Semiconductor Companies Get “Bonuses” Through IP

Protecting a semiconductor company’s most valuable asset; the legal department as a profit center

If it seems as though semiconductor companies are spending more and more time in court arguing about patents and their infringement, it’s because they are.

More patent infringement cases are being filed each year. Steve Barnes, associate editor of a trade magazine in the field of intellectual property (IP), told us, “According to the numbers we have received through the first 11 months of this year, there will be somewhere in the neighborhood of 15 to 16-hundred patent infringement lawsuits filed. I can’t give you exact numbers because even the patent office doesn’t have exact numbers.”

Actually, the solicitor’s department of the Patent and Trademark Office tries to keep up with the number of patent infringement lawsuits, but federal district courts around the country often neglect to report such litigation in their own jurisdictions. Even so, the solicitor’s department reported 1,233 patent infringement lawsuits in fiscal year 1996 (the last year for which figures are now available). Of these, 83 found their way to the U. S. Court of Appeals.

There are many reasons for the growth in such litigation. First and probably foremost, among semiconductor and other types of electronic companies, intellectual property is without doubt the most important asset a corporation can have. According to Jack Brown, who has practiced IP law since 1968, “There are very important companies totally dependent sometimes on only a few patents or processes that are terribly important to the success of the company.”

Of course, IP has always been a major asset, especially in the high-tech field. But litigation was never as common as it is now as a result of a 1980 development in the federal court system and in legislation that changed the playing field.

The Computer Software Protection Act of 1980 defined software under the Copyright Act, and the Semiconductor Chip Protection Act of 1984 provided protection of patented chip designs. But, even more important was the establishment in 1982 of the U. S. Court of Appeals for the federal circuit in Washington. Until then, patent infringement lawsuits which were under appeal by either plaintiff or defendant went to one of the federal appeals courts in different regions of the country. And the plaintiffs lost on appeal more often than not.

Now, the tables have turned. “These regional courts of appeal generally did not uphold the validity of patents,” said Lawrence Ebert of Pennie and Edmonds of New York, the biggest law firm in the country with an exclusive IP practice. “A regional court of appeal,” he said, “would find your patent invalid, unenforceable, whatever, and you wouldn’t collect any damages. Now, the Circuit Court of Appeals finds most patents valid.”

In fact, it is generally agreed that the Circuit Court of Appeals is “pro-patent.” Some experts believe its original judges were chosen for the sake of their pro-patent views to help protect American leading edge technology from copycats. In other words, the court has a “hidden agenda”.

One of the first electronic companies to take advantage of the new legal climate was Texas Instruments, which, in 1986, sued nine Asian companies–Hitachi, Oki, Fujitsu, Samsung, Toshiba, Matsushita, NEC, Mitsubishi, and Sharp–and won after three years. As a result, TI is reported to have obtained more than $1 billion in revenue.

Phoenix lawyer Jack Brown cites several other reasons for the increase in IP litigation: the rapid development of technology, leaving companies with a very short time to recover their investments; the ease with which processes can be copied; and the growth of the global marketplace.

However, another lawyer believes there is an important unstated reason why IP litigation has become so common. Gregory Stobbs, a Troy, Mich. patent attorney who has authored a book on software patents and writes a column for the monthly trade magazine, Intellectual Property Today, believes lawsuits have become essential marketing armament. “Intellectual property laws are weapons that companies use to compete with one another. Everything is more sophisticated and the legal system is being used by very sophisticated players. I think that may be the trend.”

Even if nothing else is accomplished, legal proceedings can slow up a competitor by tying it up with depositions that require detailed searches of files and court appearances.

Whatever the reasons, the practice of IP litigation is now the hottest specialty in American law. “Intellectual property is a growth field,” said Michael Kirk, executive director of the 10,000-member American Intellectual Property Law Association. “It’s attracting the interest of law firms as other areas of the law cool off. Those general practice law firms that didn’t have an IP practice are trying to start sections of IP or acquire an IP firm.”

The rewards in IP law practice are substantial. For top lawyers in the field, an annual salary of $200,000 is not unusual. And some partners pull down $500,000. Washington’s leading IP firm, Finegan, Henderson, Farabow, Garrett and Dunner, offers $78,000 to $100,000 to “attorneys right out of law school,” said Barry Graham, one of the partners who has done some of the firm’s recruiting. “That’s a pretty good start,” he joked. “I was born too early.”

In most IP-specializing firms, the majority of lawyers are patent attorneys, a subset specialty. To practice patent law–that is, to help a client obtain a patent–an attorney must have “a minimum of 30 hours in an engineering background,” said Steve Barnes, associate editor of Intellectual Property Today. “Most have an undergraduate (degree) in mechanical, electrical, biochemical, or chemical engineering before they become a patent attorney. So they have a lot of schooling. It’s not all that rare to find practicing patent attorneys who have PhDs. Someone with a PhD in semiconductor engineering or whatnot is going to be paid handsomely for the knowledge he or she has, not only in the design and prosecution aspect of the patents, but also tearing down someone else’s patents.”

Probably the two biggest and most prestigious of U. S. law firms specializing in IP litigation are Finegan, Henderson, Farabow, Garrett and Dunner of Washington, D.C. and Pennie and Edmonds of New York. Finegan, Henderson, according to one expert, has the reputation of “dealing with a very select clientele–only the upper-crust” of clients. But one of its partners, Barry Graham, told EN the firm’s client list includes “small startup companies” as well as some of the world’s biggest corporate names. Sun Microsystems, Toshiba, Sony, Hard Drive Recovery Associates and other Japanese and Korean companies are among its big clients.

Finegan, Henderson employs 180 lawyers in its offices in Washington, Atlanta, Palo Alto, Tokyo (where it’s had a presence for 10 years), and Brussels. Of the total, probably 160 lawyers in the firm “have either engineering degrees or applied science degrees,” said Mr. Graham. He cites his own background as an example of the kind of training often expected today of successful IP lawyers. “I have an electrical engineering degree. I went to the University of Virginia (to study engineering). Then, after being in the navy during the Vietnam war, I went to law school at the University of Georgia and was actually in general practice for a couple of years before (becoming an IP practitioner). I’ve been involved in everything from very high-tech semiconductor processing structures to not-so-high-tech outdoor power equipment. And everything between.”

Many of the Finegan, Henderson lawyers have post-graduate degrees. “We have a number of PhDs in the biotech area,” said Mr. Graham. “My feeling is, that to really understand a high-tech patent situation or trade secret misappropriation you need to have the technical capability to understand the facts to properly represent your client.”

For the sake of management efficiency, Finegan, Henderson has divided its lawyers into “practice groups,” one of which is “electronics/software,” involving about 40 lawyers. “A large amount of that has to do with litigation in the high-tech area,” said Mr. Graham. “Software and telecommunications is substantial.”

The second big firm in the IP field, Pennie and Edmonds of New York, is ranked by the National Law Journal as the biggest law firm with a practice exclusively devoted to IP litigation (Finegan, Henderson has other types of practice). It has 179 lawyers–128 in its New York office, 27 in Palo Alto, and 24 in Washington. It has no overseas offices and it specializes in suits involving biotechnology, rather than electronics.

A conspicuously successful firm in the field is Robins, Kaplan, Miller & Ciresi of Minneapolis. Yet, one of its partners, Martin R. Lueck, told EN, “We are not intellectual property lawyers in the classic sense. We are trial lawyers who have developed an expertise in trying intellectual property and patent cases.”

Whatever its expertise, the firm has won some substantial lawsuits on behalf of its clients, notably Honeywell, Fonar, and Unocal. In Honeywell’s suit against Minolta in 1991, the award was $127 million. In the Fonar suit against General Electric, the lower court awarded $128 million and the federal appeals court confirmed the award in 1997. In the Unocal case “against the entire oil industry, the verdict came in last month. It’s $69 million now, but potentially may go much higher.”

In one way, Robins, Kaplan is unique among law firms that specialize in IP litigation. Although Mr. Lueck has “pretty much done nothing but patent trials for five or six years,” he characterizes his firm’s 240 lawyers as specialists in “trials.” In fact, unlike many other IP specialist firms, Robins, Kaplan does not stress the need for its lawyers to have science or engineering degrees. Mr. Lueck obtained his undergraduate degree in music, although “when I was a kid I was building signal generators in my basement. It was a toss-up whether I went into music or engineering. I also studied a fair amount of physics.”

Atypical among IP firms, Robins, Kaplan has “staff scientists who have technical degrees and assist in understanding the technical side of a particular piece of technology. We call them science advisers.” Of course, all law firms use expert witnesses, but Robins, Kaplan only rarely uses its own advisers as witnesses. Their primary role is to analyze and evaluate. “If someone wanted us to represent them in a patent infringement case, probably the first thing I would do is give it to one of the science advisers and have him analyze the technical elements of that file and bring me up to speed on what that technology was, which he can do much more quickly and efficiently from a time and cost standpoint than I can do myself. Many of these cases always involve highly technical issues and it’s always helpful to have someone with technical expertise constantly able to help you.” Robins, Kaplan also depends on its clients to provide expertise. Another law firm whose emphasis is on its trial abilities rather than its technical expertise is Brown and Bain in Phoenix. Jack Brown, who heads the firm, does not have an engineering background, but ever since he successfully defended Fairchild against Motorola in 1968, he has been a specialist in IP litigation.

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