defensive patent acquisition case study
TRANSCRIPT
34 Coquito Court, Menlo Park • CA 94028 • Phone 650.854.1914 • www.litigationriskmanagement.com• [email protected]
LitigationRisk Management
Institute
Defensive Patent Acquisition Valuation
Bruce Beron Ph.D., President
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LitigationRisk Management
Institute© 2015 Bruce Beron Defensive Patent Valuation 2
Objective: Quantify expected value to Client (C) of seven recommended patents as defensive patents-in-suit against Potential Plaintiff (PP).
Framework Notable considerations simplified and excluded from this valuation Methodology Valuation Further thoughts and considerations
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The influence diagram shows the legal and factual issues and uncertainties that are taken into account in an expected value analysis of a patent suit.
Expected Value
Damage if Liable
Prob. of Liability
Trial Royalty
Rate
Customary Royalty Rates
Design Around
SettlementLitigation Cost
Lost Profits
Royalty Basis
Lost Sales Margin
ENPV of Business
Consequences
FeasibilityCost of Design Around
Future Royalties?
Prob. Infringement
Prob. Validity
Jury Finding of
Willful
Enhancement
Market Share Impact
Injunction
Time Period of
Infringement
Revenues of Infringing
Products
Claim Construction
Percent of Revenue Infringed
EV of Patents as Asserted
at Trial
Prob. Lost Profits
KeyWhite boxes: factors explicitly included in this valuationGrey boxes: factors simplified or excluded in this valuation
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Institute© 2015 Bruce Beron Defensive Patent Valuation 4
Several notable considerations are simplified or excluded in this valuation.
Shown as grayed out on previous slide Excluded
Any offensive/defensive litigation by PP
Likelihood and value of a settlement
Litigation costs
Simplified Infringement and validity probability assessments (including claim construction considerations):
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Several notable considerations are simplified or excluded in the present analysis. (cont’d)
Simplified (cont’d) Monetary remedies simplified to include only reasonable royalties as conservative estimate Royalties simplified to 5% (rough industry standard) for 3 years (assuming no marking, so only for litigation period)Lost profits are less than likely and require information beyond the scope of this inquiry—C market share, lost sales, profit margin in patent candidate technologies, etc.Rough estimates of associated 2007 revenues used for damage basis—increases/decreases not taken into account. Business value, to C, of an injunction is included, but as a direct assessment, rather than through a financial model. “How big a check would C be willing to write to guarantee an injunction against PP in the relevant business area?”Assumes no willfulness, based on presumed lack of notice.
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We are using a direct calculation to determine the expected value of the patent candidates asserted against PP.
Probability of prevailing =Value of monetary remedy if we prevail =Value of equitable remedy if we prevail =
Value of Injunction if Granted =Expected Value of Patents =
Net Expected Value =Value-to-Cost Ratio =
Probability Valid x Probability InfringedRoyalty Rate x Revenue x YearsProb. of Injunction Award x Injunction Value AssessmentProb. of Prevailing x (Monetary + Equitable Remedy)Expected Value - Cost to PurchaseNet Expected Value / Cost to Purchase
The calculations are equivalent to evaluating the tree for the monetary and equitable remedies.
.70
.30
Yes
No
EquitableRemedy
5% Royaltyfor 3 years1.0 if liability
MonetaryRemedy
Infringed
.40
Yes
.60
No
Valid
.70
Yes
.30
No
Direct assessment of business value of injunction
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This summary table shows a conservative estimate of the expected value of each patent candidate as asserted against PP’s relevant technology.
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The bottom line is the ratio of the net expected value to the cost of each patent.
The purchase of each patent is justified based on our model and current knowledge. Lowest return is 3x for ’567—highest is 136x for ’024
Most expensive—’789 & ’567 —have 27x & 3x returns
Note, on a purely damages basis, after prevailing on a 1st patent, prevailing on an additional patent against the same product has only incremental value. The total cost of $8.7M does not buy an expected value of $256M, the sum of all of the expected values.However, as a litigation strategy, multiple patents create an effective “thicket of patents.”
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Alternate/Additional Valuation: Future License Revenue
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Further thoughts and considerations for present and future valuations.
Although difficult to assess, we should keep in mind the defensive context of this valuation.
Will PP initiate litigation?
Against which business areas and products?
How serious is the threat?
Likelihood of losing
Monetary damages
Impact of potential injunction on business
What would our counterclaims look like?
With and without the additional patents
Given the relative strengths and inclinations of both sides, what would the expected settlement be?
How much better is the settlement (or net litigation) value for us with the additional patents?
This incremental value is the value of the patents
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Additional Background
Incremental Portfolio Analysis Further Searching
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We should look at the patents as a portfolio against each business area.
If we prevail on a claim for one patent in Target Area 1, prevailing on a second patent for that business area doesn’t necessarily add value. The possibility of prevailing on the second patent is certainly worth something if we don’t prevail on the first.
We evaluated decision trees for the two sets of patents, one that would be asserted against Target Area 1, and the second against Target Area 2.
The patents are chosen in descending order of their value/cost ratio.
Because of the “low” value ratio for the ‘789, we looked at the portfolio against the Target Area 1 with and without that patent.
This valuation is conservative in that we assumed that if we prevail on two patents against the same business area, we will only get the higher of the two (or three, etc.) damages, even though there may be non-overlapping markets and products which could result in a greater monetary remedy.
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We calculated the Cumulative Expected Value and an Incremental Net Value to Cost Ratio for each portfolio, starting with only one patent and then incrementing the number of patents asserted.
If we were looking just at the value of this portfolio as asserted by C, it is not clear that the fifth patent against the Product 1, ‘567, is a bargain. On the other hand, the value might be much higher if we accounted for defensive and settlement values in our analysis.
See next slide for a more detailed explanation.
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Further Explanation of Incremental Value Table for the portfolio of potentially asserted patents.
Evident Value of monetary remedy (RR…Inj. n/a) with 1 to n patents to assert, in order of increasing Individual Value Ratio
Value added by each additional patent asserted
Subtract the Cost
Incr. Net Exp Value/Cost
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We should consider a proactive search for further patents.
The analysis should include, in addition to the issues discussed on the previous slide: Which potential acquisitions have the greatest value?
Target areas of PP’s core products and greatest growth.We should conduct the search, not the seller.Should we purchase them in anticipation of possible litigation?
What is the trade-off between
Buying them sooner at a lower price and possibly not needing them v.Having to buy them at a much higher price if and when litigation is initiated?