Research Trends and Conclusions: Patents 2010
Richard Noakes
Unlike many other sectors, the patent market has demonstrated its resilience in the face of the global recession. This can largely be put down to the nature and importance of patents themselves in protecting clients’ market share.
As Edward Nodder from Bristows in London states, “Clients cannot tolerate infringement and risk losing market share. More importantly they cannot surrender their crown jewels.” Conventional theory dictates that in economic downturns patent litigation spikes as clients more aggressively stand their ground to protect their place in the market.
However, during the course of the research it has become clear that the patent industry is not totally immune from the same forces that have driven down the volume of work in other practice areas. Clients are taking a closer look at their portfolios in deciding which patents to license or enforce as their budgets have tightened. One source stated that: “Clients are paying less and challenging lawyers to be innovative in terms of fees and sharing risk in costly litigation.”
While activity of the patent market has remained steady in most jurisdictions, law firms have faced increasing pressure to lower rates. Some lawyers have found that the volume of their work has fallen as companies settle early or hesitate to bring litigation. Nevertheless, there continue to be important developments affecting practitioners’ workloads in a number of jurisdictions.
The United States
At the time of writing, attorneys in the US were waiting on a significant decision to be made by the US Supreme Court on the patent eligibility of business methods. The United States Court of Appeals for the Federal Circuit upheld a decision by the US Patent and Trademark Office rejecting a 1997 patent application made by Bernard Bilskiy and Rand Warsaw. The invention in question is a business method of hedging risks in commodities trading that enables energy suppliers and consumers to minimise the risk of fluctuations in demand during a given period. This is set to be a major precedent-setting case because it draws into question not only the patent eligibility of business methods per se, but whether the “machine-or-transformation” test is the only test for patent eligibility. As Kevin Meek from Baker Botts in Austin noted: “This case will determine the value of many patents, dozens may be instantly eviscerated.” Consequently, lawyers and many of their clients that have filed patents for software or business methods are keeping a close eye on the case. A decison is expected by the beginning of July.
A number of lawyers have noted the increasing popularity of the United States International Trade Commission (ITC) as a forum for infringement cases in relation to imports. In 2008 there were 41 section 337 investigations (patent and trademark infringement cases relating to imports), more than double the number of cases in 2003. The ITC is generally regarded by the lawyers we spoke to as a faster, more efficient method of patent litigation. More importantly, the ITC is very attractive to patentees as there is the certainty of a permanent injunction being ruled if a patent has been infringed. Indeed, the ripples are still being felt from the eBay Inc v MercExchange LLC Supreme Court case in May 2006. While the jury agreed that eBay had infringed MercExchange’s patent and stated that an award of damages was appropriate, a permanent injunction was not issued. The Supreme Court agreed with the judgment of the Court of Appeals and in doing so, made it clear that an injunction does not automatically follow an infringement decision. This verdict changed the patent landscape and fundamentally affected the strategies of patentees, who were encouraged to settle early. However, some lawyers have noted that as cases become more international, there are now three jurisdictions in the US: the Federal District Court, the US Patent and Trademark Office (USPTO) and the ITC. Lawyers are no longer dealing with just one judge and must be more flexible. The ability to provide effective tactical advice and representation to clients is forming an even larger part of the patent lawyer’s role.
There has been an important shift in the Federal Courts regarding the adequate disclosure of patents. In Ariad Pharmaceuticals v Eli Lilly, the US Court of Appeals for the Federal Circuit confirmed separate written description and enablement requirements for a patent. The judges ruled that section 112 of the Patent Act states that a patent specification must not only describe the manner of making and using a claimed invention but separately requires a written description of the claimed invention itself. This has meant that in writing patent applications lawyers have to look ahead to avoid challenges to the adequacy and definiteness of the patent specification. It is expected that there will be more cases where decisions will be governed entirely by the focus of the courts on patent descriptions. Therefore clients are placing more of a premium on counsel’s drafting abilities.
Statistics released by the USPTO indicate that clients are taking cases to US courts now more than ever. This makes the US a unique jurisdiction in terms of the volume of patent litigation. By September 2009, there were 94 cases in litigation filed in the United States district courts in that year. This is more than any financial year for data released by the USPTO since 1995. In comparison, in 2008 there were just 17 filings. Given that some lawyers we canvassed have noted a reduction in the volume of patent litigation, this could be interpreted as symptomatic of a flight to quality that is common during a recession. Large numbers of lawyers we spoke to mentioned an increased appetite from their clients for alternative fee structures, as well as a greater focus on alternative ways of settling those disputes that continue to arise (as explored in an article by Michael Warnecke and Brandy McMillion from Perkins Coie LLP in the following pages).
Regulatory Changes
Proposed regulatory changes are also affecting patent lawyers’ practices. Change in Canada has been led by the Federal Court’s initiative to streamline the litigation process. It has expressed concern about the independence of experts, the impact of expert evidence on the length of trials and the increase in cost that this causes. Among the 10 amendments proposed by the Federal Court Rules Committee is concurrent expert witnessing, also referred to as “hot tubbing”. This will allow the court to require that some or all experts testify as a panel where individuals can pose questions to each other. Some lawyers have expressed unease over the effectiveness of concurrent expert witnessing. There are fears of lawyers losing control over their expert witnesses and that the better orator will prevail in court testimony rather than the best opinion. Lawyers will therefore have to change their strategy in preparing experts for trial. One source stated that it will impair advocacy by lessening the importance of the evidence presented in a case. Others have disagreed, arguing that judges are tired of lawyers with a strong scientific background talking in detail about a subject that is foreign to them, and that it will not dominate proceedings in court as it will only be used when a judge regards it as necessary.
Canada’s Federal Court Rules Committee has also proposed a robust summary judgment procedure. As in other jurisdictions, clients could move for summary judgment to avoid going through the lengthy and costly process of discovery.
There is also an increased focus on proper disclosure in the patent specification of an application. This area is particularly interesting for generic companies trying to find ways to address the factual basis of a patent.
Local lawyers have noted that the pharmaceutical industry has been increasingly active and the majority of work has come from issues surrounding notices of compliance granted by the federal minister of health and required before a drug can be marketed. This has been an important source of work for lawyers in Canada as François Grenier from Robic LLP in Montreal observes: “This is where the big drug companies are fighting right now.”
In addition to the pharmaceutical industry, the environmental and clean energy technologies sectors have also been areas of increased activity. However, there has been a downturn in the IT sector as it has proved tougher for companies to get finance for research and development, and a resultant drop in legal work from these clients. Nevertheless, it is clear that as a result of an attempt by the Federal Court to streamline the litigation process, lawyers are required to effectively adjust their practice and strategy to protect the interests of their clients.
In the UK, Justice Jackson released his report on the cost of litigation in December 2009. He recommended that the Patents County Court, which deals with lower value disputes, should be reformed to reduce the cost to small and medium-sized companies. The proposed reforms include allowing costs to be recovered from opponents according to the nature and complexity of the case to a maximum of £50,000. The UK is generally regarded as an expensive legal system to litigate in, particularly in comparison with other European countries. It is also considered a highly technical, competent and experienced system that attracts equally complex patent cases. Nevertheless, if lawyers in the UK are to compete with the rest of Europe in high-stakes, high-risk litigation it is clear that more must be done to keep costs down.
In previous years the UK has been regarded as a good jurisdiction in which to challenge patents, prompting a deal of claims by generics manufacturers. Recently, however, there have been more pro-patentee decisions by the courts and local litigators have been kept busy as patent holders have been inclined to bring claims in English courts, despite the relatively high cost of UK patent litigation. The UK is becoming a more attractive forum as judges are aligning with European jurisprudence. Given that the UK looks set to integrate its patent system into a new European wide model, judges are being careful not to overrule the decisions taken by their European counterparts.
A European Patent System
A unified European patent litigation system has been on the horizon since 2000. Negotiations stalled in 2004, mainly over translation arrangements, an issue that is set to be an area of contention in any future discussions. Nevertheless, some important developments mean that most lawyers now perceive it as inevitable. In December 2009 the European Council reached an agreement on the main features of a European patent court. At the time of writing the Court of Justice is considering the compatibility of the draft agreement with the Treaty of Lisbon. If the Court gives its approval there will then be considerable momentum for a unified patent court. A source close to these developments has stated that the earliest date this will be approved by is 2015.
A single European patent system is set to fundamentally alter the patent litigation landscape on the Continent. Clients that are frustrated with the level and cost of parallel litigation required in Europe will certainly welcome these developments. According to the European Commission, a unified patent court is set to cut the cost incurred from parallel litigation by €289 million every year for clients operating in the region. It will create more certainty for clients as currently 30 per cent of patent cases are conducted in parallel in member states and in 11 per cent of all European cases, national courts reach conflicting judgments. However, they will be wary of putting their eggs in one basket as a number of sources remarked, by taking a case to a court that will decide for the whole of Europe. Consequently, there would be high-value cases as clients will want to make sure they safeguard their interests in the region. It is important to point out that the jurisdiction of the national patent offices in Europe will remain, preserving the choice for clients to continue in parallel litigation if they wish. As a result, some clients may take a more defensive stance by gaining separate national patents instead of engaging in European wide high risk litigation.
Lawyers are uncertain of what exactly will be the outcome of a single patent system in Europe. Some have expressed concern over whether the European court will follow a bifurcation system whereby revocation and infringement cases must be separate, as is the case in Germany. Proponents of this method argue that when a patent is assumed to be valid it should be enforced promptly without burdening the proceeding with validity questions, therefore saving time and limiting the number of patents to be dealt with. Those who are against bifurcation state that if a pan-European injunction is granted before the validity of a patent has been tested, this would be unfair to the defendant who would have to halt production across the whole of Europe, but at the same time would present the plaintiff with minimum risk. These arguments may lead a European court to be more flexible and decide on bifurcation in relation to each particular case.
It is clear however, that international firms with offices throughout Europe will have to alter their strategy in the region. The first issue is where exactly the court will be based, which will ultimately be a political decision. Firms will be quick to establish a presence there with their experts nearby, and what the larger international law firms will choose to do with their patent groups located elsewhere in Europe remains to be seen. Most lawyers do believe that while the demand for parallel litigation in Europe may fall, a new market will open up for high-value cases for which international and European firms will be competing.
Will international or boutique law firms be better placed to respond to the European patent system? Smaller firms have the advantage of flexibility and lower overheads that translate to better rates for clients, while larger law firms may be at an advantage due to their level of international experience. Nevertheless, this battle is yet to play out in a market that will be unlike any other in terms of its high-risk, cross-border nature.
Looking to the Future
It is clear from the international research conducted that the volume of patent litigation has remained stable since the last edition in 2008. It is a peculiarity of the recent global recession that has largely ensured that patent litigation has not spiked in the jurisdictions covered in the research, with the notable exception of the US. Unlike previous downturns, many clients were unable to secure credit, which tightened budgets and made smaller companies more willing to settle early through alternative means, slower to litigate and more inclined to put pressure on lawyers to offer better billing rates. The focus on value from clients has been brought to our attention time and again throughout the research and it is clear that demand may fall for those law firms unwilling to make concessions for clients with smaller budgets. Consequently, we may see an increase in activity for alternative methods of dispute resolution.
Looking ahead, European law firms will be keen to get their teeth into the new European market when it finally emerges. Law firms will have to be careful how they alter their strategy on the Continent to position themselves in what promises to be a lucrative market.
In such a climate the most respected and effective qualities for a lawyer to possess are the vision and strategic awareness needed to know the problems that a case is likely to face, the ability to offer practical advice and tenacious representation and a thorough understanding of the scientific issues that a patent raises. Lawyers who can demonstrate these qualities at an advanced level will be the leading lights of the practice area.