For most companies, US patent laws are critical for their unique selling power. However, these same laws can also cause undue stress on businesses with similar ideas or that operate in the same industry.

When patent holders find that another company is using their original ideas and are potentially stealing their business, there are options they can take. Often, this results in them filing a lawsuit.

Companies may find that they need to defend against a patent infringement lawsuit or reach a settlement. Here is what you need to know about lawsuit settlements and how you can defend your company against any action taken against you or your business.

Patent Infringement and Litigations

Patent law in the United States gives holders the right to make, use, or sell their invention for a prescribed amount of time (usually 20 years). A patent infringement happens when another party uses, makes, or sells patented items without the authorization of the original owner.

Many innovators may be surprised to find out that there is very little oversight to stop a patent infringement. However, the patent holder can sue the unauthorized party so they would stop selling or producing their item. They can also sue for damages to compensate them for the unauthorized use.

Patent holders have six years from the time of the infringement to take action. Beyond that, the infringement case is no longer considered valid. The federal district court system handles patent infringement lawsuits because federal law covers intellectual property. Federal lawsuits can end up dragging on longer than most lawsuits in other courts.

Compared to other types of lawsuits, intellectual property lawsuits are some of the most costly. Legal fees can easily cost over $1 million, and it is not unusual for expenses to go all the way up to $5 million.

Legally, there are several types of patent infringement:

• Direct is when a patented product is produced without permission.
• Indirect is when another company encourages infringement or aids in the manufacturing of products that are patented by someone other than the holder.
• Literal is infringement based on the direct correlation between the words in the patent claims and the product that infringes on it.
• Contributory is when a partysupplies the infringing manufacturers with a part that has no other non-infringing use.

How to Defend a Patent Infringement

You have several options for defending against a patent infringement. The most common defense is to counter that the patent itself is not valid. Some ways to show it is invalid include proving that:

• There is fraudulent information on the application.
• The patent results in monopoly or anticompetitive business activities.
• The patent was not novel and non-obvious enough for patent protection.

One famous case, Enfish, LLC v. Microsoft Corp., is an example of this argument. The court ruled in favor of Microsoft because Enfish’s claims were invalid. They found that the patents were not unique enough and too abstract to hold Microsoft liable for infringement.

Some other ways to defend against a lawsuit include:

• Stop selling or making the products accused of infringement.
• Negotiate licensing fees from the owner of the patent.
• Prove that you are compliant and that your product or process is not infringing.

One of the easiest ways to handle patent infringement is to protect your company before a lawsuit. This means that your product or process fulfills every limitation of the claimed patent. An expert in patent infringement can help you circumvent the claim and prevent infringement. It is also the least expensive option to save your company from a seven-figure lawsuit.

An expert also helps prevent the court from ruling willful infringement should you still face a lawsuit. Willful infringement involves larger penalties and up to triple the number of damages in addition to paying the patent holder’s legal fees. This is why companies often hire an expert beforehand to ensure that anything they use or patent is non-infringing. Such action can also be used as evidence that the infringement was not willful.

Settlements are common because it helps companies save the time and expense of lawsuits. It is often easier for companies to come up with an agreement instead of drawing things out in federal court. For example, Network Protection Services (NPS) dropped a patent settlement filed against Fortinet in 2010. Both parties agreed to have the case dismissed with prejudice—meaning, NPS can no longer file another lawsuit based on the same grounds.

Corporations that don’t settle often have to pay a hefty price. In October of 2020, Cisco was ordered to pay $1.9 billion to a Virginia company in a patent lawsuit. Because they plan to appeal, though, the lawsuit will continue to drag out even longer.

Are Patent Lawsuit Settlements Tax-Deductible?

Tax law dictates that businesses can deduct expenses considered ordinary and necessary that are either incurred or paid in the tax year. However, illegal payments such as bribes or kickbacks are not tax-deductible.

To tell the difference, the Supreme Court states that taxpayers need to consider what is referred to as “the origin of the claim.” Because a settlement is to compensate the patent holder, there is a great argument that it is deductible. On the other hand, patent holders can treat any settlements from patent litigation as capital gains on their taxes.

Defend Your Company Against a Lawsuit

In the modern world of business, patent infringement lawsuits are common. They can be costly for companies that are unprepared and have not done the homework to protect themselves from the beginning. Companies can defend themselves by proving that the patent was not valid, to begin with. They can also protect themselves from willful infringement by engaging legal counsel when creating their products.

Settlements are often a better alternative to the expensive and time-consuming lawsuit process in federal court. In addition, companies can deduct these expenses from their taxes. With the right legal help, many businesses can defend or settle with ease.