All at sea: patent licensing post-AIA
The bulk of patent disputes, whether through litigation or licensing campaigns, are settled with the accused infringer (defendant) agreeing to pay an amount significantly less than it would have cost to defend a patent litigation. In these settlements, the most sophisticated patent defendants discount the cost of litigation for the present value of money, and factor in numerous other externalities such as the time and focus business and engineering teams have lost by supporting the company’s litigation defence.
In a world where taking a patent litigation—even a clear winner—to final judgment could easily cost $1 million or more, those defence settlements can be very lucrative. Whether the patent owner is seeking $10,000 each from 200 entities, $100,000 each from 75 entities, or even $500,000 from 20 entities, the numbers quickly add up. And the profit margins are substantial, with all expenses outside of acquiring the patent portfolio paid only upon success in the form of a contingent fee.
The America Invents Act (AIA) significantly changed the patent licensing playing field. The AIA created several post-grant review proceedings—covered business method review, inter partes review and post-grant review. While there are some important differences between the various proceedings, their similarities are most important in understanding how they have altered patent licensing. Key similarities include:
- A rough cost of $250,000 to $300,000 in legal fees to prosecute a trial, as opposed to $1 million or more for a district court litigation;
- A typical time to resolution of about 16 months as opposed to several years in most district courts;
- Most district courts liberally grant litigation stays pending post-grant reviews; and
- A claim cancellation rate of about 85% of those claims upon which a post-grant proceeding is instituted.
Those similarities are a sea-change for valuing patent licensing programmes. As an initial matter, the cost of defence changes drastically when a defendant files, or credibly threatens, post-grant proceedings. A $1 million or more defence cost is cut by two-thirds or even three-quarters. So, the high end of a cost of defence settlement plummets from seven figures in a typical case to $500,000 at the most. And that is just the beginning.
Post-grant review proceedings have no relation to the defendant’s accused products. So, the drain on the time and attention of the defendant’s executives and engineers is all but erased. That negates a major non-economic cost of patent litigation. And whatever attention the defendant’s personnel must pay is over a much shorter period.
So, post-grant proceedings significantly reduce the defendant’s cost structure and overall risk. And the cost reduction is even more dramatic if the defendant can file a post-grant proceeding as part of a joint defence group. Even a three-member group could cut fees from $300,000 to $100,000. That has a major impact on the potential cost of a defence settlement. And the barrier to filing a post-grant proceeding quickly becomes negligible.
“Because there are few, if any, defendant-specific issues in post-grant proceedings, a larger group has a relatively small impact on the cost of post-grant proceedings.”
At the same time that the defendant’s risks are reduced, the patent owner’s risks increase significantly. With an 85% success rate in cancelling claims that are granted review, the defendant has much greater confidence in its chances of success than in most district courts.
Similarly, the patent owner has to account for a much more significant and immediate risk to its patent assets once post-grant proceedings are instituted. That risk is reflected in the fact that approximately 40% of all post-grant proceedings are settled in the months after review is sought and before the US Patent and Trademark Office (USPTO) decides whether to institute the review. Most patent owners do not want to be before the USPTO’s Patent Trial and Appeal Board. The risk to their patents is too great.
Furthermore, many plaintiffs’ counsel that typically handle district court litigation on a full or partial contingent fee are less willing (or not willing) to handle post-grant proceedings on a contingent basis. So in a best case the post-grant proceeding probably increases the contingent fee percentage because of the increased effort and risk by the plaintiff’s counsel. In a worst case the patent owner must pay its counsel up front—by the hour or on a fixed fee—to defend the post-grant proceedings. Either way, the post-grant proceedings cut further into the patent owner’s profit margins and increase its risk.
Finally, a patent owner that once could file concurrent cases against hundreds of defendants, and count on individual defences keeping defence costs high, loses much of that when a group of defendants joins together in filing post-grant proceedings. Because there are few, if any, defendant-specific issues in post-grant proceedings, a larger group has a relatively small impact on the cost of post-grant proceedings.
A patent owner that files against 100 defendants now risks that they all come together and file post-grant proceedings that might cost them only $5,000 to $10,000 over the year or so of the post-grant proceeding. That is an exceptionally low cost for stopping a patent claim, leading many patent owners to file much smaller batches of cases over time in the hope of avoiding their targets organising against them en masse.
Post-grant proceedings have created a much more complex environment for patent owners in terms of both valuing their patent assets and monetising them. At the same time post-grant proceedings have provided cost-rational mechanisms for challenging patents that a defendant believes to be invalid. This sea-change is new enough that the implications are not yet fully known, but it has reduced the overall value and cost of patent assets, and probably will continue to do so for the foreseeable future.
David Donoghue is a patent trial lawyer at and the deputy practice group leader of Holland & Knight’s intellectual property group. He can be contacted at: david.donoghue@hklaw.com
