Is the System Broken? Identifying Good and Bad Behaviors In Licensing – LAIPLA Spring Seminar

Is the System Broken?Identifying Good and Bad Behaviors In Licensing

– LAIPLA Spring Seminar

STRADLING YOCCA CARLSON & RAUTH, P.C.

Jay P. Kesan, Ph.D., J.D.Professor, University of Illinois at Urbana-Champaign; Patent Attorney; Entrepreneur

Phil HartsteinPresident at Finjan

Michael KallusDirector, Client Development and Acquisitions, RPX Corporation

David RosmannExecutive Vice President, Acacia Research Group LLC


Jay P. Kesan, Ph.D., J.D.Professor, University of Illinois at Urbana-Champaign; Patent Attorney; Entrepreneur

Professor Jay P. Kesan's academic interests are in the areas of technology, law, and business. Specifically, his work focuses on patent law, intellectual property, entrepreneurship, cyberlaw, digital government (e-gov), agricultural biotechnology law, and biofuels regulation.

At the University of Illinois, Professor Kesan is appointed in the College of Law, the Institute of Genomic Biology, the Department of Electrical & Computer Engineering, the Information Trust Institute, the Coordinated Science Laboratory, the College of Business, and the Department of Agricultural & Consumer Economics.

He directs the Program in Intellectual Property & Technology Law at the College of Law. At the Institute of Genomic Biology (IGB), he is group leader of the Business, Economics & Law of Genomic Biology (BioBEL) theme, and he directs research on biofuel law & regulation at the Energy Biosciences Institute (EBI).

Professor Kesan continues to be professionally active in the areas of patent litigation and technology entrepreneurship. He was appointed by federal judges to serve as a special master in patent litigations, and has served as a technical and legal expert and/or counsel in patent matters. He also serves on the boards of directors/advisors of start-up technology companies.


Phil HartsteinPresident at Finjan

Phil Hartstein is President of Finjan Holdings Inc.. He oversees the direction and management of current assets and future investments and works directly with the executive management team and Board.

Phil has worked in a number of technology and intellectual property related roles the past 15 years. He started with a boutique IP law firm, worked as IP counsel for a VC funded startup, spent time in IP consulting and IP brokerage firms, and prior to joining Finjan, spent four years bringing both private and public market capital, expertise, and credibility in licensing and enforcing patent rights on behalf of owners.

Phil holds a BS in industrial technology from California Polytechnic, San Luis Obispo. He is a regular speaker and participant in industry and trade organizations, and is a named inventor and patent holder with more than two dozen pending and issued patents across a number of disciplines.


Michael KallusDirector, Client Development and Acquisitions, RPX Corporation

Michael Kallus began his career as a judicial clerk for the Honorable Chief Judge C. Roger Vinson in the US District Court for the Northern District of Florida. He went on to private practice with Fish & Richardson’s Boston office and later as a founding member of Confluence Law Partners, focusing on the defense, development and strategic employment of his clients’ intellectual property assets. Prior to RPX, Mr. Kallus litigated complex patent issues in federal courts throughout the US and the ITC, negotiated lucrative technology licenses, reviewed IP portions of billion-dollar mergers and acquisitions, and advised businesses in capitalizing on their intellectual property.

Mr. Kallus is a graduate of the University of Virginia School of Law and the University of California, Berkeley. He is a member of the state bars of California and Massachusetts


David RosmannExecutive Vice President, Acacia Research Group LLC

Mr. Rosmann joined the company in October 2011 as Senior Vice President. He was appointed to Executive Vice President in May 2014.

Mr. Rosmann began his legal career as an attorney with Irell & Manella LLP in the High Technology/intellectual Property Group, where he represented Broadcom on I.P. and litigation matters as an outside attorney from 1996 - 2000. Most recently he was Vice President, Intellectual Property Litigation at Broadcom Corporation from 2000 - 2010.

Mr. Rosmann holds a B.S., Engineering Science and Mechanics/Biomedical Engineering from Iowa State University, a Master of Science Electrical Engineering from the University of Southern California and a J.D. degree from Loyola Law School, Los Angeles.

Going Beyond Types of PAEs

Jay P. Kesan, Ph.D., J.D.Professor and Workman Research Scholar, University of Illinois at Urbana-Champaign

Motivations

• “Suits brought by PAEs have tripled in just the last two years, rising from 29 percent of all infringement suits to 62 percent of all infringement suits.”

– Colleen V. Chien, Patent Assertion Entities, Presentation to the DOJ/FTC hearing on PAEs

• “Patent infringement litigation by patent monetization entities has risen dramatically over a remarkably short period of time. One of the most striking results is that in 2012, litigation by patent monetization entities represented a majority of the patent litigation filed in the United States.

– Robin Feldman, The AIA 500 Expanded: The Effects of Patent Monetization Entities

Motivation for this Panel

• Much of the response against PAEs has attempted to better define the nature of the PAEs involved in patent litigation to understand their incentives and strategies

• Universities • Individual inventors • Failed startups• Technology development companies• Patent holding companies • Mass patent aggregators• IP subsidiaries of operating company

Focusing on Types of Behaviors Employed by PAEs

• How can we facilitate a “liquid” market for patents?• Are patents ever likely to be a “commodity”?• How can we generate reliable and reproducible

valuations for patents?• Can we have a service like Zillow for patents?• How can we define and develop best practices for

patent licensing to advance the creation of a market of patents?

STRICTLY CONFIDENTIAL. NOT FOR PUBLIC DISTRIBUTION.COPYRIGHT 2014 FINJAN HOLDINGS, INC.

www.finjan.com

LAIPLA Spring SeminarJune 6 – 8, 2014Phil Hartstein, PresidentFinjan Holdings, Inc.

NASDAQ: FNJN

COPYRIGHT 2014 FINJAN HOLDINGS, INC.

Click to edit Master title style

Finjan as Technology, Product Producing, Operating Business

Early Innovator in Software Security• Spurred by a challenge to

develop a “killer” Java application

• Founded by Shlomo Touboul, notable security expert

• Early recognition that inventions needed patent protection

Over $65M Invested in R&D

• 10 Facilities worldwide• 150 employees• 12 inventors across the

patent portfolio

Broad Portfolio of Patents

• 40+ Issued and pending patents around the world

• Patents covering Finjan developed products

• Fundamental, not “feature,” patents

Top Technology Investors

VC’s

Corporate

Network Products Guide – Finjan’s unified Secure Web Gateway announced the winner in the 2009 Product Innovations Web Security category

Finjan's Vital Security Web Appliance 8.4 named WINNER for the Network Datastream Protection Category in eWEEK's Excellence Awards Program



Finjan’s Evolution as a Technology Company

1997 - Finjan Founded on novel, behavior-based security technology

2005 - Finjan completes first license of its patented technology

• Negotiated transaction, no litigation required

2009 - Finjan divests its product business, research center, retains its IP

• Acquiring company continues to sell Finjan products

2011 (filed 2006) - Finjan wins first patent trial and subsequent appeal at Federal Circuit

• Patents found valid and infringed, enhanced damages award from $X million to $4X million

2013 - Finjan’s investors decide on public company path, install new management team

• Implements transparency in business dealings while providing liquidity to investors

• Intellectual property expertise installed internally to drive strategy, tactics, and growth

2013 - Finjan re-engages security industry through licensing and continued investment

• Finjan invests in JVP Cyberfund focused on bringing new security technologies to market



Finjan’s Core Values & Best Practices Campaign

Finjan’s Core Values

• Invest in, protect and support the broad dissemination of technological advancements, which in turn create rewards for investments in innovation and job creation.

• Preserve our integrity by consistently being honest, truthful, and transparent in our actions.

• Show leadership and commitment as credible advocates of IP rights standing up as trustworthy experts in our industry.

• Build strong relationships through strong communications.

Best Practices• Ensure focused licensing and enforcement programs

pursuing the provider of the patented technology and not its customers, consumers or end users.

• Conduct reasonable diligence to determine a patent’s enforceability and use with respect to prospective licensees, and make that information available to them.

• Respect procedural rights and judicial efficiency in the courts and in the prosecution and protection of IP behind the innovation.

• Be transparent with the intent in each discussion, and articulate the cause and effect scenarios which would prompt a shift in communication and an escalation of each discussion.

• Provide useful facts to prospective licensees and defendants to foster productive business discussions early and often to aid in informed decision-making.

• Offer fair value licenses or settlements based on legitimate factors and considerations.

• Commit to keeping lines of communications open between the patent owner and prospective licensee to preserve a path for the parties to find an amicable solution or resolution for their respective businesses.

“Patent licensing may be the only major industry without a code of conduct or standards of ethical behavior.” ~Marshall Phelps



Through these – or other – best practices, we are working to restore credibility to the licensing industry. First, in leading by example and from there advocating for a return to an efficient marketplace.Finjan’s Innovation and Technology Continue to Drive Economic Change

• More than 200 years with a patent system as the foundation for a modern economy

• Commitment to enabling further technology development through licensing and investment

Our Licensing and Enforcement Programs are Defined by Integrity and Transparency• The company established Core Values by which it will commit in operating its licensing

business

Best Practices in Licensing Encourage Meaningful and Efficient Transactions• Seven Best Practices address common stages in licensing, focused on the merits

• Not addressing specific proposed reforms or reactive to legislative actions

• No requirement of prospective licensee to acknowledge adhere but

Realities of Licensing• Bad behaviors exist on both sides – patent owners and prospective licensees

• Reforms are focused on categorizing patent owners, should be redirected to behaviors

• Return the focus to the merits of each case and managing resources judiciously

• To be credible you have to build an infrastructure to deliver on these commitments

Finjan and its Best Practices in Licensing



We are one year into our renewed licensing campaign and have several enforcement actions. We are seeing a positive response from the industry, less contentious negotiations, and over time we expect decreased timeline.

Licensing Discussions

Enforcement Actions

• Initiating a discussion with Licensees on a factual basis• Conducting real technical and financial analysis establishes credibility• Engaging in a rational discussion has moved us to pricing and terms faster• Continued support and interaction on validity and infringement arguments• Enables multiple concurrent licensees without escalation to enforcement

Pipeline

Case Timelines

• Credibility with the Court and Defendants with heightened pleadings• Interacting directly with Defendants (not counsel) builds trust• Maximizing opportunities to engage in mediation/settlement talks is important• Utilizing judicial resources and staying focused on the merits reduces costs• Fairness in pricing and recognizing discounted terms earlier will reduce risk

Two Distinct Paths to Achieve Fair Value in Licensing



Credibility and Transparency in Licensing

ACACIA

RESEARCH

GROUP, LLC

David Rosmann

Executive Vice President

UNLEASHING patent POTENTIAL.

NASDAQ: ACTGA Subsidiary of Acacia Research Corporation

ACACIA RESEARCH GROUP, LLC


ACACIA

is at the

TRANSACTIONAL

CENTER of

INNOVATION.




Good PracticesRewarding the Idea Makers and the World Changers

Acacia is a leading player in the secondary patent market

• Most patents are owned by entities that do not make products covered by their patents

• Acacia partners with patent owners to bridge the gap between invention and production, helping patent owners get paid by licensing their patents to the companies that use them

• Outsourced IP licensing transactions help promote a secondary market for these patents

Patent Owners

Products & Services

ACACIA (Clearinghous

e)



Good Practices - Financial Models

How it works: • Up-front capital infusion as

an advance on future licensing

• Acacia receives 100% of return until capital infusion is returned

Objectives: • Recover capital infusion in

18-24 months• Upon return of capital

infusion, net profit revenue split with patent partner begins

• 3x return of capital in 5 yearsPurpose:• Increases Acacia’s total

addressable market• Strong Balance Sheet yields

competitive advantage

Acquisition Model

Acacia70-100%

Legal0-30%

Acacia buys 100% of the patents for 100% of the profitsTypical partners:• Distressed Corporations• Failed Corporations

Controlled by VCsHigher margins with increased upside potential

Hybrid PartnershipPartnershipTypical partners for Acacia:• Major corporations• Research labs and universities• Individual inventorsProtects patent owner from countersuitsHigh margins with upside leverage

40%Patent Owner

40%Acacia

20%Law Firm

PatentDiligence

License patents to corporate

users

Pay legal costs

Split net profit 50/50 with patent

owner



Rambus69 PatentsLED back lighting

Access125 PatentsSync, Apps, User Interface

VoiceAge274 PatentsHigh Fidelity Voice Codecs

Good Practices – Portfolio StrengthSmart Phone Coverage

Adaptix205 Patents4G/4.5G OFDM, Cooperative Diversity

Silicon Image138 PatentsHigh Speed Chip Interconnect

NSN74 Patents2G/3G Power Control, Handover, Coding

Silicon Image 210 PatentsHigh Speed Display Interfaces



The Future of Invention: IP LegislationPatent Reform is Fundamentally Good for Acacia’s Business

The Goodlatte Innovation Act Overview

Proposed Reforms

#1 – Reduce abusive litigation, costs and time—Acacia agrees

#2 – Mandatory disclosure of patent holdings for NPEs—Acacia agrees

#3 - Core discovery expenses are born by each party but each party must pay the other for excessive discovery requests—Acacia agrees

#4 – Protect end user—Acacia agrees

#5 – Loser pays—Acacia agrees if mutually applicable



There In No Frivolous Patent Lawsuit Crisis(5/27/14 IP Law360 Article by Acacia EVP, Jaime Siegel)

District Patent Cases Filed

Rule 11Motions Filed

Cases in whichRule 11 Motions were Filed

Rule 11Motions Granted

Delaware 2,334 17 0.728% 1

Eastern District ofTexas 2,779 1 0.035% 0

Northern District ofIllinois

453 4 0.883% 1

Northern District ofCalifornia

804 1 0.124% 0

Central District ofCalifornia 935 11 1.176% 0



ACACIA

RESEARCH

GROUP, LLC

UNLEASHING patent POTENTIAL.

NASDAQ: ACTGA Subsidiary of Acacia Research Corporation

DO NOT COPY, DISTRIBUTE, BROADCAST OR INCORPORATE THESE MATERIALS WITHOUT THE EXPRESS WRITTEN CONSENT OF RPX CORPORATION

© 2014 RPX CORPORATION

Patent Valuation

June 8, 2014

Michael Kallus, Director, Client Development and Acquisitions

Patent Reform

© 2014 RPX CORPORATION. ALL RIGHTS RESERVED

Patent Reform Goals

Patent Quality Improve quality of patent examination

Litigation Procedure Increase efficiency of patent litigation

Transparency and Notice Decrease information asymmetry


Patent ReformPatent Quality

Reform Actor Description

Software patent eligibility Judicial Clarifying patentability of computer-implemented inventions

Appellate fact-finding review Judicial Limiting appellate review of district court fact-findings to clear error

Post-grant claim construction Legislative PTO required to adopt District Court claim construction in post-grant review

Examiner training Executive Increased examiner technical training

Prior art sourcing Executive Expanding/encouraging submission of prior art by the general public

Double-patenting Legislative Codify prohibition of obviousness type double-patenting in first-to-file regime

Post-grant review estoppel Legislative Limiting validity estoppel following unsuccessful post-grant review

Patent Quality Initiatives Industry Data collection, IPR challenges, and prior art identification


Patent ReformLitigation Procedure


Fee shifting Legislative Various efforts focusing on shifting the costs of litigation to losing party

Sanctions: Rule 11 Judicial Requiring courts to make findings regarding compliance with Rule 11

Settlement offers Legislative Penalizing plaintiffs whose damage awards do not exceed settlement offers

Bonding Legislative Requiring plaintiffs to post a bond for defendant legal costs

Discovery stays Legislative Stay discovery until after claim construction

Discovery limits Legislative Cost shifting for discovery requests outside core

Discovery stays Judicial Stay discovery pending motions to dismiss/venue transfer/damages hearings

End-user stays/intervention Legislative Stays for customers until supplier suits are resolved; right of intervention

Joinder of interested parties Legislative Requiring joinder of exclusive licensees and patent owners [on defendant’s motion]

Inducement Judicial Limit claims of indirect infringement where no direct infringement found

Laches Legislative Decrease time for a patent owner to file a claim

Venue transfer Legislative Mandatory transfer when proposed new venue is “clearly more convenient”


Patent ReformTransparency and Notice


Real party-in-interest Legislative Requiring patent owners to disclose real party-in-interest during prosecution, when sending demand letters and/or in litigation

Heightened pleading standard Legislative Increasing the specificity required of claimant

Glossary Executive Require glossary of non-plain meaning terms by patentee

Abusive assertion claimsState

Attorneys General

State Attorney Generals creating cause of action for fraudulent/abusive assertion letters under consumer protection laws

Assertion database Executive/Industry

Allowing/requiring recipients or senders of assertion letters to register them in database

Notice of sale Industry Patent owners make binding commitment to notify others before selling to NPE

RPX Acquisitions Practices


RPX Overview

Founded 2008 to manage operating company NPE-related risk

Key Features● Entirely defensive- does not litigate

● Purchase patents and acquire broad sub-license rights to manage client risk

● Syndicated transactions

● Insurance services

● Patent quality initiative – IPRs

● Patent transparency initiatives

Corporate Snapshot● Publicly-traded company (NASDAQ:RPXC)

● 178 clients

● 4,300+ patent rights

● $800M+ in defensive acquisitions; 523 dismissals


Objective Due Diligence

Technical Analysis● Claims● Specifications● File history

Prior Art● Identified during triage● Internal search● Outside firm● Identified during prosecution or IPR● Provided by RPX client

Commercial Analysis ● Track accused products● Understand market shares and associated revenue streams


Subjective Due Diligence

Case Posture● Forum● Strength of case● Counsel● Motions and rulings

Existing Licenses

Other● Indemnities● Cross-licenses● Damage models


Leverage

Client Network● 178 companies with various aligned interests

Plaintiff Risk● Cash position● Expected returns● Public market pressures● Litigation costs

Litigation pressure● IPR● Claim construction and dispositive motions


Deal Valuation

Scope of license

Value to clients

66 Litigation in-licenses to date

NEWPORT BEACH

RENO

SACRAMENTO

SAN DIEGO

SAN FRANCISCO

SANTA BARBARA

SANTA MONICA

Stradling Yocca Carlson & Rauth, P.C.

www.sycr.com

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Is the System Broken? Identifying Good and Bad Behaviors In Licensing – LAIPLA Spring Seminar

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