Patent Litigation Merely an Expensive Settlement Mechanism?

In "How Are Patent Cases Resolved? An Empirical Examination of the Adjudication and Settlement of Patent Disputes," U. Illinois Law & Economics Research Paper (2005), Jay Kesan and Gwendolyn Ball look at the evolution of about 3700 cases patent cases filed in 1995 and 1997. They track a variety of characteristics in order to estimate patent litigation costs in each case, including the amount of time taken by each case through to final disposition and the number of documents filed by all the parties in each case. They conclude that

[M]any more patent cases are adjudicated on the merits (either at the pre-trial stage through a grant of summary judgment or at trial) than is commonly thought. Our results demonstrate that in addition to the small number of patent cases going to trial (about 5%), another significant percentage of cases (about 8-9%) are resolved on the merits through summary judgment. Consequently, summary judgments are important in patent cases for determining patent validity and infringement, and the summary judgments related to patent validity occur earlier in the litigation compared to summary judgments related to patent infringement.

This result is somewhat encouraging given the important role played by the courts in revoking patent rights improvidently granted at the outset by the PTO. Nevertheless, despite the fact that such rulings occur "early" in the proceedings compared to patent trials, we should still be concerned about the huge transaction costs associated with patent litigation because summary judgments in general, and summary judgment based on invalidity in particular, are expensive compared to summary judgments granted on other grounds.

In addition, there is a significant difference in duration and number of documents filed in cases resolved through summary judgment for the 1997 filed cases compared to the 1995 filed cases. This is consistent with the changes brought about by the Markman decision that invigorated claim construction as a threshold legal issue in patent litigation. The increased importance placed on first construing the claims before addressing infringement or invalidity after Markman necessitates that significant resources be allotted to the step of claim construction before (or concurrent with) filing motions for summary judgment. Hence, it is not surprising that in the 1997 filed cases more resources were expended earlier in the litigation compared to the 1995 filed cases.

Overall, our results show that transaction costs associated with patent litigation loom large, and rulings on the merits by the courts concerning patent validity, patent infringement, and remedies for infringement (i.e., injunctive relief or damages) are rare, expensive, and not pursued to completion by most litigants. Instead, most patent cases settle fairly quickly (about 12-15 months) after the filing of the complaint, thereby reducing the actual cost of patent litigation considerably.

This work has significant implications for all civil litigation in general, and for recent efforts to reform the patent system by either improving patent quality through new administrative procedures at the PTO or for substantive patent law reform. Our results strongly suggest that patent litigation is largely a settlement mechanism, and hence, any proposed change in the patent laws should be analyzed in terms of the incentives generated for prompt settlement of patent disputes. In addition, entities and interest groups seeking cheaper and/or a greater number of patent rulings concerning validity and infringement will be wise to look elsewhere, perhaps at other patent institutions such as the PTO or at other alternative dispute resolution (ADR)
mechanisms that complement the courts.