Jeff Wolfson1,2 & Russ Emerson

Danger at the gate

If it's already too late—if you've already picked up the phone and heard these three little words: "We've been sued"—then it's time to set about limiting the damage. The median cost of patent litigation when between $1 million and $25 million are at stake is more than $2.6 million. That is a lot of money for any company, but it is especially burdensome for a small biotech. Therefore, it is crucial that you spend your dollars wisely by investing in case analysis as soon as possible to maximize a positive settlement outcome. After all, 95% of patent infringement cases settle before trial.

When sued for patent infringement, it is important to quickly contact and retain counsel that is experienced in litigating patent cases. If you have regular patent prosecution counsel, he or she probably will have recommendations for patent litigation counsel. It is important that a patent litigator be involved in evaluating the case as soon as possible because patent prosecutors and patent litigators see the world through different lenses. Prosecutors generally help their clients acquire patent rights, negotiate and prepare agreements, license patent rights and evaluate noninfringement and invalidity issues in advance. Litigators generally help their clients defend their patent rights or defend against infringement claims. As with an independent peer review of a patent portfolio by a patent prosecutor as noted above, a litigator will often spot weaknesses that have not yet come to light or that cannot be uncovered until some discovery occurs.

Once you have retained patent litigation counsel, the first and most critical task is to evaluate the infringement claims (Box 2).

Litigation counsel should also begin exploring invalidity defenses. At the very least, knowledgeable company employees should be asked about the state of the technology relating to the asserted patents and about prior art (patents, products, publications and commercial use) that can invalidate the asserted patent(s). An external prior art search relating to all of the patents asserted should typically be ordered to consider additional possible invalidity issues.

You should also think about hiring, early on, a technical expert to assist in these analyses. The goal is to determine the likelihood that the infringement accusations have any merit and whether the asserted patents can successfully be invalidated.

Next, it's worth exploring whether you can attack with a patent infringement counterclaim of your own. It is likely that your company owns a number of patents, particularly if the recommendations above have been pursued. If your accuser is a competitor, you may be able to counterclaim for infringement of your own patent rights, which can be leveraged for an early and effective settlement. If your competitor has larger sales or profit numbers, they have more at stake if each of you is infringing the other party's patent rights.

Finally, your company should explore the possibility of developing a 'design-around' that will allow you to produce the accused product or use the process without infringing the asserted patents. Of course, if you took that preventative step noted above and obtained a full freedom-to-operate search and analysis, you probably aren't actually infringing any patents that were uncovered at the time. But it may be possible to minimize damages or risks by moving a product further away from claims asserted against your product(s).

Calculating damage

Once you determine the likelihood of infringement, you should determine what the damages may be if your company is found to have infringed. Successful patent infringement plaintiffs may recover at least a reasonable royalty for the unauthorized practice of their patented inventions. We have helped determine common patent royalty rates in the biotech industry to allow companies to consider the potential downside of losing a patent infringement trial.

If the patentee practices the inventions claimed in its patents, however, the company might be entitled to recover its lost profits, or the profits that it could have realized but for the alleged infringement.

Another issue that you must consider is the likelihood of a court enjoining infringement. If you are sued by a 'nonpracticing entity' or 'patent troll', they will not be entitled to lost-profits damages or, in most cases, an injunction under recent court decisions. Again, in addition to engaging a technical expert on infringement and validity issues, it may be wise to engage a damages expert, via your patent litigation counsel, early on to determine your company's possible damages exposure.

Using the technical infringement and invalidity analysis described above, along with the exposure analysis, your team can estimate an 'expected value' of the infringement case.

This early analysis may sound (and, indeed, be) expensive. But the fees will be a small fraction of the cost of defending a patent infringement case through trial, not to mention the economic and publicity costs of a negative outcome at trial. And it is money well spent, because it naturally allows your company to develop a more informed and effective settlement strategy; and, if the case does not settle, this early work will prove useful in developing a focused litigation strategy.

When considering settlement, take into account the following factors: the likelihood of infringement; the feasibility of a successful invalidity defense; the expected damages exposure; the probability of injunctive relief; the possibility of developing a 'design-around'; whether you can assert any counterclaims; the cost of litigation; and your company's (and your opponent's) business objectives.

The final factor is the most important, so it's crucial to include in the discussion executives familiar with your company's business and IP strategy, the industry's competitive climate and the importance of the accused products or processes to your company's success.

Once you have developed a settlement strategy, and if you believe that an early settlement is wise, we recommend initiating settlement discussions as soon as you are in a position to do so. Some believe that discussing settlement early, especially if initiated by the defendant, is a sign of weakness. Nonsense. Savvy players know that most cases settle, and most cases should settle.