Law & Business Episode 30: The Costs of Litigating

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It’s Law & Business Episode 30: The Costs of Litigating.

Wil Jacques, patent agent to Verna Law, P.C., and Anthony Verna, managing partner of Verna Law, P.C. talk about the costs of litigating and the benefits of litigating.  They talk about damages in patent infringement, copyright infringement, and trademark infringement cases.

In patent infringement lawsuits, there are two overall theories: Lost Profits and a Reasonable Royalty for infringement.

Since 1952, 35 U.S.C. § 284 has governed the award of damages in patent cases:

Upon finding for the claimant [patent holder] the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

Lost Profits

• Lost Sales: Lost profits from sales are the classic and most common type of lost profits damages. Lost sales constitute sales that the patent owner failed to make due to the infringement, as well as sales the infringer made that the patent owner would have made but for the infringement.
• Price Erosion: Price erosion damages arise where the patent owner was forced to lower its prices or offer discounts to meet the infringer’s competition and where the patent owner was unable to raise its prices due to the infringement.
• Unpatented Items: A patent owner may seek lost profits on unpatented items. For example, if the accused product is a multi-function device of which the patent covers only one feature, the patent owner may seek lost profits for the entire device.
• Entire Market Value Rule: The “entire market value rule” is used to determine if a patent owner can recover lost profits where the patent covers only a feature of a multi-faceted device – the patent owner must prove that the patented feature drives demand for the overall device.
• Future Lost Profits: Projected (or future) lost profits are losses that the patent owner expects to incur in the future due to the infringement. The importance of future lost profits is demonstrated by its potential for large awards, as the patent owner may be able to project substantial losses far into the future.
• Damage to Reputation and Goodwill: Another lost profits theory that patent owners have advanced, albeit infrequently, is damage to the reputation and goodwill of the patent owner and/or patented product. The patent owner argues that the infringer’s product is inferior to the patent owner’s patented product and, as a result, has caused damage to the reputation of the patented product or the patent owner. In other words, the patent owner claims it has suffered damage because of the inferiority of the infringing product.

Reasonable Royalty Damages

The term “reasonable royalty” is susceptible of two definitions. The first is an actual licensing rate, to which the patent owner and a licensee would have negotiated and agreed entirely apart from any litigation or damages question. This can be thought of as the “reasonable royalty” used in § 284. This negotiated reasonable royalty is the minimum amount of patent damages the patent owner can recover, equal to what the patent owner would have negotiated as a royalty in the first place. The second meaning of “reasonable royalty” applies whenever the patent owner is unable to prove actual damages (i.e., its lost profits). The money awarded to the patent owner (however it is computed) is usually called a “reasonable royalty.”

Interest and Enhancement of Damages

A patent owner may also obtain relief in the form of collateral assessments, which include prejudgment interest and discretionary enhancement of damages up to three times the amount found or assessed – enhancement may be based on willful infringement or litigation misconduct. (A separate sub-page in this damages website addresses prejudgment interest and post-judgment interest.) In exceptional cases, the court may award reasonable attorney fees to the prevailing party under 35 U.S.C. § 285. Post-judgment interest and most costs are awarded in accordance with non-patent law.

Patent Infringement and Attorney’s Fees: the Conduct Must be Exceptional

A case to review is Edwin Lyda v. CBS Interactive, Inc., No. 16-cv-06592-JSW (N.D. Cal., Jan. 24, 2018). In this situation, Lyda sued CBS for indirectly infringing two patents relating to the voting system used on the show “Big Brother.” In 2015, Lyda sued CBS for direct infringement on the same patents in the Southern District of New York; that case was dismissed with prejudice and the Federal Circuit affirmed. See Lyda v. CBS Interactive, Inc., 838 F.3d 1331, 1339 (Fed. Cir. 2016). Shortly after the Federal Circuit’s decision, Lyda (through counsel) sent CBS a congratulatory letter, noting that the case had taught him what was necessary to avoid a motion to dismiss and asking if CBS was interested in a license under the two patents. Lyda asked CBS to reply by November 18, 2018 but then filed his new complaint in California on November 14. CBS wrote back on November 22, explaining its position that Lyda’s indirect infringement claim was barred by res judicata; Lyda replied that he did not assert and could not have asserted indirect infringement earlier as CBS was not aware the patents at issue before the first suit.

CBS moved to dismiss the claims and the court granted the motion with prejudice. In doing so, the court noted that there was at least a colorable argument Lyda could have argued indirect infringement at the earlier case, citing an unresolved circuit split on whether indirect infringement requires a defendant’s pre-suit knowledge of a patent. The court also noted that Lyda’s position contradicted the record in his first suit against CBS, where he alleged CBS admitted knowledge of the patents as of July 28, 2011 (Lyda filed his first complaint on August 20, 2014).

In concluding that Lyda’s conduct was sufficiently exceptional to merit attorney’s fees, the court focused on two factors. First, it held that the strength of Lyda’s litigating position was “exceptionally weak.” In support of its holding, the court reiterated that Lyda’s indirect infringement claim was clearly barred by res judicata, and that Lyda’s argument to the contrary was contradicted by the record in the earlier litigation. Second, the court held that Lyda had litigated the case in an unreasonable manner by failing to perform pre-suit diligence. Returning to the contradiction between Lyda’s current argument and the earlier litigation’s record, the court noted that had Lyda reviewed his own records, he would have realized his current argument was foreclosed. The court also noted that Lyda had sued a different entity for infringement under the same patent in 2012, so requiring Lyda to pay CBS’s attorneys’ fees would serve as a deterrent as well.

Given Lyda’s substantively weak position and his failure to perform adequate pre-suit diligence, the court granted CBS’ motion for attorneys’ fees, ordering the parties to meet and confer on the specific amount.

This case shows that “exceptional” is still a high bar to meet.

Copyright Infringement

Actual Damages:  The first section of the relevant law (17 U.S.C. §504(b)) makes it clear that an infringer can be liable for the actual damages suffered by the rightful owner: “The copyright owner is entitled to recover the actual damages suffered by him or her as a result of the infringement…”

Lost Profits: Here’s the second part of the relevant law we partially quoted in section one: “…and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages. In establishing the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.”   That means that a defendant isn’t only liable for your actual damages, he’s liable for the additional profits he made from using a plaintiff’s work – over and above the amount you lost in sales.

Statutory Damages: Statutory damages aren’t automatically awarded in a copyright suit, even to those who have filed properly. The plaintiff has the option of choosing either the actual damages and profit awards we’ve already discussed, or the statutory amounts allowed by law. But not both.   Time for the big question: how much? The answer once again is not cut-and-dried. The penalty for innocent infringement may be as low as two hundred dollars. Statutory damages can range from $750 to $30,000 for each work infringed upon (which means one award for the e-book that Snidely stole, not an award for each copy sold). And in cases of deliberate infringement, statutory awards can be $150,000 or even more.

Trademark Infringement:

Section 1117 of the Lanham Act sets out several bases for awards of money relief in trademark infringement, false designation of origin and willful trademark dilution cases, including the following:

1) an accounting of the defendant’s profits;
2) an award based on the damages sustained by the plaintiff;
3) recovery of costs of the action; and
4) an award of reasonable attorney’s fees to the successful party in “exceptional” cases.

Here is a lightly-edited transcript of the episode:

Anthony Verna:

Welcome to the law and business podcast. I’m here with Wil Jacques, patent agent from Verna Law.

Wil Jacques:

Yeah, I’m doing very good. Anthony, how are you?

Anthony:

I’m well, thank you. Thanks for taking the time out to speak.

Wil:

I’m always happy to be here with you. We have very engaging, very good conversations. Thanks for today’s engaging conversation.

Anthony:

Today, our topic is litigation. The need to litigate, the cost of benefits of litigating. And, I know that this is a scary topic for a lot of people, I’ve had a few conversations with potential clients not that long ago in which the costs did scare them. So I want to talk about the cost benefit of that.

Wil:

Okay. Well I, I guess I should start out by saying that I’m a little bit afraid of this conversation as well. Anthony, you know, so in full disclosure for our listeners as your patent agent, our listeners should know that I am not an attorney but a registered patent agent. And so, with that said, I am not in any way, not obligated, but I cannot represent you in a court of law, in a litigation matter. That’s my job. But I am here to do diligence into kind of help our clients kind of figure out the proper path is the uh, potentially look to take advantage of this road.

Anthony:

Let’s start on the patent side of life. And I want to talk about damages under all sorts of intellectual property law because I think that is an important first step. Yes. So damages under the patent statute, here’s exactly what the statute says, just so that everybody can be as clear as mud as to damages.

Under the patent statute, upon finding for the patent holder, the court shall award the patent holder damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer together with interest and costs as fixed by the court.

When the damages are not found by a jury, the court shall assess them. In either event, the court may increase the damages up to three times the amount found or assessed. So that like I said, is as clear as mud as to how to calculate that.

Therefore, we’ve come up with a couple theories on the patent side of place. One is what we call lost profits. Lost profits basically means the amount of money that the patent owner lost due to the infringement. Therefore, the patent owner must prove that the infringement caused those lost profits. But if the patent owner cannot make such a proof, the patent owner is entitled to reasonable royalty damages that you get. One or the other. Not both.

Wil:

No, but it’s very interesting that you bring this topic up. So, we talk about damages and your ability to show what you would be old in the event that there was an infringer who stole market share with selling product, that you had a patent that protected yourself, your products really in that market space. I think it’s interesting to note that a lot of the clients that we talk to, Anthony actually don’t produce a product.

Anthony:

That’s true. That does happen.

Wil:

Yes, yes. Now they may own a reasonable, and maybe I shouldn’t use the term reasonable, but they certainly own an asset. It’s an intangible asset. It’s a patent, and that patent does cover the products and services that are being sold in the marketplace that actually infringe on that patent. So I guess if we were to look at those clients, then it’s reasonable royalty .

Anthony:

Under a theory of lost profits, some of the areas that a court would have to look at are lost sales. So if you’re starting at a zero point right, it’s impossible to lose sales so you can’t recover under loss sales. Your lost profits theory could look at price erosion, price erosion damages arise where the patent owner was forced to lower its prices. So again, if you’re at a sale point of zero, you won’t have price erosion unpatented items. A patent owner may seek lost profit on unpatented items. So if there is a multifunction device in the patent covers one feature, the patent owner may seek lost profits for the entire device as well. Again, if you’ve got zero a sales, you can’t get there. There’s also what we call the entire market value. And the entire market value is used to determine if a patent owner can recover lost profits where the patent covers only a feature of a multi faceted device. So the patent owner must prove that the patented feature drives demand for the overall device.

Wil:

Yes, when we tend to look at it again as assisting counsel, we’re trying to determine what damages are. There are a number of things that engineers like myself take into account and even,

Anthony:

But, you’re an engineer with an MBA. Yes. Let’s not forget that that important valuation point.

Wil:

Absolutely.

And not to, kind of, pat myself on the back, that’s the point we wanted to bring about.

Because what we’re trying to do is to say we have a distinguishing feature in a product and you know, to the extent that the distinguishing feature help drive the sales of that product is what we’re trying to determine in order to get to the damages.

What is it that I made or I might’ve made, had it not been for the fact that you were infringing my patent and took that share away from me? It is not as easy a question as what the muddied waters, as you pointed out, may have us to believe. For instance, if I were to say that a, we’re selling brand new, uh, Audi TT, you know, then in the very next year, a patented a feature of that Audi TT is the xenon headlights. It’s then again attributing or going back to your comment about lost market. What did people buy Audi TTs, just because it had this particular feature, these xenon headlights or were, was the manufacturer able to then capture a certain market share or charge a premium? All of these things form or potentially formed the basis for what those damages are and so they must be carefully viewed before one goes out and decides, I’m going to bring a case of infringement against a potential party.

Anthony:

I think that’s actually very important and thoughtful manner because that leads straight into the question of attorney’s fees and the recoverability of attorney’s fees in patent infringement. Because in short, what that’s required is the defendant has to be what we call a willful infringer or a case would have to be what we call exceptional in patent law. So here are some bullet points to think about and in order to recover attorney’s fees, the defendant would have to rely on opinions of counsel that turned out to be incorrect, presenting unreasonable and meritless defenses, selling accused products despite knowing that the products and fringe, so there’s a knowledge requirement there. Continuing to sell infringing products after the patents were found infringed and not invalid. Failing to attempt to design around the patents that are in the suit, accessing confidential information of the pen and by the way, that’s a trade secret misappropriation violation right there, and then engaging in discovery related in any other litigation misconduct, which is of course then an attorney ethics issue rather than even though would come up in damages here if any of those bullet points come up in litigation, that would be the exact opening for a plaintiff being able to recover its attorney’s fees and litigation.

Wil:

Yeah, yeah. I get that. Outside of some of those elements that suggest what might be willful infringement and so therefore you’re entitled to maybe some multiple of damages that would otherwise have been awarded. I want to just put that aside for a second and get to the issue of what is it that your IP, your patent, a patent claims or trademarks, copyrights, what is it that it brought to that product or that product class that can be attributable to that product in terms of dollars and cents? Right. That’s what we’re trying to say is what is it worth, you know, in, in the end of the day, we, at least in the patent world, are able to, uh, take a look at past cases, much like if you were trying to sell your home in a particular neighborhood location, your houses, uh, to, you know, have a certain style.

It has a certain number of features, it has elements in, there may be differences as we look across the entire population. But there’s some common things. And so I guess I’m saying that to get to the fact that we use that of bases and we go places where we can find quote unquote the comps sharp to try to help us. And there are no two patent cases are alike, not at all, or I should say infringement cases are alike. They’re never alike. However, we can at least get into the ball park and have what I find to be more of a hurdle to getting to a reasonable damages or putting reasonable damages in front of an infringing party. And that is some agreement that we are at least in the same ballpark.

Anthony:

Agreed completely. Let’s move on to copyright infringement damages and this is going to sound very similar to what we just said in patent damages because an infringer of copyright is liable for the copyright owner’s actual damages and any additional profits of the infringer. So actual damages, profits or something that we call statutory damages. And statutory damages are basically a flat rate provided by the court. Her infringement. And the key with statutory damages is because it can go up to $30,000 under a regular copyright infringement or up to $150,000 for a willful copyright infringement. And so it’s a very, I would say it’s just flat out whatever number the judge gives. So there’s not much of a calculation there under statutory damages. But again, actual damages and profits are going under the same kinds of calculations that we had discussed before. And then of course what comes to maybe something a little different like say again attorney’s fees. Well we’re looking at again, some kind of extra reason to award attorney’s fees in copyright law. The Supreme Court, uh, recently has said that a copyright infringement court should look at things such as a parties, litigation misconduct for instance, to see if attorney’s fees should be awarded. Because if the defense is being, you know, badgering, if the defense is being stonewalling, if there’s no cooperation between the parties, then that would be an issue.

Wil:

There are people, you know, I understand the statutory, uh, damages or, or calculation of what those damages would be. But is there very comparable, comparable associated with copyright damages? Are there comps? I mean, can I take a look at, you know, if I were to infringe on something that one would comp is the, the buoy bonds?

Anthony:

Well, sure, sure. Like a record collection.  I think the music is a very good example because there are lots and lots of examples of people who had copied music and let others download it from their computers or sold it without, you know, any kind of authorization. And you can look up those damages and, you know, public record. So that part is pretty easy to find. So you can make those comparisons. The other issue and I, I recently counsel the client on this is in looking at similar parties. So in other words, is this a defendant that’s been through this before and if the defendant has been through this before, what has the defendant either settled for or had to pay for through jury? Those are a couple of ways of handling this. Chances are in copyright law you will find some kind of comparison, especially with with the industry that you’re in. See, I mean it’s going to be easy to find these cases and find that yes, you can easily get to that company.

Wil:

Yeah. They’re actually a service providers in the patent industry that now collect this kind of data even down to the point where they know venue, they know, uh, say if this was a case that uh, you know it kind of was initiated at the p Tab. All of these kinds of data records are being handed, you know, to allow one to essentially make a decision. Is this comparable or is it not comparable in terms of damage?

Anthony:

Absolutely. Those services are available here. One point I would like to make, cause I make this point every single time I talk about copyright law. If you do not register your copyright, you as a plaintiff are not ever going to get attorney’s fees or statutory damages. Yes. So you must make sure you as a owner of a work of art must take that work of art and register the copyright before any infringement ever happens else you get a lot of damages taken off the table from the very point

Wil:

I think it’s a point that’s almost well worth repeating. There are a number of clients to ask about registering a copyright. Then the client asks, “But don’t I already have a trademark? Don’t I already have copyright?” And I go, “It’s a matter of semantics and definition as to what you have. But you know what is it worth outside of registration? Well, very little.”

Anthony.

Right!

And while your work may be copy written because it’s your idea that is expressed on a medium classic definition of a copyright is that doesn’t mean that you have the right to walk into court because you don’t unless you register and you again, if infringement happens before the registration, you will probably lose those statutory damages and attorney’s fees. So turning to trademark damages just to hit this plaintiff would be entitled to actual damages, any profits earned by the defendant that are attributable to the infringement. And of course, just like we said, actual damages, profits, defendant’s profits. One thing that I do want to say is that sometimes the prevailing plaintiff may recover attorney’s fees in what we call exceptional cases and that’s, that is the definition in the Lanham Act. But as to what is an exceptional case, the infringement can be characterized as malicious, fraudulent, deliberate, willful courts have kind of been shaving down what is an exceptional case in over time. But I would still say that you do have to be careful in a trademark suit because you may not get those attorney’s fees because basically every plaintiff is going into court saying our case is exceptional. And at some point, not every case is exception, even though we don’t really have a good definition of what an exceptional case is.

Wil:

So how do we get to those damages? What do we do? What’s, what’s the process? I think I’m being infringed. I think someone’s out there using, you know, my copyright or you’re using my material, they’re making music. You know, they’re putting my a logo on their tee shirts. We’ve heard it all. But so now you think you, you believe this is happening, you know, how do you get to your damages? Well,

Anthony:

I would say number one will, I think, you know, this is somebody who’s an engineer who has the uh, MBA background as well, who has done a lot of IP valuation. I think you need to first start off with a balance sheet of a business. And this is where I always take my clients and potential clients first. What is your business worth to begin with? That’s number one. And I also look again, number two, has this potential defendant been through an intellectual property lawsuit before? And if so, what have been the damages at the time? So this way I’ve got some kind of Ballpark, especially if the defendant is a bigger company. But I also say, look, you know, if you can’t really tell me how much intellectual property is worth because you don’t know what your goodwill is of your company because you’ve never calculated it because you’ve never registered it, whatever the case might be, you know that’s going to be an issue. But if you can calculate maybe your lost profits just to begin with at a certain point, like you noticed potential defendant was acting and from that point to now your business has gone down, well now you at least begin to see some lost profits in there and you can track that and then you can say, all right, now we’re talking damages. So at least you can make that correlation.

Wil:

Yeah, yeah. I think that’s very similar in the patent world. I mean when we kind of get started and I think this is kind of great to go down this line. I struggle with it, you know, or I should say I contemplate it a lot of times because you know, the value of your patent, maybe the day it’s issued or whatever is worth nothing more actually than the price you paid for it, right? It’s, it’s book value is no more than the effort that it took, including experimentation. You know, your researchers, uh, your patent attorneys, you know, uh, the folks that allowed you to actually get that patent issued, that cost associated with that is the book value of your patent right? Now, having said that, what is really the value of your patent? Well, it’s worth no more than the amount of dollars that it’s able to capture for the product that is being protected by that patent, are defended by that patent, which in itself means that you’re keeping competition out of your market for that particular item.

Anthony:

Right? And look, we all would love to say to our clients, we can get you your attorney’s fees. We would love to sit here and say, yes, we can triple the damages that are awarded, but as you can see the statutes for intellectual property damages don’t always allow that so you have to look at what your business is worth to start with. Sometimes of course you need to understand how big the defendant might be as well and this is a serious issue because look, if the defendant is selling millions more units than you are and that potential defendant really is infringing well now you’ve got a lot of lost profits. Absolutely you can recover. Absolutely. If the defendant is a tiny defendant and has sold 10 units, a hundred units worth the pain of a lawsuit.

Wil:

Actually we bring it up in our conversation right now, but I always start with clients and trying to answer the question whether or not it’s actually worth it. We talk about what the potential damages are. We talk about what your potential recovery might be and are talking now infringement at a assertion versus say carrot based licensing, which we can talk about a little bit later on, but when you’re talking about infringement, r is the recovery, forget the language for a second. Is the recovery of dollars that you’re going to put back into the coffers of your company and back into your investor’s pockets, is it going to be worth it for you to actually bring the case patent litigation is inherently expensive. Yes, and these days, one may have to take on additional hurdles in which you find yourself trying.

Anthony:

Your case at the PTAB is a kind of go-between before you can even get to the courts and having a case in PTAB can be in parallel with a patent infringement case in federal district court.  It is a headache that we’re not going to go into depth at all here, but I have heard the chief justice of the PTAB speak back in October and look, it is quite possible to have two cases on one issue running in parallel here in the United States because of the way the pizza up statute is written. And so you’re looking at the potential at that point of the p tab and the Federal District Court ruling in op quite possibly ruling in opposite directions on the validity of a con at the same time. At the same time it has happened. Yes.

Wil:

Now we take off our technical engineering hat, we take off to some degree, maybe our legal hat, not totally, but we certainly need to pull the cap down on our valuation and finance really tight. Now to be able to say with honesty to ourselves, if it’s going to cost me, let’s use an example, a dollar to run this case. Then who’s willing to take the risk of something with a failure rate of more than 40% if my return is only $2 do the math, no finance person would ever suggest that their client take that case. We need to be in the area of 10 to 20 times, maybe more before we start to take that risk and so that’s why even though we’re counseling you in a legal matter, we still need to understand the numbers and reflect on how the process of going through our legal will have ramifications on how the case may or may not prevail in your favor and not meaning your pocket book.

Anthony:

Of course. Yeah, I agree completely is that there has to be a balance and this is something that I just said, every piece of litigation is its own business. Absolutely. Just like every movie is its own business and you need to treat this piece of litigation as a separate business. There is going to be a cost to it. There’s going to be some kind of endpoint and there’s going to have to be some kind of profit made at the end. That also tells us whether you’re going to try to litigate the case to the end if you’re going to try to settle this at some earlier point as well. So I know that we titled this to kind of say, hey, you know cost benefit analysis, so varied and so complex. Oh it is very complex. Obviously in the podcast episode we’re not going to be able to sit here and give some kind of formula cause that doesn’t exist.

Wil:

Well that’s it’s as we said, every case is different in every case turns on the piece of evidence or new news that you discover as you’re moving through the process. Right. We may find that even though we’ve identified an infringer of your intellectual property, it may be more than one infringer and certainly in cases of patents that that tends to happen frequently. And so do you attempt to file suit against each party at the same time. While that may not necessarily be the way you want to handle it, you may choose to, you know, go after one party for certain reasons, be it size, be it, uh, ease of case V at any number of factors and let that a fall hopefully to your positive and then cause a domino effect is you then go seek to license other players in the market. Now with precedents making that easier or you may decide to go the Goliath route in gold, swap the smallest B and keep working your way up the chain. In the end, it all depends on how much am I going to spend and what’s the potential return and what’s the risk on obtaining that return.

Anthony:

I agree with you completely just to end this episode and with a positive thought. If there is a defendant out there or potential defendant that is infringing any of your intellectual property, remember all forms of intellectual property do get you to lost profits somehow. They do get you to a royalty rates somehow or they do get you to a fixed rate per infringement somehow. So maybe they’re not all going to get you to triple the damages. They aren’t all going to always get you to attorney’s fees. But if the value of your business plus whatever kind of estimate you can come up with for the defendant, potential defendant’s sales means that you’re going to recover on some kind of multiplier of what you’re going to spend. It’s probably worth probably every case is different. Every case is different. But that’s the starting point for trying to figure out the cost benefit analysis.

Wil:

And if that doesn’t work, then go out and buy a baseball team.