• Intellectual Property Litigation: Protecting IP Assets Through Patent Infringement Suits
  • May 1, 2003 | Author: Philip L. Judson
  • Law Firm: Winstead Sechrest & Minick P.C. - Austin Office
  • A high-tech start-up company, still bumping along on its first round of venture capital financing and the entrepreneurial spirit of its management and employees, just learned that the U.S. Patent Office has issued the patent it applied for two years ago. Better yet, the start-up already has been talking to several potential customers and venture partners under non-disclosure agreements that are anxiously waiting to see if the patent will issue for its new product. With this news, it sounds like it's time to start uncorking the champagne.

    But wait. After presenting the benefits of this revolutionary new product to several potential customers, the inventor of the product learns that a major prospective customer already has been using what sounds exactly like this new product. After making some inquiries, the inventor learns that a competitor, who hired away two software designers from the inventor, has been actively marketing and selling the product.

    Faced with this dilemma, what should the company do? It's obvious they have a legal problem, but they do not have access to inside general counsel to discuss their legal options. And the patent lawyer retained to procure the patent does not offer litigation services.

    Occurrences like this are common in the world of intellectual property, which can present a cost issue for small- and medium-sized businesses. Patent litigation is extremely expensive. For example, statistics for Texas published by the American Intellectual Property Law Association (AIPLA) in 2001 indicate that even a relatively small patent infringement suit (i.e., one with less than $1 million at risk) is likely to cost $500,000 to take through trial and an appeal. For a large suit (i.e., over $25 million at risk) the cost is five times as much -- $2.5 million. And an earlier report by the AIPLA estimates that for patent cases with very high exposure ($100 million or more) the median cost in 1999 was nearly $10 million.

    These costs would appear to put litigation out of reach for many small- to medium-sized businesses.

    However, there are options. One possible solution is to find a law firm that is willing to handle the case on a contingent fee basis, meaning the law firm earns fees only if the suit is successful and typically takes a negotiated percentage of the amount recovered.

    In addition, there are other aspects of this hypothetical case that need to be considered. First, the start-up's main objective is not recovery of damages but rather to stop the competitor from continuing to sell the infringing product. If a strong case can be made that the product sold by the competition infringes every element and at least one claim of the start-up's patent, there is a good chance the start-up can obtain a preliminary injunction against further infringement. This would shut the competitor down in its efforts to market the infringing product and send a message to other potential infringers that the start-up has valuable patent rights and is serious about enforcing them.

    Also, in our hypothetical case, it appears the competitor may have obtained access to the patented idea from the defecting designers at a time when the invention was still confidential. If the start-up took reasonable steps to ensure the confidentiality of the invention -- requiring its employees to sign confidentiality agreements and putting other reasonable security measures in place -- the invention may qualify for trade secret protection. If theft of a trade secret can be established, the start-up may be able to recover the profits already earned by the competitor's sale of the product even before the patent issued.

    Moreover, the conduct involved both by the competitor and the former employees of the start-up may justify an award of punitive damages. These facts could lead the court to award enhanced damages for the infringement after the patent issued and attorneys' fees, which are allowed under patent law "in exceptional cases." For this reason, after an investigation to determine actual infringement, litigation counsel may wish to send a letter to the infringers describing the infringement, referring to the patent number and demanding that they "cease and desist" from further infringement.

    Even considering all of these factors, the competitor's profits and potential royalty may not be large enough to support a pure contingent fee arrangement. But there might be enough to justify a blended fee arrangement, an increasingly common arrangement where the law firm would accept reduced hourly fees or a partial payment in company stock in exchange for some percentage of the ultimate monetary award, if any.

    Intellectual property litigation, particularly patent suits, can be expensive and complex. But intellectual property rights are increasingly valuable and deserving of protection. Most owners of intellectual property that has real value can and should find a feasible way to retain the legal help they need to enforce their rights.