Defensive Patent Acquisition Case Study

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LitigationRisk Management

Institute

Defensive Patent Acquisition Valuation

Bruce Beron Ph.D., President

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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




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




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):




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.




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




This summary table shows a conservative estimate of the expected value of each patent candidate as asserted against PP’s relevant technology.




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.”




Alternate/Additional Valuation: Future License Revenue




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




Additional Background

Incremental Portfolio Analysis Further Searching




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.




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.




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




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?

Date post:	13-Apr-2017
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Defensive Patent Acquisition Case Study

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