuit has been filed, a variety of strategic, logistical and practical issues must be confronted. Many of the issues, such as discovery planning, evaluation of witness credibility and tactics for dealing with lay jurors, are common to many civil suits. There are, however, several important tactical considerations that arise with some frequency in intellectual property cases.
A. Waiver of attorney-client privilege and/or product protection in infringement opinions. As noted, most litigants are well advised to obtain an opinion of counsel before a lawsuit is commenced. Quite frequently, it will be necessary for the party to expressly rely on the advice of counsel as a defense to alleged willful infringement (or in the case of a patentee, a subsequent claim of bad faith or frivolous litigation). Once reliance is invoked, there is plainly a waiver of the subject matter of the attorney-client advice. There is much uncertainty, however, in the case law as to the scope of that waiver.
1. The cases are in conflict as to whether work product (as opposed to attorney-client communications) is waived when an opinion of counsel is produced. Compare: Handgards, Inc.v. Johnson & Johnson, 413F.Supp. 926, 929, 931 (N.D.Cal. 1976) (court ruled that both attorney-client and work product protection waived as to "communications and documents relating to the advice") and Mushroom Associatesv. Monterey Mushrooms, Inc., 24U.S.P.Q.2d 1767, 1770, 1771 (N.D.Cal. 1992) (follows Handgards and applies to patent infringement suits where advice of counsel is invoked against willful infringement charge) with Thorn EMI North America, Inc.v. Micron Technology, Inc., 837F.Supp. 616 (D. Del. 1993) (rejected the approach of Mushroom Associates and found that reliance on advice of counsel waives attorney-client privilege but not work product immunity) and Steelcase, Inc.v. Haworth, Inc., 954F.Supp. 1195, 1199-1200 (W.D. Mich. 1997) (same).
2. The time period covered by the waiver is also uncertain. Both McCormick-Morgan, Inc.v. Teledyne Industries, Inc., 765F.Supp. 611 (N.D.Cal. 1991) and Smithv. Alyeska Pipeline Service Co., 538F.Supp. 977 (D. Del. 1982), refused to limit the waiver to the time period during which the non-infringement opinion was rendered. Both courts required disclosure of all attorney communications on the waived subject matter. Other courts have imposed some time limit. Haglundv. The Dow Chemical Co., 218U.S.P.Q. 55, 58-59 (E.D.Cal. 1982), limited disclosures to documents related to the opinion but dated before the date the lawsuit was instituted. A recent California court reached the same decision in Hoover Universal Inc.v. Graham Packaging Corp., 44U.S.P.Q.2d 1596 (C.D.Cal. 1997), finding:
The issue is Graham's state of mind at the time of infringement; therefore documents created after litigation was commenced do not appear reasonably calculated to lead to the discovery of admissible evidence.
Id. at 1598. The Court limited disclosure to documents created prior to the date the complaint was filed.
B. Bifurcating liability and validity issues from damages may lessen potential prejudice to the defendant. In most cases, the accused infringer would prefer not to present to the same jury both the issues of whether defendant infringed and whether defendant reasonably relied on advice of counsel while infringing. The advice of counsel may not always be consistent with the positions taken by trial counsel on liability. Some courts are sympathetic to the defendant's plight, others are less so. A defendant should anticipate the bifurcation/reliance on counsel issue early on, and devise a strategy tailored to the predilections of the judge and the particular issues that will be exposed by the contemplated waiver. Bifurcation is raised by a Rule 42(b) motion and allows the court discretion based on three factors: (1)whether it is economical or would expedite litigation to do so; (2) to avoid prejudice; and (3) for convenience. The second factor, prejudice, is the important factor in these cases. If bifurcation is ordered, the court may also choose to bifurcate discovery (i.e., postpone discovery on damages until after the liability trial.)
C. Specific litigation strategies will depend on the type of IP litigation--some current examples. Generalizations are difficult and particular strategies will vary depending upon the type of lawsuit involved. Some IP litigation has involved multiple suits against "the industry." Mr.Lemelson pursued that strategy on several of his patents, and is widely believed to have earned a small fortune. Other recent examples of such mass filings are suits by Elk Industries and E-Data against dozens of companies involved in the Internet. The most effective strategy in confronting these cases may be a minimalist approach, expending little money and looking for a quick "nuisance" settlement. Other multi-party or class action lawsuits may arise from year 2000-related issues.
The most common type of IP lawsuit arises out of a dispute between competitors. The stakes are often very high. Sometimes the protagonists realize that negotiating cross-licenses to each other's formidable patent portfolios may be more economical than protracted, scorched earth litigation. Sometimes a company must first establish a reputation in the industry for being willing to go through an expensive fight to gain the credibility to negotiate an attractive settlement. Suits between competitors will invariably raise questions regarding the appropriate protective order and access to each other's confidential documents. A frequent battleground is whether in-house patent lawyers should be given access to the adversary's sensitive technical information. A litigant should anticipate this issue and determine whether it will be aided or harmed by such disclosure. In this way, it can position itself most effectively before the issue arises.
D. Most cases settle and ADR techniques may give the parties and their lawyers an effective way to achieve settlement. Once started, an IP lawsuit may be difficult to end. Both sides may become embittered at the litigation expense and hostile statements made by the adversary. In this context, it is important to realize that the great majority of IP cases (the oft-quoted statistic is 95%) never go to trial. By providing a more objective view of the merits of a dispute, and, where desired by the parties, turning negotiations away from a litigation setting toward a business or deal-making setting, ADR can be an efficient means to resolve a dispute. Its use is now mandated under many local rules. Parties should be prepared to use the right ADR technique or combination of techniques strategically to achieve their overall objectives. A brief survey of the more well-known ADR techniques follows.
1. Mediation involves a neutral facilitator. The prospects for successful settlement negotiations can often be enhanced by a skilled and impartial mediator. Mediators suggest modes of settlement. Mediators have no power to impose a settlement on the parties, but are trained to bring out the common ground between the parties. The mediator usually meets briefly with the parties to obtain an overview of the dispute, then meets separately with each party to elicit their position and case evaluation. Following the initial meeting, the mediator shuttles back and forth between the parties seeking a mutually acceptable compromise. Some mediators work in teams, with a separate mediator for each party. In team mediation, separate mediators work with each party to gain the confidence of that party, and determine that party's realistic "bottom line" by ensuring nondisclosure to the other party. The mediators may exchange that information among themselves to determine how close the parties are in reality, in order to advance the mediation process.
Mediation, however, is not always costless and parties must be familiar with rules governing confidentiality. Under many state statutes and case law, what is said during mediation and any documents prepared for the purpose of mediation are generally not admissible into evidence. The issues arise as to what is a "mediation" and when does it start and stop. (See, e.g., the recently added chapter on mediation ''1115-1128 ofCal. Evid. Code.)
2. Mini-trials. A mini-trial is a structured settlement procedure. Mini-trials involve short presentations of the positions of each side. Each party--usually through its attorneys--makes a short presentation of the case to the principals (i.e., representatives of each party with settlement authority). The idea is to expose the principals, perhaps for the first time, to the strengths and weaknesses of all sides of the controversy. After the initial exchange, the principals are encouraged to explore pragmatic business solutions through negotiation.
Mini-trials without a third party may be quicker and cheaper than mini-trials with a third party, but the right third party can be effective in resolving an IP dispute by facilitating constructive discussion, help to avoid personality conflicts, and fill a variety of roles to enhance settlement. For example, third party neutrals have made: (1)binding decisions on the merits of the dispute; (2)nonbinding decisions which, if rejected by a party who later fails to do better in court, result in sanctions of a stipulated amount; (3)nonbinding advisory decisions which because of the neutral's position and experience may carry great weight with the parties; and (4)expert (binding or nonbinding) findings of fact on the key issues in dispute.
The advantages of mini-trials include flexibility, speed and confidentiality. In addition, if a solution is not reached through the use of a minitrial, little effort is wasted because most of the preparatory work for the mini-trial may be used at any later trial on the merits. The disadvantages of mini-trials include insufficient time to develop more complicated arguments, and a "free" preview of your case for the other side.
3. Judicial settlement conferences are common in both state and federal courts. Federal judges are expressly authorized to facilitate settlements, and to use extra judicial settlement procedures to resolve the case or controversy before the court (Fed. Rules Civ. Proc., Rule 16). Local court rules often provide for mandatory settlement conferences during the pretrial proceedings. Where the judge has a strong interest in settlement, there are a variety of influential tools at the judge's disposal. As a general rule a judge who participates in settlement discussions will not try the case if settlement is unsuccessful.
The advantages of judicial settlement conferences are that judges have credibility as well as unique leverage in dealing with an unreasonable party. The disadvantages of judicial settlement conferences include the following: individual judges may not have the time to study the problem, may not be good at mediating, may not have experience in suggesting imaginative solutions, or may merely go through a rote procedure.
4. Summary jury trials are another form of judicial mediation. This procedure involves short presentations of fact and law by the attorneys to jurors selected from the court's normal jury pool. Representatives of all parties are present and they must have authority to settle. There are no witnesses, and only limited objections, if any, are permitted. The jury's verdict is nonbinding (unless otherwise agreed by the parties). The summary jury trial informs the parties of how a real jury views their arguments and may force more realistic appraisals of the likely outcome of a full jury trial. Advantages are that both sides get an idea of what a jury may think of their case, and there will be added pressure on the parties to settle the dispute within the range of the advisory verdict. Disadvantages include that, unlike other nonbinding, non-adjudicatory alternative dispute resolution techniques, summary jury trials may not be entirely confidential. In addition, it has been said that summary juries favor "slick" presentations which do not reflect the real evidence.
5. Binding resolutions imposed by a third party. The parties may wish to avoid the burden, expense and delay necessary to obtain a conventional court judgment, but still wish to have some form of adjudication, which by prior agreement will result in a binding, legally enforceable adjudication of the dispute. There are two basic forms of such adjudication: (1)through the courts, and (2)through arbitration.
a. Court-sponsored modifications of the standard adjudication model. There are many ways in which a conventional trial may be modified, but still be administered under the auspices of the court, including trials on an agreed statement of facts. A private litigation alternative is also available in some states, under which litigants may hire their own judge or referee who is empowered to render an enforceable judgment. Under California Code of Civil Procedure section 638 et seq., litigants may agree at any time to "try any or all of the issues in an action" before a "referee" of their choosing. The referee need not be a lawyer; he or she need only be competent to be a juror. This device, dubbed "rent a judge" because the parties pay for the referee's time, has proved beneficial in resolving commercial disputes. The major benefit of utilizing a private "referee" is the speed and confidentiality of the process; however, the process has been criticized because it allows "secret justice for the privileged few." In the federal system, 28U.S.C. section 636(c) permits the parties to agree to a trial before a magistrate with or without a jury. When such an agreement is absent, Federal Rules of Civil Procedure, Rule 53, permits the use of special masters in civil litigation to a limited degree: "A reference to a master shall be the exception and not the rule" (Rule 53(b)). Some cases can be broken down into more manageable pieces through the use of special masters.
b. Arbitration. Long accepted as the norm in international disputes, arbitration has also been used effectively to resolve domestic IP disputes. Arbitration may or may not be less costly and less time-consuming than litigation. Arbitration can arise in three ways: (l)a predispute agreement to arbitrate some or all disputes arising under a contract or business relationship; (2)a postdispute agreement to arbitrate; and (3)as required in certain cases by statutes. Arbitral awards on IP issues are generally enforceable. All arbitration clauses should be carefully chosen and clearly written. The California and federal arbitration statutes enable a party to a contract to compel the other party to comply with the agreement to arbitrate, in addition to staying any litigation brought in defiance of the arbitration agreement. Generally, agreements to arbitrate will be interpreted to cover a dispute unless it can be said with positive assurance that the dispute is not covered by the agreement.
IV. TECHNIQUES TO PROMOTE EFFICIENCIES IN LITIGATION.
There is ongoing experimentation between clients and their litigation counsel on how to manage more effectively the often significant costs of IP litigation. The results are largely anecdotal and generalizations are difficult. What is best for one case, or one client culture, may be the worst for another. All can agree that, except in emergencies or where the client has expressly told the lawyer to proceed on the basis of his or her own judgment, the client should be kept informed and consulted on all significant decisions before they are made, that some motions and much discovery are wasteful and that trial dates once set should be adhered to by the court and the lawyers. There is, however, no agreement on how best to achieve these goals. Some combination of the following techniques may be effective.
A. Litigation budgets. The use of budgets in litigation is not new. Corporations have long had to live within budgets, and legal departments are expected to live within theirs. Many companies have decided that the cost of litigation should be expensed against the budget responsible for the dispute. When managers view the not-insignificant cost of litigation as coming directly out of their budgets, it can produce a more pragmatic assessment of the cost and benefits of proceeding with the case. Some companies now require in-house lawyers, as well as outside counsel, to bill their time to the responsible budget--effectively putting in-house and outside counsel in competition and allowing the managers to chose the more efficient alternative.
The problem is that IP litigation by its very nature is notoriously difficult to predict and hence difficult to budget. Outside counsel are now asked to submit budgets in the form of "bids" to get significant new business. The temptation may be to underestimate the time and expense involved to try and be the winning "bidder," notwithstanding ethical obligations to the contrary. But unrealistic budgets--high or low--serve neither the client nor the lawyer in the long run. Forecasts beyond six months are generally not very accurate, especially for cases that present novel or nonrecurring issues. Realistic budgets should include contingencies for unanticipated costs, and many also account for the very real costs to the company of the lost time of its legal and nonlegal personnel noted above.
Despite their shortcomings, budgets are here to stay. They impose useful discipline on clients and lawyers alike. It will increasingly be the rare case when litigation counsel is instructed to "spare no expense" and the client sincerely means it. Even in the most important "bet-your-company" litigation there is always a point of diminishing returns where the next deposition or legal research memorandum adds less benefit than its incremental cost. Budgets help to identify that point.
B. Task-based billing forces the outside counsel to identify those tasks worked on in a given day. In 1995, a group of law firms and law departments agreed to uniform task-based billings codes for use in civil litigation. The concept is to allow more meaningful management of litigation by allowing better comparison between cases and law firms. The codes also create an added burden in breaking out time among tasks. Block billing--listing many tasks without separately listing the time spent in a given day--is not allowed. Large entries with a generalized description (e.g., legal research, 6 hours) may not be acceptable. Either the time spent falls into a budgeted category or it will not be billed to the client. (There can be a category for case administration to account for productive time spent in case coordination and on miscellaneous tasks not falling within a budgeted category.) As bills are sent to the client, it is possible to monitor the budget to see where cost estimates should be altered because of unforeseen circumstances.
The advantages to the client of such an arrangement are obvious--the cost for each task should not exceed a preset amount. There is a danger, however, that by limiting the time devoted to a particular task, the quality of the advocacy could suffer. Some task-based billing may force outside counsel to bill no more than the amount stated for each task and thus absorb any excess time actually expended. In other arrangements, going over budget may simply necessitate budget revisions, changing the overall amount or shifting cost from one item to another. In any event, the consequences of going over budget should be addressed at the outset.
As in any other endeavor, the accuracy of litigation budgets should improve with experience. As clients and lawyers become more familiar with the process, accuracy should be improved. A budget setting forth the tasks to be completed, the professional staffing of the case, and the estimated hours needed to complete each task has other potential benefits. It can greatly enhance in-house counsel's ability to monitor the quality and efficiency of outside counsel's work by providing the client with important, up-to-date information.
C. Real time cost reporting. Traditionally, the monthly bill from outside counsel reaches the client two to eight weeks after the services are rendered and the costs incurred. When a client has a question about a particular charge, it is often too late to reconstruct precisely why the cost was incurred or even if it was authorized. This problem can be alleviated through the technique known as real (or almost "real") time reporting of billing information. Some outside firms can link their billing systems to the information systems of their clients. Outside counsel can report their time once a week for all of the client's matters via a personal computer modem hook-up. Through royalty-free use of billing software, companies with large litigation portfolios can track their budgets against time expended on an almost real time basis. It allows aberrational cases and firms to be identified quickly and possible problems to be identified within weeks instead of months.
D. Creative billing arrangements. Another method of controlling costs is to modify the system of billing for services based on the number of hours expended. A variety of approaches are being used with mixed results. All have in common some departure from the traditional practice of billing clients by the hour according to each attorneys' hourly rate for all time productively devoted to any particular piece of litigation.
The billable hour has been criticized under a number of fronts because it may encourage inefficiency and redundancy. Clients justifiably want to pay for tangible results, not merely an attorney's time. Stated differently, clients legitimately expect to be billed only for productive and efficient time spent on their behalf. Further, clients ask why, if one attorney can produce a high quality product in 15 hours, should they pay a second attorney for 30hours of his time expended to produce the same quality product. As a result of these and other criticisms, a growing number of variations on the standard billable hour system are being utilized in litigation.
Under one arrangement, lawyers at a firm are billed at a single, "blended" hourly rate at some agreed upon level between the highest and lowest billing rate. The client pays the same hourly rate for all attorney time, whether it is that of the most senior partner or the most junior associate. From the client's perspective, the desirability of a blended rate depends largely on the amount at which the rate is set, and the client's confidence that the more senior attorneys will maintain an adequate time commitment to the case. Some clients don't like the blended rate because they fear that senior partners might pay less attention to the case than might be necessary.
A more radical departure from billing by the hour is utilization of a fixed-fee or fee cap for particular litigation. This arrangement typically consists of a commitment by outside counsel to charge no more than an agreed amount for a given case. Hours are billed in the normal fashion until the cap is reached. Time expended beyond that point is absorbed by the firm. Under this arrangement, the client has the benefit of paying only for the hours actually expended, but with the assurance that the total bill will not exceed the agreed upon amount. An alternative arrangement would be to pay a flat fee for each agreed upon segment of the litigation, such as $10,000 for the pleadings, $300,000 for discovery and $100,000 for trial. Under such an arrangement the client pays the agreed amount regardless of the hours expended or the results achieved. Such an arrangement can be disadvantageous to the party that makes an incorrect estimate of the time required. However, where the client and outside counsel have a long-term relationship, the shortfall often can be adjusted when determining the fee in the next engagement. Other alternatives to hourly billing include various merit-based arrangements currently being explored. They have in common the premises that the client should pay for the results delivered, not the time expended. In recent years, large corporate law firms have been utilizing contingent fee arrangements in several notable antitrust and patent cases. The Resolution Trust Corporation hired a Wall Street firm under a modified contingency fee agreement calling for a sharp escalation in the amount to be paid if a given threshold amount was recovered. Other firms have agreements with clients specifying identified parameters for "success" in litigation, calling for additional payments if the specified goals are acheived.