Patent Litigation Survey 2010: An Unexpected Turn

Judging by the results of the 2010 edition of our annual Patent Litigation Survey, you might not guess that the number of patent suits filed in federal court fell last year. According to PricewaterhouseCoopers, though, that's just what happened: The number of new infringement claims brought in 2009 was down by 6 percent, compared to the 2008 total.

But while there may have been less litigation work to go around overall, there was certainly plenty to keep the top law firms in our rankings busy. Consider Fish & Richardson, which snagged the top spot on our overall list again. In 2008 Fish handled a combined total (plaintiffs plus defense) of 77 cases. In 2009, the firm's total shot up to 99 cases—a 29 percent increase. Second-place finisher Kirkland & Ellis saw its docket surge from 57 cases in 2008 to 72 in 2009, a 26 percent jump.

All five of the top firms on the overall list—Jones Day, Quinn Emanuel, Urquhart & Sullivan, and Howrey are the others— benefited from one patent litigation trend that just won't quit: the ongoing flood of suits filed by nonpracticing entities (NPEs), or "patent trolls." In fact, for several of the top firms, defending against NPEs accounted for more than half of their overall caseload.

But while NPEs are responsible for many patent suits, disputes between competing companies—which tend to drag on longer and generate more in fees than "troll" suits—still make up the core of many top firms' litigation business. The smartphone wars that flared up this year between Apple Inc. and rivals like Nokia Corporation and HTC Corporation, for example, may ultimately produce more fees for the firms representing them (Kirkland & Ellis and Wilmer Cutler Pickering Hale and Dorr, among others) than many patent troll cases combined.

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So the business of patent litigation is fundamentally solid. For further proof, consider data compiled by PricewaterhouseCoopers that shows damages awards in patent cases reaching a median of $9.3 million in 2009—not far off the all-time high of $10.6 million in 2001.

Of course, a few extraordinary awards helped push up last year's median, including i4i Inc.'s $290 million win against Microsoft Corporation, which the software giant hopes the U.S. Supreme Court will consider, and the even more eye-popping $1.8 billion awarded to Johnson & Johnson subsidiary Centocor Ortho Biotech Inc. for having the patent on its antiarthritis drug Humira infringed by Abbott Laboratories. Large awards like those don't just nudge the median higher. They grab the attention of everyone involved in patent litigation—including judges, who have always been more conservative than juries in awarding damages. Now—in an emerging trend with major implications for the firms that rely on patent cases—those judges are moving to limit the size of awards by examining more closely the economic models on which they are based.

The issue turns largely on royalty calculations. While they are often at the heart of patent damages cases these days, that wasn't always so. As recently as the 1980s, patent litigation—and the damages it produced—mostly involved battles between rivals trying to persuade judges and juries of the profits they'd lost as a result of infringement.

Today, the lost-profits argument is less prevalent than it once was. According to PricewaterhouseCoopers, lost profits accounted for 39 percent of damages awards in patent cases from 1995 through 2001; the figure dropped to 28 percent for awards granted between 2002 and 2009. That's partly explained by the rise of nonpracticing entities as a force in the patent litigation arena. Another factor: the increasing willingness of operating companies to try to cash in, via lawsuits and licensing, on patents that aren't generating revenue otherwise.

The heavy reliance on royalty calculations in figuring damages has prompted judges to apply particular scrutiny to the so-called entire market value rule, which allows plaintiffs experts to claim damages for a patented invention based on the overall value of an infringing product, even if the patent at issue only covers a small piece of the product in question. And one judge in particular appears to be having a major influence in this area: Chief Judge Randall Rader of the U.S. Court of Appeals for the Federal Circuit.

In 2009, before becoming chief judge, Rader sat "by designation" on three district court trials, two in Eastern Texas, the other in New York's Southern District. It's not unusual for appellate judges to spend time in trial courts, but many observers saw Rader's decision to visit East Texas—still considered a plaintiff-friendly venue—as telling.

In one of the Texas cases, Rader threw out expert testimony backing patent-holding plaintiff IP Innovation, saying that the expert's report "improperly inflates" damages by using "irrelevant or unreliable evidence." In the New York case, he sliced a $184 million award to Cornell University to $53 million, finding the royalty base on which the initial award was calculated too broad.

Rader issued both rulings in March 2009, and patent practitioners say his apparent willingness to get tough on damages has already started to filter down into district courts. "There's a noticeable effect on the high-tech side," says McDermott Will & Emery partner Yar Chaikovsky. "The 'entire market value' rule is applied much more vigorously. It's causing plaintiffs to search for other methods, and be much more creative in their damage theories."

As if to drive the point home, the Federal Circuit issued an important damages ruling in September 2009 in connection with a long-running patent dispute between Alcatel-Lucent and Microsoft.

After a San Diego jury found that the "date picker" function on Microsoft's Outlook calendar infringed an Alcatel-Lucent patent, the damages arguments between the parties couldn't have diverged more wildly. Citing the entire market value rule, Alcatel-Lucent argued that it should be paid 8 percent of relevant Outlook sales—$561 million—while Microsoft argued that the damages award should be no higher than $6 million because the patent in question covered a small portion of Outlook's overall functionality. The jury ultimately awarded Alcatel-Lucent $358 million.

On appeal, Microsoft repeated its argument that an award based on total Outlook sales was nonsensical—an argument the Federal Circuit embraced while affirming the lower court's finding of infringement. In February the Federal Circuit used similar logic in tossing out a 12.5 percent royalty rate awarded in ResQNet.com, Inc. v. Lansa, Inc.

While rulings that limit damages hardly spell the end of high-stakes patent cases, litigators say that such decisions do make it harder for a patent plaintiff to make an intimidating damages demand. "I think now you're going to have to come up with a tighter case, if you're going to make that kind of claim," says Hopkins Guy, a patent litigator at Orrick, Herrington & Sutcliffe.

It's worth noting that a year ago, few would have guessed that the most meaningful changes shaping patent law at the moment would involve judges reining in damages calculations. Most people were focused instead on patent reform legislation and, as time passed, on how the Supreme Court would rule in the Bilski case. Ultimately, the Court's ruling changed little about patent law or litigation.

The Bilski opinion did ensure that patent disputes—including those in such controversial areas as software and "business methods"—will continue to flare up. And when they do, there will still be substantial sums of money at stake, and, according to Ronald Schutz, head of IP litigation at Robins, Kaplan, Miller & Ciresi, defendants who are often ready to fight harder than ever. "The amount of money that defendants are willing to spend on defending an NPE litigation these days is mind-boggling," says Schutz, who busied himself mostly with contingency-fee plaintiffs work in 2009.

Faced with a steady docket of patent litigations—and with no serious changes to damage calculations apparently coming via legislative patent reform anytime soon—defendants may feel that fighting is all they can do. •