Intellectual property enforcement 101
Intellectual property (IP) disputes are the badge of honor that most successful companies have to bear. As success has many fathers, so too do successful companies face many IP claims. Common disputes include:
- competitor-versus-competitor suits to block market access;
- “patent troll” suits, whereby a nonpracticing patentee will sue one or more companies, often an entire industry, usually for a payoff; and
- employment-related disputes, often alleging trade
To maximize your leverage on the offense and protect yourself on defense, here are some strategic considerations for these IP disputes that are likely to impact your company.
Offensive enforcement considerations
Patents: Developing a strong patent portfolio is a “quality not quantity” requirement. A single patent, with a single good claim, can do the job. The best patent claims cover your competitor’s product as it exists when it is shipped or sold or housed on their servers. Proving infringement becomes difficult if it is necessary to determine how customers ultimately use the product.
Worldwide protection is costly, so prioritize the United States, Europe (designating at least Germany and the Netherlands), and China, among other jurisdictions that may be important for your particular market. Consider getting patents issued by the German Patent Office, as opposed to the European Patent Office (EPO), because upcoming rule changes may strip the benefit of the German court system for patents issued from the EPO. Also consider getting “utility model” protection in Germany and China, which is a form of “baby patent” that can be obtained in weeks at low cost.
Enforcing in the United States: Protecting your U.S. market may be your top goal. Patent suits in the United States typically cost $2 million to $5 million, and may take two to four years to fully resolve, depending on the course of proceedings. Enforcement in the United States has become increasingly challenging with the advent of the Patent Trial and Appeal Board (PTAB), discussed below, which is a Patent Office tribunal for invalidating patents.
PTAB challenges create the likelihood that your enforcement case may be shelved for 18 months, which may be an intolerable delay. Although a risky strategy, seeking a preliminary injunction in court may be your best leverage. If you sue within three months of patent issuance, then district courts cannot stay a preliminary injunction request pending a PTAB challenge (for Post Grant Reviews, discussed below). If you are confident in your patent, this “guns blazing” approach may be your best option for keeping a competitor off the shelf. Otherwise, the delay of 18 months while the Patent Office reexamines the validity of your patent may be insufferable in the market.
Enforcing overseas: Enforcement options outside the United States should be part of every company’s toolkit. The “biggest bang for your IP buck” may be Germany. Winning in Germany is tantamount to winning in Europe, and most companies cannot afford to lose access to the European market. The time to trial in Germany is around a year, often as short as nine months.
The cost is on the order of $500,000, often less. The German court system has unique procedural rules that generally favor plaintiffs by limiting the enforcement trial to infringement questions and resolving validity in a separate trial, which usually lags behind. Essentially the first day in court is the trial itself, with none of the procedural exit points that are characteristic of U.S. proceedings, such as motions to dismiss, claim construction proceedings, or summary judgment. German courts that find infringement generally award injunctions, unlike the United States, which may simply award royalties. There are options for swift customs actions for seizing goods within days or weeks, including at trade shows. For cash-strapped companies that need maximum leverage over their opponents, Germany may be the best strategic option. Thus prioritize obtaining patent protection in Germany.
The Netherlands is also a key jurisdiction— get patents there. The port of Rotterdam is Europe’s shipping hub, so locking the doors on your competitor in the Netherlands may effectively shut down your competitor’s access to Europe.
Europe is on track to finally establish the Unified Patent Court (UPC), which will provide a single forum to enforce patents across most European jurisdictions. While this takes shape, preserve your options by obtaining patents through the national patent offices of particular countries (particularly Germany). The court systems of those individual countries may be more advantageous than the UPC. The consequence of losing in the UPC is a loss of all your rights across Europe in one fell swoop.
China is another important forum. It is a “wild card,” with the system generally more opaque and uncertain. Procuring and enforcing your IP in China can be extremely powerful, particularly if your adversary manufactures its products in China—in that situation, getting an injunction in China effectively gives you worldwide exclusivity. Trials are also swift (about a year), and low cost.
Threat letters: Be careful making IP infringement threats. An allegation with any particularity can expose you to “declaratory judgment jurisdiction,” meaning the recipient can sue you in its home court for casting a cloud over its business.
If you don’t have patents yet, trade secret protection may be sufficient. In some cases, trade secret protection may surpass patent protection, particularly in software fields where patent protection is difficult to obtain. Companies should make a deliberate decision on whether to rely on trade secret protection instead of patent protection, because filing a patent on your technology will undercut its trade secret status. Trade secret cases require an act of misappropriation, typically an employee taking secrets, or some kind of espionage. Documentation is key for establishing your possession of particular trade secrets, for showing access to and misappropriation of the secret, and for demonstrating that you maintained reasonable safeguards against disclosure.
Often overlooked as a form of IP protection, NDAs can provide the cheapest and most effective form of protection if done correctly. If you are heading into a critical negotiation where your key technology is being disclosed, customize the NDA and conduct yourself accordingly:
- Document the items being disclosed, preferably with numbered pages, marked confidential;
- Keep a duplicate copy of whatever is being given to the other side;
- If you disclose things orally, document the conversation with a follow-up email, describing what you conveyed;
- Specify the people who have access;
- Require the receiving party to document evidence of independent invention in the event of a dispute;
- State in the NDA that you will be irreparably harmed by breach, and state that injunctive relief would appropriate in the event of a breach;
- Specify your home court as the venue for disputes;
- Keep the things confidential that you say are confidential.
If you get these terms agreed to (and you may be pleasantly surprised what other people don’t read or push back on!), you may have superlative options for IP enforcement. The action can be brought as a breach of contract, so no patent is necessary. The contract may provide for injunctive relief, which patent protection might not even support. And the action can be brought without the delays and procedural hurdles of patent cases (such as PTAB challenges). So if you have an especially important negotiation where there is a credible risk of misappropriation, don’t just reach for the standard form NDA—customizing it to fit the situation may be your cheapest and most effective form of IP protection.
Defensive IP dispute strategy
Patent competitor suits
Competitor patents suits are the highest risk, because the patentee has a credible injunction threat. Evaluating PTAB challenges is a top priority. If you foresee the dispute, prepare your invalidity arguments in advance. This is particularly true in the medical devices and life sciences sector, where there is often a small and known universe of players. You cannot afford to rush a PTAB filing, and so conducting the prior art investigation and at least outlining the arguments is worthwhile to do prior to conflict.
Note that you may be paying for two proceedings at once. Filing a PTAB petition will cost on the order of $200,000 (explained below). The district court proceeding will likely continue at least until the PTAB issues an order to institute the proceeding, typically six months after filing the petition. Thus you must budget for both tracks, which may easily total $500,000 to $1 million before the court may decide to stay the litigation. Depending on how far along the litigation has progressed, the court may decline to put its work on hold pending the outcome of the PTAB proceeding, another reason to proactively prepare.
"Patent troll" suits
Suits from nonpracticing entities are a costly annoyance. Establish a policy about how to handle them, particularly whether to pay out early or to fight to the end. Companies will develop a reputation for settling or fighting, so an early settlement may invite future litigation.
Be wary of joint defense groups. It is attractive to sign onto a larger group to defray costs across multiple defendants. However, if a codefendant botches a PTAB challenge, the estoppel (see below) will likely apply to you, as being “in privity” with the petitioner. And if the defendant who has been taking the lead in the litigation decides to settle, you may be left in a scramble.
The PTAB has become a major player in patent litigation since its creation in 2011. The PTAB resolves only patent validity and does not hear infringement disputes. These proceedings were enacted under the basic belief that it makes more sense to have a panel of specialists at the Patent Office, rather than a lay jury, hear disputes about whether prior art invalidates a patent. The PTAB has strict deadlines for resolving these disputes; from the filing of a petition to ultimate disposition takes about 18 months (i.e., roughly half the time of court trials). Costs through disposition typically run about $200,000 to $500,000. These Patent Office challenges are far less intrusive on a company’s operations because of the limited scope of discovery.
PTAB trials are popular with defendants. Parties to patent disputes now routinely consider:
- Is a PTAB challenge appropriate for the case, considering the limitations on the scope of the Patent Office’s review?
- Which among the PTAB proceedings (Covered Business Method, Inter Partes Review, and Post-Grant Review, each with their idiosyncrasies) is the appropriate procedural vehicle?
- What is the best timing for filing a PTAB petition?
- Whether to move to stay the district court litigation pending the PTAB proceedings; and
- How to harmonize positions in the PTAB and district court, where divergent goals may apply.
Filing a PTAB challenge is a risky move. It is essential to “look before you leap.” Prominent considerations include:
Cost: PTAB litigation is immediately costly. As opposed to district court litigation, where costs are low initially and steadily crescendo, PTAB litigation is the inverse. For the petitioner, most of the costs are incurred immediately. These costs include conducting a thorough prior art search (do NOT skimp on this!), paying an expert to prepare an invalidity declaration, paying the lawyers to draft the petition, and paying a stiff PTO filing fee (typically $25,000 to $40,000 per patent). Thus immediate expenses are typically on the order of $200,000 to file a petition. Sinking this much money into litigation on Day 1 may harden you for battle rather than facilitate settlement.
Noninstitution: The Patent Office declines to hear about 25 percent of cases filed. This decision will occur about six months after the petition is filed. Although formal “estoppel” (discussed below) does not result from a noninstitution decision, significant negative consequences follow. The patent owner will certainly tell the district court judge that the specialists at the Patent Office found no reasonable likelihood that the patent is invalid. The judge may allow this argument to be made to the jury, which is highly prejudicial but sometimes allowed. Defendants will not know until the eve of trial if the patentee will be allowed to make this argument.
Estoppel: Challengers are “estopped” from having two bites at the apple, by trying to invalidate patents in the Patent Office and then if unsuccessful, reasserting these arguments in court. This rule differs from that in Europe, where challengers may file an “opposition” in the European Patent Office and if unsuccessful, relitigate these same issues in court. The U.S. rule of estoppel forces accused infringers to pick the forum where they are going to make their invalidity arguments—often the instinct is to give this authority to the specialists at the PTAB rather than a lay jury. However, given the limited scope of PTAB proceedings, certain arguments (such as prior use, for example), may play better in district court where live witnesses have a bigger role. The different PTAB proceedings have different levels of estoppel, with Covered Business Method (CBM) being a low-risk option and Post Grant Review (PGR) the highest risk; in the latter, you will have almost no validity case preserved in court if you lose at the PTAB (or if you are found to be “in privity” with a losing petitioner).
Inflexible positions: Challengers at the PTAB have to make all their arguments in the initial petition. This is a handicap relative to district court. At the time of the initial petition, the claim construction will be unresolved, so it may be uncertain what prior art applies. Furthermore, the priority date of the patent being challenged may be unknown, meaning that certain prior art may be later disqualified. Generally these fundamental issues remain unresolved until the merits hearing. If the PTAB “moves the goalposts” unexpectedly, then the entire basis of the petition may be undercut. By contrast, in court parties have more latitude to adapt to changes in claim construction, priority dates, etc.
Thus, PTAB challenges should only be launched after careful considerations of potential pitfalls, and after determining if your defense would be better presented in court.
Employment and trade secret disputes
Some of the ugliest litigation arises from trade secrets. Preventive measures include:
- Establish a screening process for new employees, particularly those who just departed from
- Require employees to scrub their computers, Dropbox accounts, Gmail accounts, memory sticks, , of any and all competitor information and to sign an attestation documenting their efforts to do so.
- If you receive confidential materials through an NDA, keep that information sequestered and destroy it (assuming this is permissible) after conclusion of the of the collaboration.
- If competitor confidences do make it into your system, act aggressively to sequester that information, including the tainted Consider excluding them from certain product teams.
- Ensure your development documentation is preserved, so that if accused of misappropriation you can establish independent development. Generate archive copies of your inventive work, and lock it away.
Trade secret cases are often more intrusive, costly, and vitriolic than patent cases because discovery may properly extend to dozens
of computers, email collections, texts, and even the slack space on hard drives, etc., with overtones of theft. Thus reasonable preventive measures should be structured into your organization.
IP disputes can make or break companies. Before litigation, have a litigation plan. From both an offensive and defensive posture, preparing for likely disputes will give you the advantage for defusing, avoiding, or flat-out winning the fight of your company’s life.
Steven C. Carlson, Managing Partner, Silicon Valley Office, Kasowitz Benson Torres LLP