Statistics show that an accused infringer usually wins on summary judgment, yet the great majority of accused infringers will settle rather than progress to the merits.  The reason is that it often costs too much and takes too long to litigate on the merits.  Changing to a non-hourly based fee gives trial counsel the heretofore missing will to find the way to a faster and cheaper adjudication.

Statistics often are misleading. This said, the odds of a patent litigation surviving a motion for summary judgment are strikingly low under any margin for error. PwC’s most recent survey of patent litigation says that in instances where a final decision is reached at summary judgment, lawsuits brought by patent owners who are non-practicing entities (NPEs) are successful only 2% of the time and that lawsuits brought by patent owners who are practicing entities are successful only 9% of the time. While these odds improve to 66% if the patent owner can get to trial, the point is that this is a very hard thing to do.

So based on the empirical data there is a compelling case that the party bringing the patent litigation likely will lose a decision on the merits.

Why then do the great majority of patent litigations, 95% by some accounts, settle instead of progressing to a decision on the merits? (See RPX: From Exposing NPE Myths to Explaining NPE Math) (PwC acknowledges that “[d]ismissals that didn’t occur at trial or summary judgment are not included in this breakdown [of PwC’s reported success rates at summary judgment].”)

The answer is that it takes too long and costs too much to defend the patent litigation to a decision on the merits. 

In a patent litigation between operating companies in one of the higher volume venues such as the Northern District of California or the Southern District of New York, it often takes on average a year and a half or more to complete discovery and otherwise get the case in a posture where it is ready for summary judgment. Even in those cases where the accused infringer’s potential exposure assuming liability is less than $25M, the lawyer fees (using standard hourly rates) to take the case through summary judgment average if not exceed $3-4M and the related costs of depositions, experts and processing voluminous and complex electronically stored information and other disbursements average if not exceed $500-800K. If the weighted cost to the defendant to litigate the case to a summary judgment conclusion is $4.368M (arrived at by adding cost of defense, $4.8M, and expected payout, $0, and multiplying this sum by the likelihood of success, 91%), it makes sense to pay a lot of money –  up to $4.368M – to settle.

Not surprisingly, these circumstances have motivated numerous proposals for making it cheaper and faster to adjudicate a patent litigation. As jointly proposed by law professors David Schwartz (Chicago-Kent College of Law) and Jay Kesan (University of Illinois College of Law):

To the extent changes are needed to the patent system, we suggest focusing on reducing transaction costs (e.g., lawyers’ fees) in patent litigation, offering cheaper mechanisms to challenge issued patents (the AIA’s post-grant challenges and other administrative procedures for challenging validity appear to be a step in the right direction), and providing cheaper and quicker adjudication through a new small claims court for patent lawsuits, instead of focusing solely on whether the patent holder is a non-practicing entity.

Likewise, Federal Circuit Chief Judge Rader has proposed improving patent litigation, stating “Courts must control the cost and efficiency of electronic discovery,” “[t]he bar has a responsibility to work with the bench to present, if at all possible, a summary judgment motion, or maybe TWO, that can end the litigation . . . ,” “[t]he bar needs to work with the bench to determine at an early stage the economic value of the case for both parties. With that evaluation in mind, the court may then tailor its timing and procedures to make sure a billion-dollar case gets a “billion-dollar” process and a thousand-dollar case gets its due as well,” and developing “an announced and dependable set of procedural rules that all parties understand in advance,” among other things.

These are all good suggestions for getting more quickly and at lower cost to an adjudication on the merits. There are many like them. The AIA includes still more in statutory form.

However, even more fundamental than suggesting good ideas for improving the system is making sure that outside trial counsel, arguably the persons playing the greatest role in identifying and implementing these suggestions, is highly motivated to do so. Right now this is not the case.

Patrick Anderson captures the essence of the trial counsel handling a patent defense: “a lot of really smart, highly paid individuals are going to do their best to try and prove A) that their products don’t match something in your patent claims and B) that someone else invented it first, with a few other arguments sprinkled in which essentially boil down to “you or someone you paid screwed up along the way.””

These are laudable activities. The problem is that under an hourly-based billing system, the incentive of outside counsel is to achieve them using as large a team as possible, leveraged to as many inexperienced attorneys as possible, and taking as long as possible, addressing every issue possible. Until the billing system is changed to a non-hourly based system that rewards smaller teams of more experienced attorneys taking as little time as possible, it is hard to see how there is going to be any meaningful reduction in either the time or expense it takes to get a decision on the merits of a patent lawsuit – and consequently it is hard to see any meaningful reduction on the economic pressure on an accused infringer to settle a claim even though it most likely could win if it took the case to a decision the merits.