Keep The ‘Home Court’ Advantage And Reduce The Cost Of IP Litigation

Intellectual property litigation is expensive. According to the most recent survey numbers released by the American Intellectual Property Law Association, the cost of litigating a single patent through trial, where less than $25 million is at stake, is over $2 million.

If more than $25 million is at stake, the cost of litigation soars above $4 million. The numbers for trade secret, copyright and trademark cases, although not quite as high, are also daunting.

IP litigation is also time consuming and disruptive. Cases can take several years to resolve through trial or appeal, and can distract management and technical personnel from day-to-day business affairs. The company can also experience disruption to its relationships with customers, suppliers and others as a result of their concerns over the lawsuit.

Nevertheless, IP litigation continues to explode across the United States, as companies seek to enforce their intellectual property rights against others in an increasingly competitive marketplace. In today’s economy, the enforcement of intellectual property has become a critical business tool.

When it becomes necessary to enforce your IP portfolio against competitors, you should be concerned about two things. First and foremost, of course, is winning the case. A close second is minimizing the extent to which the cost (both direct and indirect) of the litigation eats into its benefits for your business.

In a multi-million dollar IP case, there are many steps that your law firm can and should take to increase the likelihood of success while easing the burden on you and your company. A few examples include: completing appropriate due diligence before bringing the case; mastering the technology quickly at the outset of the case (where patents or trade secrets are involved); identifying and focusing on the key issues throughout the case; and keeping you well-informed, while at the same time shielding you from litigation-related hassle as much as possible.

Pre-Litigation Communication

This article focuses on an issue that arises at an even earlier stage (often long before litigation commences), yet can have a dramatic impact on the cost and hassle of the case, as well as your likelihood of success. The issue is your company’s pre-litigation communications with your competitor. If sufficiently threatening, these communications can give the competitor the right to file a lawsuit challenging your IP rights in a court of the competitor’s choosing.

The possibility of an IP owner and an accused infringer “trading places,” so that the accused infringer is the plaintiff and the IP owner is the defendant, seems counterintuitive, but it happens all the time.

A provision of federal law called the Declaratory Judgment Act permits an accused infringer to file an action asking the court to find the IP right invalid and/or not infringed, if the accused infringer has developed an “objectively reasonable apprehension” of being sued.

The classic example of such a situation occurs when the IP owner or its counsel dashes off a strongly worded cease-and-desist letter, threatening to take legal action if the competitor does not stop its infringing activity.

Such a letter, often thought to be an effective business tool for “sending a message,” can have the unintended consequence of vesting the recipient with the right to file its own lawsuit – in a court of its choosing.

The consequences of triggering a declaratory judgment action can be quite significant.

First, as noted above, you (the IP owner) are now the defendant. You cannot simply drop the matter if you make a strategic decision to hold off on suing your competitor.

The competitor can press its declaratory judgment claims, and you will be forced to defend your IP, undoubtedly at significant cost. Indeed, just being the “plaintiff” may embolden the competitor, encouraging aggressive litigation.

Second, litigating in a remote forum almost always increases the cost of the case. Your primary attorneys will have to retain local counsel (either because the court requires it, or as a practical matter, to assist with filing papers and navigating the court’s unique rules and requirements). Your attorneys will also have to travel to and from the court for hearings. In some jurisdictions, judges hold hearings as frequently as once per month.

Third, if the case goes to trial, company employees will be faced with the inconvenience of traveling to participate and testify. If the trial is lengthy (complex IP trials typically last several weeks, and can go even longer), this can be a significant and costly hassle.

Fourth, your likelihood of success may be affected by litigating in your competitor’s home court rather than your own. The jury will be selected from the local area, where your competitor may be well known and may be a significant employer. Although legally irrelevant in theory, the reality is that these factors can tip the balance in a close case.

Safeguarding The Home Court

So how can you safeguard your home court advantage? A simple and effective strategy is to file a preemptive lawsuit in your chosen forum before sending a strongly worded cease-and-desist letter. You need not serve the complaint on the defendant; the lawsuit will simply sit in the court (for 120 days), serving as a placeholder in case negotiations sour and your competitor files a declaratory judgment action in another court. In such cases, the first-filed action (yours) usually takes precedence.

Of course, it may not be practical to file a lawsuit every time you wish to communicate with a competitor about its infringement of your IP rights. Moreover, many companies (or their attorneys) now employ watch services alerting them if they are sued anywhere in the country. Thus, you may not have the element of surprise after all.

An alternative strategy is to craft your dealings with the competitor (such as your cease-and-desist letter) in a way that accomplishes your business objectives without triggering declaratory judgment jurisdiction in the first place. This can be a fine line to walk, but a review of the pertinent case law shows that it can certainly be done.

For example, the Federal Circuit Court of Appeals (the court that hears most patent appeals in the U.S.) has addressed the issue of declaratory judgment jurisdiction on about 20 occasions over the past two decades. These decisions provide helpful guidance in structuring negotiations with competitors without empowering them to file their own lawsuits challenging your patents.

For example, you should notify your competitor about your patent rights. Merely bringing patents to a competitor’s attention, without more, is unlikely to create a danger of declaratory judgment jurisdiction.

You should also offer to license your patents if that is consistent with your strategic business objectives. Declaratory judgment jurisdiction is generally negated by bona fide licensing offers and negotiations.

If the subject comes up, communicate that litigation is a last resort. Expressing a preference to resolve infringement issues short of litigation makes it much harder for a competitor to justify bringing a declaratory judgment action.

Do not issue a direct threat to sue, unless you are prepared to run the risk of being sued first for a declaratory judgment, and do not attempt to circumvent declaratory judgment jurisdiction by threatening your competitor’s customers. Such “indirect” threats have been held to put the competitor itself under a reasonable apprehension of suit.

Similar guidelines apply in the context of other types of IP rights, such as trade secrets, copyrights and trademarks.

Michael N. Rader is an attorney with Wolf, Greenfield & Sacks, P.C., a leading intellectual property law firm in Boston. His practice focuses on intellectual property litigation.