Betting for Keeps

Thursday, September 1, 2011

Patent litigation cases can last up to decades, meaning the wins are typically huge and the losses are devastating. Illustration by Stephen Sauer.

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Wadleigh, Starr & Peters, Manchester

Cook Little Rosenblatt & Manson, Manchester

Sheehan Phinney Bass + Green, Manchester

When you bet your business in litigation, just hope you win.

When you talk about "bet-the-company litigation" in New Hampshire, you could do worse than to start with the case of Edwin Howard Armstrong. His story has all the elements: an inventor's soul, a brilliant creation and a big business whose very existence was cast into doubt by a new device that rendered its antecedents obsolete. And Armstrong owned one of those big houses on the coast in Rye.

Armstrong's invention - namely, today's FM radio technology - and the struggles surrounding it were so significant to the evolution of broadcasting that New Hampshire's own Ken Burns covered it in his film, "Empire of the Air: The Men Who Made Radio." To make a long story short, the Radio Corporation of America (better known as RCA) disputed Armstrong's patent on FM and refused to pay royalties for its use in radios and televisions. Armstrong sued and eventually won, but only after RCA had strung the case out for so long that the inventor, disconsolate, killed himself.

"Patent litigation is notorious for extending years, even a decade or more," noted Eugene Van Loan, an attorney with the law firm of Wadleigh, Starr & Peters in Manchester. "Big companies often infringe on a little guy's patent and then more or less dare you to try to do something about it, then they try to make the litigation as lengthy and onerous and expensive as possible."

Why? Because the very essence of bet-the-company litigation is a case where a win is very, very big and a loss is devastating - like Armstrong and RCA. "Someone may believe they own intellectual property at the core of a company, and someone else may be taking the position that a company is misappropriating it," says Arnold Roseblatt, a partner of Cook Little Rosenblatt & Manson, also in Manchester. "Depending on the outcome of the case it could effectively destroy the company."

Or the inventor. "I think that 'what is highly significant litigation' is determined by the parties in question," added shareholder Edward A. Haffer of Sheehan Phinney Bass + Green, who is based in Manchester too. (It's not surprising that attorneys specializing in business-related litigation would be concentrated in the state's biggest business center.) "Where you have a patent and it's claimed to be invalid, or it's alleged your client is infringing the patent of another company, this can threaten the very bread and butter of what the company does."

And the smaller the company, the greater the portion of its value is vested in its intellectual property, to the point where losing a patent means losing the business - or (as Armstrong had come to believe) the agony of defending it can destroy the business too. For one reason, a patent only gives its inventor exclusive rights to his invention for a limited term - in most cases, 20 years. Noted Van Loan, "If you figure that if a small entrepreneur gets a patent, it's usually several years of startup work before anything comes to fruition. Then, if litigation consumes five or six years, then even if you are successful, you may have eaten up half the life of the patent."

For another reason, this kind of litigation is really risky. "Oftentimes, talking about highly technical scientific things, questions arise as to how does a very smart judge or jury go about making a rational decision on the information before them," added Haffner. "Most of the time it's going to come down to expert witnesses and which one the judge or jury is going to credit. That's why most cases just settle before they get to trial, because many times the cases are just bedeviling and neither side wants to run the risk of a rogue jury or a judge who is going to make a mistake."

For example, Armstrong once alleged that another of his patents was stolen by rival inventor Lee DeForest. After 12 years of litigation, the patent was ultimately awarded to DeForrest by the U.S. Supreme Court. That decision has come to exemplify situations wherein the technology is too complicated for the judges to understand.

In fact, some inventors don't even bother with patents at all. Despite the protection they offer, the patent process itself requires inventors to disclose specifics of their creations. "It's the tradeoff you have to make," Van Loan explained. "You get exclusive rights to use or license your invention, but you have to reveal it to everyone else so they can build off it, and some people use that knowledge to duplicate it."

So instead of a patent, some inventors choose to simply call the details "trade secrets." The classic example is the "secret formula" for making Coca Cola, but the category can also cover things like customer lists, company financials or "tricks of the trade" such as manufacturing processes or software schemes - provided certain conditions apply.

"You have to satisfy N.H. statutory requirements," Rosenblatt says. "The information must be not readily ascertainable; it has to have economic value by being kept secret; and the party claiming something is a secret needs to have taken reasonable steps to maintain confidentiality."

Sometimes, those steps aimed at keeping "secrets" secret include requiring employees and others to sign "nondisclosure agreements," as well as agreements not to compete with a company, before exposing the secrets to them. Those agreements can help determine what knowledge workers can and cannot use when they move on to their next jobs, thereby helping to avoid situations where the old employer thinks the new employer is taking unfair advantage of business details in the possession of a worker who is hired away.

"Any employee needs to be covered by an enforceable nondisclosure agreement," advised Haffner. "You may want to have a noncompete too, but it's a nondisclosure where they are forbidden from disclosing to anyone else including any future employer what the facts are in that trade secret."

But while intellectual property is a big cause of litigation that reaches the level of "betting the company," it's not the only cause. "There can be cases where a company's lifeblood is at issue in a fight among shareholders or owners of a closely-held company," Roseblatt explained. "One shareholder might be accused of breaching his or her duty to the company such as making decisions in his or her self interest rather than the shareholders as a whole."

Added Haffner, "You could have a fight between partners where one is contending she is owed more for her share in leaving the company. That goes right to the heart and soul of its economic well-being and that of the people who created it."

As with intellectual property cases, most of these "bet your company" conflicts also get settled short of trial. Even more importantly, noted Rosenblatt, "most companies go through a business life without a significant litigation, and that should be the goal of every company. My partners would say that these cases don't happen very often, but I spend my life in litigation and many of those cases are significant to the future of the companies."

So how do you stay out of court? In the case of a patent, Haffner recommends a healthy dose of preparation. "If you are aware of a patent that's out there, and you think what you are doing does not infringe on that patent, the appropriate thing is to go to a patent attorney and get an opinion," he says. "If you have a clearance opinion from a capable patent council, it's much less likely that a finding of willful infringement will happen, which is one way to minimize risk."

For intellectual property, Rosenblatt says, "What I tell them could be seen as steering people toward using lawyers at times - not lawyers like me, but lawyers who can help you avoid problems. Companies that think ahead are more likely to avoid situations that get them embroiled in controversy." NH