More patent cases taken on contingent fee basis

A growing number of law firms are willing to share the risk of patent litigation by taking cases on a contingent fee basis – a move that will help in-house counsel control legal costs for companies with patent portfolios.

Although these may represent only a tiny fraction of cases, more law firms are trying to formulate alternative fees in patent cases.

“It is a trend, and I think we’ll see more of it,” said Bruce Sunstein, who chairs the patent practice group at Bromberg & Sunstein in Boston.

The number of patent cases has exploded recently, doubling over the past decade, especially in the software and pharmaceutical fields, fueled by huge verdicts like the recent Blackberry case for $600 million.

But patent litigation can be expensive and risky, preventing many companies from asserting their patents.

An average patent case will cost between $3 million and $10 million, and take two to three years to litigate.

Individual patent holders and small companies with no other assets than its patent portfolio normally wouldn’t stand a chance against a Microsoft or other giant.

Contingent fee arrangements can allow smaller companies to “stay in the ring longer” against an opponent, said James Foster, a senior patent litigator at Wolf Greenfield in Boston.

“A lot of companies can’t afford to pay $2 million chasing a recovery they may not get. The really big companies can pay the full freight [of hourly fees], but companies that are not quite as well-financed might find [contingent fee arrangements] particularly attractive,” he said.

Foster, who recently spoke on a panel with in-house counsel on the subject, has experimented with contingent fees in a handful of patent cases and is happy with the results, noting a recent win.

“Our client was small and the defendant was huge. The client was worried the defendant would outspend them and cause us to settle for less than the case was worth, so we worked out a deal. They only paid 70 percent of our normal hourly rate and if there was a favorable event, we would get more money,” he said.

The case settled after three months, the client was able to go up against a defendant with bigger resources, and the law firm made a substantial bonus that exceeded what it would have made had it billed at an hourly rate.

Experts said contingent fee arrangements can also work on the defense side.

“You see that more and more,” said Joby Hughes, a Houston attorney who has carved out a niche handicapping and financing patent litigation. “You keep the verdict below X amount of dollars, and you get a bonus.”

For example, a defendant may agree to pay a law firm a percentage of its fees based on the results.

“If you keep it under $10 million, we’ll pay you 20 percent over your fees, or I might pay you $1 million bonus. If there’s a zero verdict, we’ll double your fees, or pay you $2 million bonus,” Hughes said.

The upside

Contingent fee arrangements will attract budget-conscious corporate counsel of a variety of companies that hold patents.

Paul Hayes of Mintz Levin in Boston said in-house counsel can benefit significantly by striking a contingent fee deal.

“If you’re in-house counsel for a $3-4 million company and you ask how much it costs to go against a Microsoft of the world, I’ll say you have to budget $2 million, you need four years with a 50 percent chance of winning, your company won’t invest the money and your competitive position goes down,” he said.

Even if the company could afford the legal fees, the board of directors will probably nix it and say they are better off using the money for research and development, Hayes noted.

Under a contingent fee arrangement, the company might agree to pay the expenses, which could amount to $1 million over four years, and share a percentage of the recovery.

Anthony Froio, managing partner of the Boston office of Robins Kaplan Miller & Ciresi, said companies are increasingly looking for alternative fee structures.

“If you file a patent infringement case these days, you better be prepared to litigate to the end. More and more clients are calling me as managing partner and saying ‘We are no longer able to afford this case. Would you look into taking it on a contingent fee basis?'” he said.

“Small businesses, inventors and institutions of higher learning, such as teaching hospitals, couldn’t possibly afford to take on patents offensively, never mind on an hourly rate. We give them a significant option on the fee,” he said.

Sunstein, who spoke at an ABA conference on this subject, said one example would be a company that holds a patent, but not in the core business of the company.

“Why should it spend $3 million for a patent peripheral to its business if the patent isn’t affecting its profitability?” he asked.

Another scenario in which a contingent fee arrangement might make sense is where a small company with decent revenues wants to assert a patent against a competitor whose infringement is taking away business.

“A relatively small company with a $10 million revenue stream has to ask whether it can afford $3 million in litigation,” said Sunstein. “It must think about the burden on its people and whether it can afford to be in litigation with a competitor like that.”

The downside

Traditionally, many factors have conspired to preclude contingency fee arrangements in patent cases. A main factor is the risk to the law firm.

Froio, whose firm goes against the grain by deriving 30-40 percent of its annual revenues from contingent fees, said most law firms won’t even consider taking a patent case on a contingent fee basis.

“The level of risk for the law firm and the willingness to evaluate a case fully is a talent and takes a tremendous amount of trial experience, particularly on a contingent fee basis,” Froio said.

Sunstein estimates that the recovery would have to be at least $15 million, and closer to $25 million, in order to justify taking a patent case on a contingent fee basis.

“If somebody has a good case, even an excellent case, the prospects are daunting,” he added.

Some of the factors are long waits, high reversal rates and some recent court decisions allowing reexamination of patents.

“These are intensive cases,” Hayes said. “If you sue Microsoft, they don’t take it lying down. They bring out an army. Second, there are only two or three jurisdictions where you can get a trial in a year and a half. For example, in Massachusetts, you’ll get stuck for four to five years. Against a big company, they’ll litigate you to death, so the actual investment by the law firm is huge.”

Another consideration is that most patent cases go to trial, and juries can be unpredictable, especially in cases with highly complex scientific or technological ideas often present in patent cases.

Other reasons law firms haven’t agreed to contingent fees in patent cases is that they lack the staff or expertise to properly vet them.

Froio said his firm goes through a rigorous vetting process for patent cases, including employee scientists and conducting mock trials before a case is ever filed.

Hayes estimates that he examines about 40-50 cases annually, but files only about five per year.

Hayes explained: “You might have a good case of infringement, but the validity of the patent is suspect. Or, you might have the greatest patent, but no damages, or the damages are more speculative than not. Even if you vet them, frankly, the long-run chance of success is probably less than 50 percent. It’s better than Vegas, but not much.”

Finding the right formula

Each case will dictate the specifics of a contingent fee arrangement, but a few basic models exist.

One option is a straight contingent fee on the recovery, typically 40 percent or more.

A law firm may take 40 percent of the recovery and pay the expenses, or it might take 35 percent of the recovery and the client guarantees the first $1 million in expenses.

More common, however, is a hybrid or blended fee in which the firm reduces its hourly rate in exchange for a percentage or bonus for achieving a “positive result”. One example: A law firm offers a 50 percent discount on fees, the client pays expenses, and the law firm gets 25 percent of the recovery.

Hughes strongly suggests that companies arrange for the law firm to carry some of the expenses.

“The problem with most contingent fee agreements, whether patent or not, is making sure the law firm has enough skin in the game, but not too much, so that it operates logically,” he said.

“I don’t care if it’s 5, 10 or 20 percent, I want to make sure the law firm is carrying some of the hard money,” he added.

For example, a law firm may reduce its fees to 60 percent of its billable rate and the client will pay 90 percent of the hard money expenses. But it wants the law firm to cover the other 10 percent of the expenses, Hughes said.

The contingent fee can be based on a percentage of the recovery, a flat amount up to a cap, or a multiple of the fees that are waived, usually two to five times.

The parties can also negotiate a contingent fee based on some result, either inside or outside the litigation, said Hughes.

For instance, the contingent fee may be pegged to achieving an injunction or retaining or transferring jurisdiction to a favorable location with shorter dockets.

An example of a contingent fee based on a result outside litigation would be where a company risks being bought out by a big company, and the lawyer puts in a contingent fee to protect the time and money put into the litigation.

Sunstein emphasized that the parties must address their expectations of the litigation in advance, such as what constitutes a reasonable settlement and under what circumstances the client and law firm would accept a settlement.

He also noted that a contingent fee arrangement in patent cases can get quite complicated, such as where royalty payments over time are involved, and the sharing of settlement proceeds may be “layered” – such as evenly sharing the first $10 million and splitting recovery above $10 million on a 60-40 basis.