The Hidden Cost of Waiting to Enforce a Patent

The Hidden Cost of Waiting to Enforce a Patent
By Bikramjit Singh

When patent holders consider when to enforce their patents, they usually view it as a legal issue, namely, how long can they wait before delays begin to work against them via defenses such as laches or estoppel, or simply because the further back the damages go, the harder it becomes to recover them? That is the kind of question you should put to a lawyer. But it is the wrong question to ask if you want to understand why the value of a patent claim diminishes the longer infringement goes unnoticed, since most of that loss has nothing to do with legal time limits and everything to do with market factors which start to work against the patent owner almost immediately.

The damages window isn’t the only clock running
Recoverable damages are usually restricted to a period extending backward from the date the complaint is filed, which clearly encourages patent owners not to keep a known infringement secret forever. However, in reality, few patent owners do keep a known infringement under wraps. The more typical scenario is that an infringing product has been on the market for two, three, or four years before anyone on the patent owner’s side becomes aware of its existence. During that time, the calculation of damages has not yet begun to work against the patent owner; instead, the infringer’s position is changing.

Entrenchment changes the negotiation, not just the numbers
A firm which has been selling an infringing product for a year has customer relationships, supply agreements, and marketing expenses based on that product; one that has been doing so for four years has all of those things plus the costs involved in switching its own customers, a sales force that is paid according to the product’s continued availability, and often some public statements regarding the product’s roadmap. None of these factors is proof of infringement, but all of them do show how costly it will be for the company to cease selling the product, redesign it, or agree to pay royalties retroactively. The later the patent owner appears, the more the infringer’s decision-making shifts from asking whether it is worth fighting to realizing that it has already invested too much in the product to change direction without a struggle.
That change is clearly evident in the licensing talks. A company which was approached regarding a product it launched eight months ago is now negotiating on the basis that a redesign is still possible. On the other hand, a company that has been shipping a product for five years and which has had three different product generations developed on the same basic architecture has essentially no option of redesign, something that one might expect to advantage the patent holder (greater leverage, higher royalties), but which often works the opposite way. The infringer has leverage in that it is now cheaper for them to walk away from the negotiations and go to court than it would have been in the first year, since they have already taken the risk into account in their years of revenue and have legal advisers, a budget, and the incentive to set legal precedents rather than to reach a settlement.

Knowledge cuts both directions
Generally, in order to claim enhanced damages it is necessary to show that the infringer was aware of the patent and had still taken action, not just that the patent appeared somewhere in the public records. This results in an unusual incentive situation which should be stated clearly: a patent owner who delays sending the notice is, in a very specific sense, keeping open the possibility of a stronger case for enhanced damages in the future, since it is often the notice that begins the period during which knowledge can be demonstrated. However, this kind of calculation involves risking a small and uncertain benefit courts only grant enhanced damages in a small number of cases and only when there has been genuinely egregious behaviour, not simply infringement against a much bigger and more certain disadvantage: years of unlicensed use, a well-established infringer, and a damages claim that becomes harder to prove the longer the records are not preserved and the witnesses’ memories deteriorate. It is rarely worth the cost to wait for the advantage of enhanced damages.

What actually erodes with time
Three things degrade steadily, and none of them depend on how long you wait to file:

1. The evidentiary value of a claim chart decreases because product documentation is regularly updated, older versions of the product become more difficult to obtain, and the individuals who could testify as to what the product actually did in a particular year either move on or forget. Therefore, a claim chart based on a product version that is five years old is more difficult to construct and easier to challenge than one based on the current version.
2. The feasibility of designing around the infringing architecture. Each year an infringing architecture remains in production, it becomes more deeply embedded in downstream tooling, supply chain agreements, and subsequent products. A design-around which would have required one product cycle in the first year may require three product cycles by the fourth year, and the patent owner has no means of forcing an earlier redesign without first determining that there is an infringement.
3. When assessing royalty rates, licensing discussions rely on comparable transactions, specifically, the terms on which similar patents have been licensed, the markets in which they have been licensed, and the stage at which adoption of the technology occurred. The more reliable such comparables are the less the technology has been adopted, since there are fewer completed deals to serve as a reference point with a small number of cases, and the patent owner is negotiating with a number of possible licensees at about the same time rather than dealing with established incumbents one by one, years apart, each of whom has observed how the previous negotiation had gone.

Why most portfolios never get monitored this way
The problem is generally not a lack of strategic agreement; indeed, most intellectual property advisers would agree that earlier detection helps to maintain leverage. It’s an operational one. Since a portfolio, no matter how small, involves dozens or even hundreds of claims that have to be kept under review as the market constantly changes, the conventional method of keeping an eye on this is manual research, a technique which doesn’t scale: a single analyst can examine a small number of potential products against a particular patent in a day, which is acceptable when dealing with a single urgent issue but impossible to carry out on a regular basis over the whole portfolio. Continuous monitoring is treated more like a goal than part of the normal working process, and patents are only checked when something happens, such as a competitor launching a product, a renewal deadline arriving, or a licensing inquiry coming in; that makes the need to do so arise.
The particular issue that tools such as ClaimHit are designed to address is not to take the place of the legal judgment made in connection with an enforcement decision, but rather to narrow the time gap between when a product enters the market and when the patent owner becomes aware of its existence. It is only by regularly screening a patent against public product data, rather than doing so just once, that monitoring can be transformed from a one-off project into an ongoing infrastructure, something that is most important in the case of the technologies mentioned here, since these are still being adopted and the market has not yet consolidated, meaning that early and well-supported outreach still has opportunities that later outreach will not.

The practical takeaway
This does not provide a reason to carry out an enforcement action prematurely, before a thorough infringement analysis has been completed – in fact, sending a weak claim chart early is a worse idea than sending a strong one later. Instead, it supports viewing monitoring as an ongoing activity rather than as a one-off project. The patents that are most worth enforcing are generally those which cover technology that is still being adopted, particularly in cases where several companies are entering the market at different times, and in such situations taking an early and well-supported stance with respect to each one keeps options open that would not be available once the product category has settled down around a small number of established players. By the time infringement is obvious to all, much of the advantage that made early enforcement valuable has already been lost.