strategic ip litigation: how to make better, justifiable decisions - a case study

34 Coquito Court, Menlo Park • California 94028 • Phone 650.854.1914 • www.litigationriskmanagement.com • [email protected]

LitigationRisk Management

Institute

Bruce Beron, Ph.D., President

Strategic IP LitigationHow to Make Better, Justifiable Decisions

Presented to Annual Meeting of LES, San Diego, Sept. 2003


Institute© Bruce Beron 2014 LES 2003 Strategic IP

IP litigation is often highly strategic, both in its conduct and its consequences.

The litigation itself is complex, expensive and takes a long time to resolve.The potential outcomes of the trial can have a major effect on the client’s business.

Having one fewer competitor in the market or being out of the market for the particular products or services.

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Strategic decision-making requires a very different mind-set or perspective from operational decision-making.

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For strategic decision-making, we need to focus on those uncertainties that can change the decision.

Most operational/implementation issues are unimportant for strategic decision-making.

These operational/implementation “details” may be very important and must be taken into account once the decision has been made and is being implemented.



A Litigation Strategy is a set of consistent decisions dealing with all stages of litigation and business.

We define a strategy as a set of key decisions or policies, taken consistently, that are intended to lead to the fulfillment of a goal, vision, or direction.Each decision, along with the interactions among the decisions, can and should be made using the right decision tools.

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In order to design the best strategy, we need:

A way to make sure we are considering a broad enough range of alternatives.

A way to understand risk.

A way to make the best decisions.

In order to make the best decisions,we must understand the uncertainty!

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The art of litigation and business strategic decision-making is the art of balancing risk and reward.

Business people and attorneys often do not have a clear definition of Risk.

Requires a statement of likelihood like:CouldMightWillOr, explicitly, .5, a probability (quantitative)

And requires a statement of consequenceHit by a carLose our shirtsOr, explicitly, lose ten million dollars (quantitative)

.

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Business people and attorneys do not always consider rewards properly.

We almost always focus on the risks, the downside.There is someone’s name on the check.The accounting system knows exactly how much was misspent.The potential upsides are never precise or well defined: very few people get fired for increasing sales by 30% when they should have increased them by 40%.The upside also requires a statement of likelihood and a statement of consequence.

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Case Study

The following case study is based on an actual case.The presentation is greatly simplified here to focus on the concepts, not the technical details of the analysis.•Liability is shown for each side as a single node.• In the actual analysis we considered validity, infringement, and damages

for many, many patents.•Also not included here, but included in the original analysis, are

litigation and ongoing business costs.

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Management at ABC kept revisiting a decision as to whether or not to sue XYZ for patent infringement.

ABC had for many years been the dominant player in a major technology market. After a few marketing blunders and product entry delays, they had been eclipsed by XYZ Corp., who had been so successful in the marketplace that they held a near monopoly and maintained very fat margins.Engineers at ABC were sure that XYZ was infringing on several of their fundamental patents and kept insisting that management sue XYZ for patent infringement.In attempted negotiations, XYZ consistently refused to offer any meaningful royalties, insisting on licensing rights to other IP in another area in which ABC held significant patents and which had significant growth potential.XYZ was a tough competitor and a scorched earth litigator.Furthermore, there was a fair amount of sales between the companies in other areas.

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Management at ABC kept revisiting a decision as to whether or not to sue XYZ for patent infringement (continued).

XYZ would almost certainly counterclaim on their patents in the same area.

Should we not prevail on one of our claims and they win and we would face a significant risk of an injunction.

XYZ would become very difficult to deal with in other ongoing business relationships with ABC.

In particular, a critical component of one of ABC’s biggest products was supplied by XYZ and in short supply elsewhere. Should XYZ slow down delivery or be uncooperative, there would be significant profit impacts and management headaches for ABC.

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An influence diagram helps to make sure that we have included all present and future business impacts as well as the litigation consequences.

Net IPRoyalties FromThis Litigation

Business Impactsto ABC

One of OurPatents Valid &

Infringed

Bus Unit1

Bus Unit2

Bus Unit3

Bus Unit4XYZ

Revenues

InjunctionXYZ PartsShortage

IP Royalties fromXYZ to ABC

RoyaltyRate

One of TheirPatents Valid &

Infringed

ABCRevenues

IP Royalties fromABC to XYZ

RoyaltyRate

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NPV to ABC



To understand and deal with risk and reward, we have to use probabilities and structured scenarios.

A decision tree is a good way to show all the significant uncertain events and their interrelationships.

We.Nail.Them

Yes

No

They.Nail.Us

No

Yes

No

Yes

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We need to know the dollar consequences of each scenario.

We.Nail.Them

Yes

No

They.Nail.Us OUTCOME(millions)

No $2,000.

Yes $500.

No $0.

Yes -$500.

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The probabilities we will be using here are a quantification of judgments, based on knowledge and experience.

The probabilities we are trying to quantify are unique, one-time events.There is no right answer to a probability judgment.

The question we want answered is, “Will we a patent infringement claim stick?”

For this question there is a correct answer, either “Yes” or “No”, we just don’t know it.

If you assign a probability of .05 to an event and it happens, it does not mean that the .05 was wrong.These probabilities are different from things like the likelihood of throwing a 7 with a pair of dice which can be right or wrong.

The best we can do is make a quantified, explicit judgment as to the likelihood of an event.

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The probabilities we will be using here are a quantification of judgments, based on knowledge and experience (continued).

Words don’t work.Extensive tests show they are ambiguous.For one person, very likely means 90-100%, while to another it may mean 60-70%.We must combine several uncertainties to come to a decision.

We can’t do that with words, but we can with likelihoods expressed as numbers - probabilities.

Probabilities change with new knowledge.They shouldn’t change much unless something extreme or unlikely happens that could influence our judgment.

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The probabilities we assign to each uncertain event can be combined to determine the likelihood of any scenario.

We.Nail.Them

0.75 Yes

0.25 No

They.Nail.Us OUTCOME PROB(millions)

0.30 No $2,000. 23.%

0.70 Yes $500. 53.%

0.30 No $0. 8.%

0.70 Yes -$500. 18.%

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Our decision criterion will be the Expected Net Present Value (ENPV) of monetary results.

Think of it as a probability weighted average.Expected Value represents the average value —if you could play many times.We define Expected Value as the sum over all the outcomes of each outcome times its respective probability.

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At first glance, going ahead with the litigation, while risky, has a positive ENPV.

950 =.3 x 2000 + .7 x 500

-350 = .3 x 0 + .7 x -500 625 = .75 x 950 + .25 x -350

6 2 5

We.Nail.Them

0.75 Yes 9 5 0

0.25 No - 3 5 0

They.Nail.Us OUTCOME PROB(millions)

0.30 No $2,000. 23.%

0.70 Yes $500. 53.%

0.30 No $0. 8.%

0.70 Yes -$500. 18.%

As you follow a path through the tree, the numbers in the ovals represent the expected value of the tree at that particular point, with all the previous decisions made and subsequent uncertainties accounted for. The final value for the tree, the expected win or loss is represented by the number in the oval at the far left side of the tree.

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Outside counsel advised that very few cases of this size had ever gone to judgment, and usually settled for pennies on the dollar.

•Management would see the case very differently:•After several years of heavy legal bills.

•When the risks of losing became more apparent.

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Taking into account the likelihood that ABC would really stick to their guns to the very end, litigating, while still positive, didn’t look like such a good idea.

The analysis shown here does not included litigation costs, business costs, and the cost of management distraction which would make the decision much more of a toss-up.

7 9

Litigate

> Yes 7 9

No

LitigationSett les

0.10 No

0.90 Yes

1

DisputeSett les

1 9

0.10 Yes 1 1

0.90 No

SettlementAmount

6 2 5

0.25 High

0.50Medium

0.25 Low

0.25 High

0.50Medium

0.25 Low

We NailThem

0.75 Yes 9 5 0

0.25 No - 3 5 0

They Nail OUTCOME PROBUs (millions) Scenario

0.30 No $2,000. 2.3% 1

0.70 Yes $500. 5.% 2

0.30 No $0. 0.8% 3

0.70 Yes -$500. 1.8% 4

$100. 23.% 5

$25. 45.% 6

-$75. 23.% 7

$25. 2.5% 8

$10. 5.% 9

$0. 2.5% 10

$0. 90.% 11

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Conclusion: After completing this study, senior management made a final decision not to pursue it.

Unlike previous studies, this one came to a definitive conclusion.

Management used the analysis to show those who had been pushing for the suit, why it was not worthwhile to commence such an action.This saved senior management many hours and the distraction of dealing with this decision again and again.

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Strategic Management of IP litigation and its business consequences is the art of balancing risk and reward.

It is a way to:

Create innovative litigation and business strategies.

Measure the balance of risk and reward.

Seize the strategies with the best trade-offs.

Clearly communicate the rationale for the decision in to all stakeholders.

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For further information, please:

Visit our website at:www.litigationriskmanagement.com

Contact:Bruce Beronbruceberon at lrmi dot com650.854.1914

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