The $90 million that gene chip pioneer Affymetrix Inc. wrung from rival Illumina, Inc. in a settlement in January was seen by Wall Street as a good deal for both companies. "The financial terms are fair," says Ross Muken, an analyst for Deutsche Bank. Under the settlement, Illumina hands Affymetrix the cash in exchange for the withdrawal of all pending patent infringement suits-one in Delaware federal court that was filed in 2004, along with another round filed in October 2007 in Delaware, the United Kingdom, and Germany-without admitting liability. (The settlement also limits Affy's ability to sue Illumina in the future.) Illumina gets out from under the threat of revenue-crimping royalties, Muken says, while Affymetrix gets certainty on the value of its IP portfolio and can invest more freely in acquisitions.
But there's another unsung advantage for Affymetrix that is of particular interest to IP professionals. While Illumina has had to pay years of hefty legal bills to Kirkland & Ellis, winner of this year's American Lawyer Litigation Department of the Year contest, Affymetrix just has had to pay the salaries-and bonuses, we hope-of the five in-house lawyers on its patent litigation staff. And Kirkland & Ellis, led by Mark Pals, a biophysics Ph.D and a top patent litigator, sure didn't roll right over Affymetrix's in-house team. Delaware federal distict court judge Joseph Farnan had divided that litigation into three parts, trying first only the issue of infringement of the six patents in question. Last spring the Affymetrix in-house team prevailed in a jury trial on that issue, winning for the company a $16 million verdict and a 15 percent royalty rate. The settlement came on the eve of the jury trial on the patents' validity.
Who decided on Affy's unorthodox staffing strategy? Barbara Caulfield, Affy's executive vice president and general counsel since 2001. Previously, Caulfield was an IP litigation partner at Latham & Watkins and at Orrick, Herrington & Sutcliffe, and in the early 1990s, a U.S. District Judge in California for four years. Affy was a client of Caulfield at Orrick, and she was receptive to its recruiting pitch because she had become fascinated by biotech.
Caulfield's first task after coming on board was to look very carefully at all the legal department functions, she says. "I saw the company was in a beginning market [at the forefront of a new technology], Caulfield says, "with the usual IP challenges" of such a market. Caulfield had had a front-row seat as a judge to the same types of initial fights over who owned what rights in the silicon chip and DVD areas. Foreseeing a lot of litigation ahead and looking for a way to create savings and efficiencies, Caulfield recommended to management that Affymetrix handle IP litigation internally. Once she got management's blessing for the idea, Caulfield in effect created an in-house litigation boutique. Michael Malacek, formerly of the U.S. Attorney's office in the Northern District of California, has led the team since 2002. His staff includes another former assistant U.S. Attorney, and lawyers from Orrick and from Wilson Sonsini Goodrich & Rosati. Kirkland's Pals tips his hat to the Affymetrix team. Caulfield "hired extraordinarily talented and skilled litigators," he says.
Early on, Caulfield realized she had to put a wall around her in-house trial lawyers so their work would not be open to discovery. The litigators are housed in Emeryville, California, away from the rest of the legal department and the business functions in Santa Clara, California. Their computer system is separate from the company's computer system. Caulfield says she can't get in it even if she wanted to. Indeed, this arrangement has survived court challenges claiming waiver of attorney-client privilege.
Another key element of Affymetrix's strategy is its uniquely pro-active document review system. The legal department requires every single document generated in the company to be retained digitally. In some instances, that means scientists' handwritten notes are scanned and entered into the system. The document database is preserved and updated from trial to trial, according to Caulfield. She estimates that the company saves 70 percent of what it used to spend on document discovery, by virtue of paying salaries rather than hourly attorney rates. What's more, team members know how Affymetrix employees keep their records, and so know exactly where to look for documents when a new case arrives.
Affymetrix also spends less money on depositions. The in-house attorneys know intimately the technology and patents involved, which naturally shortens the learning curve. Caulfield estimates that direct costs for depositions are 20 percent less than before. More important to Caulfield, though, is the flexibility that can be afforded in-house witnesses. "Rather than book an executive or scientist for an entire day, as outside counsel would because it's convenient for them," she says, "we can schedule an hour of time with witnesses on Monday, and two hours on Thursday." This doesn't distract the witnesses as much, Caulfield says. "We don't want our key people working only on litigation-they need to be doing more important things like product development."
Using in-house counsel as primary counsel for patent cases is certainly unusual. "It's a unique approach," says Christopher Cotropia, a law professor at the University of Richmond and former litigator with Fish & Richardson in Washington. Aside from using outside counsel as a sanity check, in-house counsel usually like having an added layer of protection if the case doesn't go well and the board of directors wants to know why. "It's much easier to tell the board that the company pursued a particular strategy upon advice of outside counsel," Cotropia notes.
Even Caulfield tends to go with outside counsel when Affymetrix is being sued. Latham & Watkins is leading the company's defense in a suit brought by Enzo Life Sciences, Inc. concerning Affy's use of Enzo's patented reagent systems.
