Preview: Julie Creswell - So Small a Town, So Many Patent Suits

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So Small a Town, So Many Patent Suits By JULIE CRESWELL Published: September 24, 2006 MARSHALL, TEX. ON a crisp Monday morning earlier this month, about 20 lawyers from some of the country’s top law firms shuffled their way into a brightly lit, wood-paneled federal courtroom in this small city in eastern Texas. Wearing white shirts and dark suits, the lawyers congregated in small groups, leaning into one another with their arms crossed and speaking in hushed tones At precisely 8:30 a.m., a series of knocks on the right side of the courtroom signaled the entrance of Judge T. John Ward, a blur of black robe and white hair, who quickly took his seat and, with little preamble, began the proceedings. Mark Graham for The New York Times Over the next few minutes, a 10-person jury listened raptly as lawyers for both sides laid out the case. Hyperion Solutions, a software company based in Santa Clara, Calif., accused the OutlookSoft Corporation of Stamford, Conn., of infringing two of

its patents, causing $50 million in damages. A lawyer for OutlookSoft said the company did not steal any patented technology, adding that Hyperion’s patents were not even valid. Judge T. John Ward of federal court in Marshall, Tex. Quick trials and plaintifffriendly juries have made his court one of the busiest for patent cases. What was remarkable about the trial was not the issue being tried or the arguments proffered by each side, but that these big companies — like dozens more from the East and West Coasts — wound up in the Federal District Court here in Marshall, the selfproclaimed Pottery Capital of the World and home to the annual Fire Ant Festival (sponsored by Terminix, the pest-control company). 1 From r=1 25 September 2006 More patent lawsuits will be filed here this year than in federal district courts in San Francisco, Chicago, New York and Washington. Only the Central District of California, in

Los Angeles, will handle more patent infringement cases. On the surface, there is little to recommend Marshall as a locus for global corporations looking to duke it out A Destination for Patent Holders over who owns the rights to important technology patents. Some 150 miles east of Dallas, and just minutes from the Louisiana border, Marshall and its 25,000 residents are fairly typical of most small cities in Texas. Marshall is a place where friendships last a lifetime and rivalries even longer, where residents still talk about the Civil War, debate on street corners about decades-old high school football games, and conduct midday business meetings over plates of meatloaf, mashed potatoes and banana pudding What sets Marshall apart from its neighbors is a red-hot patent docket. Four years ago, 32 patent lawsuits were filed in the Federal Eastern District of Texas, which includes Tyler, Texarkana and Marshall. This year, an estimated 234 cases will be filed in the district, a majority of

them in Marshall. Mark Graham for The New York Times The county courthouse is the center of the downtown square in Marshall, Tex. It is being renovated to accommodate federal patent law trials, helping to revive the once-bustling area. What’s behind the rush to file patent lawsuits here? A combination of quick trials and plaintiff-friendly juries, many lawyers say. Patent cases are heard faster in Marshall than in many other courts. And while only a small number of cases make it to trial — roughly 5 percent — patent holders win 78 percent of the time, compared with an average of 59 percent nationwide, according to LegalMetric, a company that tracks patent litigation. Those odds are daunting enough to encourage many corporate defendants to settle before setting foot in Marshall. Add to that the fact that jurors here have a history of handing out Texas-sized verdicts to winners. In April, for instance, a Marshall jury returned a $73 million verdict against EchoStar

Communications for infringing the patents of TiVo. MARSHALL was once one of the most prominent and wealthy cities in Texas, but much of the city’s industry and many of its downtown shops disappeared in recent decades. Now, thanks to an influx of out-of-town lawyers and the increased investment in real estate by a handful of local leaders, Marshall is in the early stages of a revival. 2 From r=1 25 September 2006 The sounds of hammers and electric saws echo across the brick-paved streets that line its picturesque downtown square as buildings that stood empty for years are being transformed into office space for rent. Restaurants that depended on tourists drawn to town by the Fire Ant Festival, the Stagecoach Days Festival and the winter Wonderland of Lights display now do a brisk business catering lunches and dinners for visiting lawyers. Some hotel chains along Interstate 20, south of downtown, are running at 95

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percent occupancy rates during the week. “During the TiVo-EchoStar trial, 90 percent of my revenue for one month came from one of the law firms in the case,” said Phillip W. Gurganus, manager of the local 68-room Hampton Inn, where rates run $77 a night. His mother, a former Texas tort reform lobbyist, helps to serve breakfast at the hotel. “I loved getting that check and taking it to the bank,” he added. How far the dollars from visiting lawyers trickle through Marshall’s economy remains unclear and is the subject of discussion among local leaders. For much of its history, Marshall has been a community divided by wealth and race. People whose grandparents or great-grandparents made fortunes from oil, natural gas or railroads live in gated mansions and rarely mix with those who frequent the local WalMart or many downtown finance shops that make $300 loans. The median family income in Marshall is $30,000. “The majority of Marshallites don’t even know the patent docket

exists,” said Johnny B. Taylor, a native of Marshall who returned and started an office rental business after spending 31 years as a police officer in Arlington, Tex. “There’s one way the docket affects them: they can’t find parking.” Cranking up the air-conditioner of her father-in-law’s 1990 red Cadillac DeVille with a matching red leather interior, Geraldine Mauthe, the city’s bubbly and silverhaired convention-and-visitors director, begins the tour of town. Samuel F. Baxter, a patent lawyer at McKool Smith, has moved from personal-injury cases to more cases covering intellectual property. Turning away from the pale yellow century-old Harrison County Courthouse, which is being renovated and updated to handle Marshall’s rapidly expanding patent docket, Ms. Mauthe often stops the Cadillac in the middle of the street — eliciting sharp honks from cars behind her — to point out local sights. This much can be said about Marshall: It is not lacking in churches (50

Baptist, 35 of other Protestant denominations and 1 Roman Catholic), historic homes 3 From r=1 25 September 2006 (many built in the 1850’s) and, oddly, funeral homes. “We have seven. Four for blacks and three for whites,” Ms. Mauthe said, matter-of-factly. When she drove past a hair salon that offered haircuts, tanning and the services of a notary public, Ms. Mauthe rubbed her fingers together and said: “You got to make money somehow.” Oh yes, Ms. Mauthe added, Marshall and its robust legal community go back a long way. In the late 1800’s, she said, Marshall was a bustling city, a transportation gateway to the North, linking local cotton farmers and the Texas and Pacific Railway. As the railroad was built, personal-injury lawyers came to town to represent injured workers. In more recent decades, Scott Baldwin, Franklin Jones and other Marshall-based plaintiffs’ lawyers generated tens of millions of

dollars in fees — and grabbed the national spotlight — by pursuing class-action lawsuits against companies that used asbestos and silica, and against the pharmaceutical and tobacco industries. Mark Graham for the New York Times Lawyers at the courthouse in Marshall are an increasingly familiar sight now that the court has become a hotbed for patent disputes. By the late 1990’s, though, it looked as if the good times were ending for Marshall’s lawyers. Broad tort reform in the state had limited punitive damages and later capped damages on medical malpractice lawsuits, effectively limiting the fees that lawyers could make. In Marshall, an oft-told joke is that the passage of tort reform was when many local lawyers made the trip from P.I. to I.P. — that is, they moved out of personal injury and into intellectual property. That was the road traveled by Samuel F. Baxter, a former state district court judge who had become a personal-injury lawyer, after he received a call from

a lawyer in Dallas in 1996, asking him to help out in a patent lawsuit in Marshall. “I told him, ‘No, I don’t know anything about patents,’ ” Mr. Baxter recalled as he reclined far back in his chair in his Marshall office, which included an autographed Cy Young baseball and aging maps of the United States depicting an outsized Republic of Texas. Mr. Baxter was eventually persuaded to take the case and was the lead trial lawyer defending Samsung in a patent lawsuit filed by Texas Instruments, which eventually settled. Since then, Mr. Baxter, who is a principal at McKool Smith, a Dallas-based law firm with a full-time office in Marshall, has been involved in a number of patent cases; in one, he helped represent TiVo in its patent fight with EchoStar. 4 From r=1 25 September 2006 Charmingly loquacious about his two adopted sons and local Civil War history, Mr. Baxter turns economical with his words when

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asked why the federal court in Marshall handles more patent lawsuits than federal courts in much larger cities. “One, speed kills,” he said. “If you’re the plaintiff, you can go fast and get a resolution faster here than you can a lot of other places. “Second, there’s a dearth of good lawsuits these days for lawyers to handle,” he added. “You know lawyers: they go where the money is.” THE testing of Marshall as a patent battleground began nearly two decades ago, when Texas Instruments, which has its headquarters in Dallas, embarked on an aggressive strategy to make rivals license its patents. If a company would not capitulate or at least negotiate, a Texas Instruments team of lawyers would drag it to court — increasingly, down the road to the uncluttered courtrooms of Marshall. In September 1999, Mr. Ward, a malpractice and product-liability lawyer with a practice nearby, in Longview, was sworn in to the East Texas federal bench. A no-nonsense judge who charms

people with his folksy demeanor but who also has a reputation for a fiery temper in the courtroom, Judge Ward began hearing patent cases. As a private lawyer, he had argued a few such cases; as a judge, however, he quickly grew frustrated at the slow pace, paperwork, and delays and motions that were part of a patent docket. That’s when he adopted what he calls “the Rules.” As any lawyer who has shown up in Judge Ward’s courtroom will testify, the Rules put patent lawsuits on a strict timetable, laying out when key documents must be handed over and setting firm trial dates. No 100-page motions or lawyer soliloquies are tolerated in Judge Ward’s courtroom. He puts page limits on documents and uses a chess clock to time opening and closing arguments, brusquely interrupting lawyers when it is time for them to wind it up. The changes turned Marshall’s federal court into a “rocket docket” — a place where the time between filing and trying a lawsuit became significantly

shorter than in other districts. “I really shot myself in the foot when I adopted the Rules,” Judge Ward said with a laugh, sitting in a leather chair in his quiet, wood-paneled chambers during a lunch recess in the Hyperion-OutlookSoft trial. The reason, he added, was that the district was soon deluged by patent suits filed by companies seeking a quick resolution to their conflicts. While judges in nearby cities also began to hear patent cases, most of them remain before Judge Ward. The expedited process pleases clients, though it is sometimes hard on the lawyers who break the Rules. 5 From r=1 25 September 2006 “When he’s mad, first his face gets red,” said Michael C. Smith, a lawyer with the Roth Law Firm in Marshall. “Then his neck gets red and he starts tucking his chin down into his chest. If he tears off his glasses, I don’t care what side you’re on, you had better drop to the floor and get

under that table fast.” Judge Ward said that he did not often lose his temper. “If I tell a lawyer to stop leading the witness and he continues, well, we’re going to have a problem,” he said. SPEED is not the only feature bringing patent holders to Marshall. So, too, is the fact that they usually win. Three-fourths of the cases that come to trial in Marshall are decided in favor of the plaintiffs, compared with less than half in New York. The success rate for patent holders in Marshall is a great incentive for defendants to settle matters quickly and privately. Since 1991, the Federal District Court in Marshall has held less than half the number of full patent trials as courts in Los Angeles, New York, Chicago and San Francisco. “I would say that this is, historically anyway, a plaintiffs-oriented district,” Judge Ward said, noting that he lost a large patent suit there himself when he was practicing. He was part of the team representing Hyundai Electronics in 1999 when it

lost a $25.2 million verdict in a lawsuit filed by Texas Instruments. Others point to a different reason why plaintiffs may win more often than defendants: plaintiffs, they say, typically hire local Marshall lawyers. Hiring local in Marshall means that you will get a lawyer who not only knows the jurors, but who also probably knows their friends and even personal details like how often they go to church, local lawyers say. “We had a Fourth of July party and we circulated the jury lists to people there on the boat dock,” said Joy Berry, a local lawyer who advises out-of-town law firms in jury selections. “By the time the party was over, we knew quite a bit about nearly everyone” on a list of potential jurors for coming trials, she said. Mr. Smith of the Roth Law Firm said it could be difficult for outside lawyers to blend in and noted that some even tried to curry favor with jurors by taking on a drawl or wearing cowboy boots. “I call them T.B.L.’s, or ‘tall building

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lawyers,’ ” he said. “They don’t take their coats off no matter how hot it is down here.” Indeed, local lawyers love to swap stories about visiting colleagues and their clients from bigger cities or from abroad. One of Mr. Baxter’s favorites is about an out-of-town lawyer, a vegan, who wanted a late-night meal. “She walked over to Wendy’s and tried to order a salad through the drive-in window,” he recalled. “She was told she needed to be in a car to order through the drive-in window so she walked back over to the hotel, woke up one of the firm’s 6 From r=1 25 September 2006 partners and had him take her through the drive-in window.” He laughed uproariously at the memory. M. Craig Tyler, a lawyer in the Austin, Tex., office of Wilson Sonsini Goodrich & Rosati, the big Silicon Valley law firm, is fond of recounting how visitors react to Texas hospitality. “We’ve had many meals with

clients from the Pacific Rim who take out their cellphones and send pictures back home when they see the portions of the meals in Marshall,” he said. “They thought it was family style, that one plate would feed many people.” And then there are the tight-knit relationships that visiting lawyers encounter when they work in Marshall. In one patent case that eventually was settled, the plaintiffs hired an accountant whose clients included Judge Ward. Patent litigation is a growing business across the country; Marshall is just the most visible example. Among the weightier issues behind the mushrooming of its patent docket is whether the elements that have made it expand — hungry plaintiffs’ lawyers, speedy judges and plaintiff-friendly juries — are encouraging an excess of expensive litigation that is actually stifling innovation. Some say yes. “A lot of the cases being filed in Marshall are by patent holding companies, or patent trolls, as they’re called, whose primary and

only assets are patents,” Mr. Tyler said. Companies spent 32 percent more on outside counsel for intellectual property litigation in 2003 than in the previous year, Chuck Fish, the chief patent counsel for Time Warner, told the House Judiciary Subcommittee on Courts, the Internet and Intellectual Property earlier this year. Spending for all other litigation rose a mere 1 percent during that time, Mr. Fish said. Defending Marshall’s role, many residents note that not only is it cheaper to hold a trial in Marshall, but that it is neutral territory for virtually all corporations that find themselves in court here. “It’s not as if you have a situation here where Microsoft is hated or Cisco is spit upon,” Mr. Baxter said. “Whether it happens in Marshall, Tex., or Des Moines, Iowa, these lawsuits are going to happen. They might as well happen here.” And many in Marshall are looking for ways to profit from the patent gusher. THE paint is peeling and the wallpaper in the bathroom

is nothing short of hideous, but all Johnny Taylor sees as he walks through the former doctor’s office he just bought in town is space for as many as 16 lawyers. “Furnished office space is renting for $1 to $1.50 a square foot per week. So, a 2,000square-foot office can get $2,000 per week,” said Mr. Taylor, who has already wired the 7 From r=1 25 September 2006 building for high-speed Internet access and created to highlight offices for rent and offer advertising to local businesses. One of the first challenges for visiting lawyers arriving in Marshall is cramped quarters. They often roll into town with semitrailer trucks that have traveled from San Francisco or New York containing everything that could be needed to try a case, including volumes of documents, copying machines, desks, video and audio equipment and even cappuccino machines. Some people in Marshall are trying to save them

the trouble by providing fully equipped office space on short-term leases. “We’re going to have a 6,000-square-foot space for a war room that we can rent out for $7,500 to $10,000 a week,” said Leslie D. Ware, a patent lawyer in Dallas, who bought a former furniture building next door to the federal courthouse. “A firm could basically walk in, plug in their laptops, work and unplug and go home,” he said. Others are trying to lure patent dollars through different tacks. Fairfield Inn, which bought a subscription to Pacer, the electronic docket, routinely calls law firms to offer rooms for their lawyers with cases scheduled for trial. “I’m thinking of coming up with a T-shirt for the lawyers,” said Jennie A. Kelehan, a former financial adviser who moved here from Houston three years ago and is now the co-owner of a wine and specialty store called Under the Texas Sun. She estimated that lawyers in town for the patent docket were responsible for about a sixth of her sales.

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“The patent lawyers were not in our plans at all,” she said, “but they are definitely a huge asset for us and we will start using that as we start planning for the future.” Others, though, seem more skeptical about the long-term effect of the patent docket on Marshall’s economy. They said they would like to bring in new industries and increase tourism. “For the most part, the rocket docket and the lawyers are ‘today dollars,’ ” said Alan Grantham, a member of the Marshall Economic Development Corporation and a senior vice president at Bancorp South. “They spend the night at a hotel, rent cars and eat at restaurants.” But, he added that the patent docket was not the only factor driving the local economy. Others, like Jerry Cargill, who runs a wholesale beverage distributing company in Dallas and has a family farm outside Marshall, said they hoped that increased tourism would play a bigger role in Marshall’s comeback. In the last three years, Mr. Cargill has

bought nine buildings downtown, as well as a $500,000 stake in the historic Hotel Marshall. The City of Marshall put in $1 million and others raised $527,000 to restore the building to its original Italian Renaissance design. 8 From r=1 25 September 2006 “I didn’t even hear about the rocket docket until a year ago,” Mr. Cargill said. “By then, we were well into the various projects.” This fall, a tourism marketing firm is coming to town to create a branding plan and to offer ideas to alter Marshall’s infrastructure for tourism. “It’s a unique community,” Mr. Cargill said. “It just needs some marketing.” Marshall’s patent docket may not be able to sustain its current pace of growth. Its reputation for speed is starting to attract so many cases that a certain sluggishness may be setting in. Four years ago, lawsuits took less than two years to go to trial. Now the average time between when a

suit is filed and when it goes to court is more than 27 months. There is legislative movement afoot as well. This spring, two senators, Patrick J. Leahy, Democrat of Vermont, and Orrin G. Hatch, Republican of Utah, introduced a patent reform bill. Among its many provisions is one to limit damages in patent lawsuits and another to require a more substantial connection between a business and the court where it brings a patent lawsuit. WE think the bill will restore more balance in the patent system and remove incentives for plaintiffs to run to one jurisdiction and try to hit the jackpot,” said Mark W. Isakowitz, a lobbyist with the Coalition for Patent Fairness, which advocates patent reform on behalf of corporations. Any reform would likely happen next year at the earliest, lawyers say. But the biggest change in Marshall’s status could come if plaintiffs start losing more cases. A jury in Judge Ward’s courtroom in July stunned observers when it returned a verdict that said WG

Security Products had not infringed any of the patents of Sensormatic. The jury in the Hyperion-OutlookSoft case went even further a little over a week ago. After a five-day trial, it deliberated for less than three hours before deciding that OutlookSoft had not infringed the Hyperion patents and that those patents were invalid. After the verdict was read, OutlookSoft’s legal team returned to the local law office it had been working out of and opened some Champagne, said the company’s chief executive, W. Phillip Wilmington, who attended every day of the trial in Marshall. “As we were going through our victory discussion, a big truck pulls up and there goes the copier and fax machines out the door,” Mr. Wilmington said. “It disappeared just as quickly as it was set up. I’m sure the week following, there was someone coming in to do it all over again.” 9 From r=1 25 September 2006