PATENT BUSINESS LANDSCAPE: CREATIVE STRATEGIES FOR MONETIZING A CLIENT’S PATENT PORTFOLIO

PENNSYLVANIA BAR INSTITUTE 7TH ANNUAL INTELLECTUAL PROPERTY LAW INSTITUTE PHILADELPHIA, PENNSYLVANIA APRIL 25, 2013

ROBERT A. MCKINLEY, ESQ. INTELLECTUAL PROPERTY COUNSEL RATNERPRESTIA GREGORY J. URBANCHUK, MSC., AVA, CFE PRINCIPAL ASTERION, INC.

OUTLINE OF TOPICS COVERED

• Building A Patent Portfolio with an Eye Toward Monetization

• Assessing and Categorizing Patent Assets to Plan for Monetization • An Overview of Classic and Emerging Monetization Methods

• Creative Strategies to Lay the Groundwork for Executing a

Monetization Strategy

• Recommendations for Directors and Officers to Minimize Liability for Failure to Properly Manage IP Assets

WHY IS MONETIZATION SUCH A BIG DEAL NOW?

| CHANGES IN THE IP MARKETPLACE| • Over the last 35 years, there’s been a major shift in

industry from a labor-driven economy to a knowledge-based economy

• 35 years ago, only 20% of the value of a US publicly-traded company derived from intangible assets (i.e. patents). Now, intangibles represent 80% of the value of publicly traded companies. (Source Ocean Tomo Intellectual Capital Equity - Oceantomo.com)

• Directors and Officers can’t sit back and keep the status

quo.

Building A Patent Portfolio

| What Are Your Goals ? | • Create a barrier to entry to competition?

• Grow market share by protecting your product?

• Attract investment?

• Generate revenue?

| What Do You Want to Protect? | • Core technology • Key Products

– But what is here today may be gone tomorrow. • Non-core technologies • Develop a “Tier” system with an Eye Toward

Monetization.

Building A Patent Portfolio

| Where Do You Need Protection? | • Look at where your market is

• Where are your competitors?

• Can you envision how the marketplace may change?

• Do you need foreign protection?

| Budget Considerations |

• Patent $20-30K on average to prepare and prosecute through issuance

• Over a 3-5 year time frame

Building A Patent Portfolio – Setting Up Tiers • GOLD TIER

– Patented product will be developed – Projected revenue from the product is high – Patent would serve to materially block a competitor from entering

the market – Patent covers a vital component part of a larger product with high

projected sales revenues

• SILVER TIER – Patented product may be developed – Some projected revenue if it is developed – Competitors business may be affected in some way

• BRONZ TIER

– No plan for product – No expected revenues, or expected revenues highly speculative – No perceived competitor blocking value

Assessing and Categorizing Assets • HOW?

– Compile a list of patents – Work with in-house patent attorneys, sales units, and engineers

to divide the patents up into categories

• Two Category Method: Core v. Non-Core – Patents that cover products v. those that do not

• Broken Down Further

– Core • Products in the pipeline • Products currently being sold • Products on their way out, but of substantial value now • Blocking patents

– Non-Core • Not used, non-blocking, may be of value to others • Not used, appear to have little value • Other patents

Primary Methods for Monetizing Patents

• Licensing – Exclusive – Types:

• All rights under the patent (Complete Exclusive) • Limited to one or more Fields of Use • Limited to a particular Geographic Region • Limited to a Particular Market

– Non-exclusive – Indirect (through law firm or licensing agent )

• Sale – Patent holding companies – Through a broker – At auction – (newer phenomenon) “market-maker” IP Intermediaries

• Litigation – What is your strategy?

• Low hanging fruit first? Large player first? • File early to prevent the infringing product from hitting the market? • File later -- wait until the product is rolled out = actual revenue and may not be easy to re-

tool for a design around.

Primary Methods for Monetizing Patents

Pre-Litigation Factors to Consider • Is the target in a position to bring a countersuit? • How strong is your case?

– Strength of infringement theory under a reasonable claim construction – Are there any validity concerns?

• Where will you institute the action? – Jurisdiction over the target – Patent-plaintiff friendly? – Speed to trial – Experience of the Court – Home court advantage?

The method you choose may depend on what your goals are and who you decide to target. If your goal is to extract the most out of a sale or license, you need to be prepared to litigate, and make sure the other side understands that.

Laying the Foundation for Monetization | Creative Strategies Based on Emerging Trends|

• Impact of Accounting Guidance on IP

Litigation – Accounting Standards Codification (“ASC”)

805 – Purchase Price Allocation • Squeezing the Return from IP Assets

– Targeted & Strategic Use of 3rd Party Compliance Audits

Impact of Accounting Guidance on IP Litigation

| ASC 805 – Purchase Price Allocation |

Purchase Price $1,186,500

Assets Opening BalanceCash 5,000$ Accounts Receivable 25,000$ Inventory 50,000$ Property Plant & Equipment 75,000$ Trademarks 250,000$ Patent 772,500$ Goodwill 9,000$

Total 1,186,500$

Impact of Accounting Guidance on IP Litigation

| ASC 805 – Purchase Price Allocation | For the Twelve Months Ended 3 Year 3/30/2008 3/30/2009 3/30/2010 Average

Net Sales $ 9,366,571 $ 9,174,770 $ 8,000,000 $ 10,000,000 Percentage of Sales Attributable to Patent 100.0%

Net Sales $ 10,000,000 Appropriate Royalty Rate 2.0%

Royalty Savings $ 200,000 Less: Income Taxes 40.0% $ 80,000

Net Royalty Savings $ 120,000

Net Royalty Savings Adjusted for Growth 3.0% $ 123,600

Capitalization Rate 16.0%

Capitalized Value of Patent at March 30, 2010 $ 772,500

Laying the Foundation for Monetization | ASC 805 – Purchase Price Allocation|

• How does ASC 805 impact monetization

of IP Rights – Enforcement of IP Rights

• Economic Damages – Royalty Rates – Entire Market Value Theory/Apportionment

• How do we address ASC 805 in the

Context of IP Monetization?

Squeezing the Return from IP Assets | Targeted & Strategic Use of 3rd Party Compliance Audits|

• Turnaround & Distressed Situations • Mergers & Acquisitions

– Pre-Sale – Post-Sale

• Renegotiation

• Recommendations for Directors and

Officers to Minimize Liability for Failure to Properly Manage IP Assets

ANY QUESTIONS NOW OR LATER

GREGORY J. URBANCHUK, MSC., AVA, CFE PRINCIPAL ASTERION, INC. 215 S. BROAD STREET, 3RD FLOOR PHILADELPHIA, PA 19107 P 215.893.9921 F 215.893.9903 GURBANCHUK@ASTERION-CONSULTING.COM

ROBERT A. MCKINLEY, ESQ. INTELLECTUAL PROPERTY COUNSEL RATNERPRESTIA 1235 WESTLAKES DRIVE, SUITE 301 VALLEY FORGE, PA 19482 P 610.407.0700 F 610.407.0701 RMCKINLEY@RATNERPRESTIA.COM