Patent Contingency Fee Agreements

By Eric Goldman

Patent litigation is hot, but I rarely see much discussion about the fee agreements used by patent litigants. So I was very interested to hear Stephen Susman (from the well-known Susman Godfrey firm) speak at the May UT Austin Technology Law Conference about fee agreements for patent contingency work–a topic he knows well, as he said he spends 70% of his time on such matters.

Plaintiff-side patent contingency cases pose a number of unique challenges to lawyers. Most obviously, the cases represent a major upfront investment by the law firm. Susman said his baseline is $3M of attorney time to complete a trial, plus $2M of out-of-pocket expenses (mostly) for experts. Further, these investments are subject to significant risk by the rapidly evolving patent jurisprudence; any defense-favorable Supreme Court opinions (such as the AT&T v. Microsoft case) mid-stream can eviscerate a case’s economic value.

To reduce these risks, Susman Godfrey does the following:

* the firm invests significant money (he estimated $100,000) diligencing a potential case, including getting validity and infringement opinions. During this diligencing phase, Susman Godfrey enters into a “standstill agreement” to freeze the client from going to a different lawyer. Susman didn’t provide a copy of the standstill agreement, but I would love to see it! An agreement getting clients to temporarily restrict their choice of counsel and forebear their litigation rights should raise particularly interesting and complicated professional responsibility issues. (Sounds like an excellent exam question!)

* the firm only takes on cases that receive a majority vote of all of the firm’s lawyers (with every lawyer, from associate to senior partner, receiving an equal vote). This reminds me a little of the Wisdom of Crowds approach to decision-making.

* the firm joins forces with a patent firm for each case. Susman’s view is that it’s better to have 50% interest in two cases than 100% interest in one.

Given the significant dollar values of a patent judgment, there is a higher-than-average risk of litigation between lawyer and client when it comes time for fee payoffs. Plus, it can be difficult to value patent settlements, which might include cross-licenses, running royalties, equity investments or obligations to purchase future widgets. Thus, when negotiating a patent contingency fee agreement, Susman strongly encourages clients to get their own independent counsel to review the agreement as a way of increasing the agreement’s likely enforceability.

Susman Godfrey’s fee agreement includes a provision allowing the firm to unilaterally terminate a representation if the firm decides the case is a loser. The goal of this provision is to address the moral hazard risk in contingency fee cases where clients feel no economic disincentives to pursue a case to trial even if there’s a low chance of victory, but the firm wants to cut its losses. Susman acknowledged that this clause would be difficult to enforce in court, but he said that the firm included the provision after their ethics professor/expert concluded that the provision wasn’t likely to jeopardize the enforcement of the other provisions even if the judge tossed that provision out.

Susman said that his firm never initiates any settlement/licensing talks with defendants before the firm files a case in a favorable forum. This prevents the defendant from initiating a declaratory judgment action in an unfavorable (to the plaintiff) forum, but it also struck me as crummy that no deal is discussed before the case consumes court resources. This may be another good reason to include venue limitations in any patent reform bill.

Susman said that the firm’s malpractice carrier would prefer that the fee agreement’s dispute resolution provision specify a non-jury trial to preserve the ability to appeal, but the firm has chosen to specify mandatory arbitration to help preserve client confidentiality, a particularly important issue when patents (and trade secrets) may be on the line.

Susman didn’t discuss typical contingency fee percentages, but he did say that typically the percentage increases at various milestones. For example, the percentage bumps up 60 days prior to trial because of the major ramp-up in work starting then. He also said that if the firm advances expenses for the client, the percentage is typically 5% higher to compensate for the extra risk (the expenses may be recouped before the remainder is split). The downside is that if the client doesn’t have any skin in the game, they may be unreasonable about settlements. That’s why he said patent trolls make good clients; they are sophisticated players that evaluate settlement offers rationally (he described them as “professional gamblers, not casual gamblers”).

I haven’t seen the Susman Godfrey fee agreement form online in total, but you can see the first couple pages here.