Ask the people working at the bars, restaurants, and hotels of Marshall, Texas about April 13, 2006--the day TiVo Inc. won a $73.9 million patent infringement verdict against EchoStar Communications Corporation--and they'll reminisce about a river of money. To them, it didn't matter who won, only that Marshall was sharing in the good fortune of the patent litigants who came to their courthouse and lavished money on their town. After the jury came back, the first thing a TiVo lawyer from Irell & Manella asked a local was the location of the nearest bar to celebrate.
The joyous mood, however, wasn't shared by all. While the Irell lawyers partied at OS2 Restaurant & Pub, Marshall's one downtown bar, EchoStar's lawyers from Morrison & Foerster straggled out of the town's small federal courthouse and returned to the Comfort Suites hotel, where the lawyers drank and watched cartoons. The looming question wasn't just how they could have suffered such a devastating loss--Marshall was, after all, part of a plaintiff-friendly district once described by U.S. Supreme Court justice Antonin Scalia as "a renegade jurisdiction"--but how they could prevent it from happening again: MoFo partner Rachel Krevans was scheduled to return to the Eastern District of Texas in early 2007 to defend EchoStar against Forgent Networks, Inc.'s $200 million patent claim.
After a week off, Krevans and Harold McElhinny, the lead lawyer in the TiVo case, returned to their offices in San Francisco to figure out what to do differently the second time around. In later court filings, the Morrison & Foerster lawyers would argue that Irell & Manella had made impermissible arguments at trial and that some TiVo evidence shouldn't have been admitted. But in private, the MoFo attorneys conceded they'd been beaten. They needed a new approach. A year later, in May 2007, their rejiggered strategy proved successful: The jury delivered a complete defense verdict for EchoStar.
MoFo's journey from that $73.9 million loss to TiVo in 2006 to the defense win in the Forgent case a year later exemplifies the startling transformation that has taken place in the courtrooms of Marshall and nearby Tyler in the last 18 months. MoFo and its counterparts at such firms as Wilmer Cutler Pickering Hale and Dorr and Kirkland & Ellis refined their trial techniques--and won. Defense lawyers paid thousands of dollars to consultants who taught them how to speak Texan to juries. They simplified complex cases. Well-established first-chair lawyers deferred at trial to hired guns from Texas, in several cases elevating them from local to cocounsel. And it didn't hurt that a pair of Supreme Court rulings in 2005 and 2006 favored patent defendants.
In 2007, after three straight years without a defense win in the Eastern District of Texas, defendants won seven of the nine patent cases that were tried to a verdict, according to Michael Smith, an attorney in the Marshall office of Siebman, Reynolds, Burg, Phillips & Smith. "The conventional wisdom is that defendants can't win in the Eastern District, and that's not accurate anymore," he says. The newfound parity for defendants has come as patent reform legislation is pending in Congress that would dry up the patent wellspring in East Texas [see "Losing An Industry."]--but defendants no longer seem to need the congressionĀal bailout.
When T. John Ward became a federal district judge in Marshall in 2001, the town was just a speck on the litigation map. Its patent docket was notable only for the frequent appearances of Dallas-based Texas Instruments Inc., which enjoyed a home court advantage as a plaintiff before Marshall juries. Ward's first pretrial hearing on patent claims as a judge convinced him that the rules had to change. He'd spent hours reading up on the claim terms for the patent at issue, assuming that lawyers on both sides would wrangle over the meaning of key words in the patent. But when the hearing began, defense lawyers acceded to each term the plaintiffs argued. Ward called a recess and told the attorneys to negotiate. When he returned, only two claims remained contested. "I wasted all this preparation time getting ready," Ward recalls saying.
So he dug up a set of rules that he heard the Northern District of California had adopted to streamline patent cases. Ward borrowed from and tweaked the California rules, instituting new procedures that he thought would make his job easier. Instead, when patent holders realized that the wait for a trial in Marshall was only 12-14 months, Ward's docket was flooded: from five patent cases in 2000 to 87 in 2006, according to LegalMetric. "I had no idea that was going to be the result of adopting the rules," Ward says.
Other judges in the district--Leonard Davis in Tyler, David Folsom in Texarkana, and Ronald Clark in Beaumont and Lufkin--followed Ward's lead, filling courtrooms no longer crowded with personal injury cases with patent disputes. Streamlined pretrial proceedings and short trials meant lower costs, crucial for plaintiff attorneys working on contingency. By the time Ward's rules went district-wide in February 2005, the district had become the prime venue for patent trials nationally, with more than 860 patent cases filed since 2000.
Local firms like McKool Smith; Ireland, Carroll & Kelley; and Brown McCarroll were among the first to capitalize on the changes. They filed suits on behalf of small tech companies and patent-holding companies. Soon after, bigger firms in Texas and beyond--including Howrey; Susman Godfrey; Fish & Richardson; and Fulbright & Jaworski--took notice of plaintiffs' successes and also began filing in Marshall and Tyler.
The jurors who heard the plaintiffs' cases were inclined to agree with them. Only about 20 percent of Marshall's population in 2000 held a bachelor's degree, according to the Census Bureau. Compared to jurors in a tech-friendly city like Boston, where more than 40 percent of the jury pool holds at least a bachelor's degree, folks in Marshall and its neighbors were receptive to the simple, nontechnical presentations that local plaintiff lawyers preferred. Moreover, the East Texas economy has suffered since a downturn in oil and gas production in the mid-1980s. The townspeople, who are accustomed to fighting with oil companies over royalties, tend to be strong believers in property rights. "People here respect the underdog because people here have been stepped on over the years," says Douglas Green, a jury consultant.
Plaintiffs had an additional advantage in the disinclination of East Texas judges to grant summary judgment. "They thought trial was the American way of doing things," says Paul Janicke, a law professor at the University of Houston. Ward readily admits his own preference for letting juries, rather than judges, decide cases; he says that's been the custom in East Texas since he started practicing in 1968. "Most of the time we feel like there are fact questions," he says.
So in the first years of the East Texas patent boom, trial results were starkly one-sided. Defendants lost 17 out of 19 trials from December 2001 to June 2006, according to Michael Smith. And the damages awards were big. In April 2006, the same month that TiVo won its $73.9 million verdict against EchoStar, Microsoft Corp. was hit with a $133 million verdict in a case involving antipiracy software. Two months later, in a dispute over patents for high-speed data networks, Finisar Corp. won a $78.9 verdict against The DirecTV Group, Inc.
Clients began instructing defense lawyers to stay out of East Texas courtrooms. According to Wilmer partner Mark Matuschak and others, the risk of litigation in Marshall and Tyler was so daunting that in several instances the mere threat of a filing produced licensing agreements and cash settlements.
The case that broke the plaintiffs' streak was one that had attracted little pretrial attention. In 2004 Sensormatic Electronics Corporation, a subsidiary of Tyco International Ltd., filed suit in Marshall against two start-up security products manufacturers: San Jose-based WG Security Products Inc. and Hollywood-based EAS Sensorsense, Inc. Sensormatic alleged that WG was infringing patents covering the plastic tags that clothing stores use to prevent theft.
It was an odd case for Judge Ward's docket. Sensormatic sought $7.3 million in damages--a fraction of what East Texas patent plaintiffs usually wanted. And Sensormatic, the market leader in antitheft tags, was no patent troll; in an unusual role reversal, the defendants cast themselves as the David to Sensormatic's Goliath. The disparity between legal teams bore out the comparison. IP giant Fish & Richardson represented Sensormatic. Sim Israeloff of Dallas's Cowles & Thompson and the Waters Law Office in Louisville were counsel for WG and EAS. Israeloff had never tried a patent case, and Waters was hardly a regular in Marshall's courtrooms.
For a year, defense lawyers fought to move the case to California, where both WG and EAS were based. But Sensormatic's Fish & Richardson lawyers wanted to stay in East Texas, which they had come to know well through dozens of patent cases on both sides of the aisle.
The trial took four days in June 2006. After less than half a day of deliberation, the jury ruled for WG and EAS. (For the most part, jurors in this case and others could not be reached for comment because under district rules their identities are kept confidential.) Defense lawyers immediately took note of the victory. "It was more psychological than anything," says Wilson Sonsini Goodrich & Rosati partner M. Craig Tyler. "That case did allow us to at least tell clients, 'Look, you're not facing a completely stacked deck.' " But the case wasn't a total win for Israeloff and his defense team--the jury declined to invalidate Sensormatic's patent. Patent defendants remained leery of cases filed in Marshall.
A month after the WG verdict, Wilmer's MatuĀschak was sitting in Judge Ward's courtroom, convinced he'd lost his client's case. For five days, the 48-year-old partner had defended OutlookSoft Corporation against Hyperion Solutions Corporation's $150 million patent infringment claim. He thought he'd connected with the jury, but as jurors funneled into the courtroom to deliver their verdict, none of them would look at him. "I thought, 'This is bad,' " he recalls. Then Matuschak learned that his side had won. (He later learned in the parking lot that jurors were pulling a gag by not looking at him.)
With two defense jury verdicts, lawyers could assure clients that it was possible to win a trial in East Texas. "Once the cookie starts to crumble a little bit, people started to think we can win these cases there," Matuschak says.
In retrospect, the victories seem inevitable. With more than 350 patent cases filed in the district in 2007, East Texas now ranks nationally as the busiest jurisdiction for patent litigation. Sheer volume slowed the rocket docket, increasing plaintiffs' costs and giving deep-pocketed defendants a financial advantage at trial. (Once among the five fastest patent venues in the country, East Texas now ranks eighteenth, according to LegalMetric.) Plaintiffs also paid for their own cockiness. "You attracted a lot of weak patent cases," says Irell & Manella's Morgan Chu.
At the same time, the Supreme Court's eBay and KSR rulings started helping patent defendants. The cases made it easier for defendants to argue that patents were invalid because of prior art and gave judges more discretion over whether to impose an injunction after a finding of infringement. Judge Davis of Tyler is believed to have been the first federal district court judge to apply the Court's eBay ruling when, in June 2006, he denied a request by z4 Technologies, Inc., to bar Microsoft from selling or making Windows and Office products. (Microsoft later lost at trial.) Last August, Vinson & Elkins partners Brian Buss and Willem Schuurman used KSR precedent to convince Judge Davis to invalidate merchant cash corporation AdvanceMe, Inc.'s patent in a suit against Reach Financial, LLC, and Merchant Money Tree, Inc.
Defense counsel still had to invest considerable time and money to change the course of patent litigation in the Eastern District of Texas. And perhaps no firm knew that better than Morrison & Foerster as it prepared for EchoStar's second trial as a defendant in the district.
After the TiVo loss in April 2006, Mofo's Rachel Krevans visited her family in Minneapolis. Harold McElhinny spent Easter weekend with his wife. When they returned to work, it was time to figure out how to keep EchoStar from losing again.
MoFo acknowledged that to connect with Texans and to soften EchoStar's image, it needed to make better use of local attorneys than it had in the TiVo trial. Though McElhinny is no fan of Irell's Morgan Chu (whom he criticized in court filings in his unsuccessful appeal of the TiVo verdict), he did admire Chu's use of his local counsel, Sam Baxter of McKool Smith.
Outside of Texas, Baxter's name may not be familiar. But inside the Marshall courthouse, he's a star--a guy who knows the names of half the town. During the 1970s and 1980s, Baxter was the glad-handing district attorney of Harrison County, where Marshall is located, and a state district court judge.
During the TiVo trial, while McElhinny kept EchoStar's local counsel, John Pickett of Texarkana's Young, Pickett & Lee, in his seat, Baxter was conducting voir dire in his thick drawl, grilling EchoStar's most important witness, and splitting the closing statement with Chu. By giving Baxter such a prominent role, McElhinny realized after the trial, Chu was able to limit the jury's prejudice against an out-of-town lawyer representing a big corporation. (Baxter also defused with humor a potential prejudice against Chu's Chinese ancestry: In an incident that has become legend among patent litigators, Baxter threw his arm around Chu's shoulders in front of the jury during voir dire. "Morgan here is different," he told the jurors. "Morgan wears a bow tie.")
About three months after the TiVo trial, EchoStar and DirecTV, a codefendant in the Forgent case, went shopping together for a strong local trial lawyer. Like the MoFo team, DirecTV's lead counsel, Jones Day of counsel Victor Savikas, had previously lost big in Texas, in the 2006 Finisar trial. Over a chicken-fried steak lunch near the courthouse in Tyler, the two big-firm lawyers met with Otis Carroll of Tyler's six-lawyer Ireland, Carroll & Kelley. "They wanted somebody who would take it shoulder-to-shoulder with them," Carroll says.
MoFo and Jones Day also drastically tailored their trial presentation to fit what they'd learned from mock juries. In pretrial proceedings, lawyers for EchoStar's cable company codefendants argued both that the cable companies didn't infringe the Forgent patent and that the patent was invalid based on obviousness, a legally sound strategy. But when MoFo and Jones Day tested that argument, the mock jurors concluded that the defendants were lying. "It's like someone . . . accused of beating his wife saying, 'I didn't do it, but if you think I did, she provoked me,' " says Savikas. The team decided to abandon the infringement defense at trial--even though Judge Davis had ruled that their strongest evidence of invalidity, a recent Patent and Trademark Office decision to reevaluate the validity of the Forgent patent, wasn't admissible at trial.
Forgent's lead counsel, William Fred Hagans of Hagans Burdine Montgomery Rustay & Winchester, says he knew his client would have a hard time against an invalidity challenge. Forgent's patent was issued in 1991, but the claims relevant to EchoStar's technology were only added in 2001--after EchoStar's product was on the market. Nevertheless, EchoStar's codefendants were skipping town as fast as they could sign settlement papers. Time Warner Inc. and the cable companies, represented by Alston & Bird, Dewey Ballantine, and Perkins Coie, settled for $20 million in late April, and DirecTV bowed out a day before trial, settling for $8 million.
When the trial began, "Carroll made Fred Hagans [who's from Houston] seem like he's from New York," says EchoStar associate general counsel Jeffrey Blum. After a five-day trial, the jury spent only an hour deliberating. Soon the MoFo team was celebrating at Jake's restaurant. For once, defense money would foot the bill.
A longer version of this article appears in the March issue of sibling publication The American Lawyer.
