shutterstock_189716540Inertia

Sir Isaac Newton’s first law of motion holds that a body at rest will start moving only if a big enough outside force acts on it.

Newton’s law governs in the legal realm as well — except we lawyers call it stare decisis.

The doctrine last week doomed an effort to push the Supreme Court to abolish a rule that all the justices conceded their predecessors got wrong half a century ago. And the outcome disrespects royalty — patent royalties.

The error of Brulotte

The decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), has for 51 years barred patent licensors from collecting royalties on uses that occur after the patents expire. The Court concluded, 8-1, that “[t]he exaction of royalties for use of a machine after the patent has expired is an assertion of monopoly power in the post-expiration period when . . . the patent has entered the public domain.” Id. at 33. The Court deemed the practice “unlawful per se”. Id. at 32.

In Kimble v. Marvel Entertainment, LLC, No. 13-720 (U.S. June 22, 2015), the Court upheld Brulotte despite “a broad scholarly consensus” that Brulotte mistook the economic effects of post-term royalties. Rather than extending a patent’s lawful monopoly beyond the patent’s term, a license that calls for post-term royalties enhances competition by lowering the royalty rate for the licensee (making it better able to charge lower prices for its products) and by encouraging non-licensees to make competing products available to consumers (also at cheaper prices due to their freedom from royalty obligations). Id., slip op. at 12-13.

As the dissent pointed out:

The economics are simple: Extending a royalty term allows the parties to spread the licensing fees over a longer period of time, which naturally has the effect of reducing the fees during the patent term. See ante, at 5. Restricting royalty payments to the patent term, as Brulotte requires, compresses payment into a shorter period of higher fees. . . .

There are, however, good reasons why parties sometimes prefer post-expiration royalties over upfront fees, and why such arrangements have pro-competitive effects. Patent holders and licensees are often unsure whether a patented idea will yield significant economic value, and it often takes years to monetize an innovation. In those circumstances, deferred royalty agreements are economically efficient. They encourage innovators, like universities, hospitals, and other institutions, to invest in research that might not yield marketable products until decades down the line. See Brief for Memorial Sloan Kettering Cancer Center et al. as Amici Curiae 8–12. And they allow producers to hedge their bets and develop more products by spreading licensing fees over longer periods. See ibid.

Id., slip op. at 3-4 (Alito, J., dissenting).

Brulotte abides

The majority upheld Brulotte anyway. Justice Elena Kagan wrote that “[w]hat we decide, we can undecide” but that Congress’s failure to reject the Brulotte rule as a misreading of the Patent Act gave it the strength of a “superpowered form of stare decisis“. Id. at 10.

The three dissenters saw Brulotte as “a bald act of policymaking” instead of “simply a case of incorrect statutory interpretation.” Id. at 2 (Alito, J., dissenting).

Old licenses and new deals

What does Kimble do for cases involving patent licenses old and new?

It hurts the value of existing licenses to the extent they call for payment of royalties beyond the expiration of the patents they license. You still cannot collect royalties on post-expiration sales.

Kimble also restricts the sorts of licensing arrangements that you can make going forward — in settlement of a patent infringement case, for instance.

Justice Kagan offered four kinds of exceptions (which I set off in the quote below with numbers in bold brackets):

[P]arties can often find ways around Brulotte, enabling them to achieve those same ends. To start, [1] Brulotte allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period; all the decision bars are royalties for using an invention after it has moved into the public domain. See 379 U. S., at 31; Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U. S. 100, 136 (1969). A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-year patent term, but to amortize that amount over 40 years. That arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long timeframe. And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights. Under Brulotte, [2] royalties may run until the latest-running patent covered in the parties’ agreement expires. See 379 U. S., at 30. Too, [3] post-expiration royalties are allowable so long as tied to a non-patent right—even when closely related to a patent. See, e.g., 3 Milgrim on Licensing §18.07, at 18–16 to 18–17. That means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone). Finally and most broadly, [4] Brulotte poses no bar to business arrangements other than royalties—all kinds of joint ventures, for example—that enable parties to share the risks and rewards of commercializing an invention.

As the dissent notes, the four “ways around Brulotte” — deferring payments, linking royalties to longer-lasting patents, tying them to use of trade secrets, and entering into joint venture arrangements — “do not provide the same benefits as postexpiration royalty agreements”, which “would allow licensees to spread their costs, while also allowing patent holders to capitalize on slow developing inventions. ” Id. at 4 (Alito, J., dissenting).

Flat as a PancakeGoing flat

In the last post, I reviewed the plusses and minuses of the hourly fee, which I said still strides the world of high-stakes litigation like a Colossus.

But a distinctive trait of the hourly fee — its extreme concentration of risk on the client — limits its appeal and threatens its longevity. Almost all of the downside — including the potential for spiraling hourly charges — rests on the client.

I promised to talk this time about a better option — one that shifts a modest amount of the risk to the lawyer: flat fees. And so I will.

What does flat mean?

Let’s start with a definition of flat fee.

My firm spends between 15 and 20 percent of our hours on what we call “flat fee” matters, all of which involve high-stakes business disputes. And most of the biggest law departments in the U.S. say they pay “flat fees” to outside counsel for “entire matters”.

What makes a fee for big and risky matters a “flat” one?

A flat fee in that context generally means a specific dollar amount payable each month or quarter. As the trial or final hearing approaches and our efforts greatly intensify, the figure usually increases (doubles). Although I’ll talk about caps and other variations under the head of “hybrid” arrangements, for now let’s stick with the base case: a periodic payment that varies only between the pre-trial and trial phases of a lawsuit or arbitration. Again, we’ll speak in terms of control, downside risk, and upside and how those they differ in a flat fee deal versus an hourly one.

Plusses and minuses — client perspective

A flat fee tends to give the client a bit less control over the lawyers than an hourly arrangement does. Unlike their hourly brethren, flat-fee lawyers do not provide the monthly invoices that detail what they have done to earn the fee. That limits the client’s ability to fly spec the lawyers’ work. It also gives the lawyers more freedom. The challenge for the client may consist largely in assuring that the lawyers devote appropriate resources — personnel and hours — to the matter. As with the hourly fee, the fact that the client does not owe a bonus for good results makes replacing the lawyers less problematic and keeps the disengagement arrow handier in the client’s quiver.

The benefit to the client from ceding some control comes in the form of risk-sharing. In return for more liberty in deciding how to staff a case and implement strategy, the lawyers assume procedural risk — the danger that the litigation process will consume more resources than the lawyers expected.  While an adverse result bad outcome on the merits does not cut the flat fee, the additional hours and overhead that result from surprising difficulties in motion practice, discovery, trial preparation, and trial come partly out of the lawyers’ paycheck.

Some of the upside also moves the lawyers’ way. A case that proves far easier to handle than the client and lawyers expected may result in a premium on the lawyers’ time. Sharing risk produces an opportunity to earn a premium over the less risky hourly fee.

Plusses and minuses — lawyer’s view

A lawyer on a flat fee not only retains professional independence but also gains a measure of control. No longer must the lawyers report their hours to the client. The client may now welcome an aggressive strategy that she would have declined to pay an hourly lawyer for. The partial alignment of interests makes for a more trusting relationship.

The risk of outlandish demands on the lawyers’ resources now falls largely on the lawyers. The client pays a flat fee regardless of hours. The danger of a negative premium — a loss on the nominal value of the lawyers’ hours — may hover in the lawyers’ consciousness. Reputational and collection risks remain present but no greater than in an hourly scenario.

A flat fee also matches the lawyers’ upside to their somewhat higher risk. They now may earn more than the equivalent of their hourly fees by doing things efficiently, avoiding unnecessary fights, focusing on the essentials.

The case for going flat

The flat fee alternative reallocates procedural risk from clients to lawyers. It empowers the lawyers to use their experience and skills to manage the process in ways that avoid waste. The client benefits from the lawyers’ more efficient efforts. The ability to predict legal expenses provides an additional bonus to the client. And the lawyers capture some of the upside by putting themselves in a position to earn a premium by doing the necessary work with fewer resources.

What sorts of cases justify flat fee treatment? In general, they involve recurring situations that have produced enough data to allow reasonable predictions about cost. Some kinds of patent-infringement cases have produced enough cost information to permit reasonable estimates of how much an hourly engagement would run. Instances of bringing in counsel to replace existing law firms also present circumstances that allow comparisons. Both plaintiff-side and defense-side cases are suitable for flat-fee engagements.

Next time

I favor the flat fee over the hourly any day. The trade-off of risk amply justifies the prospect of a premium for the lawyers, in my view. And clients should welcome the opportunity to give their lawyers incentives to become more efficient.

I will wait to write about contingent fees until Thursday, July 2. The next post will focus on a new U.S. Supreme Court ruling — Kimble v. Marvel Entertainment, LLC, No. 13-720 (U.S. June 22, 2015) — that affects the value of patents, patent portfolios, and patent-infringement claims.

Billable Hours

Still dominant

The billable hour bestrides the world of high-stakes litigation like a Colossus. Whatever its prospects,¹ today it continues to set the baseline for expectations about attorneys’ fees.

Big firms charge by the hour, class action lawyers detail “lodestars” in fee applications, flat fees aim to smooth out hypothetical hourly charges, and hybrid and contingent fees can trigger payment of a multiple of the lodestar. Though imperfect as a proxy for value, people use the billable hour — or hourly fee — for that purpose all the time.

Because we want to understand all the options that business clients have for paying lawyers, we need to understand the main traits of hourly (and all other) fees — control, risk, and upside — first. Let’s take a look.

Plusses and minuses — client perspective

Paying by the hour maximizes the control that the client has over its lawyers. Monthly invoices detail what the lawyers have done to earn a fee, and if the client doesn’t like what it sees, it can call for changes. Strategic choices may undergo a cost-benefit analysis by a client who is naturally skeptical of bold and expensive initiatives. Providing specifics to the client also enforces (some) discipline on the lawyers. And because the client doesn’t owe a fee that depends on the results of the engagement, the process of firing the law firm and replacing it with another one involves less difficulty.

But almost all of the risk — arising both from the merits and from the litigation process itself — remains with the client. A bad outcome on the merits generally won’t reduce the hourly fee that the client must pay the lawyers. And the out of pocket cost of discovery, expert witnesses, travel, trial preparation, and trial rests entirely on the client. Complexity, inefficiency, excessive discovery and motion practice, continuances, acts of God, and other slings and arrows of litigation come at the client’s sole expense.

The upside of litigating also stays with the client. It need not share with counsel the benefits of a quick or easy resolution of a case.

Plusses and minuses — lawyer’s view

A lawyer who works by the hour of course retains professional independence but submits to close monitoring by the client and cedes some control. The lawyer must justify every hourly fraction she bills for. She must overcome client skepticism about potentially risky or costly strategic and tactical choices. She may have to provide budgets and respond to auditor queries and nitpicking.

The low risk level that the lawyer faces compensates somewhat for her lack of control. Neither extraordinary expense of the process nor a surprisingly bad result affects the lawyer’s income. The lawyer’s risk consists mainly in the possibility of damage to reputation and the possibility that the client won’t or can’t pay what it owes.

The lawyer’s upside corresponds to her risk. She won’t reap the rewards of exceptionally favorable outcomes, either process-wise or merits-wise, and will benefit mainly from a reputational boost and from a greater likelihood that the client can and will pay the lawyer’s invoices.

The case for paying/working by the hour

The hourly fee represents the most conservative option for both clients and lawyers. It has the most appeal in situations where the client faces the potential for loss rather than a prospect of gain — where the client is a defendant.

That is because people will spend more to avoid loss than to secure gain. The typical defense client thus accepts the likelihood of high hourly fees for the sake of maximizing its ability to manage the downside risk of a loss on the merits, including harm to the client’s reputation.

Next time

I will explore in future posts the question of whether the extreme concentration of risk in the client makes sense or whether better alternatives exist. You will not be surprised to learn that I do believe better alternatives exist.

The next post will deal with one of them — an option that shares a modest amount of risk: flat fees.

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¹It may not last much longer. It may go the way of its forebears — “minimum fees”, which bar associations set in hopes of thwarting price competition, and “for services rendered” invoices, which reflected subjective, after-the-fact judgment about the legal services’ value. For more history, see Robert E. Hirshon, “The Billable Hour Is Dead. Long Live . . .“, GPSolo, Jan./Feb. 2013; “In the Beginning: Hourly fees are relatively new for lawyers“, Civilian’s Guide to Lawyers, Apr. 11, 2015.

WelcomeWelcome to The Contingency — a new law blog that will offer insights on sharing risk in high-stakes business disputes.

Reasons to read

The Contingency will tell you things you need to know if you:

  • Hire lawyers to handle civil cases and would like to get better results at a lower net cost;
  • Work as a civil trial lawyer and want to boost your earning prospects through favorable outcomes for your clients; or
  • Are curious about how sharing risk can promote stronger, happier, and more successful ties between civil trial lawyers and clients.

About me

I have tried high-stakes lawsuits for 30 years at the number one litigation boutique in the country, Susman Godfrey L.L.P.

As a firm, we spend well over half of our time on engagements that share risk with our clients. Any case that doesn’t involve a straight hourly fee arrangement requires a vote by all the partners and associates in the firm, and to do that we meet almost every Wednesday to debate the strengths and weaknesses of potential cases.

My three decades of experience and the ongoing case evaluation process that I regularly participate in enable me to pass on to you inside knowledge that very few lawyers — and fewer clients — ever have access to.

Content

My first law blog, Blawgletter, ran from January 1, 2007 until June 15, 2015 and included 2,324 posts, mostly about new decisions relating to commercial litigation. The Contingency will allow readers to access all of the Blawgletter posts and going forward will focus on the challenges and opportunities of sharing risk with clients in high-stakes business disputes.

To give you an idea of what I have in mind, in the next several posts, I will walk you through the major types of fee arrangements in civil cases — hourly, flat, hybrid, and contingent — and explain advantages and disadvantages of each.

Participate

Whether you like what you read in The Contingency or it infuriates you, please remember to post comments that others can see and benefit from. The conversation adds a ton of value.

Please also tell your friends and colleagues about The Contingency. And by all means get yourself a subscription by clicking on one or more of the available options under “Stay Connected” on the right-hand side of this page.

Thanks

The fantastic people at LexBlog have provided much help and encouragement in making the transition to The Contingency and the far-superior LexBlog platform. Special big thanks to Sarah Fischer for her excellent guidance, saintly patience, and good humor and to Brian Biddle for his design wizardry.  Colin O’Keefe also provided heavy lifting on the front-end; thank you, Colin.

I look forward to many productive years as a LexBlogger.

Screen Shot 2015-06-14 at 11.19.54 PMUnpatentable subject matter

A pair of Federal Circuit opinions last week rejected patents involving patent-ineligible subject matter.

What does that include, you ask?

As Blawgletter noted last year in "You Still Can't Patent Ideas":

Section 101 of the Patent Act allows patents on "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof". 35 U.S.C. 101. But, the Supreme Court has held, it does not make laws of nature, natural phenomena, or abstract ideas patentable. Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2116 (2013). Those things "are the basic tools of scientific and technological work". Gottschalk v. Benson, 409 U.S. 63, 67 (1972).

We went on to discuss the then-new ruling by the Supreme Court on "business method" patents that fail the section 101 test because they involve "abstract ideas" in Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014).

Alice applied the analytical framework that the Court announced in a "laws of nature" case it decided two years earlier – Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (U.S. Mar. 20, 2012). The framework calls for a two-step process:

First, we determine whether the claims at issue are directed to a patent ineligible concept. Id. at 1297. If the answer is yes, then we next consider the elements of each claim both individually and “as an ordered combination” to determine whether additional elements “transform the nature of the claim” into a patent-eligible application. Id. at 1298. The Supreme Court has described the second step of this analysis as a search for an “inventive concept”—i.e., an element or combination of elements that is “sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.” Id. at 1294;

Ariosa Diagnostics, Inc. v. Sequenom, Inc., No. 14-1139 (Fed. Cir. June 12, 2015).

The cases

The two cases concerned paternal DNA — "cffDNA" — floating in the bloodstream of pregnant women and a method for helping merchants charge the highest gettable price in light of changing market conditions. The Federal Circuit in both instances affirmed the district courts' rejection of the patents as relating to unpatentable subject matter.

In the "laws of nature" case, the court ruled that patent failed the "inventive concept" requirement of Mayo:

The method at issue here amounts to a general instruction to doctors to apply routine, conventional techniques when seeking to detect cffDNA. Because the method steps were well-understood, conventional and routine, the method of detecting paternally inherited cffDNA is not new and useful. The only subject matter new and useful as of the date of the application was the discovery of the presence of cffDNA in maternal plasma or serum. 

Ariosa Diagnostics, slip op. at 11. 

The "abstract ideas" case made a similar thudding sound:

At best, the claims describe the automation of the fundamental economic concept of offer-based price optimization through the use of generic-computer functions. Both the prosecution history and the specification emphasize that the key distinguishing feature of the claims is the ability to automate or otherwise make more efficient traditional price-optimization methods. . . . But relying on a computer to perform routine tasks more quickly or more accurately is insufficient to render a claim patent eligible.

OIP Technologies, Inc. v. Amazon.com, Inc., No. 112-1696, slip op. at 7-8 (Fed. Cir. June 11, 2015) (citing Alice, 134 S. Ct. at 2359).

Meaning

Ariosa and OIP underscore the high stakes and uncertain outcome of challenges to patentability in cases involving biological material or business methods. The Federal Circuit's latest decisions make clear that the "inventive concept" requirement of the Mayo framework requires more than using concepts by means of "conventional" techniques. Uses like that simply do not "transform" the idea into patentable subject matter.

So long Blawgletter, hello The Contingency

With this post, Blawgletter ends a run that started on January 1, 2007. We wish to thank our loyal readers for their high intelligence, extraordinary good looks, and excellent sense of humor. We invite you to become loyal readers of The Contingency, which begins its journey on Tuesday, June 16. Stand by for info on subscribing.

Pork Processing PlantAnother Term, another chance to gut class actions

If you've watched the Supreme Court over the last several years, you may have marveled at how earnestly some of the justices have worked to render Rule 23 a dead letter. Behold:

  • You have to arbitrate class claims individually. AT&T Mobility, LLC v. Concepcion, 531 U.S. 321 (2011).
  • You can't use statistical methods we don't find compelling to prove class claims. Dukes v. Wal-Mart Stores, Inc., 131 S. Ct. 2541 (2011).
  • No, really, you have to arbitrate class claims individually, no matter what. American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).
  • Hey, didn't you hear what I said about not using statistical methods to prove class claims? Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013).

The Court split 5-4 in all four cases, with the same five justices in the majority (Chief Justice Roberts and Justices Alito, Kennedy, Scalia, and Thomas) and the same four justices dissenting (Justices Breyer, Ginsburg, Kagan, and Sotomayor) every time.

We exaggerate only a little

In Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), the Court did uphold a crucial principle in securities fraud class actions — that class plaintiffs may take advantage of a presumption that the securities buyers relied on the defendants' failure to disclose material information. And in Erica P. John Funds, Inc. v. Halliburton, 131 S. Ct. 2179 (2011), the Court did rule that class plaintiffs need not show "loss causation" in order to establish grounds for class certification of a securities fraud case.

But both rulings related to securities law violations, which hurt rich people more than poor ones, and in the 2014 decision the Court also ruled that defendants must have the chance to show at the class certification stage that the nondisclosure didn't inflate the price of the securities.

Other kinds of class cases

Class actions involving consumer fraud (Concepcion), antitrust law violations (Behrend and Italian Colors), and short-changing workers through discriminatory practices (Dukes) didn't fare nearly so well. In each case, the little person stood against the behemoth corporation — and got a shellacking.

Last week, the Court took another class action case that aims to benefit the regular Joe and Josephine. In Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146 (U.S.), the Court will address — big shout out to our friends at SCOTUSblog — these questions:

(1) Whether differences among individual class members may be ignored and a class action certified under Federal Rule of Civil Procedure 23(b)(3), or a collective action certified under the Fair Labor Standards Act, where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample; and (2) whether a class action may be certified or maintained under Rule 23(b)(3), or a collective action certified or maintained under the Fair Labor Standards Act, when the class contains hundreds of members who were not injured and have no legal right to any damages.

The problem, as the petitioner Tyson Foods sees it, arises from the fact that class plaintiffs used averages to show how much time Tyson didn't pay, in the aggregate, for class members' donning and doffing gear they needed to wear to work at Tyson's pork processing plant in Storm City, Iowa. Using averages, Tyson insists, means that "hundreds" of the 3,344 class members did not suffer any compensable damages.

What will happen

Employment discrimination, consumer fraud, and antitrust claims almost always pit weak economic actors against far more powerful ones. Tyson Foods has the same David v. Goliath orientation. Blawgletter — who will sign off with our last post on June 15 to begin The Contingency on June 16 – expects that what happened to the plaintiffs in Concepcion, Dukes, Italian Colors, and Behrend will also occur to those in Tyson Foods.

Although the Court will not state the rule this way, the Court will come close to saying that class plaintiffs must present a near-perfect statistical model if they wish to use statistics to support a finding that questions common to class members predominate over individual ones. Justices Scalia and Thomas Some justices seem to think that forcing a defendant to pay an amount equal to the total harm it caused the class should never happen if any class member did not suffer recoverable damages.

Perfection becomes the enemy of the good, in their view. Or, more likely, the enemy of what they may see as a bad thing — defendants having to pay for 100 percent of the harm they caused.

Get ready for The Contingency

My new law blog will go live on Tuesday, June 16, 2015. Please stand by for info on how to find The Contingency, how to subscribe, and other fun facts.

Standing BearSnares

Patent law features so many traps that even the wary fall in one now and then. It happened again last week. This time the ruling concerned standing, an issue that goes to the power of a court to decide a case.

A narrow license

The case involved a patent on "Gelatinous Elastomer Compositions and Articles". Alps South sued The Ohio Willow Wood Company for infringing the patent by making and selling prosthetic liners.

Alps never owned the patent. Instead, before filing suit in 2008, it signed a license with the patent owner, Applied Elastomerics. But Applied granted Alps a license to practice the patent only in the field of prosthetic liners.

Motion on standing

Ohio WIllow Wood moved to dismiss the case on the ground that Alps lacked standing. Alps responded by signing a new license with Applied. This one eliminated the field restriction (prosthetic liners only). The district court denied the motion.

As trial approached, the trial judge expressed concern about Alps' standing and urged it to join Applied to the case. Alps declined the request.

The case went to trial before a Florida jury. After more than a week of evidence, the juror found for Alps in all respects and awarded Alps almost $4 million for Ohio Willow Wood's infringement of the patent.

Standing from the start

Ohio Willow Wood's appeal raised several questions, but it won on standing. The Federal Circuit therefore had no need to delve into the merits.

The court noted that a plaintiff generally must have the right to bring suit — it must have standing to sue — at the time it brings the case. A corollary to the standing-from-the-start rule posits that the plaintiff cannot cure a lack of standing retroactively.

The corollary knocked out Alps' case. The license it got from Applied before filing the action against Ohio Willow Wood didn't give Alps enough rights to qualify as a "patentee" for purposes of the standing requirement in 35 U.S.C. 100(d) and 281. The later elimination of the field of use restriction in the Applied license cured the problem as of the date of the amendment. But "[t]he party asserting patent infringement is “required to have legal title to the patents on the day it filed the complaint and that requirement can not be met retroactively.” Alps South, LLC v. The Ohio Willow Wood Company, No. 13-1452, slip op. at 10 (Fed. Cir. June 5, 2015) (quoting Abraxis Bioscience, Inc. v. Navinta, LLC, 625 F.3d 1359, 1366 (Fed. Cir. 2010)).

The court conceded that it permits retroactive curing of an initial lack of standing if the plaintiff joins the patent owner after filing suit. But that didn't happen in the Alps case. And the panel said it couldn't ignore its precedent barring a cure that involves a nunc pro tunc license amendment.

Highlighting risk

Alps highlights the riskiness of patent infringement cases. Unless your client has always owned the patent, its status as an assignee or licensee may expose it to a motion to dismiss for lack of standing. Because such a motion implicates the court's jurisdiction — its basic authority to handle and decide the case — the defendant may raise a standing question at any time. It may bring the issue up after an adverse verdict and judgment, as Ohio Willow Wood did. And the loss of such a motion essentially wipes out everything that happened in the trial court.

Observations

Before bringing a patent infringement case, your client needs either to own the patent she will sue on or at least to have all of the "substantial" rights in the patent under an assignment, exclusive license, or similar agreement. Insist on reviewing any assignment or license of the patent to your client to make sure it conveys enough rights to pass muster under Supreme Court and Federal Circuit requirements for standing.

That could save you and your client seven years of work and a jury verdict.

Awards Sign

As the June 16th launch date for The Contingency gets ever closer, Blawgletter post from five years ago offers a preview of the sort of subjects The Contingency will deal with on a more regular basis.

                                                                                                Barry Barnett

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Qui Tam Winner May Deduct Contingent Fee, Tax Court Affirms

Jan. 22, 2010

Blawgletter often handles business cases on a contingent fee basis.  We earn a percentage of the client's recovery. No recovery, no fee.

But guess what?  The client may owe tax on the recovery. Which could of course affect the client's net.  And the Internal Revenue Service may regard the entire recovery — including the contingent fee that goes to the lawyer — as taxable income to the client. See Roco v. Commissioner, 121 T.C. 160, 165 (Tax Ct. 2003) (holding that payment to False Claims Act relator for exposing contractor's fraud on the federal government amounted to a "reward" and therefore counted as gross income). Which would reduce the client's net further.

But we got decent news yesterday from the U.S. Tax Court, which ruled on whether another False Claims Act/qui tam relator, Albert D. Campbell, "must include the entire $8.75 million qui tam payment in gross income or is entitled to exclude the $3.5 million attorney's fee payment and thus include only the $5.25 million qui tam payment in gross income." Campbell v. Commissioner, 134 T.C. No. 3 (Tax Ct. Jan. 21, 2010)[, aff'd, 658 F.3d 1255 (11th Cir. 2011)]. Yes, the court held. No surprise there.

But the court went on to decide that Mr. Campbell "may deduct" the contingent fee "as a miscellaneous itemized deduction." Because he testified he paid the fee and corroborated his testimony with the contingent fee agreement between him and his lawyers, the court concluded, Mr. Campbell "has substantiated the payment of the fees" and thus could deduct them. Hooray.

The tax treatment of qui tam proceeds may not apply to other sorts of recoveries — such as ones that compensate for actual loss. We suggest you get advice from a tax professional.

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Blawgletter adheres to that last suggestion — "get advice from a tax professional" — but we also note that at least one court since Campbell v. Commissioner has confirmed its basic ruling. See Bagley v. United States, 963 F. Supp. 2d 982, 1002 (C.D. Cal. 2013) (ruling that "the litigation expenses incurred by Bagley in pursuing his FCA lawsuit as a qui tam relator, may be deducted as ordinary and necessary business expenses incurred for a trade or business"); 

Bonus:

Qui tam relators fared less well when they argued for treating a False Claims Act award as a capital gain rather than ordinary income. See Patrick v. Commissioner, 142 T.C. 124, 130 (Tax Ct. 2014) (rejecting taxpayer Patrick's effort to characterize qui tam award as capital gain after concluding that taxpayer failed to satisfy "sale or exchange" or "capital asset" requirement for capital gain treatment); Alderson v. United States, 1200 (C.D. Cal. 2010) ("Because Alderson's did not hold a property interest in the information he exchanged to the Government, his subsequent recovery of $27 million was not a capital gain.").

Screen Shot 2015-05-31 at 10.09.38 PMIn a couple of weeks, Blawgletter will end its eight-year run as my principal law blog.

On Tuesday, June 16, I will launch The Contingency: Insights on Sharing the Risks and Rewards of High-Stakes Business Disputes. You'll get more info on The Contingency, including how to subscribe.

Turning down the lights on Blawgletter will give me a pang of loss, but as Shakespeare said, what's past is prologue. I've wanted to write about things that The Contingency will address for a long time.

Take this early Blawgletter post (on Jan. 5, 2008) — on "How to Negotiate a Reverse Contingent Fee" as a for-instance. The post has held up pretty well. I'll have more to say about the subject (and others) on The Contingency. But in the meantime, I've copied it below.

                                                                                            Barry Barnett

*   *   *   *

How to Negotiate a Reverse Contingent Fee

D. Todd Smith – master blogger over at Texas Appellate Law Blog – commented a couple days ago on The Hourly Fee Must Die — Some More.  He said:

I'm still trying to break free from the billable hour, with increasing success.  From the plaintiff's side, evaluating whether to accept a matter on a contingent fee is fairly straightforward.  But I still haven't settled on the best alternative-fee arrangement when working for the defense. A "reverse contingent" fee perhaps?

Great question, Toddster.

Blawgletter's firm, Susman Godfrey L.L.P., has handled some cases on a reverse contingent fee (RCF) basis.  The agreement with the client calculates the RCF as a percentage of the savings off of a benchmark number.  The benchmark reflects an estimate of the client's possible exposure.

By way of example, if the law firm and client agree that a patent infringement case exposes the client to potential liability of $10 million, the RCF would equal a percentage — 40 percent, say — of the difference between $10 million and any lower amount that the client pays in settlement or as a result of a judgment.  If we zero out the plaintiff, our fee totals $4 million — .4 x ($10 million – $0) = $4 million.

Negotiating an RCF presents unique challenges.  The hardest part probably is arriving at the benchmark number.  The law firm will want to use the plaintiff's demand as the starting point, but the client will prefer to begin at bupkes.  Unless some reliable methodology for assessing exposure exists, the discussions may lead nowhere.

A second barrier to negotiating an RCF results from the fact that the client must come out of pocket to pay the fee.  Fortune 500 companies can do that, but smaller enterprises may lack the necessary liquidity.  A letter of credit or other security could bridge the gap.

The best candidates for RCF arrangements thus are cases that (1) have a track record and (2) involve clients that have the resources to pay the RCF.

Patent litigation springs to mind as a likely occasion to represent a defendant on an RCF basis.  Cisco Systems, for instance, draws its share of patent infringement complaints.  Say Cisco gets a complaint for infringing a patent that the plaintiff already litigated against another company and settled for $X.  The $X could provide a baseline for determining the benchmark in the RCF agreement.

Cisco is a good example, by the way.  Its General Counsel, Mark Chandler, has led the charge against the hourly fee as the principal basis for paying lawyers.  He's worked out a number of creative ways to align the interests of the company with the interests of its lawyers — including by way of an agreement that had an RCF element in it.  Excellent. 

CiscoThe U.S. Supreme Court has taken away a potentially devastating defense from companies that induce others to infringe patents.

The Court ruled in Commil USA, Inc. v. Cisco Systems, Inc., No. 13-896, slip op. at 10 (U.S. May 26, 2015), that "a defendant's belief regarding patent validity" does not provide "a defense to a claim of induced infringement".

The holding focused mainly on the fact that the "scienter" element for an inducement theory of infringement relates not to the defendant's belief regarding the patent's validity but to its awareness of infringement. Id. at 9.

The Court also cited the statutory presumption in favor of each patent's validity and noted that "validity is not a defense to infringement, it is a defense to liability." Id. at 10 & 11.

It went on to note that infringers may protect themselves by suing for a declaratory judgment of invalidity, that a good-faith-but-wrong belief in invalidity defense would make patent litigation "more burdensome", and that ignorance or mistake of law generally doesn't excuse breaking the law. Id. at 12-13.

Justice Anthony Kennedy wrote the Court's majority opinion, in which Justices Alito, Ginsburg, Kagan, and Sotomayor fully joined and in which Justice Thomas mostly agreed to. Justice Antonin Scalia authored a dissent that Chief Justice Roberts joined.

Blawgletter congratulates our friend Mark Werbner on his victory. We had the pleasure of seeing him argue the case on March 31, 2015. You can listen to the session here.