Costs of Patent Litgation: Effects of America Invents Act

Seattle Intellectual Property Inn of CourtGroup 3 Presentation: Costs of LitigationJanuary 16, 2014

Introduction (Kevin Zeck)

Overview and Effect of pertinent new provisions of AIA (Isabella Fu)

Overview and Effect of various recently issued Local Patent Rules and Model Orders (Ben Byer)

Proposed changes to Federal Rules of Civil Procedure (Parker Folse)

Proposed Patent Reform Legislation (Dario Machleidt/Jeffrey Cox)

Questions and Answers

The Patent Litigation System:

Costs of Litigation & Reform of the System

Group 3Presenters: Ben Byer, Jeff Cox, Parker Folse, Isabella Fu, Dario Machliedt, and Kevin ZeckCosts of Patent LitigationPresenter: Kevin ZeckTypes of Costs: OverviewCosts to Patentee/InventorCosts to Obtain/Maintain Patent ProtectionLost ProfitsPrice erosionFailure to monetize (loss of expected royalties)Litigation Fees and CostsAttorneys FeesIndirect Costs (diverting resources from R&D, marketing, manufacturing, etc.)

Costs to Alleged InfringerLitigation Fees and CostsAttorneys FeesSettlement Value & Damages AwardsIndirect Costs (diverting resources from R&D, marketing, manufacturing, etc.)Types of Costs:Costs to Third Parties Involved in LitigationCosts to respond to subpoenas and informal requests for informationExternalities:Costs of enforcement borne by public (e.g., judicial resources consumed in effort to enforce patent, reduction in availability of alternative goods, etc.)Costs to reform system perceived to be broken

Are Costs Good or Bad?Depends on evaluative model

If deontological, costs are good (or at least justified) if necessary to secure the rights of inventors.

If utilitarian or consequentialist, then the patent system functions to incentivize progress (through invention)Costs are theoretically good up to point where marginal increase in progress is equal to marginal increase in cost to achieve progress Litigation CostsTypes of Litigation Costs:Attorneys FeesDocument Retention/Production CostsDepositionsConsultantsExpertsAlternative-Dispute-Resolution Related CostsMock Trials and HearingsCourt Fees and CostsAppeal Related CostsSettlement Value/Damages Awards

Litigation CostsLittle high-quality, publicly-available, quantitative information existsLitigation CostsBest Source on Quantitative Litigation Costs Available is AIPLA: Report of the Economic Survey

Conducted by AIPLA every two years since 1989Drawbacks: Self-Reporting, Small Sample Size (usu. a couple thousand responses, equaling roughly a 20% response rate), failure to catch many types of costs (e.g., judicial resources, indirect costs of litigation, etc.)

Other resources: PriceWaterhouseCoopers (focuses on damages), RPX (focuses on NPEs does not publicly provide all data), other private studies (Bessen and Meurer)

AIPLA Results: Sample Size and Response RateAIPLA SurveyQuestion Posed:Two part question (at least as far back as 1995) that asks, for different levels of value at risk:

What is your estimate of the total cost of a patent infringement suit through the end of discovery?

What is your estimate of the total cost of a patent infringement suit inclusive of discovery, motions, pretrial, trial, post-trial, and appeal?AIPLA Results: Median Costs1995 DataAIPLA Results: By Percentile1995 DataAIPLA Results: Median CostsLess than 1 million at RiskAIPLA Results: Median Costs Between 1 and 25 million at RiskAIPLA Results: Median Costs More than 25 million at RiskAIPLA Results: Median Costs Between 1 and 25 million at Risk Other IP LitigationGDP United States 1995 to 2013

Inflation Rate United States1995 to 2013Number of Suits

From PriceWaterhouseCoopers, 2013 Patent Litigation Study: Big Cases make headlines, while patent cases proliferate 6 (2013), available at http://www.pwc.com/en_US/us/forensic-services/publications/assets/2013-patent-litigation-study.pdfNumber of SuitsFactors:Economic ExpansionThe Information AgeNon-practicing Entities (RPX thinks this is a significant driver in the number of suits)Success stories (e.g., large verdicts)

Number of Suits per year has more than tripled since 1995, which would drive up demand for patent litigation legal servicesAggregate Economic Impact?Little research has been doneDrivers of Costs?Increased Suits/Demand for ServicesE-Discovery (Information Age)Markman v. Westview (mid-1990s)Promulgation of Local Patent RulesN.D. Cal. was first in 2000Increasingly Complex TechnologiesHigher-Stakes Litigation (Smart Phone Wars)Economic Expansion (general price increases)Looking ForwardPatent Applications, Issued Patents, and Patent Infringement Suits Appear to be Increasing at Record Paces

Technologies will continue to become more sophisticated

Recent case law (e.g., Apple v. Samsung Posner) suggests damages theories will need to be developed more rigorouslyLooking ForwardIncreased costs, however, are not necessarily bad

If marginal gains from patent protection exceed marginal costs to obtain/enforce, then cost levels are acceptable

Little real-world data exists comparing gains to costsBecause of this, some theorize that patent protection is unnecessary (Boldrin and Levine, 2013)Quality of life has substantially increased since 1995 (the Internet, smart phones, etc.) but whether this is the result of patent protection is unknown Comments/QuestionsCosts of Patent Litigation:Effects of America Invents ActIsabella FuMicrosoft CorporationAmerica Invents Act Relevant ProvisionsBeginning September 16, 2012, alleged infringers may challenge validity of patents through new inter partes, litigation-like proceedings in US Patent OfficeInter Partes Review (IPR) -- generally available if patent was issued over 9 months ago, and petitioner files request within 1 year of being sued for patent infringementCovered Business Method (CBM) Review -- available for patents claiming a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service; not for patent for technological inventionsA technological invention is one where the claimed subject matter as a whole recites a technological feature that is novel and unobvious over the prior art; and solves a technical problem using a technical solutionPost Grant Review (PGR) available for patents filed after March 16, 2013 (subject to first to file rule), and within 9 months of issuanceLots of useful information, including statistics at PTO website:http://www.uspto.gov/aia_implementation/index.jsp

Costs and TimelineIPR:5-6 months after petition is filed, PTO decides whether to institute trialPTO gives an indication of its reasoning and claim construction PTO aims for decision within 12 months of institutionTotal: 18 months to appealable decision, in theoryDistrict court litigation (other than ):Typically 9-12 months to get Markman rulingTotal: 24 months or longer to trial, and additional time for post-trial motions Cost of IPR - http://www.uspto.gov/web/offices/ac/qs/ope/fee031913.htmFiling fees: About $23,000 plus additional feels for claims over 15PTO: the Office estimates that the cost of preparing a petition for inter partes review would be $46,000. the Office estimates that the average inter partes review will have 6 motions, oppositions, and replies after institution.Very little discovery typically just depositions of expertsEffectively patent litigation minus fact discovery, damages discovery, and trialCost of district court litigationDiscovery infringement, validity, and damagesMarkman briefing, SJ briefing, discovery motionsInfringement, validity, and damages expertsTrial

Considerations IPR v. LitigationFor IPR, estoppel will apply for any type of prior art that could have been raised in an IPR (patents and printed publications)Need strong documentary evidence, without need for extensive discovery, to invalidateAlleged infringer can still raise subject matter (Section 101) and Section 112 defenses, as well as 102/103 arguments based on public useConsider whether the arguments will play better before PTO or judge/juryConsider whether broad claim language may be affected by PTO proceedingsConsider whether patent owner is prepared to expend significant sums early on in proceedings

Statistics Petitions and Litigation StaysFilings from September 16, 2012 through November 2013Over 500 IPR PetitionsOver 80 CBM Petitions1 PGR Petition (accidentally filed)About 80% of petitions result in institution, but only on minority of groundsHowever, challenges are instituted on most claims More likely to institute on anticipation than obviousnessOver 70% of motions to stay district court proceedings are ultimately successful Effect of Local Rules and ESI Orders on Costs of Patent LitigationBen ByerResearch conducted by Yeu-Yan Perng

dwt.com32Background: Local RulesLife without local patent rules chaos?Define needed contentionsOrganize selection of claim termsSchedule Markman briefing

33dwt.comAll:P infringementD prior art invaliditySome: D non-infringement 112 invalidity

33Background: Local Rules3429 District Courts LocalPatentRules.comW.D. Wash.E.D. Tex.N.D. Cal.

dwt.comBackground: E-Discovery OrdersTiming:Stage email v. non-emailCustodian Limit:5/10Search Term Limit:5/10Volume Limit:250 MBsDefine Claw BackDefine Inaccessible Info

35dwt.comBackground: E-Discovery Orders - OriginFed. Cir. Advisory Committee releasesSome district courts adoptW.D. Wash.E.D. Tex.Others

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I ESI

dwt.comWDNY, ND Ill.36Effect on Costs of Patent Litigation37dwt.comLocal Patent Rules Reduce Costs?ProsOrganize litigationConsOne size fits allHarder for early SJResultsStudy: Save 2.5 monthsNot sole solutionRocket Dockets dont use them

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dwt.comModel ESI Orders Applicable CasesTwo types: (1) all case and (2) patent cases onlyAre they needed in all patent cases?NPE suitsimbalanced costsCompetitor suitspage-by-page reviewN.D. Cal. says yes

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dwt.comPotentially save costs in all cases39Model ESI Orders Staging EmailLiability typical does not depend on emailAfter spending time and energy on non-emailLess needLess appetite

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dwt.comModel ESI Orders Custodian LimitHelpful to the extent it reduced volumeVolume key!Limited value if still need to search for non-email ESICauses issues with 30(b)(6) and trial witness

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dwt.comLimited value if still need to search for non-email ESIDoesnt truly reduce custodiansStill has some benefit because email more costly to review because of priv issues

41Model ESI Orders Search Term LimitLimited number of terms means courser searchEach term broaderTailored search may require many narrow termsDoes not lower costs without volume limits

42dwt.comModel ESI Orders Search Volume LimitStorage SizeW.D. of Wash.Document CountNone?

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dwt.comPotentially unfair to requesting partyIf term hits on PPT, may only get a few emails43Model ESI Orders SummaryKeys to Cost ReductionNegotiate with opposing counselReduce volumeStaging

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dwt.comNPE?Goal is pain not info?

44Proposed Changes to the Federal Rules of Civil Procedure

Parker FolseSUSMAN GODFREY, LLPCurrent Rule 37(e)(e) Failure to Provide Electronically Stored Information. Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.

Proposed Rule 37(e)(e) Failure to Preserve Discoverable Information.(1) Curative measures; sanctions. If a party failed to preserve discoverable information that should have been preserved in the anticipation or conduct of litigation, the court may:

(A) permit additional discovery, order curative measures, or order the party to pay the reasonable expenses, including attorneys fees, caused by the failure; and

(B) impose any sanction listed in Rule 37(b)(2)(A) or give an adverse-inference jury instruction, but only if the court finds that the partys actions:

(i) caused substantial prejudice in the litigation and were willful or in bad faith; or

(ii) irreparably deprived a party of any meaningful opportunity to present or defend against the claims in the litigation.(2) Factors to be considered in assessing a partys conduct. The court should consider all relevant factors in determining whether a party failed to preserve discoverable information that should have been preserved in the anticipation or conduct of litigation, and whether the failure was willful or in bad faith. The factors include:

(A) the extent to which the party was on notice that litigation was likely and that the information would be discoverable;(B) the reasonableness of the partys efforts to preserve the information;

(C) whether the party received a request to preserve information, whether the request was clear and reasonable, and whether the person who made it and the party consulted in good faith about the scope of preservation; (D) the proportionality of the preservation efforts to any anticipated or ongoing litigation; and

(E) whether the party timely sought the courts guidance on any unresolved disputes about preserving discoverable information.Other Proposed Changes to the Rules of Civil ProcedureShorten time for service of complaint and case management conferenceAdditional subjects for case management conference (preservation of ESI, Rule 502, discovery conferences)Earlier Rule 34 requests

Other Proposed ChangesNew presumptive limits:5 depositions per side6 hours per deposition15 interrogatories25 requests for admission (other than document authenticity)Rule 34 responses: state objections with specificity, state whether documents withheld, state reasonable date for productionOther Proposed ChangesRule 26(b)(1):Parties may obtain discovery regarding any nonprivileged matter that is relevant to any partys claim or defense and proportional to the needs of the case, considering the amount in controversy, the importance of the issues at stake in the action, the parties resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable.

Public CommentsProposals available at www.uscourts.govFederal RulemakingProposed Amendments Published for Public CommentComments due by February 15, 2014Three hearings Washington, D.C. (Nov 7, 2013), Phoenix (Jan 9, 2014), Dallas (Feb 7, 2014)After the public comment period, the Advisory Committees will decide whether to submit the proposed amendments to the Committee on Rules of Practice and Procedure. At this time, the Committee on Rules of Practice and Procedure has not approved these proposed amendments, except to authorize their publication for comment. The proposed amendments have not been submitted to or considered by the Judicial Conference or the Supreme Court.

The proposed amendments would become effective on December 1, 2015, if they are approved, with or without revision, by the relevant Advisory Committee, the Committee on Rules of Practice and Procedure, the Judicial Conference, and the Supreme Court, and if Congress does not act to defer, modify, or reject them. Pending Federal Legislation Dario Machleidt, Jeffrey Cox Status of Pending LegislationDec. 5, 2013House passed H.R. 3309 (Innovation Act), R. Goodlatte. 325 for to 91 against.Dec. 17, 2013Senate Committee on the Judiciary hearings entitled Protecting Small Business and Promoting Innovation by Limiting Patent Troll Abuse. Senate Bills referred to committeeS. 1720 (Patent Transparency and Improvements Act). Sen. Leahy (D-VT)S. 1013 (Patent Abuse Reduction Act). Sen. Cornyn (R-TX).S. 1612 (Patent Litigation Integrity Act). Sen. Hatch (R-UT). S. 866 (Patent Quality Improvement Act). Sen. Schumer (D-NY)The Innovation Act (H.R. 3309)Provisions Directed to Reducing the Costs of Patent LitigationFee shiftingHeightened pleading requirementsLimited discoveryCorporate disclosure requirementsEnd-user protectionAIA amendmentsSummary of Senate BillsS. 1720-Patent Transparency and Improvements ActCustomer stay provision; regulation of bad faith demand letters; transparency measures S. 1013-Patent Abuse Reduction Actfee shifting (no bond req.), heightened pleading requirements, discovery limitations, interested party joinderS. 1612-Patent Litigation Integrity ActFee shifting with bond requirementS. 866-Patent Quality Improvement ActExpansion of AIA Covered Business Method provision

Comparison of billsBillFee shiftingHeightened pleading standardsHeightened corporate disclosuresDiscovery limitationsEnd-user protections (Joinder, stays)AIA amendmentsRegulation of bad faith demand lettersHR 3309XXXXXXS. 1720XXXS. 1013XXXXS. 1612XS. 866XLooking ForwardNext StepsHearings by Senate Judiciary CommitteeResourcesBillsHR 3309Innovation Act: https://www.govtrack.us/congress/bills/113/hr3309/textS. 1720Patent Transparency and Improvements Act: http://www.leahy.senate.gov/download/patent-transparency-and-improvements-act-of-2013S. 1612Patent Litigation Integrity Act: http://www.hatch.senate.gov/public/_cache/files/8d6b7549-fe32-47cb-952f-b59ab110d97c/ALB13851.pdfS. 1013-Patent Abuse Reduction Act : http://www.cornyn.senate.gov/public/?a=Files.Serve&File_id=2d0600bf-6c00-4d9d-ad6e-d58130937c26S. 866-Patent Quality Improvement Act: http://www.gpo.gov/fdsys/pkg/BILLS-113s866is/pdf/BILLS-113s866is.pdfStatus informationhttp://www.judiciary.senate.gov/https://www.govtrack.us/congress/bills/