It appears that 2016 saw a surprising and dramatic drop in patent litigation filings. As reported by Richard Lloyd of IAM Magazine,[1] recent studies released by the intellectual property firms Unified Patents[2] and RPX confirmed patent litigation filings were down almost 25% in 2016 from the prior year, the lowest volume of cases since 2011. Paradoxically, however, the risk of a patent lawsuit being brought against middle market companies may be higher than before.

RPX Corporation, a leading provider of patent risk solutions, recently examined the patent litigation activities of Non-Practicing Entities (NPEs)[3] in 2016.  RPX closely examined the lawsuits filed by NPEs over the past 6 years, and concluded that while patent lawsuits by practicing entities (i.e. operating companies) have remained constant, NPEs are filing fewer patent lawsuits.  Moreover, fewer of the NPE lawsuits are being filed against large companies with annual revenues over $100M with the resources to vigorously defend against patent lawsuits. Instead, two-thirds of NPE lawsuits are targeting “first-time defendants” to extract quick and lucrative settlements from inexperienced defendants that lack resources necessary for long, costly legal battles. As RPX concludes, NPEs are now seeking easy targets.[4]

When a patent claim hits a middle market company, it is survival, not winning, that is often the reality and objective.  Robert Sher, a middle market executive advisor, observed that the legal fees in a typical patent litigation case can “crush the mid-market company long before any “just” outcome occurs.”[5] The American Intellectual Property Law Association estimates that the median cost of a typical patent lawsuit, where $1 million to $10 million is at risk, is $2.2 million through final disposition.[6]

But business success often requires striking out in new fields and markets to grow your company business. “The strongest middle market companies ‎often rely on proprietary innovation and branding to earn share from the largest market participants.”[7]  Innovation is a key driver of middle market growth, and one of the factors underlying the introduction of new products or services last year by 40% of middle market companies.[8]  What can middle market companies do to reduce the risk of costly patent litigation? Here are a few things to consider.

  1. Install and use systems and processes to monitor internal activity and risk. Avoid carelessly adopting existing technologies or solutions that are used by others. Establishing a system of checks and processes of review are needed to mitigate the rush to bring new products and technologies to market as quickly as possible, for the lowest cost possible. As noted by Robert Sher, the cost of internal monitoring and prudent review will be much lower than a huge legal bill or, worse, a judgment of patent infringement.
  2. Develop a patent portfolio that can be used to counter a claim, and may add value as a beneficial side effect. Patents held by a company being sued can be used as in a defensive strategy in case settlements.  While patents are not inexpensive to obtain, the cost of prosecution or acquiring a patent is often less than the cost of litigating a patent claim to judgment or paying a judgment. Owning a patent portfolio may also serve to increase the value of your company as an additional benefit, and may be a source of additional license revenue. You might also consider companies like RPX and Unified that offer innovative deterrence strategies such as insurance and aggregation licensing that may provide a practical solution to the risk of being sued.
  3. Use professional services to evaluate patent litigation risk before deciding on new products or services. The advance of data analytics is providing new tools to professionals in the intellectual property arena that make it easier and less expensive to strategically evaluate the risk of running into a field densely populated with existing patents. These capabilities can be used to guide development of new products or services. Engaging professional analytical services to obtain a preventive assessment could be cost effective way to avoid a minefield of patent rights held by others, at a fraction of the cost of patent litigation.

And, if your company is served with a patent infringement complaint?  Find good professionals to help, including a patent litigation attorney or firm that is experienced at defending middle market companies. Be realistic in your expectations about outcomes, and pick your battles carefully.  A quick resolution will often save defense costs, as well as the steep cost of distracted and diverted company executives.

[1] IAM, “Patent litigation falls dramatically in 2016 as NPEs shift their focus away from the richest companies” (1/4/2017), http://www.iam-media.com/blog/detail.aspx?g=6fb92bce-b8f0-4cc7-a09d-14899644dc8f.

[2] Univied Patents, “2016 Annual Patent Dispute Report” (1/1/2017) https://www.unifiedpatents.com/news/2016/12/28/2016-annual-patent-dispute-report.

[3][3] A non-practicing entity (NPE) is typically defined as an entity that holds a patent but does not have products or services using the patent, and seeks instead to commercialize the patent by licensing the patent to others and enforcing the patent in litigation against companies with products or services that practice the patent without a license.

[4] RPX Corporation, “RPX Data Update: Patent Litigation Volatility Persists as Strategies Shift” (1/3/2017) http://www.rpxcorp.com/2017/01/03/rpx-data-update-patent-litigation-volatility-persists-as-strategies-shift/#.

[5]Sher, Robert, “Legal Lessons for Mid-Sized Firms from the Apple-Samsung Patent War,” Forbes (9/4/2012) http://www.forbes.com/sites/robertsher/2012/09/04/legal-lessons-for-mid-sized-firms-from-the-apple-samsung-patent-war/#617db8ea7b22.

[6] American Intellectual Property Law Association, Report of the Economic Survey, at 37 (2015).

[7] Ocean Tomo, http://www.oceantomo.com/clients-middle-market-company/.

[8] National Center for the Middle Market, “4Q 2016 Middle Market Indicator”, downloadable at http://www.middlemarketcenter.org/performance-data-on-the-middle-market.