Maximizing IP Value in an Economic Downturn

James BabineauPrincipalFish & Richardson P.C.babineau@fr.com

February 5, 2009Houston, TX

IP Management Tactics to Help Survive the Storm

Edward CavazosPrincipalFish & Richardson P.C.cavazos@fr.com

David HealeyPrincipalFish & Richardson P.C.healey@fr.com

Garland StephensPrincipalFish & Richardson P.C.stephens@fr.com

2007

Fish expands internationally

to Munich, Germany.

11 Offices Nationwide, 1 European OfficeVirtually unlimited resourcesGo-to firm for complex patent litigationVast and varied experiences and technical depth

Seamless international capacity

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Top Patent Litigation Firm IP Law & Business2001-2002, 2004-2008

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Biggest Winners List National Law Journal- 7 Fish cases in the last 9 years - 4 defense judgments

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2003, 2005, 2008

Named by IP Law & Business as the #1 firm in Patent Prosecution & #2 firm in IP Litigation for BusinessWeek’s 50 most innovative companies in the world.

Fish Ranked #1 in Prosecution

Trademark Practice

Top trademark firm, based on the number of trademarks granted (Intellectual Property Today, 2006-2008)

Disclaimer

The material is presented for informational purposes only. Ideas and opinions are those of the speakers and not those of Fish & Richardson. Nothing contained in this presentation is offered as or can reasonably be construed to be legal advice. This presentation is not intended to create an attorney-client relationship nor does it create an attorney-client relationship between you and the presenters or Fish & Richardson where one did not previously exist.

James BabineauUniversity of New Mexico B.S. Mechanical Engineering; University of Michigan, M.S.E; Harvard Law School, J.D. Principal in the Austin office of Fish & Richardson P.C.Experience in design and development of vehicle chassis systems and geotechnical and environmental exploration and testing equipment.Practice emphasizes U. S. and foreign protection and licensing of intellectual property and the avoidance of infringement risks, and management of client patent portfolios in electrical and mechanical technology areas.

Almost 75 percent of 115 general counsel recently surveyed said their law department's budget would be cut in 2009 (IPLaw360, December 9, 2008).

What is one to do?

Don’t Lose Sight of the Basics

Find your intellectual property

Secure the IP that provides strategic value

Maintain your IP consistent with changing circumstances

An Effective and Strategic IP Program -

Prompts the identification, development, acquisition, maintenance, and licensing of IP assets

Treats each piece of IP according to the value it represents to owners, shareholders and customers

Focuses on quality instead of quantity

Portfolio Components

Issued patentsPending patent applications

Unprotected Inventions

Disclosure Intake

Traditional innovators

Market innovators

Disclosure FunnelingInternal review subcommittee

– Technology manager– In-house or outside counsel– Sales/Marketing

Considerations– Development stage/time to market– Potential value– Likelihood of protection– Competitive landscape

Best practice is not binary

Patent Preparation and ProsecutionSystem Efficiencies

– Division of workload– Paperless files– Centralized docketing

Communication Efficiencies– Standing instructions– On-line portfolio monitoring – Case-managing paralegals

Patent Preparation and Prosecution

Filing Efficiencies– Electronic filing– PCT as first filing– Provisional filing– Nesting inventions– File “once and for all”

Prosecution Efficiencies– Time examination to

market– Interview examiners– Avoid unnecessary

extensions and missing parts

– Centralized IDS management

– Stop and consider value at every step

Maximizing Value of Issued Patents

Cull obsolete or unused, older patents– Be realistic about likelihood of use– Consider typical enforcement time– Match sales to jurisdiction– Requires good competitive analysis

Consider licensing or sale– Licensing into new markets or fields– Legal department as a profit center?– Access to other inventions through cross-licensing

Does your patent file room look like this?

What’s in this patent?

We own this patent?

I thought we needed to license this technology from our competitor.

Building Attractive Portfolios

Resolve title questionsMaintain prosecution flexibilityCover key marketsLimit arguments, not claimsKeep your halo onTie IP to revenue

MAXIMIZE OPPORTUNITY MINIMIZE RISK

Due Diligence – Recent Statistics85 percent of corporate respondents said a target company's IP had importance equal to or greater than all other assets when M&A deals were on the table.Most corporate respondents cited inadequate due diligence as theprimary reason dealmakers fail to identify intellectual propertyrisks like future litigation. Among corporate respondents that cited deficient due diligence, 56 percent cited lack of time as the main due diligence roadblock and 46 percent cited lack of resources.

Mergermarket Group: M&A Insights: Spotlight on Intellectual Property Rights, 2008

Edward CavazosUniversity of Texas, B.A. Philosophy; UT School of Law, J.D. Adjunct Professor, UT Law School – “Software Licensing”Principal in the Austin office of Fish & Richardson P.C.Experience in drafting, negotiating and litigating technology-related transactions, including licensing arrangements, development agreements and other IP-focused commercial contracts.Former General Counsel of Interliant, Inc. (NASDAQ) – an early application service provider

Three Ways to Develop New Technology Assets (IP)

Build or develop it (DIY)

Buy or license it

Team with someone in a strategic alliance

Paths to IP Value

Direct Sales

Tech Licensing

Joint Ventures

Joint Development

Bundling

Spin outVC

OEM Arrangements

Defensiveoperations

Exclusive go toMarket plan

Partnerships

Patent Licensing

Litigation

IPAssets

Changing Economic Environment = Increasing Reliance on Partnering

The end game is Monetizing Technology. Tech partnerships provide:

Time to marketAccess to talentAccess to technology or IP Access to markets or marketing skill of partner

Manufact.Reps

VARFoundry

Open Source

StandardsBodies

Development

Consultants

FablessSemi

Company

Marketing

CAD/CAMSoftware

Tools

EmbeddedSoftware

HardwareLicenses

IPLicenses

Mask Shop

Packaging

Testing & FA

Distributors

OEM/ODM

BusinessSoftware/Sys

NGOs,Non-Profit,

Univ.

EngineeringBusiness

Sales

OpsCustomer

Example of Complex Web of Tech Partnerships – Semiconductor Industry

Agreement (K)

K + Facts

K + Facts + Other Ks

K + Facts + Other Ks + Market Dynamic

Business Model Engineering

Properly Allocating The Five R’s:

• Rights

• Risk

• Revenue

• Responsibility

• Repercussions

For each new relationship – companies must undertake a process to properly allocate the “Five R’s”

Economic Downturn Introduces NewRisks that Must be ContemplatedTendency toward lower transaction costs

– Might result in “half-baked” agreements

Different terms for different economic climatesIncreasing reliance on Joint Development Arrangements as a cost savingMore outsourcing

The Dangers of the Half-Baked Agreement

Defined: An agreement that purports to create a binding obligation, but falls short because of indefinite or open material termsExamples:

– Letters of Intent that are never finalized– License Language that only indicate intent “Licensor will

grant…” or “Licensor shall grant.”See Massachusetts Eye and Ear Infirmary v. QLT Phototherapeutics, 412 F. 3d 215 (1st Cir. 2005)

The Dangers of the Half-Baked Agreement

Practice Tips:– Beware of LOI as a shortcut

– Draft definite language “Licensor hereby grants…”

– Beware of other “open” terms such as “a to-be-definedroyalty…”

– Where business terms are not finalized, add a procedure that ensures finalization or spells out what happens if never accomplished

Different Terms for Different Economic Climates

Royalty/Payment structures and timing

Outs?

Renegotiation rights? Adjustments?

Bankruptcy

The Pitfalls of Joint Development Agreements

Summary: Many “Joint Development Agreements” do a poor job of clearly delineating “who owns what” and thus pose special risksBusiness people often default to “joint ownership” when relationships become complexWhat is often carelessly characterized as “jointly owned”?

– Improvements– New inventions resulting from working together– Derivative works– Inventions resulting from jointly funded work

The Problem:– Joint Ownership is a messy concept

– The patent statute: “In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners.”

– This is often 100% different than the intent of the parties

– Attempts to contractually define Joint Ownership often fall short– Who prosecutes the patent? Who pays? Who makes key decisions?– Who enforces the patent? Who collects judgments? Can the joint-owner be involved

and to what extent?

Practice Tip:– Any time business person refers to joint ownership, test them. Do

they mean it? Be considerate of all issues

The Pitfalls of Joint Development Agreements

The IP Implications of Outsourcing

The Problem:– Many outsourcing / service agreements (development arrangements,

outsourcing deals, consulting agreements, etc.) have the serviceprovider retaining some level of “ownership” in work product

– Companies retaining these firms need to:• Clarify ownership issues carefully; “work-for-hire”• Beware of joint inventorship issues (need full assignments)• Don’t be lulled into false sense of security by:

– Confidentiality provisions that allegedly protect client– Industry exclusivity purporting to restrict developer’s use of materials to

non-competitors

Things to Keep in Mind for Existing RelationshipsMonitor contract terms carefullyConsider renegotiation

– Express renegotiation rights– Change of circumstance; may create shift in leverage

Be mindful of bankruptcyStay on top of breach scenarios

One Last Thought: Director Oversight LiabilityDelaware Supreme Court’s decision in Stone v. Ritter

– Directors can be subject to oversight liability for:• Failing to implement any reporting or information system that would avoid

corporate liability and protect corporate assets• Having implemented such a system or controls, but consciously failing to

monitor or oversee its operations, thus enabling themselves from being informed of risks or problems requiring their attention

– Oversight failure is considered a breach of the duty of loyalty (not care) – meaning that directors cannot be shielded from oversight liability in their corporate charter

In sum, directors are more likely now than ever before to be held personally liable for money damages for breaching their duty of oversight of IP assets and risk

The Changing Face of IP Law:What You Need to Know or

Should Consider

David HealeyBrown University B.A.; University of Texas J.D. with Honors Principal in the Houston office of Fish & Richardson P.C.Practice includes trials, appeals, pre-litigation analyses, and counseling on litigation strategy, including the use of alternative dispute resolution proceedings. Extensive work in litigation of cases involving semiconductors, cardiac devices, catheters, telecommunications and software.

Recent IP Law Trends and Considerations

InjunctionsReexaminationsOpinions of counselMultiple defendantsPatents by the poundForeign patentsInternal IP coordination

Injunctions: Still a Swinging Pendulum

Old thinking: Injunctions are mandatory

Newer but no longer valid thinking: Injunctions are only available in competitor cases

Real life today: Injunctions are still available in any case where eBay factors can be met

Injunctions: Still a Swinging Pendulum

Cost-effective “worst case” planning– Always consider design-arounds (also useful on

damages case)– Get evidence on eBay factors into record– Look at reexam option to help argue stay pending appeal

(and for other reasons)– Address ongoing or paid-up lump sum royalty in

damages expert report

Hope for the best but plan for the worst

Reexamination: Not the Same Old SNQ

Old thinking: Reexams are useless or dangerousNew thinking: Inter partes reexams can be useful

– Patents are “killed” in majority of inter partes– Use SNQ to attack willfulness, intent on inducement, and

presumption of validity– Reexams can provide negotiating leverage– Ongoing reexam can provide basis to stay trial court case

or (worst case) injunction pending appeal

Opinions of counsel: Not the Only Option

Old thinking: Necessary if in litigationNew thinking: Reexam could be a cheaper and better option if no pre-litigation opinion

– Opinions of counsel are less valuable under In re Seagatethan they were in the past

– Opinions create privilege-waiver issues and are expensive

– Post-litigation opinions do not play well with juries– SNQ counters intent based on PTO action (vs. your

“independent patent lawyer’s opinion”)

Multiple defendants: Don’t Play into Plaintiff’s HandOld thinking: No sharing counsel due to conflicts and security issuesNew thinking: Grow up!

– Patent trolls sue many defendants for an advantage –don’t let them get one by leveraging costs against you

– Co-defendants can agree on security and conflicts issues for trolls – not the same as competitor/high risk cases

– Coordination among many firms is expensive and creates risk of “case killing” inconsistent positions

Patents by the Pound: Quality Counts

Old thinking: The more patents I have the betterNew thinking: Volume has marginal advantage in negotiations or as a means to create prior art

– Quality always wins over quantity in litigation or negotiation

– Consider alternatives for increasing portfolio quality (auctions, bankruptcies, foreign patents)

– Consider publishing without patenting to create prior art

Foreign Patents: Investment Opportunity

Old thinking: Generally an after-thoughtNew thinking: Global IP is of increasing utility

– Focus on stable countries (Germany, France)• Cost and timing of enforcement in Germany is much better than

U.S. and can be an effective enforcement or counter-attack

– Consider emerging economies and systems (China)• Recently a Chinese court granted an injunction! Who knows what

is next?...

– Watch foreign applications as they publish in your key product areas

Internal IP Coordination: Prosecution and Litigation Must Co-ExistOld Thinking: Prosecution and litigation are separate New Thinking: Patent claims only exist to be enforced

– Write claims with litigation or enforcement in mind: draft claims over competitor products

– Draft claims avoiding means or “coined terms”– Draft more claims, not more arguments - only you can create

prosecution history estoppel– Put all prior art of any kind into the case in the PTO (including late

discovered): you will win the prior art issues– Cross-file different countries searches, prior art, and office actions at

least in the U.S. to avoid inequitable conduct in the U.S.– Comply with standards-setting group rules when claiming inventions

that are in standards– Never let a priority filing date die

Litigating in a Downturn

Garland StephensCourtroom lawyer specializing in high-stakes patent litigation in the electronic and computer industriesExtensive experience defending well-known products from charges of patent infringementUniversity of Chicago, B.S. Mathematics; Columbia University, M.S. Electrical Engineering; University of Missouri, J.D.

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Patent Suits Are Driven By Patents

NOT The Price of Shares

http://mioaklandcounty.com/blog/2007/10/04/this-is-not-a-buyers-market/

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Patent ApplicationsNASDAQ

2007

Increase in “Economy Sized”multi-defendant suits

Sue First, Talk LaterVenue Matters

After Medimmune, Plaintiffs may lose their choice of forum by talking first

0%50%$650,0002.03EDMi

26%68%$25 million0.88EDVa

SJ SuccessTrial SuccessMedian Award

Median time to trial

District

~3.5 % of patent suits get to trial

$31 millionTelecom

$8.5 millionSoftware

$6 millionMedical Devices

$4.9 millionBiotechnology

$34,000Automotive

Median Damages Awarded ’95-’07

Industry

Pricewaterhouse Coopers 2008 Patent Litigation Study

High Risk for Both SidesLow Median/High Deviation

One million $1 billsLibrary of Congress Photo

$2.5 million$1.25 million$1-$25 million

$5 million$3 million>$25 million

$600,000$350,000<$1 million

Through TrialClose of Discovery

At Risk

Median Patent Litigation Costs

AIPLA Economic Survey 2007

350 tons of $100 bills ($12 billion) were distributed in Iraq by the US

http://www.guardian.co.uk/world/2007/feb/08/usa.iraq1

Carl von Clausewitz1780-1831

“War is a continuation of politics by other means."

Clausewitz, On War.

Wikimedia photo

Cost Benefit/Case Management

Know your opponent

Treat them with respect

Engage on the merits early

Avoid pointless aggression

Cost Benefit/Case Management

Initial Case Management Conference is crucial

eDiscovery costs can dominate a case

Negotiate with your opponent BEFORE the CMC

Cost Benefit/Case Management

Come prepared to Rule 26(f) conference– Determine products at risk– Conduct telephone interviews with potential key

witnesses– Locate prior art– Formulate a discovery plan you can live with

Cost Benefit/Case Management

Strategies to reduce discovery costs– No emails– Privilege claw-back provision– Keyword screening, limited review– Native format production– Limit expert discovery (materials relied on)

Cost Benefit/Case Management

Avoid scorched-earth tactics

– Do not file unnecessary motions• Defendants frequently file SJs that are sure losers, and give the

other side a roadmap

– Consider not taking some expert depositions

Reexamination

59%13%28%24.5 months92%Ex Parte1

21%67%12%32.6 months95%Inter Partes

Claims changed

All claims canceled

All claims confirmed

Average Pendency

Reexam Declared

1 statistics for third-party requestsSource USPTO website

Since 2005, PTO Central Reexamination Unit has improved PTO reexamination practice

Reexamination

$279,000$123,000$91,000$50,000$30,000

With Fed. Cir. Appeal

With Board appeal

Through close of prosecution

Through first office action responses

Through filing request

Average costs for Inter Partes

AIPLA Economic Survey 2007

Reexamination

Patent owner’s admissions, and its experts’, may be considered by examinerExaminer must apply “broadest reasonable construction”Amendments

– Give rise to intervening rights– Are strong reasons to stay pending litigation

Questions?

Thank You!

James BabineauPrincipal512-226-8112babineau@fr.com

Edward CavazosPrincipal512-226-8130cavazos@fr.com

David HealeyPrincipal713-654-5310healey@fr.com

Garland StephensPrincipal713-654-5306stephens@fr.com