Identity crisis: The rise in IP litigation

It's arguably the intellectual property of a company that makes up its true worth, which means a heightened focus in litigation

The value of a business is typically measured in dollar and cents, but it's arguably the intellectual property of a company that makes up its true worth. And while patent and intellectual property dispute cases have been commonplace since the 1500's, they’ve received heightened focus over the last two decades. This is due in part to the rise of non-practicing entities (NPEs), but there is something to be said for the complexity of the patents involved in running businesses.

The Wright brothers may have been put to task over the patents in the original airplane for example, but the patents in a Boeing 787 Dreamliner are more complicated and prolific than anything litigated in the brothers’ lifetimes. Add to this the fact that most companies now rely heavily on a revolving stable of software-based innovation and it's easy to understand why IP battles seem so much more commonplace in the 21st century.

Non-practicing entities

Although there have been a number of developing trends in intellectual property law over the last decade, legal threat from NPEs has remained arguably the most consistent. The 2013 Crowell and Moring Litigation Forecast estimates that patent lawsuits filed by NPEs jumped again from 3,025 to an estimated 3,466 in 2013.

As far as trends go, NPEs toe the line between frequent and constant nuisance. But while the volume of lawsuits brought by NPEs continues to increase, that is not the only upward trend. Overall settlement rates are also up, and venue selection, strategy and regulatory attitudes towards NPEs are also changing.

“Where we’ve seen these cases going, instead of bringing one lawsuit, [NPEs] will bring 30 lawsuits, knowing that they can settle each for less than the cost of defense and still turn that into a profitable business,” says Andy Culbert, associate general counsel at Microsoft.

In addition to more prolific filings, selecting a venue with judicial records that favor patentees is another strategy that NPEs employ. “We often find ourselves litigating patent cases in Delaware, Texas or California most frequently,” Culbert says.

Certainly, NPEs are not the only challenge companies must withstand in the intellectual property space, but the level of exposure the subject gets in courtrooms and in the media often makes it the basis for broader criticism of the patent system.

“There is a clear increase in the amount of assertions and activity that NPEs have been involved in and it has clearly grown over the last decade,” says Manny Schecter, chief patent counsel and associate general counsel at IBM. “That's one of the already established mega-trends that we’re seeing. We have more NPE activity, we have the rise of eastern district of Texas as their favorite jurisdiction, and we have a significant increase in the amount of multi-defendant litigation. All of these things go together and clearly have formed the basis for much of the scrutiny of the patent system.”

Though NPEs may tend to favor certain tactics and specific court jurisdictions, Richard Vary, head of litigation at Nokia, says that advantage may not last.

“What we have seen is a general reaction of court and regulators. For a long time we had quite pro-patentee courts in some jurisdictions and what we’re starting to see now is as regulators become involved, and people continue to talk about intellectual property, specifically patent cases, regulators are starting to take notice and react, and so certain areas are starting to become less favorable to patentees and perhaps more favorable to defendants,” Vary explains.

Increased focus on IP

While the NPE trend may be the most prevalent source of intellectual property frustration for organizations, growing awareness about the value of intellectual property is also driving its priority at the business level.

“Whether the awareness is increasing because intellectual property has become more important, or it's become more important because the awareness is increasing, is a chicken and the egg kind of thing. But they certainly go hand in hand,” Schecter says. And one recent event gives perspective to the increasing value and attention that intellectual property now receives, specifically as it relates to patents.

Google acquired Motorola in 2012 for $12.5 billion, and in January 2014 Google sold the Motorola name to Lenovo for roughly $2.91 billion, while keeping most of the patents for itself. While fundamental math would hold that Google lost a considerable amount in this deal, the value it retained in patents more than makes up for the difference.

Don Fancher, principal and national IP services leader for Deloitte Financial Advisory Services, says that knowledge of patent value has always existed in some corporations, but has begun to spread at least in part due to public awareness generated by media coverage.

“First of all, clearly your high level technology companies and manufacturing companies, the IBMs and the Texas Instruments, have always known the value of patents….What is different in the last five to 10 years is the perception of that value and the broadening of that understanding outside of the research and development component of an organization,” Fancher says. “It's become something that investors are now aware of and boards of directors are now aware of it. The C-suite is now being pressured to find more value through intellectual property and as a result you see a much greater level of attention being placed on it.”

Strategies for success

While NPEs and increasing awareness from the board are concerns for companies, with the right organizational dynamics and consultation, these challenges are surmountable. Building a team is the first step towards achieving that goal.

“We think it's important to have a team of intellectual property lawyers in house, it is possible to completely outsource litigation, but I don't think that produces the best result,” Vary explains. “Within Nokia, we’ve tried to build a small team of highly experienced highly skilled intellectual property litigators…we can have up to 200 cases pending against us at any one period of time so managing that sort of caseload, it requires a team that communicates well and works well together.”

But when it isn't cost effective or possible to rely on an internal resource to help with a case, Vary says that the priority of skills should start with where the attorney is located.

“Patent litigation really depends on area, so patent litigation in Germany, for example, is very different from patent litigation in France, the U.K. and the United States. The approach of having one centralized patent litigation team somewhere in the world, doesn't produce good results…find the best people in the local jurisdiction even if they are not connected to your preferred international or M&A firm,” Vary advises.

The proper selection of counsel is essential not only in trials against NPEs but also in legitimate patent cases against competitors. In some industries, however, the concept of competitors in not always clear-cut.

“Increasingly parties are not just competitors, they’re often partners and suppliers and buyers and are in healthy competition.” Schechter says, “With an NPE, one is usually not as worried about one's business relationship, usually they’re just hoping they won't have to feed them again. With a competitor, you have a business relationship; sometimes a very complex business relationship, usually one wants that relationship to survive... so I think one thing that often goes overlooked is how that relationship colors possible action. I would say that is a powerful incentive for considering alternatives dispute resolution like mediation.”

With cases that are expensive and time consuming, this notion of evaluating all options before going to court is certainly one that companies will want to bear in mind.

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