Seattle Intellectual Property Inn of Court

1. Seattle Intellectual Property Inn of Court Group 3 Presentation: Costs of Litigation January 16, 2014 • Introduction (Kevin Zeck) • Overview and Effect of pertinent new provisions of AIA (Isabella Fu) • Overview and Effect of various recently issued Local Patent Rules and Model Orders (Ben Byer) • Proposed changes to Federal Rules of Civil Procedure (Parker Folse)  • Proposed Patent Reform Legislation (Dario Machleidt/Jeffrey Cox) • Questions and Answers

2. The Patent Litigation System:Costs of Litigation & Reform of the System Group 3 Presenters: Ben Byer, Jeff Cox, Parker Folse, Isabella Fu, Dario Machliedt, and Kevin Zeck

3. Costs of Patent Litigation Presenter: Kevin Zeck

4. Types of Costs: Overview • Costs to Patentee/Inventor • Costs to Obtain/Maintain Patent Protection • Lost Profits • Price erosion • Failure to monetize (loss of expected royalties) • Litigation Fees and Costs • Attorneys Fees • Indirect Costs (diverting resources from R&D, marketing, manufacturing, etc.) • Costs to Alleged Infringer • Litigation Fees and Costs • Attorneys Fees • Settlement Value & Damages Awards • Indirect Costs (diverting resources from R&D, marketing, manufacturing, etc.)

5. Types of Costs: • Costs to Third Parties Involved in Litigation • Costs to respond to subpoenas and informal requests for information • Externalities: • Costs of enforcement borne by public (e.g., judicial resources consumed in effort to enforce patent, reduction in availability of alternative goods, etc.) • Costs to reform system perceived to be broken

6. Are Costs Good or Bad? • Depends on evaluative model • If deontological, costs are good (or at least justified) if necessary to secure the rights of inventors. • If utilitarian or consequentialist, then the patent system functions to incentivize progress (through invention) • Costs are theoretically good up to point where marginal increase in progress is equal to marginal increase in cost to achieve progress

7. Litigation Costs • Types of Litigation Costs: • Attorneys Fees • Document Retention/Production Costs • Depositions • Consultants • Experts • Alternative-Dispute-Resolution Related Costs • Mock Trials and Hearings • Court Fees and Costs • Appeal Related Costs • Settlement Value/Damages Awards

8. Litigation Costs Little high-quality, publicly-available, quantitative information exists

9. Litigation Costs • Best Source on Quantitative Litigation Costs Available is AIPLA: Report of the Economic Survey • Conducted by AIPLA every two years since 1989 • Drawbacks: Self-Reporting, Small Sample Size (usu. a couple thousand responses, equaling roughly a 20% response rate), failure to catch many types of costs (e.g., judicial resources, indirect costs of litigation, etc.) • Other resources: • PriceWaterhouseCoopers (focuses on damages), RPX (focuses on NPEs – does not publicly provide all data), other private studies (Bessen and Meurer)

10. AIPLA Results: Sample Size and Response Rate

11. AIPLA Survey • Question Posed: • Two part question (at least as far back as 1995) that asks, for different levels of “value at risk”: • What is your estimate of the total cost of a patent infringement suit through the end of discovery? • What is your estimate of the total cost of a patent infringement suit inclusive of discovery, motions, pretrial, trial, post-trial, and appeal?

12. AIPLA Results: Median Costs1995 Data

13. AIPLA Results: By Percentile1995 Data

14. AIPLA Results: Median CostsLess than 1 million at Risk

15. AIPLA Results: Median Costs Between 1 and 25 million at Risk

16. AIPLA Results: Median CostsMore than 25 million at Risk

17. AIPLA Results: Median CostsBetween 1 and 25 million at Risk – Other IP Litigation

18. GDP – United States – 1995 to 2013

19. Inflation Rate – United States1995 to 2013

20. Number of Suits From PriceWaterhouseCoopers, 2013 Patent Litigation Study: Big Cases make headlines, while patent cases proliferate 6 (2013), available at http://www.pwc.com/en_US/us/forensic-services/publications/assets/2013-patent-litigation-study.pdf

21. Number of Suits • Factors: • Economic Expansion • The Information Age • Non-practicing Entities (RPX thinks this is a significant driver in the number of suits) • Success stories (e.g., large verdicts) • Number of Suits per year has more than tripled since 1995, which would drive up demand for patent litigation legal services

22. Aggregate Economic Impact? Little research has been done

23. Drivers of Costs? • Increased Suits/Demand for Services • E-Discovery (Information Age) • Markman v. Westview (mid-1990s) • Promulgation of Local Patent Rules • N.D. Cal. was first in 2000 • Increasingly Complex Technologies • Higher-Stakes Litigation (Smart Phone Wars) • Economic Expansion (general price increases)

24. Looking Forward • Patent Applications, Issued Patents, and Patent Infringement Suits Appear to be Increasing at Record Paces • Technologies will continue to become more sophisticated • Recent case law (e.g., Apple v. Samsung – Posner) suggests damages theories will need to be developed more rigorously

25. Looking Forward • Increased costs, however, are not necessarily bad • If marginal gains from patent protection exceed marginal costs to obtain/enforce, then cost levels are acceptable • Little real-world data exists comparing gains to costs • Because of this, some theorize that patent protection is unnecessary (Boldrin and Levine, 2013) • Quality of life has substantially increased since 1995 (the Internet, smart phones, etc.) – but whether this is the result of patent protection is unknown

26. Comments/Questions

27. Costs of Patent Litigation:Effects of America Invents Act Isabella Fu Microsoft Corporation

28. America Invents Act – Relevant Provisions • Beginning September 16, 2012, alleged infringers may challenge validity of patents through new inter partes, litigation-like proceedings in US Patent Office • Inter Partes Review (IPR) -- generally available if patent was issued over 9 months ago, and petitioner files request within 1 year of being sued for patent infringement • Covered Business Method (CBM) Review -- available for patents claiming a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service; not for patent for technological inventions • A technological invention is one where the claimed subject matter as a whole recites a technological feature that is novel and unobvious over the prior art; and solves a technical problem using a technical solution • Post Grant Review (PGR) – available for patents filed after March 16, 2013 (subject to first to file rule), and within 9 months of issuance • Lots of useful information, including statistics at PTO website: http://www.uspto.gov/aia_implementation/index.jsp

29. Costs and Timeline • IPR: • 5-6 months after petition is filed, PTO decides whether to institute “trial” • PTO gives an indication of its reasoning and claim construction • PTO aims for decision within 12 months of institution • Total: 18 months to appealable decision, in theory • District court litigation (other than ): • Typically 9-12 months to get Markman ruling • Total: 24 months or longer to trial, and additional time for post-trial motions • Cost of IPR - http://www.uspto.gov/web/offices/ac/qs/ope/fee031913.htm • Filing fees:  About $23,000 plus additional feels for claims over 15 • PTO: “the Office estimates that the cost of preparing a petition for inter partes review would be $46,000.”  “the Office estimates that the average inter partes review will have 6 motions, oppositions, and replies after institution.” • Very little discovery – typically just depositions of experts • Effectively patent litigation minus fact discovery, damages discovery, and trial • Cost of district court litigation • Discovery – infringement, validity, and damages • Markman briefing, SJ briefing, discovery motions • Infringement, validity, and damages experts • Trial

30. Considerations – IPR v. Litigation • For IPR, estoppel will apply for any type of prior art that could have been raised in an IPR (patents and printed publications) • Need strong documentary evidence, without need for extensive discovery, to invalidate • Alleged infringer can still raise subject matter (Section 101) and Section 112 defenses, as well as 102/103 arguments based on public use • Consider whether the arguments will play better before PTO or judge/jury • Consider whether broad claim language may be affected by PTO proceedings • Consider whether patent owner is prepared to expend significant sums early on in proceedings

31. Statistics – Petitions and Litigation Stays • Filings from September 16, 2012 through November 2013 • Over 500 IPR Petitions • Over 80 CBM Petitions • 1 PGR Petition (accidentally filed) • About 80% of petitions result in institution, but only on minority of grounds • However, challenges are instituted on most claims • More likely to institute on anticipation than obviousness • Over 70% of motions to stay district court proceedings are ultimately successful

32. Effect of Local Rules and ESI Orders on Costs of Patent Litigation Ben Byer Research conducted by Yeu-Yan Perng

33. Background: Local Rules • Life without local patent rules – chaos? • Define needed contentions • Organize selection of claim terms • Schedule Markman briefing

34. Background: Local Rules • 29 District Courts • LocalPatentRules.com • W.D. Wash. • E.D. Tex. • N.D. Cal.

35. Background: E-Discovery Orders • Timing: Stage email v. non-email • Custodian Limit: 5/10 • Search Term Limit: 5/10 • Volume Limit: 250 MBs • Define Claw Back • Define Inaccessible Info

36. Background: E-Discovery Orders - Origin • Fed. Cir. Advisory Committee releases • Some district courts adopt • W.D. Wash. • E.D. Tex. • Others I ESI

37. Effect on Costs of Patent Litigation

38. Local Patent Rules – Reduce Costs? • Pros • Organize litigation • Cons • One size fits all • Harder for early SJ • Results • Study: Save 2.5 months • Not sole solution • “Rocket Dockets” don’t use them

39. Model ESI Orders – Applicable Cases • Two types: (1) all case and (2) patent cases only • Are they needed in all patent cases? • NPE suits • imbalanced costs • Competitor suits • page-by-page review • N.D. Cal. says “yes”

40. Model ESI Orders – Staging Email • Liability typical does not depend on email • After spending time and energy on non-email • Less need • Less appetite

41. Model ESI Orders – Custodian Limit • Helpful to the extent it reduced volume • Volume key! • Limited value if still need to search for non-email ESI • Causes issues with 30(b)(6) and trial witness

42. Model ESI Orders – Search Term Limit • Limited number of terms means courser search • Each term broader • Tailored search may require many narrow terms • Does not lower costs without volume limits

43. Model ESI Orders – Search Volume Limit • Storage Size • W.D. of Wash. • Document Count • None?

44. Model ESI Orders – Summary • Keys to Cost Reduction • Negotiate with opposing counsel • Reduce volume • Staging

45. Proposed Changes to the Federal Rules of Civil ProcedureParker FolseSUSMAN GODFREY, LLP

46. Current Rule 37(e) (e) Failure to Provide Electronically Stored Information. Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.

47. Proposed Rule 37(e) (e) Failure to Preserve Discoverable Information. (1) Curative measures; sanctions. If a party failed to preserve discoverable information that should have been preserved in the anticipation or conduct of litigation, the court may: (A) permit additional discovery, order curative measures, or order the party to pay the reasonable expenses, including attorney’s fees, caused by the failure; and

48. (B) impose any sanction listed in Rule 37(b)(2)(A) or give an adverse-inference jury instruction, but only if the court finds that the party’s actions: (i) caused substantial prejudice in the litigation and were willful or in bad faith; or (ii) irreparably deprived a party of any meaningful opportunity to present or defend against the claims in the litigation.

49. (2) Factors to be considered in assessing a party’s conduct. The court should consider all relevant factors in determining whether a party failed to preserve discoverable information that should have been preserved in the anticipation or conduct of litigation, and whether the failure was willful or in bad faith. The factors include: (A) the extent to which the party was on notice that litigation was likely and that the information would be discoverable;

50. (B) the reasonableness of the party’s efforts to preserve the information; (C) whether the party received a request to preserve information, whether the request was clear and reasonable, and whether the person who made it and the party consulted in good faith about the scope of preservation;