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INSIGHT: Competitor Suing You Over IP? Settle in for the Long Haul

Dec. 14, 2018, 12:17 PM

Techniques for handling patent trolls dominate patent-law literature. But what happens when the patent litigation is with a competitor?

Techniques for dealing with trolls are ill-suited for competitor lawsuits.

Adding to that difficulty, management misconceptions about competitor-based patent litigation can put in-house counsel in a difficult spot. The job of expectation setting—and, in many cases, reminding management of those initial expectations—often falls to in-house attorneys.

In-house attorneys need a plan to convey litigation realities to management, the board, investors, and even customers. Failures in setting and managing expectations can sink a litigation before strategy even gets a chance to play out.

Litigation Considerations

For in-house counsel, choosing when to engage in intellectual property litigation is often an integral part of the job. Both offensive and defensive competitive-based litigations play critical roles in the business development strategies of many companies. The price of protecting one’s IP and defending against IP claims by others should be woven into the overall business plan as a necessary cost of doing business.

But an in-house counsel’s audience (especially for smaller companies) is rarely well versed in the realities of competitor-based IP litigation. Counsel must show the true investment required to pursue a competitor case to the end—in both money and time. Even when defending a suit brought by a competitor, in-house counsel is tasked with keeping the company focused on and committed to the case.

After the initial enthusiasm at the beginning of a suit fades, litigation fatigue sets in. Litigation fatigue often drives unfavorable settlements and short-term strategy decisions meant to lessen the immediate pain of litigation.

Right-Sizing Expectations

In-house counsel at companies with limited exposure to competitor IP litigation find themselves as the focus of management’s ire when a suit drags on for years. Management’s expectations may be skewed based on limited-to-no exposure to competitor cases. Prior to a competitor suit, management may only think of IP cases in the context of cheap, quick nuisance-value litigation without an understanding of the radically different scope of a competitor suit.

Unlike nuisance-value troll suits, competitor litigation costs a company on average approximately $1 million per year (often more) and generally drags on for three to four years—a cycle that can repeat if either side appeals and wins a remand for further trial court litigation. AIPLA Report of the Economic Survey 2017 at 41.

According to the 2017 AIPLA Economic Survey for suits where $10 million or more is at stake, the median cost through trial and appeal is $2 million to $3 million. Id. The longer and more hard-fought the case, the more it will cost. The resources involved are not limited to financial spend. A hard-fought competitor suit will involve significant time investment over the course of years by company representatives.

How to Best Manage Expectations

When a company is considering filing suit, it is important to understand the company’s goals and then set expectations accordingly from the outset. Is the goal to drive the competitor to submit to an acquisition? To push a defendant to acquire the patent holder? To block the acquisition of a competitor with a poison pill? To right a perceived wrong, such as challenging a former founder or employee who is now a competitor using infringing technology? To stop a competitor from selling a competing product?

The ultimate goal of a campaign impacts what to emphasize with management when evaluating whether to pursue litigation. If the goal is to drive an exit event or to force the sale of the target, the reality of litigation needs to be made clear. If the other side does not immediately “bite” on a sale or acquisition, there may be few opportunities to conclude the suit without losing credibility and taking a hit in the press. With limited ability to make a graceful exit, the company could be facing years of litigation accompanied by significant legal fees, a drain on company resources due to the necessary involvement of key personnel, a potential of a negative finding hurting the company’s IP, and even countersuits.

The same warnings should be clearly made when the goal of an enforcement action is to stop infringement by a competitor, including when the competitor is a former employee. Emotions run high at the start of this type of suit, which can lead to heightened frustration as a case wears on—particularly if management is harboring hopes of a quick resolution, capitulation by the opponent after an immediate preliminary injunction, and a surge in customer sales. In-house counsel should manage expectations by putting them in the broader context of the company’s long-term goals and address overly optimistic expectations:

  • Capitulation should only be expected if the competitor can afford to give up. If they have no hope of changing their process or product, they often keep fighting because otherwise, they will cease to exist.

  • Preliminary and permanent injunctions are rarely granted and are difficult to enforce when granted.

Defending against suits also requires early expectation setting. Company stakeholders often take one of two extreme positions at the outset of a suit that can result in frustration as a suit progresses:

  • Fight: Overconfidence in ability to defend or countersue with an overwhelming desire to “refuse to be bullied” without a full understanding of litigation realities.

  • Flight: Belief that a case can quickly and cheaply be resolved by removing the feature or product in question from the market or by offering a quick settlement payment.

For management in the “fight” category, education about the length of suits, the necessary financial and company resources involved over the years of the suit, and the monetary and injunction risk is imperative.

And if management is new to IP litigation, it may not have factored in the impact of a suit on customers. Customers may be dragged into the suit, which may permanently damage the customer relationship. Even when customers are not forced to actively participate in a case, a pending claim creates uncertainty that can drive customers to seek out alternative providers.

For example, if a threat of injunction exists, the customers may get unnerved and explore other providers. Also, the mere act of notifying customers that their confidential information may need to be produced could cloud the customers’ view of the provider. Digging in for the long haul to avoid “bullying” may end customer relationships long before any liability determination is made in a case.

For management in the “flight” category, education should involve explaining the differences between a competitor suit and troll suits. Management’s view of litigation may be skewed by quick-to-settle troll cases. A competitor suit is unlikely to settle quickly or for a low sum. The reality of a competitor suit is a greater emotional investment and willingness to fight by the plaintiff that is unlikely to fade without significant investment of time and money on the part of the defendant. The hope of presenting an easy design-around to quickly end a litigation is also likely to be met with great skepticism by the plaintiff-competitor. Design-arounds are rarely a get-out-of-jail-free card.

Author Information

Sarah Guske is a partner at Baker Botts in San Francisco in the firm’s Intellectual Property Group. She has significant experience litigating software and electronics patent litigation cases.

Wayne Stacy is a partner at Baker Botts in San Francisco and the department chair of the firm’s Intellectual Property Group. With a computer-engineering background, he has more than 20 years’ experience litigating high-stakes technology cases, including patent, trade secret, software-based copyright and technology-licensing disputes.

Bronwyn Savary is senior vice president and general counsel at Verimatrix, which specializes in securing and enhancing revenue for multi-network, multi-screen digital TV services. She advises the company on a variety of legal issues associated with the global development, marketing, licensing, and sale of technology and professional services.