Valuation of Settlement Positions

Alexander Poltorak, Ph.D.

General Patent Corporation

October 31, 2006

© General Patent Corporation 2006. All rights reserved.

2

Overview Rational Approach:

Taking emotions out of the equation; Patent litigation as risk management.

Litigation Risk Analysis: Decision Trees; Choosing probabilities.

Other Decision-Making Tools: Monte Carlo Simulation; Game Theory.

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Rational Approach:Taking emotions out of the equation

“Fighting to the death” is a sure way of getting your death wish.

“Never hate your enemies – it clouds your judgment.”

– The Godfather

“It’s not personal, it’s strictly business.” – The Godfather

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Rational Approach:Patent litigation as risk management Quantum Mechanics of patent litigation. Although patents are presumed valid, in

reality, they are neither valid nor invalid until tried in court.

Collapsing the wavefunction, i.e. going to court.

Litigation as risk management.

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Constructing a Decision Tree

Baby Tree

Patent is infringed65%

$5,000,000

Patent is not infringed35%

$0

Patent is enforceable89%

Patent is unenforceable11%

$0

Patent is valid65%

Patent is invalid35%

$0

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Decision Tree for Patent Litigation

Treble Damages No Treble Damages

Lost Profits

Treble Damages No Treble Damages

Reasonable Royalties

Enforceable

Unenforceable

Valid

Invalid

Infringed

Uninfringed

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Choosing Probabilities

National statistics: Validity: 65%; Enforceability: 89%; Infringement: 65%.

Statistics for your district: EDT: 88%; Massachusetts: 34%;

Statistics for your judge.

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Refining Probabilities

Specific issues impacting on the merits of your case:

Questions of ownership; Questions of inequitable conduct; Willfulness; Marking; Latches and/or estoppel; Other claims, e.g. breach of contract.

Delphi method.

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Rolling Back the Tree

Patent is infringed0.650

$5,000,000; P = 0.376

Patent is not infringed0.350

$0; P = 0.202

Patent is enforceable0.890

$3,250,000

Patent is unenforceable0.110

$0; P = 0.072

Patent is valid0.650

$2,892,500

Patent is invalid0.350

$0; P = 0.350

$1,880,125

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To Settle or Not to Settle

Win68%

$5M

Lose32%

0

Litigate

Settle$1M

Win0.680

$5.0M; P = 0.680

Lose0.320

$0.0M; P = 0.320

Litigate$3.4M

Settle$1.0M

Litigate : $3.4M

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To Settle or Not to Settle

When the plaintiff is a NPE.

When the plaintiff is a competitor.

Valuing a patent monopoly.

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Present Value of Patent Monopoly

Annual value of the monopoly:

Total value of the monopoly during the patent term:

Present value of the patent monopoly:

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Common Mistakes

Various outcomes are not statistically independent.

Jury bias. Law of large numbers. Catastrophic outcomes.

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Other Decision-Making Tools

Monte Carlo Simulation

Game Theory

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ConclusionStay rational;Use of formal decision-making tools helps keep

emotions at bay;Use of decision tree helps compare certainty of

settlement with uncertainty of litigation;You get to play this game once – don’t gamble;Whatever the probability, if the result is

unacceptable you cannot take the chance;Trial is an expensive Russian roulette.