Business Method Patents: Challenges for Patent Infringement Cases

As attorneys involved in patent litigation, our firm has received several inquiries lately about whether we might take, on contingent fee, a case for infringement of a business method patent.  The answer is “maybe!” “A business method is simply one kind of ‘method’ that is, at least in some circumstances, eligible for patenting.” Bilski v. Kappos,130 S.Ct. 3218 (U.S. 2010). Great care must be taken in evaluating such a case, however, because method patents are not broadly patentable.

Bilski made its way to the highest court via an administrative route rather than by private litigation. An applicant tried to patent a method of hedging risk in commodities trading in the energy market. The PTO rejected the patent, which was affirmed by the Board of Patent Appeals and the Federal Circuit (en banc).   The Supreme Court granted certiorari.            

Methods of doing business are not necessarily non-patentable. In Bilski, the claimed invention was a mathematical formula, an “abstract idea,” and thus not a patentable “process.” Significantly, however, the Court rejected any limitation that a method patent must satisfy a “machine” or “transformation” test. That is, a claimed process is not patent eligible only if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.  Although a useful tool, the Supreme Court held that the “machine or transformation” test is not the sole test for determining whether a method is patent eligible.   While the “machine or transformation” test might have worked well in the Industrial Age, it does not work as well in the Information Age.             

In the Supreme Court’s decision, four Justices concurred in one opinion (strongly disagreeing with the Court’s disposition of the case) and two in another (believing that business methods are not patentable). The Federal Circuit’s decision produced five opinions. This led Justice Kennedy to note, “Students of patent law would be well advised to study these scholarly opinions.”             

This has led some to suggest reexamination as an alternative to patent litigation or a license and that “defendants and potential licensees are using reexaminations more frequently than in the past to challenge the validity of the claims in issued patents.  So what’s the bottom line? Business method patents, while perhaps alive, will be difficult to successfully litigate by a plaintiff.   Perhaps the patent owner can best prepare his case for successful litigation by seeking re-examination himself before it is sought by a defendant, potential licensee or other third-party. We would be much more likely to take a business method case on contingency fee after the patent has survived re-examination in light of the substantial, though perhaps somewhat ambiguous, discussion of the higher and highest courts in Bilski.


Why don't more hourly-billing lawyers take on contingent fee cases?

              In the Wall Street Journal’s Law Blog dated March 29, 2010, Ashby Jones asks whether there are any takers on the strategy of mixing a traditional hourly fee practice with a contingent-fee business. 

Most firms do not take plaintiff's contingency fee cases because they are risk averse. They lack the entrepreneurial spirit. I've seen it time after time. Many lawyers on the hourly side think it is easy to make loads of money during contingent litigation. It is not. It requires huge investments of lawyer time and borrowed expense money. For the same reasons that some people work for corporations and other are entrepreneurs, some lawyers and firms are cut out for hourly work and others are willing to risk everything. No risk, no reward. 


            For a lawyer to be successful with a contingent fee case, three things are necessary.  First, there must be a reasonably good case for liability. Second, there must be significant damages. Third, the defendant must be able to pay a judgment.


            Even if all those things are present, the case must survive inevitable legal challenges by the defense, including motions for summary judgment (to prevent the case from even reaching the jury) and appeals. Years can pass, and millions of dollars in lawyer time and case expenses will be repaid. And after all is said and done, the lawyer might lose and have to pay back a line of credit. It is not a business for the weak or fearful.


            Many of our contingent fee clients are true entrepreneurs. Even if they are doing business as a corporation, they are risk-takers. They appreciate that their lawyers have their own “skin in the game.” Businessmen and lawyers who will not take risks need not apply! 

Contingency Fee Representation: When the lawyer's fee exceeds the amount in dispute.

             All too often, legal fees eclipse the amount in dispute in the lawsuit.  Why is this?  Typically, the culprit is hourly billing.

            I recently saw an editorial in the Houston Chronicle entitled “It’s time to reconsider how lawyers are trained.  It is written by James Parsons, a staff attorney with one of the Texas Civil District Courts in Houston. 


            Parsons correctly notes that too often the legal process begins by billing rather than problem solving.  I see it in my practice all the time.  The plaintiff’s lawyer, on a contingency fee, has an incentive in getting to the goal line as quickly, efficiently and inexpensively as possible.  The defense attorney, if billing by the hour, wants to do the opposite.  His incentive is to turn over every rock, scorch the earth, and “defend” every issue possible.  If it can be done, it must be done.  After all, he gets paid for every hour worked, not by the result he obtains.


            Why not just solve the problem?  Communicate.  Listen to the other side’s point of view.  As Parsons suggests, employ the skills of teamwork, communication and leadership.   Good defense lawyers should not ask “how can this case be defended.”  Rather, they should ask “how can this plaintiff’s problem be solved.”


            Sometimes the problem can be solved with a simple apology.  Other times a business deal will do the trick.  If it’s more complicated, however, and litigation or dispute resolution is necessary, then try to identify the points where the parties agree and just fight about the rest. 


            Agree on as many facts as possible.  Narrow the issues down to the real dispute.  Conduct only the minimum necessary discovery.  Get an early trial setting and let the decider decide.   Don’t focus on how to obfuscate, obliterate and litigate.  Instead, focus on communication, understanding and resolving.


            The contingent fee lawyer wants to do that.  Clients would be happier if hourly billing lawyers did the same.

Lawyer awarded real estate from contingency fee agreement

        The recent case Ferguson v. Strutton involved claims for the partition of several pieces of real estate.  The client retained her attorney through a contingency fee contract which entitled the attorney to “thirty-three and one third percent of whatever may be recovered, whether in money or property, or whether recovered through suit or compromise.” 

         The client settled her case and received 338 acres of the land.  She originally offered her attorney a specific parcel of property as his fee, but then changed her mind and gave him nothing.  He sued and was awarded $135,804.06, an amount equal to one-third of the appraised value of the 338 acres. 


        The Missouri court of appeals reviewing the case reversed the award for money.  It held the fee contract expressly provided the attorney one-third of whatever was recovered and, because the client’s recovery was real estate, the attorney’s fee was therefore “an undivided one-third interest in the property recovered by the client as a result of the settlement of the partition suit.” 


        Every person who wants to hire an attorney should know that the amount and method of the attorney’s payment is negotiable.  The attorney and client in the Ferguson case agreed that the attorney would receive one-third of whatever the client received.  In this case, it happened to be real estate.


"No Win No Fee": What Does It Mean?

     “No Win No Fee” is a general reference to a contingent-fee agreement. A contingent-fee agreement is a contract between an attorney and client that describes how the attorney is to be paid for his or her work. Under a pure contingent-fee agreement, the attorney receives a fee only when the contingency is met—usually when the client recovers money from the opponent. Thus, “no win no fee” is an apt description. Without a recovery for the client, no fee is owed to the attorney.  It may also be referred to as a "success fee."  

     Except when prohibited by law (such as in criminal defense or some family law cases), contingent-fee agreements can be used in a variety of situations. It is important for the client to understand that, like most contracts, the terms of a contingent-fee agreement are negotiable. Negotiable terms may include the work the attorney is expected to do, the attorney’s percentage of the recovery, who will advance the case expenses, how those expenses will be subtracted from the recovery, and how any non-cash recovery will be valued. Because these terms are negotiable, the client who is shopping for legal services may want to have a disinterested attorney review the proposed contract to ensure that it meets the client’s needs.

     For more information this topic, please contact any of the firm’s partners at

Benefits Of The Contingent-Fee Agreement

       Under a typical contingent-fee agreement, the "contingency" is usually the recovery of money, or something of value, for the client. If that contingency does not occur, the client owes the attorney nothing for his effort. The obvious benefit to the client is that he or she does not have to incur an out-of-pocket expense for attorneys’ fees. This may be particularly valuable to a client who does not have the ability or desire to pay an attorney by the hour to advance the client's case.

       The contingent-fee agreement also benefits the client by effectively spreading the risk of litigation. An hourly-rate payment agreement requires the client to assume all of the risk because the attorneys’ fees are a sunk cost. But under a contingent-fee arrangement, the attorney shares that risk and is only paid a fee if he wins the case or obtains a settlement. The Texas Supreme Court recently described the benefits of contingent-fee agreements when it wrote:

This risk-sharing feature creates an incentive for lawyers to work diligently and obtain the best results possible. A closely related benefit is the contingent fee’s tendency to reduce frivolous litigation by discouraging attorneys from presenting claims that have negative value or otherwise lack merit.

     Finally, the contingent-fee agreement has an implicit benefit for the client.  The arrangement ensures that the attorney believes in the client's case and will do the work necessary to obtain a positive result. Faith in the case and the desire to fight for the client may not always be present when attorneys are guaranteed payment—without regard to the success or outcome of the case.  A client who retains an attorney through a contingent-fee arrangement therefore receives the attorney's implicit belief that the case has merit. 

Lawsuit Defense Through A Contingent Fee

    Most people have some idea about how a contingent fee works in a plaintiff’s case. Say you are injured in a car wreck. You find a personal injury lawyer. He advances the case expenses and gets paid a percentage of the money received in a settlement. "No fee if no recovery." This same idea works in complex business lawsuits. If a small business or entrepreneur lacks the money to pay lawyers by the hour, there are firms, like ours, that will take even expensive, complicated, business cases on a contingent fee. This helps level the playing field and gives the little guy access to justice.

       But what happens when the little guy gets sued and has to defend himself? What happens when Goliath sues David?

       Well, there are some options.

  • David might assign part of his company, invention or assets to an institutional investor who will pay for the defense.
  • David might assign part of his company, invention or assets to a law firm that will undertake the defense.
  • David might have a counterclaim that a contingent fee lawyer would assert, and include defense of Goliath’s claim as part of the representation.
  • David might find a lawyer willing to defer payment of an hourly fee until David is able to pay.
  • David might use a "reverse contingent fee."

    Blawgletter Barry Barnett gives some excellent examples in "How to Negotiate a Reverse Contingent Fee."

    Sometimes David can defend against an attack by Goliath by using a combination of these techniques. In one case, I was asked by a small medical device manufacturer to defend it in a "bet the company" patent infringement and unfair competition case. The plaintiff, Goliath, was a huge company, well-funded, and was represented by two large and very able law firms. Goliath wanted to stomp out David like a bug! We looked to see if David had an antitrust counterclaim, but that didn’t work out. David was able to pay some of the trial expenses (such as jury consultants and trial graphics) but we worked "by the hour" hoping that if David could survive, we would somehow get paid.

       The case was tried to a verdict. David won. Goliath’s stock lost half its market cap ($1.5 billion) overnight! We were patient about getting paid. David merged into a large European medical device company, and we were finally paid for our work. It was a win-win, and we were very proud to have helped save the day!

       As Barry explains,

By way of example, if the law firm and client agree that a patent infringement case exposes the client to potential liability of $10 million, the RCF would equal a percentage -- 40 percent, say -- of the difference between $10 million and any lower amount that the client pays in settlement or as a result of a judgment. If we zero out the plaintiff, our fee totals $4 million -- .4 x ($10 million - $0) = $4 million.


Patent Litigation On A Contingent Fee

            In  “Patent Payday,” (, 2/12/08) Nathan Vardi discusses institutional investors such as Rembrandt IP Management, Altitude Capital Partners and NW Patent Funding that have raised capital to acquire and enforce patent rights. One of the investors, Michael Cannata, sees such funds as leveling the playing field in David v. Goliath battles. He is right.

            According to the 2007 American Intellectual Property Law Association’s “Report of the Economic Survey,” the mean (average) cost of a small patent infringement case in Texas is approximately $3,000,000 through trial! Most individual inventors and entrepreneurs do not have the money to pay hourly lawyers such fees to enforce their rights. Some law firms, including mine, have the ability to take a patent case on a contingent fee, where we advance the case expenses and receive a fee only if we achieve a settlement. Without the institutional investors and contingent fee lawyers, however, the little guy would be simply out of luck in trying to enforce his patent rights. 

            Mr. Vardi mentions pending legislation in the U.S. Senate, pushed by large technology companies, to limit the rights of plaintiffs and make litigation even more expensive. The intent of such legislation is obvious. If the price of admission to the playing field can be made so high that only the big companies can afford to play, the smaller companies can either be litigated to death or acquired on the cheap.

            If the institutional investors can help insure access to the court system by all, then more power to them! They, together with contingent fee lawyers like my firm, can indeed level the playing field.