An Inventor’s Guide to Enforcing Patents on a Budget
March 11, 2020
“Just because lawyers agree to take your case on contingency does not mean that litigating and enforcing patents costs you nothing out of pocket. There are other litigation expenses that must be accounted for, and it is usually your responsibility to pay for those up front.”
Patent litigation and enforcing patents can be cost prohibitive for many individual inventors and smaller businesses. Hourly rates at large firms may be out of reach for those with “not so deep pockets,” and most litigation funding companies either avoid patent litigation altogether or require a case valuation in the tens of millions of dollars. So, if you think your patent rights are being infringed, what enforcement options do you realistically have?
Contingency Fee Representation
A contingency legal fee is “contingent” on the outcome of your patent litigation. Rather than charging an hourly fee, lawyers representing you on contingency set their fee as a percentage of any litigation settlement or judgment. This percentage must be “reasonable” in accordance with factors such as those listed in Rule 1.5(a) of the American Bar Association’s Model Rules of Professional Conduct (“ABA Model Rules”). This will reduce your overall financial risk since the lawyers only get paid if the patent litigation is successful.
However, just because lawyers agree to take your case on contingency does not mean that litigating costs you nothing out of pocket. There are other litigation expenses that must be accounted for, and it is usually your responsibility to pay for those up front. Most of these expenses are predictable and manageable (e.g., filing fees, travel expenses, or deposition costs), especially during the initial phase of a patent litigation through claim construction. But once expert discovery begins, necessary infringement, validity, and damages experts can increase litigation costs considerably. The hourly rates for such experts vary widely depending on how much experience they have in the relevant industry, their educational background, and their experience testifying in patent litigations. So be sure to interview a good number of candidates before retaining; the most expensive expert is not necessarily the best one for your case.
Local counsel fees are another litigation expense to be mindful of. Most district courts require a local attorney who is admitted to their court and practices nearby to appear on your behalf. Unless your contingency lawyers (i.e., your lead counsel) qualify as local counsel per district court rules, separate local counsel and their hourly rates will be required. It is, therefore, critical that you communicate your expectations with local counsel up front to avoid sticker shock on monthly invoices. Negotiate hourly rates, determine if more affordable associates or paralegals can handle certain tasks, and confirm that local counsel will defer to and take direction from your lead counsel. Local counsel can be a highly beneficial resource, so finding the proper balance between managing your budget and enabling productive collaboration between your lead and local attorneys is important. But if you become dissatisfied for whatever reason, ask your lead counsel to search for and provide local counsel alternatives sooner rather than later.
An important aspect of a contingency agreement is whether these litigation expenses are deducted from any settlement or judgement before or after the contingent fee is calculated. Depending on the eventual litigation recovery and contingency percentage, this may have real financial consequence. Although it may seem like a foregone conclusion that contingent fees are based on gross recovery, meaning litigation expenses are only deducted from a settlement or judgment award after disbursing your lawyer’s fee percentage, ethical rules governing attorney conduct contemplate either scenario. For example, Rule 1.5(c) in the ABA Model Rules provides that a contingent fee agreement must specify “whether such expenses are to be deducted before or after the contingent fee is calculated.” Certainly, if your agreement provides for litigation-related expenses to be deducted from a settlement or judgment first and before calculating the contingent fee, your lawyers will have additional financial incentive to closely manage those expenses.
In sum, a contingency agreement shifts financial risk even though other litigation expenses may remain your responsibility. And even if the eventual contingent fee ends up being greater than it would have under a straight hourly rate billing arrangement, the contingent fee should always be “reasonable” in accordance with applicable attorney rules of ethics.
Patent Assertion Entities
A patent assertion entity (PAE) is a company that acquires patents from third parties and tries to generate revenue by asserting them against alleged infringers. A patent assertion entity may also be referred to as a “non-practicing entity” or “NPE” because it does not practice the patented inventions it acquires or produce consumer goods or services generally.
A PAE acquires your patents for purposes of monetization through licensing, litigation, or sale to third parties. In exchange for assigning your patents to the PAE, you are entitled to a percentage of any monetization revenue. It is important to understand, however, that this percentage is not subject to the same “reasonableness” ethical standard that governs lawyer contingent fees. The PAE is not your lawyer, so the PAE can keep whatever percentage of settlements, judgements, licensing fees, or patent sales that you contractually agree to.
Because you no longer own or otherwise retain enforcement rights after assigning your patents to the PAE, it controls all strategic decision-making, including when and whether to settle cases. This is in stark contrast to retaining lawyers on contingency which enables you to remain the patent owner with definitive authority over the course of litigation and settlement decisions.
Assigning your patents to a PAE is no trivial matter, so make sure you ask the right questions before doing so. For example:
How many attorneys will be responsible for monetizing your patents?
How many patents does the PAE currently own?
How many patents has the PAE licensed?
Has the PAE ever sold/assigned patents to third parties without imposing future revenue sharing requirements?
What is the average revenue per patent licensed or sold?
What is the financial health of the PAE?
Will you be granted a non-exclusive license to practice the patents after assignment?
Will you have a reversionary right to the patents if the PAE goes bankrupt or ceases to assert the patents?
Getting as much information about a PAE’s business practices can help you gain confidence that your interests and the actions of the PAE will be better aligned.
Although you relinquish all control over your patents and how they are monetized post-assignment to a PAE, there are some advantages over contingency representation. First, you will not be liable for any enforcement expenses: Local counsel fees, expert witness fees, and other expenses are all handled by the PAE. Second, you will avoid the publicity of being a named plaintiff in patent litigations. This may be important depending on your business and who you anticipate the PAE will sue for infringement. And third, you are not liable for litigation sanctions that may be imposed against the PAE for whatever reason.
Overall, monetizing your patents by assigning them to a PAE can be an attractive option for those who want to avoid all costs of litigation and patent enforcement generally. Although you may not agree with every licensing and litigation decision that a PAE makes, working with a PAE requires no financial commitment and insulates you from the stress and procedural obligations of fighting in court.
Finally, there may be circumstances – albeit rare – in which you are comfortable filing a patent litigation on your own. This is called proceeding “pro se.” You can always represent yourself in district court without an attorney and will not be subject to local counsel requirements.
Setting aside the complexity of patent litigation, you should be aware that proceeding pro se does not mean that you cannot obtain legal advice. For example, suppose opposing counsel files an early motion to dismiss your case and you have no idea how to oppose. Instead of relinquishing your pro se status by retaining lawyers to appear on your behalf (which you may have trouble affording for the duration of a litigation), you could retain a lawyer for the limited purpose of providing guidance or helping draft your opposition brief. If you are capable of handling other case deadlines and hearings on your own, such targeted and narrowly defined legal assistance can help you maintain strict control over your legal fees. And though it varies from one court to the next, many do not view drafting assistance for pro se plaintiffs unfavorably It is largely encouraged, however, that such drafting assistance be disclosed to the court and opposing counsel.
Ensure You’re Well-Equipped
Enforcing your patent rights can be an expensive endeavor, but affordable options do exist. Retaining lawyers on contingency enables you to maintain control over a litigation and related settlement decisions but may subject you to additional expenses. Assigning your patents to a PAE relinquishes all of your patent rights and your percentage of monetization revenue is not governed by any “reasonableness” ethical standard. But it can save you more money up front than a contingency arrangement, and you largely avoid the publicity and requirements of litigations involving your assigned patents. Finally, proceeding pro se is usually only attractive if you have a legal background and familiarity with patent litigation. But in theory, you would be able to maintain strict control of any narrowly defined legal assistance and ultimately keep 100% of any settlement or judgement. If you understand the relevant distinctions between these options in view of your own financial risk tolerance and goals, you should be well-equipped to make appropriate decisions for asserting your patents against infringers.