One evening you are leisurely flipping the pages of a magazine and suddenly your heart starts racing. There it is: your invention, your brainchild looking at you from the pages of the magazine. How could that be, you ask yourself, I've got the patent on this thing and someone else is selling it? Your imagination takes flight and you envision the BAD GUYS making a FORTUNE with your idea.

This is more that you can bear and the very next morning you are sitting in the office of your trusted patent attorney, the one who helped you to get this patent in the first place. You explain to him your predicament and promise him a portion of the future fortunes if only he agrees to take the bad guys to court. Your are surprised to learn that your good ol' patent attorney is not a litigator, that he only prosecutes patent applications before the Patent Office and has never set foot in a courtroom.

A meeting with a patent litigator, if you find one, is even more distressing. While many litigators are eager to represent a client, they require a sizable retainer, and contingency representation is generally not an option.

If you are not prepared to bankroll your case – at a cost of over $1 million – they quickly lose interest. What is my patent worth if I can't enforce it, you may wonder.

A patent is not what many people think. Patents do not give inventors the right to use their inventions. Patents only give inventors the right to prevent others from using their inventions. As the patent law clearly states:

"Every patent shall contain ... a grant to the patentee ... of the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States,...". 35 U.S. Code 54(a)(1).

That means a patent is merely the right to sue. Nothing more.

Our founding fathers, many themselves inventors, properly intended to encourage economic progress when they wrote into the U.S. Constitution the basis for the patent system:

"The Congress shall have the power to promote the progress of Science and useful Arts, by Securing for a Limited Time to Authors and Inventors the exclusive Right to their respective Writings and Discoveries". Article I, Section 8.

The patent was established as a bargain between the State and an inventor. In exchange for the right to exclude others from using the invention for a limited time, the inventor agrees to disclose the invention to the public. Inventors uphold their end of the bargain with that disclosure. But when the patent is infringed, the patent owner learns that the government's promise of "securing" an exclusive right for inventors does not come with its own police force. The only way to enforce those rights is through the courts, a lengthy and expensive burden that falls on the patent owner alone.

Patent Infringement and Litigation

Patent infringement litigation costs on average $1.5 million. This fact puts it out of reach for most individual inventors as well as many small and start-up companies. The only remaining option is contingency litigation. In contingency representation attorneys are not paid by the hour, but instead receive a portion of the recovery if they win the case or if the case settles out of court. The contingency fee is typically one-third to one-half of the total recovery. We've all heard of personal injury lawyers chasing ambulances. Unfortunately, no one is chasing inventors to enforce their infringed patents. There are several reasons for this.

Firstly, there are very few patent litigators. Most patent attorneys only prosecute patent applications before the Patent and Trademark Office (PTO); they are not trained or experienced in litigation, which is another specialty entirely and requires another set of skills.

Secondly, the enormous cost of patent litigation (unlike personal injury litigation) places it beyond the ability of all but a few large law firms. This is a highly specialized field and most of the players are small "boutique" type firms. These smaller firms cannot afford to invest so much money in your case, and even less so if you ask them to lay out for you the out-of-pocket expenses, which in a patent case may run into a six-digit number. The large firms which, in theory, can afford to take a case on contingency, do not like to do that simply because they have enough paying corporate clients to keep them very busy.

Another reason is that any large firm representing corporate clients has to watch for potential conflicts of interest. The infringer may already be their client, which will preclude any legal representation adverse to their client. Also, accepting your case may preclude getting business from the infringer in the future. Since you are a one-shot deal for these firms, it is not too difficult to guess where their interest will be focused.

An inventor stands a slim chance of retaining an IP litigation firm on a contingency basis. If you secure an interview with an IP litigation firm, you need to be well prepared – you get only once chance. So, be prepared to answer two basic questions: (1) why do you think that the accused device (or process) infringes your patent, and (2) how much money is at stake, i.e. what is the amount of damages.

In order to make your case for infringement, try to prepare what is typically referred to as a "claim chart". To say that your patent is infringed is not enough. You need to show exactly which claims of your patent are infringed and how. A claim chart demonstrates how well each infringed claim "reads" on the infringing device (or process). A claim chart is a simple two-column table. You place the elements of your patent claims in the left column and the corresponding structure of the infringing device (or steps of the infringing process) in the right column.

For illustrative purposes, suppose you have a patent on an electric fork that is well suited for eating spaghetti. The patent claim may look something like this:

Claim 1: An electrical eating utensil suitable for handling spaghetti, comprising:

  1. a hollow handle with a receptacle for an electric motor;
  2. a fork head rotatably connected to said handle;
  3. an electric motor positioned within said hollow handle further coaxially connected to said fork head;
  4. a battery positioned within said hollow handle and electrically connected to said motor;
  5. a button positioned on said handle and electrically connected to said motor.

You find an advertisement for "Happy Fork", a utensil that you think infringes your patent. After you buy and examine the Happy Fork, you should be able to create the following claim chart:

Claim Chart for U.S. Patent No. X,XXX,XXX

Claim No. 1

Happy Fork (Serial No. B872342)
a. a hollow handle with a receptacle for an electric motor;

the Happy Fork has a hollow handle
b. a fork head rotatably connected to said handle;

the Happy Fork head rotates at the push of a button
c. an electric motor positioned within said hollow handle further coaxially connected to said fork head;

the Happy Fork has an electric motor driving the rotating head
d. a battery positioned within said hollow handle and electrically connected to said motor;

the Happy Fork motor is powered by one AAA battery disposed in the hollow handle
e. a button positioned on said handle and electrically connected to said motor.

the Happy Fork handle has a button which starts and stops the rotation of the fork head

The structural elements of the infringing device are determined in this example by examination of and actual experimentation with the device. If you cannot obtain a sample of the infringing device, you may use for your right column quotations from technical or marketing literature. Remember, based on the "all elements rule", every single element of your claim must have a corresponding structure (or step) in the infringing device (or process). If even one step is missing, you have no literal infringement. (Infringement under the Doctrine of Equivalence is a complicated issue and lies outside the scope of this article.)

Better yet, if you are able to obtain a legal opinion as to the infringement of your patent from a competent patent attorney, your chances of obtaining litigation counsel may improve. Unfortunately, legal opinions come at a price and are not cheap. Be prepared to pay anywhere from five to twenty five thousand dollars for an infringement opinion. In any event, your counsel will have to make his/her own claim chart and will not rely on someone else's opinion. Thus, if you are able to make a claim chart on your own (perhaps with a little help from your patent attorney or agent) that may suffice.

Putting The Infringer On Notice

Your first inclination when you learn of infringement is to send the infringer a "cease and desist" letter. This knee-jerk reaction, however, may backfire. You may be sued for a declaratory judgment (DJ) if the accused company is worried about being imminently sued by you. Such reasonable apprehension gives it the standing to file a lawsuit against you to seek a court judgment that the patent is either invalid or not infringed - usually both. Such a preemptive move may be aimed at intimidating you, but at the very least it will secure a convenient venue for the infringer who always prefers to litigate in his own backyard. If you don't defend yourself in a DJ action you may lose your patent, which will be declared invalid by default. Therefore, do not make threats before you are prepared to fight. Even when you have secured counsel and are ready for battle, it is always better to choose the venue that is convenient for you.

Another danger may arise if you write a letter to an infringer who ignores you or responds with a boilerplate "we will look into this matter and get back to you", and then you fail to follow up. It is particularly dangerous when you threaten litigation but do not carry out your threat. Doing so may create an estoppel, which will render your patent unenforceable with respect to this infringer.

On the other hand, inaction is not always a better alternative. If you have failed to enforce your rights within a "reasonable" time after learning of infringement, you may be guilty of laches (an equitable defense based upon neglect or lapse of time), which may ultimately prevent you from collecting any past damages from the infringers.

What are you to do? The best thing to do is let your attorney handle this very delicate issue. If you are determined to write a letter by yourself, stay away from such words as "infringement", "cease and desist", "litigation", or any other threatening words or phrases. Keep the tone of the letter polite and friendly. State that you would like to bring to the attention of the reader your patent (and enclose a copy) for which you are seeking licensees. Describe the importance of your patented technology and its relevance. End the letter by saying that a license is available on favorable terms. While this is no guarantee that the infringers will not file a DJ action anyway, they will have a more difficult case to make that they were threatened by your friendly offer of a license. However, this type of letter is not likely to produce a response that includes a check in the mail.

To Sue Or Not To Sue?

(the economics of patent enforcement)

The average cost of patent infringement litigation is $1.5 million. If you are asking your counsel to bet this amount on a contingency basis, you need to make a strong case that your counsel stands a good chance to make a multiple of this amount as a result of litigation. This requires a bit of economic analysis.

There are two basis types of damage awards prescribed by patent law: lost profits and reasonable royalties. Generally, lost profits are only available to someone who makes and sells his patented product, and has lost sales or been forced to reduce prices due to the infringer's activities. Most individual inventors do not make or sell their patented inventions. Therefore, they are not entitled to lost profits, but are awarded "reasonable" royalties as the minimum required by law. You may want to research what are typical royalty rates in your industry. If you cannot find relevant data, you may know the typical gross profit margins in your industry. In this case, use the following rule of thumb: reasonable royalty is 20% to 33% of the gross profit margin. Thus, if your industry has a typical margin of 30%, a reasonable royalty may be anywhere between 6% and 10%. If you intend to settle the case (which is the right strategy in most cases), you need to discount your potential royalties by 50% or so to account for the uncertainty of litigation. In our example, this would bring the reasonable royalty rate to 3-5%.

Now you need to multiply this royalty rate by the portion of the revenues of the infringer that is attributable to the infringing product (or process). You need to do this for every one of the past six years, which will give you the total past damages. To project the future infringing revenues for the remainder of the patent life, multiply these future revenues by the royalty rate, and discount to the present time. This will give you the present value of future royalties. Adding past damages and the present value of future royalties yields your total potential recovery from the case. (If you go through trial and win, you will be entitled to statutory interest on past damages, but in settlement negotiations this factor is often discounted.) Thus, the formula for the total potential recovery is:

where:

RR is the Royalty Rate;

AIR is the Annual Infringing Revenues, summed for the past six years;

PV is the Present Value;

FR is the projected Future Revenues; and

PW is the Probability of Winning the case.

This probability can be more precisely gauged as a result of a detailed litigation risk analysis which involves elaborate decision trees and Monte Carlo simulation. For the sake of simplicity, you may assume this number to be between 50% and 75%. This range, while oversimplified, is useful for a crude best/worst case analysis.

Prospective counsel will generally request anywhere from one-third to one-half of the total recovery. Unless this number is a multiple of the typical $1.5 million litigation cost, in all likelihood he will not be interested. Simple arithmetic gives us $15 million in damages as a minimum threshold to arouse the curiosity of the potential counsel to continue to listen to the rest of your story. Practically speaking, however, most counsel will not consider a case where potential damages are less than $100 million. This amount of damages corresponds roughly to a half billion dollars in annual infringing revenues, which helps to explain why there are so few contingency cases in the IP field.

Conclusion

Where do you go from here? Unfortunately, the patent holder whose patent is infringed finds him/herself between a rock and a hard place… unless you have a couple of million dollars to finance the litigation. As U.S. News and World Report once put it on another occasion, American justice is the best justice your money could buy.

The big guys know that you cannot take them on. It is for this reason that large corporations routinely infringe the patent rights of individual inventors and small companies. It is also for this reason that they will most likely ignore you when you write to them; they know that after a few letters you will probably run out of steam and go away. This astonishing inequity undermines the very essence of the U.S. patent system. It is this inequity that prompted us over ten years ago to start our firm, dedicated to enforcing the rights of individual inventors.

Footnotes:

1 See Alexander I. Poltorak and Paul J. Lerner. Grain, Grain, Go Away. IP Worldwide, Feb. 2000

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.