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IP Litigation:  What are the Stakes?

IP Litigation: What are the Stakes?


SML Perspectives
(July 1, 2011)

Your company has invested countless hours and money developing and introducing a new product, and it’s been paying off with sales that have exceeded even your most optimistic forecasts. Now your biggest competitor has come out with a knock-off that is priced twenty percent lower than yours (it’s easy for them, given they didn’t have any R&D expenses). You are sure that the knock-off is infringing one of your hard-earned patents. How much will it cost to sue for patent infringement? Can you stop the competitor from selling its infringing goods, or are you limited to trying to get a judgment for money damages? What can you get if you win?

Or, you receive a “cease and desist” letter from a lawyer on behalf of a company that you’ve never heard of, located in “Timbucktoo”, claiming that your company’s name, which it has used for years, is “confusingly similar” to a federally registered trademark issued last year. Do you need to change your company’s name? What happens if you get sued? How much might the company have to pay? If you fight it and win, can you recover your attorneys’ fees?

Whether you are considering filing a suit, or you’ve been threatened with a suit, it is extremely important to understand what you are getting into, what it can cost, and what you can win or lose. Protecting or asserting your IP rights is a business decision, and the more information you have, the better. The first question is almost inevitably, “How much is this really going to cost?”

Determining the actual costs of a lawsuit in advance of litigation is typically difficult. However, taking a look at the laws surrounding the different types of intellectual property can provide a better understanding of just what could be at stake, and help you determine how best to position your company, whether it’s on the defense or the attack.

INJUNCTIONS

Many IP cases start with a cease and desist demand. Absent a resolution, the next step usually involves the filing of a law suit, and a request that the court immediately enter an injunction stopping the alleged infringement.

To obtain a preliminary injunction, a party needs to convince the court that it is likely to win the case (which goes to the merits of your claim) and that the party is likely to suffer “irreparable harm” if the court does not order that the other side stop its alleged infringing activity. That means the party needs to prove that money damages at the end of the case would not be sufficient to compensate it for the damage caused by the infringement. Examples of irreparable harm include: loss of good will, loss of market share, and customer confusion.

Because you need to prove that you are likely to win the case, efforts to obtain a preliminary injunction are intensive, and they often require extensive discovery and an evidentiary hearing, all on an expedited basis. And if you win, you are likely going to have to post a bond to pay damages in case it turns out that the injunction was improper (i.e., the party who was enjoined won the case).

Many times, the fight at the preliminary injunction stage ends up determining the overall outcome of the case. This occurs because the process leaves the parties well informed with regard to the evidence, and the court has given some indication as to the strength of the parties’ relative positions.

PATENTS

Very simply, if someone makes, uses, sells or offers to sell someone else’s patented invention, the patent owner can sue for infringement. If they win in court, the patent owner will receive “reasonable damages” adequate to compensate for infringement, with interest and costs as fixed by the court. There are two damage components used in calculating an award: first, compensation; and second, reasonable royalties. Generally, compensation refers to compensating the patent owner for lost profits and even price erosion that occurs through unjust competition with the patent infringer. Lost profits must be shown by some economic markers that the court can use to justifiably quantify the actual profits. If the damages awarded are supported by the evidence, and are not “grossly excessive, or based only on speculation and guesswork,” appellate courts are unlikely to disturb the award. 1

Above and beyond these damage calculations is the specter of “willful infringement.” If a court determines that the infringer knew what they were doing, triple damages could be awarded. The court also has the ability to award prejudgment interest for the time between the first infringement and the payment of judgment. In infringement cases that drag on for years, this can be a substantial increase to the award amount. Attorneys’ fees may also be awarded to the prevailing party in some cases.

How Much Are We Talking About?

The question of what “reasonable” royalties are continues to be a much debated subject, the answer to which could climb into the millions. In the past, courts have used the 25 percent rule: 25 percent of the value of the product should go to the patent owner as a royalty and 75 percent would remain with the seller/infringer.2 However, recently this rule was expressly overruled and is no longer the correct starting point for determining a reasonable royalty. The effect is yet to be seen, but it could result in wild conjecture and questionable “evidence” of what is reasonable. Regardless, any royalty reward is going to depend on a number of factors related to the patents, previous licenses, competition, and the relationship between the parties, to name a few.3

IP litigation, particularly patent litigation, can be very expensive. Although each case is unique, the average contested case costs each party seven figures to litigate, particularly if there are questions as to the validity of the patent and counterclaims seeking to invalidate the patent.

The recoveries can also be significant. For example, in 1991, Polaroid won a record setting award against Eastman-Kodak over the infringement of several patents.4 The resulting $900 million reward was later revised to $873 million.

More recently, Microsoft lost a patent infringement suit to Uniloc. The “reasonable royalty” in that case was determined to be $388 million, based on a royalty rate of $2.50 per license.5 Although most cases do not involve claims that support such an award, many meritorious claims involve potential recoveries that justify the cost to pursue them.

COPYRIGHT

Copyright categories include literary, musical, and dramatic works, choreographic works, pictorial, graphic and sculptural works, motion pictures and other audiovisual works, sound recordings, and architectural works. Software falls under literary works. A copyright gives the owner the exclusive ability to reproduce the work, prepare derivative works, distribute copies, display the work, and perform the work.

Of all the intellectual properties, copyright infringement remedies are the most governed by statute. A copyright owner must elect to pursue either actual damages or statutory damages prior to a final judgment.

If the copyright owner elects to pursue actual damages, often the most attractive method is to disgorge the infringer’s profits. To determine an infringer’s profits, the copyright holder is allowed to show the infringer’s gross revenue. The burden then shifts to the infringer to prove its attributable expenses. The infringer can also seek to prove that profits were attributable to factors other than the copyrighted material, which could allow for an additional offset in damages. The copyright owner can also recover damages for its own lost profits, so long as there is not a double recovery in light of the disgorgement. Damage to the copyright owner may include not only lost sales, but also the difference in sale prices. The court will also take into consideration fair market values and the state of the market in determining what is attributable to the infringer and what is attributable to a poor market.

If the copyright owner elects to pursue statutory damages, it will simply show that there was an infringement. Then it is the infringer who must prove that his or her infringement was limited to as few “infringements” as possible. The infringer will also attack the ability of the copyright owner to elect statutory damages. Statutory damages were designed to encourage copyright registration. Therefore, statutory damages are only available if the copyright was registered within three months of first publication or if it was registered prior to the infringement.

How Much Are We Talking About?

Disgorgement of profits is simply a matter of the extent of the infringing sales and how much profit the infringer earned from such sales, and they can run from pennies per item to hundreds or thousands of dollars per item. Statutory damages range from $750 to $30,000 for “all infringements involved in the action, with respect to any one work.” The award can be increased to $150,000 if the copyright owner proves that the infringement was willful. However, this limitation to “all infringements… with respect to any one work” is the main drawback of statutory damages. For example, producing 100 prints of one copyrighted work is one infringement under the statutory scheme, not 100 infringements. Attorneys’ fees are available for the prevailing party.

TRADEMARKS AND TRADE DRESS

Someone may infringe on a trademark if they use an identical trademark or a trademark that is likely to cause consumer confusion as to the source of those goods. There are also actions for trademark dilution. Trademark dilution occurs when a famous mark is being tarnished by another trademark or the distinctive quality of the mark is blurred through association with inferior products or services even though there is no likelihood of confusion. (Think McDonald’s and McSleep6.)

If a party is guilty of trademark infringement, the remedies for the trademark owner include injunctions designed to prevent the violation of the trademark owner’s rights, the infringer’s profits, as well as damages sustained by the trademark owner and costs of the action, and destruction of the infringing articles. Additionally, if the infringer was intentionally using a counterfeit trademark for selling goods or services, the court “shall” triple the profits or damages, whichever is greater, and award attorneys’ fees. Unlike patent damages, where the tripling of damages is discretionary in exceptional cases, the tripling of damages is required in trademark counterfeit cases unless there are “extenuating circumstances”. Counterfeit trademarks are also subject to statutory damages at the trademark owner’s election. Statutory damages entile the trademark owner to not less than $500 and not more than $100,000 per counterfeit mark per type of goods or services sold, offered for sale or distributed; and not more than $1 million per counterfeit mark per type of goods or services if the court finds the use was willful.

How Much Are We Talking About?

Although the ability to collect monetary damages appears clear from the statutes, it is actually harder to prove the damages/profit required for a monetary reward. The obstacles for monetary damages include showing that the infringer knowingly acted to infringe another’s trademark and what portion of the infringer’s sales constitute profits that should be attributed to the trademark owner as well as how those sales or trademark uses actually damaged the trademark owner. In cases of counterfeiting marks, it is easy to show what was sold (profit) and what portion of those sales would have been lost sales (damages). In other trademark and trade dress infringement cases however, the cost to prove the profits and damages may be more than the remedy. The ability to collect attorneys’ fees for “exceptional” cases also limits collection. Additionally, monetary damages are generally limited to compensatory damages, not punitive, except in the case of counterfeiting. The above factors make injunctions which require a showing of a likelihood of confusion the more prevalent remedy for trademark and trade dress infringement. Keep in mind, unlike some other areas of intellectual property, an owner of a trademark or trade dress has an affirmative obligation to enforce its rights against an infringer and to stop infringement, or else its right might be lost. Accordingly, a decision as to whether to take action against an infringer might not be limited to the questions of how much it will cost to pursue the claim and how much can be recovered from the infringer, but instead what is the value of the mark and the good will associated with the mark.

CONCLUSION

Unlike in poker where you have to play the hand you are dealt, good IP counseling and planning lets you pick which cards to hold. How you play those cards, however, depends on the amount of the ante and the number of chips in the pot. Early consultation with IP counsel can help you make smart decisions.

Click here to view the full digital version of the The Innovation edition of SML Perspectives.

Authors
Richard A. Coughlin
T (336) 378-5471
F (336) 378-5400
Associated Attorneys
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