1. Seattle Intellectual Property Inn of Court Group 3 Presentation: Costs of Litigation January 16, 2014 Introduction (Kevin Zeck) Overview and Effect of pertinent new provisions of AIA (Isabella Fu) Overview and Effect of various recently issued Local Patent Rules and Model Orders (Ben Byer) Proposed changes to Federal Rules of Civil Procedure (Parker Folse) Proposed Patent Reform Legislation (Dario Machleidt/Jeffrey Cox) Questions and Answers

2. Group 3 Presenters: Ben Byer, Jeff Cox, Parker Folse, Isabella Fu, Dario Machliedt, and Kevin Zeck

3. Presenter: Kevin Zeck

4. Costs to Patentee/Inventor Costs to Obtain/Maintain Patent Protection Lost Profits Price erosion Failure to monetize (loss of expected royalties) Litigation Fees and Costs Attorneys Fees Indirect Costs (diverting resources from R&D, marketing, manufacturing, etc.) Costs to Alleged Infringer Litigation Fees and Costs Attorneys Fees Settlement Value & Damages Awards Indirect Costs (diverting resources from R&D, marketing, manufacturing, etc.)

5. Costs to Third Parties Involved in Litigation Costs to respond to subpoenas and informal requests for information Externalities: Costs of enforcement borne by public (e.g., judicial resources consumed in effort to enforce patent, reduction in availability of alternative goods, etc.) Costs to reform system perceived to be broken

6. Depends on evaluative model If deontological, costs are good (or at least justified) if necessary to secure the rights of inventors. If utilitarian or consequentialist, then the patent system functions to incentivize progress (through invention) Costs are theoretically good up to point where marginal increase in progress is equal to marginal increase in cost to achieve progress

7.  Types of Litigation Costs:  Attorneys Fees  Document Retention/Production Costs  Depositions  Consultants  Experts  Alternative-Dispute-Resolution Related Costs  Mock Trials and Hearings  Court Fees and Costs  Appeal Related Costs  Settlement Value/Damages Awards

8. Little high-quality, publicly-available, quantitative information exists

9.  Best Source on Quantitative Litigation Costs Available is AIPLA: Report of the Economic Survey  Conducted by AIPLA every two years since 1989  Drawbacks: Self-Reporting, Small Sample Size (usu. a couple thousand responses, equaling roughly a 20% response rate), failure to catch many types of costs (e.g., judicial resources, indirect costs of litigation, etc.)  Other resources:  PriceWaterhouseCoopers (focuses on damages), RPX (focuses on NPEs – does not publicly provide all data), other private studies (Bessen and Meurer)

11.  Question Posed:  Two part question (at least as far back as 1995) that asks, for different levels of “value at risk”:  What is your estimate of the total cost of a patent infringement suit through the end of discovery?  What is your estimate of the total cost of a patent infringement suit inclusive of discovery, motions, pretrial, trial, post-trial, and appeal?

20. From PriceWaterhouseCoopers, 2013 Patent Litigation Study: Big Cases make headlines, while patent cases proliferate 6 (2013), available at http://www.pwc.com/en_US/us/forensic-services/publications/assets/2013-patent-litigation-study.pdf

21.  Factors:  Economic Expansion  The Information Age  Non-practicing Entities (RPX thinks this is a significant driver in the number of suits)  Success stories (e.g., large verdicts)  Number of Suits per year has more than tripled since 1995, which would drive up demand for patent litigation legal services

22. Little research has been done

23.  Increased Suits/Demand for Services  E-Discovery (Information Age)  Markman v. Westview (mid-1990s)  Promulgation of Local Patent Rules  N.D. Cal. was first in 2000  Increasingly Complex Technologies  Higher-Stakes Litigation (Smart Phone Wars)  Economic Expansion (general price increases)

24.  Patent Applications, Issued Patents, and Patent Infringement Suits Appear to be Increasing at Record Paces  Technologies will continue to become more sophisticated  Recent case law (e.g., Apple v. Samsung – Posner) suggests damages theories will need to be developed more rigorously

25.  Increased costs, however, are not necessarily bad  If marginal gains from patent protection exceed marginal costs to obtain/enforce, then cost levels are acceptable  Little real-world data exists comparing gains to costs  Because of this, some theorize that patent protection is unnecessary (Boldrin and Levine, 2013)  Quality of life has substantially increased since 1995 (the Internet, smart phones, etc.) – but whether this is the result of patent protection is unknown

27. Costs of Patent Litigation: Effects of America Invents Act Isabella Fu Microsoft Corporation

28. America Invents Act – Relevant Provisions Beginning September 16, 2012, alleged infringers may challenge validity of patents through new inter partes, litigation-like proceedings in US Patent Office Inter Partes Review (IPR) -- generally available if patent was issued over 9 months ago, and petitioner files request within 1 year of being sued for patent infringement Covered Business Method (CBM) Review -- available for patents claiming a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service; not for patent for technological inventions A technological invention is one where the claimed subject matter as a whole recites a technological feature that is novel and unobvious over the prior art; and solves a technical problem using a technical solution Post Grant Review (PGR) – available for patents filed after March 16, 2013 (subject to first to file rule), and within 9 months of issuance Lots of useful information, including statistics at PTO website: http://www.uspto.gov/aia_implementation/index.jsp

29. Costs and Timeline IPR: 5-6 months after petition is filed, PTO decides whether to institute “trial” PTO gives an indication of its reasoning and claim construction PTO aims for decision within 12 months of institution Total: 18 months to appealable decision, in theory District court litigation (other than ): Typically 9-12 months to get Markman ruling Total: 24 months or longer to trial, and additional time for post-trial motions Cost of IPR - http://www.uspto.gov/web/offices/ac/qs/ope/fee031913.htm http://www.uspto.gov/web/offices/ac/qs/ope/fee031913.htm Filing fees: About $23,000 plus additional feels for claims over 15 PTO: “the Office estimates that the cost of preparing a petition for inter partes review would be $46,000.” “the Office estimates that the average inter partes review will have 6 motions, oppositions, and replies after institution.” Very little discovery – typically just depositions of experts Effectively patent litigation minus fact discovery, damages discovery, and trial Cost of district court litigation Discovery – infringement, validity, and damages Markman briefing, SJ briefing, discovery motions Infringement, validity, and damages experts Trial

30. Considerations – IPR v. Litigation For IPR, estoppel will apply for any type of prior art that could have been raised in an IPR (patents and printed publications) Need strong documentary evidence, without need for extensive discovery, to invalidate Alleged infringer can still raise subject matter (Section 101) and Section 112 defenses, as well as 102/103 arguments based on public use Consider whether the arguments will play better before PTO or judge/jury Consider whether broad claim language may be affected by PTO proceedings Consider whether patent owner is prepared to expend significant sums early on in proceedings

31. Statistics – Petitions and Litigation Stays Filings from September 16, 2012 through November 2013 Over 500 IPR Petitions Over 80 CBM Petitions 1 PGR Petition (accidentally filed) About 80% of petitions result in institution, but only on minority of grounds However, challenges are instituted on most claims More likely to institute on anticipation than obviousness Over 70% of motions to stay district court proceedings are ultimately successful

32. dwt.com Effect of Local Rules and ESI Orders on Costs of Patent Litigation Ben Byer Research conducted by Yeu-Yan Perng

33. dwt.com Background: Local Rules  Life without local patent rules – chaos?  Define needed contentions  Organize selection of claim terms  Schedule Markman briefing 33

34. dwt.com Background: Local Rules 34  29 District Courts – LocalPatentRules.com  W.D. Wash.  E.D. Tex.  N.D. Cal.

35. dwt.com Background: E-Discovery Orders  Timing:Stage email v. non-email  Custodian Limit:5/10  Search Term Limit:5/10  Volume Limit:250 MBs  Define Claw Back  Define Inaccessible Info 35

36. dwt.com Background: E-Discovery Orders - Origin  Fed. Cir. Advisory Committee releases  Some district courts adopt – W.D. Wash. – E.D. Tex. – Others 36 I ESI

37. dwt.com Effect on Costs of Patent Litigation 37

38. dwt.com Local Patent Rules – Reduce Costs?  Pros – Organize litigation  Cons – One size fits all – Harder for early SJ  Results – Study: Save 2.5 months – Not sole solution “Rocket Dockets” don’t use them 38

39. dwt.com Model ESI Orders – Applicable Cases  Two types: (1) all case and (2) patent cases only  Are they needed in all patent cases? – NPE suits imbalanced costs – Competitor suits page-by-page review  N.D. Cal. says “yes” 39

40. dwt.com Model ESI Orders – Staging Email  Liability typical does not depend on email  After spending time and energy on non-email – Less need – Less appetite 40

41. dwt.com Model ESI Orders – Custodian Limit  Helpful to the extent it reduced volume – Volume key!  Limited value if still need to search for non-email ESI  Causes issues with 30(b)(6) and trial witness 41

42. dwt.com Model ESI Orders – Search Term Limit  Limited number of terms means courser search – Each term broader  Tailored search may require many narrow terms  Does not lower costs without volume limits 42

43. dwt.com Model ESI Orders – Search Volume Limit  Storage Size – W.D. of Wash.  Document Count – None? 43

44. dwt.com Model ESI Orders – Summary  Keys to Cost Reduction 1.Negotiate with opposing counsel 2.Reduce volume 3.Staging 44

45. Proposed Changes to the Federal Rules of Civil Procedure Parker Folse SUSMAN GODFREY, LLP

46. Current Rule 37(e) (e) Failure to Provide Electronically Stored Information. Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good- faith operation of an electronic information system.

47. Proposed Rule 37(e) (e) Failure to Preserve Discoverable Information. (1) Curative measures; sanctions. If a party failed to preserve discoverable information that should have been preserved in the anticipation or conduct of litigation, the court may: (A) permit additional discovery, order curative measures, or order the party to pay the reasonable expenses, including attorney’s fees, caused by the failure; and

48. (B) impose any sanction listed in Rule 37(b)(2)(A) or give an adverse-inference jury instruction, but only if the court finds that the party’s actions: (i) caused substantial prejudice in the litigation and were willful or in bad faith; or (ii) irreparably deprived a party of any meaningful opportunity to present or defend against the claims in the litigation.

49. (2) Factors to be considered in assessing a party’s conduct. The court should consider all relevant factors in determining whether a party failed to preserve discoverable information that should have been preserved in the anticipation or conduct of litigation, and whether the failure was willful or in bad faith. The factors include: (A) the extent to which the party was on notice that litigation was likely and that the information would be discoverable;

50. (B) the reasonableness of the party’s efforts to preserve the information; (C) whether the party received a request to preserve information, whether the request was clear and reasonable, and whether the person who made it and the party consulted in good faith about the scope of preservation;

51. (D) the proportionality of the preservation efforts to any anticipated or ongoing litigation; and (E) whether the party timely sought the court’s guidance on any unresolved disputes about preserving discoverable information.

52. Other Proposed Changes to the Rules of Civil Procedure Shorten time for service of complaint and case management conference Additional subjects for case management conference (preservation of ESI, Rule 502, discovery conferences) Earlier Rule 34 requests

53. Other Proposed Changes New presumptive limits: – 5 depositions per side – 6 hours per deposition – 15 interrogatories – 25 requests for admission (other than document authenticity) – Rule 34 responses: state objections with specificity, state whether documents withheld, state reasonable date for production

54. Other Proposed Changes Rule 26(b)(1): Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the amount in controversy, the importance of the issues at stake in the action, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable.

55. Public Comments Proposals available at www.uscourts.gov – Federal Rulemaking – Proposed Amendments Published for Public Comment Comments due by February 15, 2014 Three hearings – Washington, D.C. (Nov 7, 2013), Phoenix (Jan 9, 2014), Dallas (Feb 7, 2014)

56. After the public comment period, the Advisory Committees will decide whether to submit the proposed amendments to the Committee on Rules of Practice and Procedure. At this time, the Committee on Rules of Practice and Procedure has not approved these proposed amendments, except to authorize their publication for comment. The proposed amendments have not been submitted to or considered by the Judicial Conference or the Supreme Court. The proposed amendments would become effective on December 1, 2015, if they are approved, with or without revision, by the relevant Advisory Committee, the Committee on Rules of Practice and Procedure, the Judicial Conference, and the Supreme Court, and if Congress does not act to defer, modify, or reject them.

57. Pending Federal Legislation Dario Machleidt, Jeffrey Cox

58. Status of Pending Legislation Dec. 5, 2013—House passed H.R. 3309 (Innovation Act), R. Goodlatte. 325 for to 91 against. Dec. 17, 2013—Senate Committee on the Judiciary hearings entitled “Protecting Small Business and Promoting Innovation by Limiting Patent Troll Abuse.” Senate Bills referred to committee – S. 1720 (Patent Transparency and Improvements Act). Sen. Leahy (D-VT) – S. 1013 (Patent Abuse Reduction Act). Sen. Cornyn (R-TX). – S. 1612 (Patent Litigation Integrity Act). Sen. Hatch (R-UT). – S. 866 (Patent Quality Improvement Act). Sen. Schumer (D-NY)

59. The Innovation Act (H.R. 3309) Provisions Directed to Reducing the Costs of Patent Litigation Fee shifting Heightened pleading requirements Limited discovery Corporate disclosure requirements End-user protection AIA amendments

60. Summary of Senate Bills S. 1720-Patent Transparency and Improvements Act – “Customer stay” provision; regulation of “bad faith” demand letters; transparency measures S. 1013-Patent Abuse Reduction Act – fee shifting (no bond req.), heightened pleading requirements, discovery limitations, “interested party” joinder S. 1612-Patent Litigation Integrity Act – Fee shifting with bond requirement S. 866-Patent Quality Improvement Act – Expansion of AIA Covered Business Method provision

61. Comparison of bills BillFee shifting Heightened pleading standards Heightened corporate disclosures Discovery limitations End-user protections (Joinder, stays) AIA amendments Regulation of bad faith demand letters HR 3309 XXXXXX S. 1720 XXX S. 1013 XXXX S. 1612 X S. 866 X

62. Looking Forward Next Steps – Hearings by Senate Judiciary Committee Resources – Bills HR 3309—Innovation Act: https://www.govtrack.us/congress/bills/113/hr3309/text S. 1720—Patent Transparency and Improvements Act: http://www.leahy.senate.gov/download/patent- transparency-and-improvements-act-of-2013 S. 1612—Patent Litigation Integrity Act: http://www.hatch.senate.gov/public/_cache/files/8d6b7549-fe32- 47cb-952f-b59ab110d97c/ALB13851.pdf S. 1013-Patent Abuse Reduction Act : http://www.cornyn.senate.gov/public/?a=Files.Serve&File_id=2d0600bf- 6c00-4d9d-ad6e-d58130937c26 S. 866-Patent Quality Improvement Act: http://www.gpo.gov/fdsys/pkg/BILLS-113s866is/pdf/BILLS- 113s866is.pdf – Status information http://www.judiciary.senate.gov/ https://www.govtrack.us/congress/bills/