Articles
Managing Patent Lawsuits in the United States for Favorable Results
China IP News
March 2009
Puknys, Erik R.
Article
I. INTRODUCTION
Today’s global economy makes it easier than ever for a company to generate revenue from dozens of countries without even having to leave its home country or region. This is definitely the case for an increasing number of Chinese companies.
This increased interconnectivity provides enormous benefits to everyone involved, but there are also some unfortunate side-effects to international trade, such as having to defend yourself against lawsuits in a foreign country. This article addresses patent lawsuits in the United States. Litigation in the United States is different from litigation in virtually every other country in the world. This article addresses some of the more significant and unique aspects of U.S. litigation and provides suggestions for how a Chinese company can maximize its chances for a successful outcome while at the same time minimizing the notorious costs associated with U.S. patent litigation. There is an old soldier’s proverb that says “the more you sweat in peace, the less you bleed in war.” As this article explains, the same concept applies equally for litigation in the U.S.: Some of the most effective measures for increasing your chances of success and saving money during litigation can be implemented by a company long before any lawsuit is filed.
II. HOW TO MAXIMIZE YOUR CHANCES OF SUCCESS WHILE HOLDING DOWN COSTS
A. Determine Whether You Can Be Sued in the United States
One surprising aspect of litigation in the United States is how often the U.S. courts determine they can exercise jurisdiction over foreign companies. Under the United States patent laws, a company is liable for patent infringement when it makes, uses, offers for sale, sells, or imports an infringing product in the United States. It obviously follows, therefore, that a Chinese company with manufacturing facilities in the United States or one that sends its sales representatives or ships products directly into the United States can be sued here.
What may be surprising, however, is that several U.S. courts have allowed suits to go forward against foreign companies that have never sent an employee or shipped a product to the Unites States. This is because the U.S. patent laws also have a provision that allows a person or company that “induces” others to infringe a U.S. patent to be sued here. An “inducement” situation can be illustrated with a hypothetical: A Chinese IC manufacturer sells an IC to a Japanese consumer electronics manufacturer that incorporates the IC into its own product (say, a digital camera). The Japanese camera manufacturer then sells its camera around the world, including some percentage of sales in the United States. In such a scenario, the only infringing act is performed by the Japanese camera manufacturer and it obviously can be sued in the United States. But what if the patent owner is a company that makes ICs and wants to sell its own ICs to the camera manufacturer? Suing potential customers is not good business, and the patent owner can expect that the camera manufacturer will be extremely unlikely ever to buy ICs from a company that sues it for infringement. Accordingly, the patent owner would like to sue the Chinese IC manufacturer instead.
The law of “induced” infringement may provide that opportunity, since an argument can be made that the IC manufacturer is “inducing” the camera manufacturer to infringe. The U.S. courts are split on when the Chinese IC manufacturer can be sued. Some courts are very liberal, finding that the IC manufacturer can be liable as long as it knew, or should have known, its customer (the Japanese camera manufacturer) would sell its products in the United States. Other courts have been more conservative, refusing to hold the IC manufacturer liable for induced infringement unless it actually caused its customer to sell its products in the United States by, for example, setting up return and repair centers in the United States or by indemnifying the camera manufacturer specifically against claims in the United States. It may be years before the courts finally settle on a uniform rule for when a foreign company can be held liable in this situation. In the meantime, there are other things a company can do to protect itself.
B. Study Your Competitor’s Patents or Patents That Might Be a Threat to You
One of the most effective ways to protect your company is by knowing in advance where a patent infringement lawsuit is likely to come from. The most obvious source of potential lawsuits are your competitors. Some business sectors also have well-known patent owners who aggressively enforce their patents against every major company in that business. Thus, if a number of your competitors are being sued by a single patent owner for selling essentially the same product your company sells, it may only be a matter of time before that same patent owner sues you.
Knowing in advance what patents pose risks to your company gives you a substantial advantage. First, you might be able to “design around” the patent relatively easily, that is, redesign your product so that it is less likely to infringe. This is one of the services a good law firm can provide, especially if it has attorneys who are not only experts in patent law, but who also have practical experience in the type of product involved or who hold technical degrees in the relevant field. Designing around a patent is almost always easier to do before the product is released, especially if the product has to be “designed in” to another company’s products.
It also may be easier to negotiate a license with the patentee before or shortly after your product is released. This is because it is usually easier for a company to factor in the price of a license before any sales are made as opposed to paying a lump sum royalty for past sales. Also, it may be easier to negotiate a license fee before there is a track record of sales—a patent owner might get more aggressive if it knows the product is an important part of your company’s product line.
Finally, knowing about patents that may be asserted against your company gives you an opportunity to discuss them with U.S. patent counsel. Your U.S. patent counsel can study the patents and your products and provide an opinion about whether the patent actually poses a risk to your company. These opinions can play a critical role in litigation. For example, they can be used as a defense against charges that you “induced” your customers to infringe the patent (because the law of inducement requires the patent owner to prove that the alleged inducer intended for infringement to occur). An opinion from outside counsel can also help a company avoid liability for “willful” infringement, which can triple a damages award.
C. Develop Your Own Portfolio
Another way to protect yourself is to build up your own patent portfolio. A patent portfolio provides you with a potential counter-threat to a patent owner, particularly if the patent owner is a competitor. Even if you do not counter-sue your competitor on a patent in your portfolio, you can often negotiate a less expensive license fee if you can cross-license your patents with your competitor.
D. Establish (and Follow!) a Document Retention Policy
Perhaps the most surprising, burdensome, and costly aspect of litigation in the United States is discovery. In the United States, your opponent is entitled to obtain copies of every document in your possession that is relevant to your opponent’s claims and your defenses in lawsuit with only a few, very narrow, exceptions. Every document related to the accused product is subject to discovery, including those concerning research and development documents, testing, marketing, and sales. Corporate documents also are usually subject to broad discovery in the United States. It is important to remember, moreover, that document discovery includes every e-mail that is related to these topics as well.
The process of collecting and producing documents for discovery is extremely burdensome, and doing it well—or badly—can often be a critical factor in the litigation. There are numerous cases in the United States where a litigant was severely sanctioned for not turning over all its relevant documents or for destroying relevant documents when it should not have. The risk is greater for foreign companies that may not be accustomed to the discovery process required by the U.S. courts and are therefore unaware of the extent of their obligations.
A good document retention policy (which can be set up with the help of a law firm and experienced document vendors) can help avoid disasters relating to discovery. These policies provide a systematic way to back-up and store in readily accessible files every document in a way that makes collecting them relatively easy and inexpensive. A good policy also ensures that old documents are destroyed according to schedule so that unnecessary documents are not kept longer then they are needed and so the total amount of documentation remains manageable.
Once a document retention policy has been established, it is critical that every employee be trained to follow it. For example, destroying a document that is not otherwise scheduled for destruction can look extremely bad in litigation. Thus, in addition to establishing a document retention policy, your company should also ensure it is followed.
Finally, your company needs to be ready to suspend the destruction of any relevant document once it becomes apparent that your company will be (or has been) sued. Under U.S. law, it can be a crime to knowingly destroy evidence once you become aware that a lawsuit will be or has been filed. Even if the destruction is inadvertent, courts will often punish a litigant by refusing to allow certain arguments to be raised or evidence to be used. This can create enormous problems in a litigation. In some extreme cases, courts have even entered judgment against litigants who destroyed evidence when they should not have. As a result, it is critically important to immediately inform all your employees that they should not destroy any documents (including e-mails) relating to any lawsuit that has been (or will be) filed. This includes documents that otherwise would have been scheduled for routine destruction according to a document retention policy. The notification procedure is called a “litigation hold,” and every U.S. law firm qualified for handling patent litigation will know how to help you implement it.
E. Limit Unnecessary Discussions (Especially in E-Mail) About Competitors’ Patents or Litigation Plans
One common problem that arises in cases involving foreign defendants is loose talk in e-mails among company employees or between company employees and customers or suppliers. This is especially true for foreign companies, where the communications may not be in the participants’ native language (for example, in the hypothetical discussed above, the Chinese IC manufacturer’s employees may communicate with the Japanese camera maker’s employees in English). To put it bluntly, sometimes the person writing the e-mail writes something that he does not mean, either because he chose the wrong word or because he is being too casual. In one case we have been involved in, for example, one engineer wrote to another, saying that they should “copy” the patent owner’s product with one of their own products, when what he really intended to say was that they wanted to “compete” with the patent owner by offering a competing product in the same market. The author probably did not really think about what he was saying because he thought the e-mail was just between him and his colleague. The patent owner, however, was able to rely on that e-mail in the litigation to paint a misleading picture of what was actually being done in the development of the accused product.
It is also not unusual to see internal e-mails expressing concern about a competitor’s patent or the threat it poses to the company or its customers. These e-mails can be extremely harmful when produced in litigation (and they must be produced).
It is best to train your employees to not discuss any patent issues with each other, especially by e-mail, to avoid miscommunications that can be exploited by an opponent during litigation. Patent law is extremely complex and even the most experienced employees can misapprehend the issues involved. Instead, the company should designate an individual who has been trained in at least the basics of patent law (if not a lawyer, than at least a high-level engineer) to handle internally all issues related to patents and who knows when outside counsel should get involved.
III. CONCLUSION
There is no avoiding the fact that patent litigation in the United States is extremely burdensome and costly. There are a number of things a company can do, however, to make litigation proceed more smoothly and cheaply, while at the same time increasing the odds of success. The steps outlined above are just a few of the things a company can do to prepare itself for litigation in the United States.