Blawgletter®

New Paper Explores Market for Patent Lawyers Who Try Cases

Blawgletter's firm handles lots of patent infringement cases on a contingent-fee or hybrid basis. And by hybrid we mean either a fraction of hourly plus a contingent percentage, a flat-fee plus a kicker, or an hourly or flat fee with some case-specific incentive to get exceptional results.

Now we see a scholar who has looked at the market for lawyers who take on clients under a contingent-fee deal. Although it remains in draft form, we commend it to your consideration. See David L. Schwartz, The Rise of Contingent Fee Representation in Patent Litigation.

Mock Trial -- Dare You NOT Do It?

Blawgletter's firm handles much of our work on a contingent fee basis. That means we share risk with our clients -- and earn no fee if we don't help our clients get a good result.

What counts as a good result will vary from case to case. It often involves a money inflow, sometimes not having to pay. In some instances, a particular outcome -- winning a motion to dismiss, to compel arbitration, for class certification, for preliminary injunction, and so on -- defines success.

Why do we mention the risk-sharing? Mainly because our firm has a rule that, before trying any case in which we have a contingent fee on the line, we must MOCK TRY it. That should tell you how much we believe in the usefulness of the mock trial.

But what good, you may ask, does the mock trial do? Do the results predict the real outcome? How could they? Cramming weeks of opening statements and witnesses and argument and PowerPoints and blow-ups and expert opinions and juror notebooks and sidebars and so forth into TWO OR THREE HOURS -- how could that possibly tell you anything worthwhile?

Okay. Listen up. We don't want to have to repeat this.

Mock trying the case forces you -- the lawyer and the client -- to prepare. It makes you think about the other side's strengths -- especially if you compel your lead trial counsel to play the other side's lead (in her or his own style, of course). And it fast-forwards your client to the main event, which he or she may have an unrealistic Hollywood-y image of.

Does the outcome predict actual results? Heck no -- by which we mean in the particulars. Mock juries often differ widely in their damages awards. That goes double for punitive damages. But the direction of their verdict -- you win, or the other side does, big time -- has a fair degree of reliability.

Third, the process reveals the One Fact. The One Fact that the lawyers know Has Importance. But that nobody realizes -- until the mock trial -- the Whole Case Turns On.

So mock try your cases. Spend your own money doing it, if you work on a contingent fee. Clients should insist on jury research. You'll like the results. 

Rule Behind Huge Patent Damages Dies at Hands of Federal Circuit, Second Rule Lives to Fight Another Day

You may have wondered why patent cases have seemed so vogue in the last decade or so for hot shot trial lawyers.  Blawgletter would not presume to tell you the cause.  But perhaps it stems from the fact that, as Willie Sutton said, "that's where the money is."

But that now looks so two days ago.  Because, in Uniloc USA, Inc. v. Microsoft Corp., No. 10-1035 (Fed. Cir. Jan. 4, 2011), a panel of the Federal Circuit, which hears appeals in all patent infringement cases, held that a mainstay of huge awards in patent cases must go the way of the dinosaur and confirmed that another applies rarely.

Let's start with the basic rule on patent damages.  Under 35 U.S.C. § 284, a patent owner may collect damages "in no event less than a reasonable royalty for the use made of the invention by the infringer".  And "a reasonable royalty is often determined on the basis of a hypothetical negotiation, occurring between the parties at the time the infringement began."  Uniloc, slip op. at 36.

The first mainstay -- the "25 percent rule of thumb" -- posits that, in your typical hypothetical negotiation, a patent owner would make a deal for one-quarter of the profit that the patent infringer expects to reap from selling or licensing its infringing product; the infringer would keep the rest (75 percent).  Uniloc, slip op. at 36-37.

Despite the 25 percent rule's long tenure, ease of use, and numerical charm, the panel noted, its "admissibility . . . has never been squarely presented to this court."  Id. at 39.  So what does support the rule?  Not much, the panel felt:

[T]here must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case.  The 25 percent rule of thumb as an abstract and largely theoretical construct fails to satisfy this fundamental requirement.  The rule does not say anything about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry, or party.

Id. at 45.  Finding the rule "fundamentally flawed [as a] tool for determining a baseline royalty rate in a hypothetical negotiation", the panel held that "[e]vidence relying on the 25 percent rule of thumb is thus inadmissible".  Id. at 41.

The panel then turned to the other mainstay of very large patent awards -- the "entire market value" rule.  The EMVR compares the reasonable royalty that a patent owner proposes against the EMV of the infringing product.  But:

The . . . rule allows a patentee to assess damages based on the entire market value of the accused product only where the patented feature creates the "basis for customer demand" or "substantially create[s] the value of the component parts."   Lucent Techs.[, Inc. v. Gateway, Inc.], 580 F.3d 1301[,] 1336 [(Fed. Cir. 2009)]; Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549-50 (Fed. Cir. 1995).  This rule is derived from Supreme Court precedent requiring that "the patentee . . . must in every case give evidence tending to separate or apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpat-ented features, and such evidence must be reliable and tangible, and not conjectural or speculative," or show that "the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature."  Garretson v. Clark, 111 U.S. 120, 121 (1884).  See also Lucent Techs., 580 F.3d at 1336-37 (tracing the origins of the entire market value to several Supreme Court cases including Garretson).

Uniloc, slip op. at 48.  Because the product at issue didn't create the basis for customer demand or substantially create the value of the component parts, the panel ruled, the EMVR didn't apply.

If this all sounds abstract and largely theoretical, let's put some meat on the airy-fairy bones. 

Uniloc accused Microsoft's "Product Keys" of infringing Uniloc's patent on a software registration system that deterred copying of the software.  Uniloc won in a jury trial.  Its damages expert proposed to the jury that the value to Microsoft of the infringing Product Keys equaled $10 per copy of Office and Word software.  He then suggested $2.50 -- 25 percent of the $10 -- as a reasonable royalty.  He checked the result -- $564,946,803 -- against Microsoft's Office and Word revenues -- around $19.28 billion -- and noted that the $564 million came to a mere 2.9 percent of the infringing products' entire market value.  The jury awarded $388 million.

What does the decision mean?  It looks like obvious bad news for anybody who relies on the 25 percent rule.  And it should caution anyone who wants to invoke the entire market value rule. 

Will it devalue patent cases in general?  We doubt it.  The amateurs have largely left the building already, and the efficient market has factored in the concerns.  But the pros surely will take notice. 

Right?

Not Just for Plaintiffs Any More: California Court Voids Attorney-Client Contracts for Help with Taxes, Investments

Since 1982, California law has required contingent fee agreements between a lawyer and a "plaintiff" to meet certain tests. 

Ten years after the law took effect, a California court of appeals held that the law doesn't apply "outside the litigation context."  Franklin v. Appell, 8 Cal. App. 4th 875, 892 (Cal. App. 1992) (involving real estate transactions).

Two years after Franklin v. Appell, the Golden State's legislature changed "plaintiff" in most places to "client".  See California Business and Professions Code § 6147.

See the train coming?

A California lawyer complied with the statute in two of his fee agreements with clients -- almost.  One related to tax matters, the second concerned investments.  Both provided for a "success fee" on top of a monthly stipend.  But neither document included, as section 6147(a)(4) required, "a statement that the [contingent] fee is not set by law but is negotiable between attorney and client."

The Second District Court of Appeal held yesterday that section 6147 barred the lawyer from recovering the success fees.  Arnall v. Superior Court of Los Angeles County, No. B225264 (Cal. App. Nov. 22, 2010).  It directed the trial court to grant summary adjudication to the lawyer's (former) clients on the point.

The lawyer may now receive a "reasonable fee".

JPML Heads to Duke for Short Docket on Nov. 18

Seven hopefuls for pre-trial transfer will hit the argument calendar for the U.S. Judicial Panel on Multidistrict Litigation this Thursday at the Duke University School of Law in Durham, North Carolina. 

The Panel plans to hear lawyers explain why their respective groups of cases should -- or shouldn't -- go to a single federal judge so that she or he can get them ready for trial and then send them back from whence they came for the actual trials.

The docket lists these matters for live hearing November 18:

MDL No. 2195, In re Credit Card Payment Protection Plan Mktg. and Sales Practices Litig.

MDL No. 2196, In re Polyurethane Foam Antitrust Litig.

MDL No. 2197, In re Dupuy Orthopedics, Inc., ASR Hip Implant Products Liability Litig.

MDL No. 2198, In re Toyota Motor Corp. Priud HID Headlamp Products Liability Litig.

MDL No. 2199, In re POM Wonderful, LLC, Mktg. and Sales Practices Litig.

MDL No. 2200, Armodafinil Patent Litig.

MDL No. 2201, In re Transocean Ltd. Securities Litig.

Will California's Fondness for Class Actions Survive Concepcion? (Thomas Update)

California law favors class actions.  So much so that Golden State courts have struck down class-action bans that show up in consumer contracts whether they apply to lawsuits, Discover Bank v. Superior Court of Los Angeles, 113 P.2d 1100 (Cal. 2005), or arbitration cases, America Online v. Superior Court, 108 Cal. Rptr. 2d 699 (Cal. App. 2001).  And federal courts applying California law in the Ninth Circuit have followed suit.

But it may not last.  The biggest threat to California's stance took center stage at the the U.S. Supreme Court on November 9.  The Court heard argument that morning in AT&T Mobility, LLC v. Concepcion, No. 09-893 (U.S.), a case from the Ninth Circuit, where AT&T lost.  The company hopes to beat the court of appeals ruling by claiming that California's distaste for bans on class actions tilts the playing field against arbitration.  That, AT&T asserts, defeats section 2 of the federal Arbitration Act, which section states that courts must enforce arbitration agreements "save upon such grounds as exist at law or in equity for the revocation of any contract".  Section 2, in the AT&T view, preempts the California rule.

The UCL Practitioner's Kimberly Kralowec posted links to news reports and scholarly-esque reactions to the argument in Concepcion the day after.  Most opiners -- make that all opiners -- opined that the hour went better for the class action favorers than they'd expected and that the Concepcions stand a decent chance of winning.

Blawgletters sees more cause for doubt.  

The transcript of the argument suggests to us four justices in favor of upholding California's approach and three against.  Justices Breyer, Ginsburg, Kagan, and Sotomayor all asked questions that imply a simple view of the main issue:  California's rule that both lawsuits and arbitrations must make class actions an option proves the absence of bias against arbitration.  Questions by Chief Justice Roberts and Justices Alito and Scalia, on the other hand, suggest that they believe California only pretends at using neutral rules, which in fact stack the deck against arbitration.

Justice Thomas, who said nothing, as he always does, may go for the Concepcion's federalism tack, which asserts that the Court should avoid holding that federal law preempts state law.  Our friend Paul Bland watched the session live and said that in his silent way Justice Thomas seemed downright lively. Bland added that, despite his conservative bent, Justice Thomas just might supply the fifth vote in favor of keeping the California rule.

That leaves Justice Kennedy.  What does he think?  He said these things:

[During the argument of AT&T's lawyer]

But it seems to me that all State -- most State statutes pertaining to contracts pertain to a class that is not entirely universal.  Suppose that a State had a statute referring to banks, contracts with banks.  That doesn't apply to all contracts.  It doesn't apply to railroads.  But we know that it applies to a class that generally includes both arbitration and non-arbitration.  And that's this case, because there can be a class action rule with respect to litigation and class action rules with respect to arbitration.  So you have to have some rule that recognizes that you don't have to have the entire universe of contracts.  And I'm not quite sure what your test is.  You have a few of them in your brief.

[During the argument of the Concepcions' lawyer]

Suppose that this doesn't have what's called a blowout clause.  Suppose that that kind of clause was not in there.  And the consumer opts out of the arbitration [and chooses to try his or her claim on a class basis].  Arbitration [on a class basis] doesn't -- doesn't go well.  Anyway, can the consumer then insist on the arbitration that the consumer bargained for, the individual arbitration that the consumer bargained for?

So then the bank has to have -- liability exposure for two different proceedings?

*   *   *   *

But you are saying then California can say it's unconscionable to allow the parties to agree that there will be just the single arbitration proceedings?  I don't see how the third parties are necessarily protected.  If you say that the consumer still has the election, that certainly isn't what they bargained for.  Maybe I'm -- maybe that's just a quarrel with the content of the unconscionability standard.

Rather than the FAA [federal Arbitration Act], but I think it does bear on at least section 4 of the FAA.  [Section 4 provides that a party to an arbitration agreement has the right to ask a court to order arbitration "in the manner provided for" in the parties' contract.]

*   *   *   *

If you stick with the theory that the test is whether or not the law in question is inconsistent with the idea of arbitration -- whose idea of arbitration?  What about, suppose it's the bank's idea of arbitration, that we -- we want this settlement, say; we do not want that; that's the bank's idea of arbitration that the parties agreed on.

If you think Justice Kennedy's remarks leave you guessing at how he views the case, we join you.  But he did question the Concepcions' lawyer more, and the questions he posed did seem hostile to the simple view that the neutrality of the California rule -- no class-action bans in court or in arbitration -- resolves the case.

The outcome may pivot, as outcomes so often do in this Court, on Justice Kennedy's thoughts.  We can't read them and will likely have to wait for at least a few months, maybe even until the end of the Court's term in June 2011.  

And yet this time Justice Thomas may become the spoiler.  We look forward to the Court's ruling.

Big Business Cases Hit the Supreme Court Next Week: Copyright and Class Arbitration

On Nov. 8 and 9, the Supreme Court will take up two cases that hold promise and peril for businesses.  Blawgletter sees more cause for businesses to hope than fear.

The first of the pair, Costco Wholesale Corp. v. Omega, S.A., No. 08-1423 (U.S.), deals with the reach of copyright law's "first sale" doctrine.  If you buy something "lawfully made" under the Copyright Act -- a book, a house blueprint, a Barbie® doll, even a fancy rug -- the first sale rule entitles you to do pretty much whatever you want with it, as long as you don't make copies of it.  17 U.S.C. § 109(a).  But what about copyrightable works that originate in another country?  Do they count as "lawfully made"?

The Ninth Circuit said no.  It cited the Supreme Court's decision in Quality King Distrib., Inc. v. L'Anza Research Int'l, Inc., 523 U.S. 135 (1998), which held that the doctrine does extend to "round trip" works, which come into the U.S. from overseas but started in the U.S.  Copyright owners didn't like the ruling because, they said, it hurts their ability to control distribution of their products in the U.S.  The Ninth Circuit's decision, as one amicus points out, gives them more options on timing, price, and content of their works.

Companies that buy for resale oppose the Ninth Circuit's limit on the first sale doctrine.  They'd prefer freedom to get merchandise from any legitimate source, including overseas.  That allows them to pay less and get more -- and that benefits consumers, too, they urge.

The second case on the calendar, AT&T Mobility LLC v. Concepcion, No. 09-893 (U.S.), also hales from the Ninth Circuit, but this one unites businesses against that court's decision.  Concepcion raises the question of how far state law can go in striking down arbitration agreements that ban class or aggregate treatment of multiple people's claims.  The Ninth Circuit applied California law to declare a class arbitration ban in AT&T Mobility's subscriber agreement unconscionable and therefore void. 

AT&T Mobility urges to the Supreme Court that the ruling violates the federal Arbitration Act, which calls for enforcement of arbitration clauses on the same footing as other contracts.  The Concepcions and consumer groups contend that the Ninth Circuit simply applied neutral state law principles.

Both sides all but hyperventilate over the bad effects of a ruling that goes against them.  The businesses assert that banning class bans would injure them -- and consumers! -- by depriving them of a cheap and effective way to resolve small disputes.  The consumers say upholding bans would kill the best means available to hold wrongdoing companies accountable and compensate their victims.

Blawgletter wishes to point out that, if AT&T Mobility wins (as we expect), class arbitrations will become as rare as unicorns.  Last term, in Stolt-Nielsen, the Court held that an arbitrator can't order class arbitration unless the parties' agreement more or less expressly allows class treatment.  The combination of upholding class arbitration bans and barring class arbitration absent express language permitting it will prove a fatal one-two punch.

What the Election Means for Business Lawsuits: More of Them

Lots of people want to know what voters meant just now when they mostly, in lots of places, swept ins from office and replaced them with outs.  Did they want to vent anger?  Express anxiety?  Demand a new path?  Something else?

Blawgletter suspects people wanted to say A Great Many Things, often all at the same time.  And we bet plenty of voters can't say exactly what bothered them so much.  They just feel that something has gone wrong.  Bad wrong.

What?  And what does the what mean for lawsuits involving businesses?

We've noticed over the last several years growing impatience with organizations that don't act responsibly.  How many people do you believe feel upset at subprime borrowers for taking out loans they knew they couldn't repay?  At the mortgage companies that gave them the money knowing they couldn't repay?  At the loan servicers who can't find the paperwork or, worse, sign affidavits pretending that they can and did?  At investment banks for packaging thousands of the high-risk mortgage loans and selling them as AAA stuff to investors for millions and then taking bailout money to tide them over?  At the government for letting the whole thing happen in the first place -- and then seeming powerless to fix it?

We could also talk about health care, the auto industry, taxes, deficit spending, late fees, unemployment, and on and on.  People seem to us more than anything angry, anxious, unhappy -- you name it -- that nobody seems willing, at last, to take responsibility.  Responsibility for mistakes, responsibility to fix them.  Now more than in our memory.

Which brings us to what could happen lawsuit-wise.  In a word, we think:  more.  For example:

• a greater willingness by governmental entities to use litigation as a (high-profile) tool to combat and punish what citizens may view as harmful private irresponsibility.
• a multitude of private suits against companies whose conduct over the last couple of years has earned them a public odor of selfishness, arrogance, and greed.
• heavier emphasis, especially at trial, on showing that the other side behaved in an irresponsible way and that your side acted -- and continues to act -- responsibly.

Ponder this responsibility idea.  See if it resonates with you.  And tell us what you think.

Delaware Court Okays Reverse Contingent Fee

You may recall Blawgletter's thoughts on "How to Negotiate a Reverse Contingent Fee".  We said:

The [reverse contingent fee] 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.

You can also base an RCF on achieving goals -- such as winning a motion to dismiss or for summary judgment.  And you can use a multiplier of hourly fees to compute the premium.

The ex-CEO and COO of PRC, LLC, did just that.  Wesley T. O'Brien hired three different law firms to represent him in connection with an arbitration and litigation arising from claims that he defrauded and breached fiduciary duties to PRC.  O'Brien won.  And then he sought to recover his defense costs from PRC and its parent, IAC/InterActive Corporation, under an Indemnification Agreement and a Merger Agreement.

O'Brien had agreed to pay two of the firms a 20 percent premium on top of their hourly fees if O'Brien prevailed.  He contracted with a third firm to remit a 100 percent bonus.  Vice Chancellor Parsons, in the Delaware Court of Chancery, had to decide the indemnitors had a duty to pay not only the hourly fees but also the "success" fees.

The court held that the indemnitors did, indeed, have such an obligation.  Although O'Brien had in fact paid only a fraction of the fees he agreed to, the court ruled, he had "actually incurred" them "because he was obliged to pay that amount".  The court also rejected the indemnitors' argument that "a modest success premium is per se unreasonable in the case of officers and directors seeking indemnification from their corporations."

The Vice Chancellor allowed the 20 percent reverse contingent fees but cut the 100 percent premium for the third firm to 50 percent.  O'Brien v. IAC/InterActive Corp., No. 3892-VCP (Del. Chanc. Aug. 27, 2010)

Why would a client agree to a reverse contingent fee?  Most often to save cash, especially if the client doesn't have funds to pay hourly.  As with a regular contingent fee, the reverse variety allows the client to retain capable counsel and align the lawyers' interests with those of the client.

[Hat tip to Delaware Corporate and Commercial Litigation Blog, which discusses O'Brien here.]

Third Circuit Rejects Shores v. Sklar Securities Fraud Theory

Whether to treat a securities fraud case on a class basis often turns on whether the court may presume that class members relied on false statements or omissions by the defendants. 

The most common form of presumption -- the fraud on the market theory -- won the Supreme Court's okay in Basic, Inc. v. Levinson, 485 U.S. 224 (1988).  

A more exotic breed -- the Affiliated Ute variety -- provides for a presumption of reliance on material facts that the defendant failed to disclose despite a duty to do so.  See Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). 

A third, and even more rare, means for presuming reliance came in Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981) (en banc), where the court recognized a "fraud-created-the-market" presumption, which posits the notion that investors probably assume the lawfulness of a security's issuance and that courts may therefore presume that they so assumed.

Yesterday, the Third Circuit joined the Seventh in rejecting Shores v. Sklar.  Malack v. BDO Seidman, LLP, No. 09-4475, slip op. at 12 (3d Cir. Aug. 16, 2010) (citing Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1130-31 (7th Cir. 1993)).  The court also held that a variant of the theory would not work in the case before it.  See id. at 33 (distinguishing T.J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel Authority, 717 F.2d 1330 (10th Cir. 1983)).

The court affirmed an order denying class certification under Rule 23(b)(3) on the ground that common issues of fact did not predominate.