This is the second part of a two-part series about Professor David Schwartz’s (Chicago-Kent School of Law) draft article, Contingent Fee Patent Litigation. If you do not know Schwartz from his empirical study of claim construction reversal rates, you should read that article as well — Practice Makes Perfect: An Empirical Study of Claim Construction Reversal Rates in Patent Cases. Schwartz has found an excellent niche in filling in the gaps between case law and the practical experience of those of us that litigate patent cases on a daily basis. Schwartz’s latest article does not disappoint. The heart of the article is Schwartz’ interviews of forty contingent fee patent lawyers and his review of forty-two contingent fee agreements. While the focus of Schwartz’s study is not exclusively on patent trolls, a high percentage of trolls use contingent fee counsel. So, the lessons and conclusions drawn from Schwartz’s article are valuable for retailers. In this post, I will look at Schwartz’s categorization of contingent fee counsel and some of his conclusions and predictions based upon his study.
Schwartz categorizes contingent lawyers into four broad categories:
- Top-tier patent lawyers at small to mid-size firms, often having been trained on other plaintiff-side contingent cases. Interestingly, Schwartz argues that these contingent lawyers often litigate aggressively using the no-stone-unturned methods often thought of as a defendant’s standard procedure.
- Large firm lawyers (general practice and patent boutiques) that usually litigate just a few contingent cases at any given time — Schwartz calls these lawyers “dabblers.”
- Small, middle-market firms. These firms tend to litigate on a cost-benefit model, instead of the no-stone-unturned strategy of the top-tier contingent lawyers.
- Cost of defense lawyers are contingent lawyers that focus on volume of defendants and target cost of defense settlements, often in the range of $100k-250k, according to Schwartz. In my experience, the range for these lawyers is often below $100k.
While these categories are broad, they are valuable in helping retailers understand and assess their opponents. The categories are also a useful data point in developing initial patent troll defense strategies — even if those strategies have to be reevaluated to the extent contingent counsel does not fit its category perfectly.
Schwartz also looks at the key groups of contingent fee clients — individual inventors, large companies, patent aggregators, universities and small patent holding companies. There are a few interesting takeaways from Schwartz’s categories:
- Individual inventors are a favorite client of contingent lawyers, no doubt because they can use the individual inventor’s story to attempt to avoid the patent troll stigma, and some inventors have compelling stories of developing their inventions. Schwartz does not draw a distinction between a true inventor and an inventor that is more of a patenting professional. In other words, someone who tries to get broad patents covering key new technology areas in an effort to be able to demand licenses from one or more industries.
- Patent aggregators include both traditional patent trolls like Acacia and Intellectual Ventures, as well as more defensive entities like RPX. While I recognize that both groups aggregate patents, the way the two groups use their patents is sufficiently different to make it difficult to draw generalizations across this category.
- Small patent holding companies (one of the key troll demographics) are the least desirable clients for the contingent lawyers. Although the article does not make clear why, presumably they are more clearly patent trolls which harms jury appeal. The holding companies also make up a large percentage of patent trolls. Schwartz acknowledges that the line between his patent aggregators and small patent holding companies is blurry. Personally, I would leave RPX as an aggregator and classify Acacia and Intellectual Ventures as small patent holding companies, or small patent holding company aggregators. Buth Acacia and Intellectual Ventures routinely use small holding companies to assert their patents.
One thing Schwartz’s study did not address is how the type of patent holder impacts outcomes of the cases. But the overall feel of his article suggests that the type of counsel may be more important than the type of client.
Schwartz argues that the America Invents Act’s joinder limitations — requiring that cases against unrelated entities be filed separately — will reduce the number of troll cases, at least as to the cost of defense counsel because of the cost of the $350 filing fee for each, unrelated defendant. While this argument is initially appealing, I am not sure it works in practice. Even the cheapest cost of defense cases settle for average numbers well above the $350 filing fee. Additionally, patent litigation filings have continued to be plentiful even after the joinder provision went into effect. For more on this debate, go to Dennis Crouch’s Patently-O.
Finally, Schwartz noted that the mean rate for the contingent fee agreements that he reviewed was 38.6% for flat rate contingencies. The other major type of contingent fee was a graduated fee. The average graduated fee went from 28% at the outset of a case to 40.2% by the end of the case. While the exact percentages do not impact a retailer’s patent troll strategy in a significant way, they are interesting in that the median and mean percentage recoveries are up from the 1/3 that many think of us the standard contingent recovery.