Patent profits

If you strolled into your firm with a cheque for $200m (£111.9m), your managing partner would probably single you out for a little praise come the year-end. Thanks to the recent raft of big paydays for firms willing to take cases on a contingency basis, notably in the area of so-called ‘patent troll’, a number of lawyers have become familiar with that feeling.

If you strolled into your firm with a cheque for $200m (£111.9m), your managing partner would probably single you out for a little praise come the year-end. Thanks to the recent raft of big paydays for firms willing to take cases on a contingency basis, notably in the area of so-called ‘patent troll’, a number of lawyers have become familiar with that feeling.

James Wallace, a patent litigator at US firm Wiley Rein & Fielding, is one such. He handled the trial work for software company NTP in its dispute with BlackBerry manufacturer Research In Motion (RIM). Wallace did handled on a contingency basis, getting a cut of the eventual settlement.

RIM settled the dispute in March with a $612.5m (£343.7m) pay-off. Sources at the time reported that Don Stout, a partner at Virginia law firm Antonelli Terry Stout & Kraus and co-founder of NTP, reportedly gave Wallace a cut of around a third of the settlement.

“We didn’t have the money to pay for it up front, so we went for a contingency fee consultation,” Stout says. “Wiley Rein earned every penny of it. Someone who’s going to put the hours in on a contingency basis is taking a gamble.”

Now, however, these big paydays look to be under threat and patent trolls are back in the spotlight thanks to MercExchange’s ongoing Supreme Court battle with online auction site eBay. In front of the Supreme Court panel of judges last month, eBay’s counsel, Carter Phillips of Sidley Austin Brown & Wood, called MercExchange a patent troll.

Often vilified by the media and by the targets of their law suits, these small-scale patent enforcers offer IP lawyers the chance to be the big billers in the firm for a change, with settlements in the tens or even hundreds of millions. If taken on a contingency basis with the possibility of a big pay-off in the end, these clients could be the most profitable of all for law firms.

MercExchange’s Supreme Court dispute with eBay is only one recent example. Both Microsoft and Apple Computers have encountered Burst.com, a two-man internet company, across a meeting room table during the past 12 months. It is an indication that the trend is on the rise.

Last year, Burst won a $60m (£33.7m) settlement from Microsoft. Although that figure is only a tenth of the amount NTP won, the increasing amount of time spent in court and the growing number of hefty financial settlements are good news for patent lawyers in the US.

“Look at the risk-to-reward ratio,” says Wallace of the fees earned from the NTP case. “Show me a bank where I can make that return.” However, although the case came good for Wallace and his firm Wiley in the end, the firm would have been offering its services for free if unsuccessful. Not many firms are willing to accept this as a viable business model. Chicago-based Niro Scavone Haller & Niro, however, has championed this approach for 20 years.

Senior partner Raymond Niro alone has won more than $400m (£224.4m) for his clients, racking up a lot of small settlements, rather than hitting one big pay day. He reportedly charges a 35 per cent cut of the gross revenue when working on a contingency basis.

“The point is really to systematically analyse your intellectual property rights and be clear with the firm,” says Stout. “In the US, contingency is a totally appropriate way of representing people.”

But lawyers will have to act quickly to get in on the big patent cases. The patent litigation gold rush could change course following the Supreme Court’s decision in eBay v MercExchange, which is expected within a few months.

At stake is the future of injunctive relief in US patent cases. This is often used as a bargaining tool for patent owners to push through large settlement deals with infringers. The threat of injunction was a key weapon in the BlackBerry case and is ultimately a driver of lawyers’ fees in contingency-based litigation.

The US government will also weigh in this year with consultations on patent reform legislation, known as ‘HR 2795’. Patent trolls are on the list of issues to address and any action is likely to make their route to court a little more winding.

US Patent and Trademark Office director John Dudas and representatives from RIM will attend government consultation hearings set for May. RIM’s management has criticised publicly the US patent litigation system and its handling of David and Goliath-type cases.

Stout believes that people are missing the point and a real patent troll is an entirely different entity from those companies appearing in the business press recently. A true troll, he argues, is a non-inventor who obtains patents from picking over the carcass of a bankrupt company and then goes out to enforce them by picking fights.

Stout argues that the patent system should not discriminate between large and small operations that try to enforce patent rights, saying: “The patent system is all about those who innovate and the rights they get as a result of disclosing that information.”

Wallace, on the other hand, takes a more direct line. “The people that use the term ‘patent troll’ are the people who like to avoid paying patent fees,” he argues.

It is not easy to measure what effect disputes between tiny patent companies and big tech firms will have on innovation in the US, but the rise of the small patent enforcer has certainly boosted profits for lawyers on both sides of the negotiating table. It is now up to the Supreme Court to have the final word on where litigators go from here. •