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IP: Coase’s Theorem and stays pending re-examination

What to do when the judge says no.

It’s a common problem in patent litigation, at least for a defendant. Your company is sued on a patent that your lawyers say is invalid, and they have the prior art to prove it. But summary judgment has become an anachronism, at least with your judge, and you don’t want to pay millions just to get to a jury.

Under the circumstances, a re-examination proceeding—in which the Patent Office re-opens the examination of an issued patent based on certain categories of prior art—is starting to look like an attractive alternative. The costs are de minimis compared even to a couple months of federal litigation. And the Patent Office grants these petitions more than 90 percent of the time, with the vast majority of patent claims either cancelled or changed, either ending litigation or at least creating obstacles to the plaintiff’s chances of recovery. Of course, re-examination can take three years, and by that time you’d be as many millions into your federal litigation, perhaps even done with it. So, naturally, you plan on asking the court to stay your litigation pending the outcome of Patent Office proceedings.

But here’s the problem: Research shows your judge will deny the motion, holding instead that a delay of three years is too long for a plaintiff to wait to sue on a patent that the law—rightly or wrongly—presumes to be valid even over prior art that the Patent Office never considered. The plaintiff has chosen his forum, so goes the logic, and you just can’t kick him out of it because you prefer a different one.

Now what?

Take the law into your own hands. That’s right, use a little self-help. Forty years ago, Ronald Coase—the only law professor to earn a Nobel Prize—wrote in his landmark work, “The Problem of Social Cost,” that any right will be owned by the person who can use it most efficiently no matter to whom the right is assigned in the first place, assuming no (or sufficiently low) transaction costs. Economists call this the “Coase Theorem,” and it is relied on daily by governments and businesses worldwide. Of course, Coase wrote about substantive rights, like farm land, grazing cattle and railroad easements. So, how does Coase’s Theorem apply to procedural rights like a stay pending re-examination proceedings?

Let’s assume a patent troll sues an industry group using a contingency-fee law firm. The law firm needs cash to finance the case and doesn’t want to invest heavily in a loser. A defense group can offer the plaintiff a modest sum—made more so by cost sharing—to stipulate to a stay.

The plaintiff can’t complain because it doesn’t sell anything and, thus, doesn’t lose market share. Additionally, damages, assuming there are any, continue to accrue, making the deal pure gravy. Plaintiff’s counsel, too, benefits from a lowering of information costs—the Patent Office either kills the patent or makes it stronger through double examination, all on the cheap. If the plaintiff demands more than a modest price, the defendants can insist that the price be applied as an offset against any future settlement or judgment. Either way, if the price is, as it should be, less than a month’s worth of litigation costs, it’s still a very good deal.

But what if your judge denies even a stipulated motion for a stay? Not to worry. You can ensure against this risk, too, by an agreement whereby the plaintiff promises in advance to dismiss its case without prejudice pending the outcome of Patent Office proceedings while the defendants promise to protect the plaintiff’s future forum choice, toll the six-year statute of limitations on damages and forego any declaratory judgment action in the interim. That way, neither the plaintiff nor any defendant is worse off than had the court simply stayed the case.

The next time you want a stay pending re-examination proceedings, and your research shows that your judge is unlikely to give you one, try buying one. If re-examination really is the most efficient option for your case, then you should be able to buy a stay for a price that’s worth it.

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