Contributed by FindLaw Staff

When a company receives a cease-and-desist letter, the most dreaded question that intellectual property counsel must answer is, "What is this patent suit going to cost us?" While a traditional cost-benefit analysis may be used to calculate the settlement value of a case, the evolution of unorthodox twists in traditional patent litigation may affect your answer and change the valuation of the case and the possibility of settling at an early stage.

Traditional Cost-Benefit Analysis

Traditional cost-benefit analysis often involves a mathematical formula that factors in all the outcomes, the probability of each outcome, as well as the value of each outcome. The drawback to this approach is that reducing the nuances and uncertainties of a case to a single number can sometimes lend a false sense of precision to the process.

Potential outcomes. A basic calculation will look at wins and losses. A more sophisticated analysis will include counterclaims and potential enhancements of damages.

Probabilities of outcomes. Assigning probabilities to outcomes is a subjective assessment that experienced attorneys will have to make. Hopefully, these are tied to the facts and laws of case. While counsel should try to stick with those results that are reasonably likely, the problem in patent litigation is that the unlikely can often happen. Lighting does strike, especially in patent litigation in the district or appellate court level, so that separating the very, very unlikely from the sort of unlikely may be a difficult judgment call to make.

Values of outcomes. For each outcome, take the net award or liability and deduct the costs to arrive at that outcome. This figure is usually in dollars; however, there may be circumstances where money is not an adequate proxy for the value of a particular outcome. Additional refinements to this figure may include factoring the time value of money or the relative risk aversion of a client.

New Twists on Patent Litigation

Non-Traditional Plaintiffs. One of the new twists on patent litigation is the emergence of non-traditional plaintiffs with patent litigation as a stand-alone business model. These plaintiffs may either be independent companies or divisions of firms specializing in addressing the licensing of a particular patent portfolio. Examples of this include the Lemelson model, academic institutions, and traditional businesses. Another model for the non-traditional plaintiff is a firm that out-sources or sells its intellectual property to another firm whose business is assembling and acquiring patent portfolios to enforce.

Non-traditional portfolios. In additional to non-traditional plaintiffs, another twist involves non-traditional patent portfolios. When the number of patents in a portfolio in a particular industry reaches a certain size, the task of any defendant to respond to a cease-and-desist letter grows increasingly complicated. An example is Lemelson, who holds hundreds of patents, many of which are focused in particular subject areas, that are collectively a very significant asset for a patent plaintiff.

Non-traditional defendants. As companies focus more on the business of licensing, some attention has been paid to where the greatest profit can be gained. Again, Lemelson can serve as a model. Instead of attacking barcode manufacturers as an initial matter, Lemelson decided that going after the downstream user or retailer with a method of use claim was more profitable. The strategy of going after a different level of the production chain will depend on who's out there and how deep the pockets may be.

35 USC 271(g) raises another issue. The Process Patent Amendment Act of 1988 addresses the importation, sale or use of goods made with processes that would infringe a US patent. While the real impetus behind the statute was importation, what has become an interesting development in recent years is that 271(g) can actually turn a user or seller of a product that is not itself patented, but was made with a patented method, into an infringer even if the product was manufactured domestically. However, the authorities are split on this interpretation. Still, this is something to keep in mind as patent plaintiffs are looking for different targets. Different levels of the distribution chain can be reached in a number of ways.

Recurring encounters. Because, it may be more likely today that a particular plaintiff, defendant or their lawyers may encounter each other after they have resolved their the present patent dispute, a decision of how to resolve today's dispute may affect how you can negotiate the next resolution, if you can at all. Multiple runs through the same situation or the same game is one of the motivations behind game theory which tries to take into account of other players and their impact going forward.

Multiple defendants. Coordination among defendants presents another issue in both traditional and non-traditional patent litigation. Where you have an increasing frequency of industry-wide pools of defendants or potential defendants, this issue is going to be part of everyone's practice. For the plaintiff, driving a wedge between multiple defendants may allow the patent owner to use settlement funds from smaller infringers to bankroll litigation against larger infringers.

In addition, in the joint defense scenario, one of the first questions is whether communication among defendants is possible or practical. If it is, the typical array of joint defense issues will come up, including privilege and confidentiality issues during discovery. Still, companies must maintain their independence, including their ability to settle independently, which is important from the antitrust perspective and a business perspective.

To the extent that communication among defendants is not possible or practical, defendants can face what is traditionally called the prisoners' dilemma. Reaching a solution to this problem on traditional decision theory can be very complicated and would not normally lead to the optimal outcome. In the patent litigation scenario, this is seen where the first defendant to settle funds litigation against the next defendant.

Conclusion

The increase in the number of non-traditional plaintiffs, defendants and portfolios has complicated what to do with patent disputes as a plaintiff or defendant. And, whatever valuation methodology you use – mathematical formula or intuitive approach – it is necessary to take into account these uncertainties, the increasing complexity and the likelihood of multiple encounters with the same adversary, when you decide which strategies to adopt in your patent disputes.