economics of patent litigation: itc vs. district courts of patent litigation: itc vs. district...

Economics of Patent Litigation: ITC vs. District Courts

Thomas L. Jarvis Winston & Strawn LLP

Washington, D.C. July 10, 2014

2 © tom.jarvis@winston.com

1. IP Value Realization a. Exclude competitors, maintain large profit margins b. License competitors, royalties from competitor’s profit margins

2. Informal Valuation Mechanisms a. Negotiation: inexpensive, but often slow b. Expert Opinions: inexpensive, knowledge of royalty rates,

but technology differences c. Arbitration/Mediation: wide range of expense, speed, satisfaction,

but depends on voluntary participation 3. Litigation

a. Expensive for small markets, inexpensive for large markets b. Force unwilling competitors to participate c. Most cases resolved w/o trial—97% of U.S. District Court, 60% ITC

Litigation: IP Valuation Mechanism

89 U.S. District Courts

U .S. District Courts with Most Patent Cases

District 2012 2013 Net Change

Eastern District of Texas 1,247 1,495 +248

District of Delaware 1,002 1,336 +334

Central District of California 499 399 -100

1. 6,000 patent complaints in 2013 2. 3% proceed to trial 3. Frequent flyers (Lex Machina)

a. Complainants—patent trolls (NPE/PAE)

b.Defendants—electronics/telecommunications companies

U.S. District Court Patent Actions

Defendant No. of Cases

Apple 59

Amazon 50

AT&T 45

Plaintiff No. of Cases

Melvino Technologies 137

ArrivalStar 137

Wyncomm 131

AIPLA: Cost of District Court Patent Litigation

+ Trial Appx. $6-7 Million

U.S. International Trade Commission 500 E Street, Washington D.C.

10 Year Statistics for IP Litigation at ITC

1. 90% of cases involve patent infringement

2. 70% of cases involve semiconductors or electronics

3. 40% of cases go to trial

4. 50% of cases won, at least in part, by complainants

5. 50% of cases are complete wins for respondents

ITC 337 Expedited Proceedings

ITC 337 Proceedings Instituted/Completed

Larger Number of Complaints, Lower Win Rates

Michael G. McManus Duane Morris

Federal Circuit Reversals: ITC vs. District Court

1. De novo appellate review of claim interpretation. − “from the beginning,” “afresh,” “anew,” “beginning again”

2. Claim interpretation reversed in 38% of appealed district court cases − Schwartz study 2008

3. Claim interpretation reversal rates are same for ITC and district court cases − Schwartz study 2009

4. ITC exclusion order effective during 18 month appeals, district court injunctions often stayed

AIPLA: Cost of ITC Patent Litigation

+ Trial Appx. $6-7 Million

Differences in Patent Litigations at the ITC vs. U.S. District Courts

ITC Jurisdiction

1. ITC has jurisdiction over manufacturers and distributors of goods sold for importation into USA, importers, and those who sell after importation

2. Smart phone stream of commerce into USA: — Japanese LED component supplier — Taiwanese flat panel TV manufacturer — Mexican final assembly — USA retailer

3. All five business subject to jurisdiction of ITC

§ 337 Statutory Authority

The ITC Can Stop Importations into the U.S. of:

Section (A) − goods that are involved in unfair methods of competition that threaten to destroy or substantially injure a U.S. industry.

Section (B) − goods that infringe a U.S. patent or registered copyright that is also used by a domestic industry in the U.S. (over 90% of all cases).

Section (C) − goods that infringe a U.S. registered trademark.

Section (D) − semiconductors that infringe a registered mask work.

Three Elements of § 337 Violations at ITC

§ 337 (B): Infringement of intellectual property rights

Products can be excluded from the U.S. if:

1. The products infringe a valid U.S. IP right, and

2. The products are imported, and

3. A U.S. domestic industry is using the IP rights

ITC Patent Infringement Law

1. Generally, same patent law as district courts

2. All patent cases from ITC & U.S. District Courts appealed to Federal Circuit

3. District Court §271(g) “Safe Harbor” against process patent infringement: (A) materially changed by subsequent process, or (B) infringing feature is a trivial and nonessential component of another product

3. Safe Harbors do not apply to ITC cases. Kinik Co. v. International Trade Commission

Importation

1. Sale for importation into USA, importation, or sale after importation

2. Single unit of importation is sufficient

3. Trade show exhibitions often trigger complaints

4. Stopping importation will not stop ITC case

Domestic Industry

§ 1337(a)(3) A domestic industry exists if, with respect to the articles protected by the IP right, there is:

(A) Significant investments in plant & equipment, or

(B) Significant employment of labor or capital, or

(C) Substantial investments in research, development, engineering or licensing associated with the IP

Participants in 337 Cases

Administrative Law Judge

ITC Commissioners

ITC General Counsel

Court of Appeals

Federal Circuit

U.S. Trade Representative(Trade Policy

Review Group)

U.S. President U.S. Supreme Court

Complainant(Patent Owner)

Respondent(Sale for

Importation)

Respondent(Importer)

Respondent(Sale After

Importation)

OUII Staff(Public Interest)

Fast Proceedings: Typically 16 Months

Final Decision/Orders Commission Review

ALJ Deliberations Post-Trial

Trial Pre-Trial

Discovery Institution

Months

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Remedial Orders

1. Limited Exclusion Orders prohibit importation of infringing goods made by a respondent in the case

2. General Exclusion Orders prohibit importation of infringing goods made by anyone if the source of the goods is difficult to identify or if necessary for an effective remedy

3. Down-stream exclusion of finished products due to infringing components

4. “All Infringing Products” District Court injunctions limited to litigated products; ITC orders cover “all infringing products”

No Monetary Damages

1. No monetary damage awards, but frequent term of settlement agreements: — 97% of district court cases settled without trial or damage awards — 60% ITC cases settled, many with monetary payments

2. No obligation to license — compulsory licenses in EDTX

Relationship of ITC and Federal Courts: Subject Matter Jurisdiction

U.S. Supreme Court

Court of Appeals for the Federal Circuit

ITC District Court

Infringement U.S. IP Right + Imported Products + Domestic Industry

Infringement of U.S. IP Right

Relationship of ITC and Federal Courts: Personal or In Rem Jurisdiction

U.S. Supreme Court

Court of Appeals for the Federal Circuit

ITC District Court

Personal Jurisdiction or

In Rem Jurisdiction over Imported Products

Personal Jurisdiction

Products & IP Rights Most Often at Issue in ITC Cases

Technology at Issue in ITC Cases

Fast Procedures Match Electronics Life Cycles

Electronics = 70% of all ITC cases

IP Rights & Protected Features

Food Chain IP Rights iPod

Marketing Copyrights Advertising

Branding Trademarks Apple TM

Appearance Design Patents Sleek Style

Manufacturing Process Patents Chip Fabrication

Product Design Utility Patents Circuit Diagrams

Consumer Research Trade Secrets Research TOP SECRET

Which Court is Best for Specific IP Rights?

Food Chain IP Rights iPod

Marketing Copyrights Advertising

Branding Trademarks Apple TM

Appearance Design Patents Sleek Style

Manufacturing Process Patents Chip Fabrication

Product Design Utility Patents Circuit Diagrams

Consumer Research Trade Secrets Research TOP SECRET

Customs

Fed/State Court

Revenue Risk: ITC vs. District Court Patent Cases

Life Cycle Cost & Revenue

25 25 25

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0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53

Revenue ($ Millions USD)

Life Cycle in Months

Revenue$425 Million

R&D Cost$45 Million

Revenue Risk of District Court: $30 Million

25 25 25

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13 13 13

5 5 5 5

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0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

District Court Complaint Trial & Injunction Appeal

Revenue$395 Million

($425)

R&D Cost$45 Million

$30 MillionLost Revenue

Revenue Risk of ITC Speed: $100 Million 25 25 25

24 24 24

23 23 23

22 22 22

20 20 20

18 18 18

15 15 15

13 13 13

5 5 5 5

4 4 43 3 3

-1 1 1 1

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0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

District Court Complaint Trial & Injunction Appeal

ITC Complaint Exclusion Order Appeal

Revenue$325 Million

($425)

R&D Cost$45 Million

Life Cycle Cost & Revenue: 2nd Gen Products

25 25 25

24 24 24

23 23 23

22 22 22

20 20 20

18 18 18

15 15 15

13 13 13 13

10 10 10

7 7 7 7

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-1 1 1 1 1 1 1

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-5 5 5 5 5 5 5 5 5 5 5

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61

R&D Cost$45 Million

Revenue Gen 2$425 Million

R&D Cost$45 Million

Total Revenue Gen 1 + Gen 2$850 Million

Revenue Risk of District Court: $60 Million

25 25 25

24 24 24

23 23 23

22 22 22

20 20 20 `

18 18 18

15 15 15

13 13 13 13

10 10 10

7 7 7 7

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-5 5 5 5 5 5 5 5 5 5 5

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61

District Court Complaint Complaint 2 Trial & Injunction Trial & Inj 2 Appeal

($850 Million)

R&D Cost$45 Million

Revenue Risk of ITC Speed + 2nd Gen: $500 Million 25 25 25

24 24 24 `

23 23 23

22 22 22

20 20 20

18 18 18

15 15 15

13 13 13 13

10 10 10

7 7 7 7

5 5 5 5 5

-1 1 1 1 1 1 1

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-5 5 5 5 5 5 5 5 5 5 5

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61

District Court Complaint Complaint 2 Trial & Injunction Trial & Inj 2 Appeal

ITC Complaint Exclusion Order Appeal

R&D Cost$45 Million

($850 Million)

1. Competitor v. Competitor Cases Dominate

2. Revenue Risk

3. Multi-Patent Cases

4. Complex Technology

5. International Discovery

6. Expedited Proceedings

7. 40% of Cases Proceed to Trial

8. Internal Appeals (Commission Review)

What Drives ITC Litigation Costs?

Questions / Answers

Thomas L. Jarvis, Partner Winston & Strawn LLP 1700 K Street, NW Washington, D.C. 2006 Direct Dial:+1.202.282.5324 Email: tjarvis@winston.com Licensed: New York

Washington, D.C. Taiwan U.S. Patent & Trademark Office

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