R.I.P. – Controlling potentially fatal patent risks

March 2013 | PROFESSIONAL INSIGHT | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

While there has been an increase in the number of litigation cases in the last 10 years, it could, in part, simply be a logical consequence of the significant growth of granted patents and applications filed by companies (IPWatchdog, ‘Patent Litigation Statistics 1980-2010’, 02/08/11). Other significant factors are the mass adoption of internet broadband technologies, both fixed line and wireless, and a strong convergence of electronic and communication devices. This has led to numerous overlaps in business models and technology usage and, in turn, resulted in an increase in cases of patent infringement. Smart TV, for example, is essentially a flat computer display connected to the internet via WIFI on which you can watch broadcast TV, browse the internet, access movies on demand, play online games, conduct video conferences, download apps and more: the overlap with other consumer electronic platforms and distribution channels is evident.

Another contributor to the increase in patent infringement litigation has been the growth of Non-Practicing Entities (NPEs), whose business model is variously based on purchasing patents from companies in bankruptcy, from companies willing to divest IP, or from inventors who were unsuccessful in commercialising their inventions, in order to monetise them through assertive licensing.

The 2012 Patent Litigation Study from PwC (PricewaterhouseCoopers ‘2012 Patent Litigation Study’) highlighted some interesting US statistics for business leaders: the median damages awarded over the last five years was $4m; median damages awarded to NPEs nearly doubled that awarded to operating companies ($6.9m versus $3.7m); NPEs have been successful approximately a quarter of the time versus a third of the time for operating companies. In Europe, industry experts believe that the impending European patent court (FFII, ‘EU Patent Plans are a Fuel for Patent Trolls’, April 2012) could instigate a similar situation in Europe.

The financial success of NPEs has now led operating companies, manufacturers and service providers to indirectly adopt a similar monetisation process through: ‘Virtual Non-Practicing Entities’ (VNPEs), where operating companies assert their IPR by proxy. Examples include Mosaid (TechCrunch, ‘Mosaid Acquired 2000+ Nokia Patents…’, 01/09/11), which acquired over 2000 Nokia patents for free in order to licence them assertively. Another example is MobileMedia (Arstechnica, ‘Jury Finds iPhone Infringes Nokia…’, 13/12/12), an NPE that acquired 300 patents from Nokia and Sony and which is part owned by these two companies, which is asserting patents against Apple, HTC and Research in Motion.

What really grabs the attention of business leaders and shareholders is the potential scale and impact damages or a product sales ban can have on their businesses. Cases to have made the headlines include the $1bn awarded to Apple in its patent dispute against Samsung (The New York Times, ‘Jury Awards $1Billion to Apple in Samsung Patent Case’, 24/08/12), the $612m that RIM paid to NTP to settle their patent dispute (IT World, ‘Blackberry Battle: RIM/NTP Patent Case Takes New Turn’, 28/09/09), and the attempt by Apple to get a permanent injunction against 26 Samsung phones in the US (TechEYE, ‘Apple Fails to Get Samsung Injunction’, 18/12/12).

When taking into account the success rate of litigation, it becomes clear that having a defensive patent strategy in place is a key requirement of every technology dependent business. Defensive strategies can take several forms. Companies can organically file or acquire patents to ensure they have meaningful leverage to retaliate against operating companies. This strategy would not be effective against NPEs, however, as they do not sell products or services and will therefore not be infringing patents. Another strategy could involve intellectual property insurance to cover the potential legal cost and damages from litigation, however the insurance market is somewhat underdeveloped. The EU commissioned a study (CJA Consultants Ltd, ‘Patent Litigation Insurance’, June 2006) into the development of such financial products, but the lack of statistical data and the level of uncertainty associated with patents make it a risky business for the insurance industry.

Some companies have now included IP as part of their strategic risk management, identifying possible threats and taking steps to mitigate the risk through the acquisition of potentially dangerous patents or by weakening the strength of those patents through patent re-examination or opposition proceedings.

Another option for companies at risk against NPEs is to take membership of defensive aggregators, like RPX and AST, whose raison d’être is to acquire patents which become available on the market before they end up in the hands of NPEs. The complication with NPEs is that it is difficult to know the true extent of their portfolio, due to their use of shell companies to hide patents they have acquired. Help is increasingly at hand though, as some IP consultancies are now tracking key patent transactions involving NPEs, in an attempt to enable their clients to review how their existing products and services may infringe these patents. This allows companies to have a clearer idea of the patents they need to monitor, those patents that do not pose much of a threat, and how to devise a strategy to defend against potential litigation.

Most companies only plan their defensive actions against existing or potential short- to medium-term patent litigations from a tactical point of view. However, shareholders are increasingly IP savvy and will start to demand a long-term strategy to control the risks associated with IP. Areas to consider in a long-term strategy include the following. First, identify existing IP competitors and new entrants through patent landscaping.

Second, establish a watch program to regularly document and review the competition’s patents, any new filings and assess which patents could be asserted against your own products and services.

Third, work across the whole company alongside the design strategy to manage the risk of infringement by some or all of the following: product/service redesign; taking a licence from companies whose patents may be infringed or cross-licensing each other’s IP; developing an invalidation strategy ahead of potential litigation; acquiring patents being infringed by companies who may claim their own IP is being infringed, in order to be able to diffuse a litigation or retaliate, if necessary.

Finally, plan for the future by evaluating the alignment between the company’s technology roadmap for the next 5-10 years and the supporting intellectual property, identifying IP gaps and taking actions to fill them through filing programs, in-licensing, cross-licensing or aggressive patent filing or patent acquisition.

Without unlimited resources, not all patent infringement risk can be mitigated and some prioritisation will have to be considered. Assessing the strength of infringement threat against the strength of their defensive strategy can help organisations focus their defensive IP strategy by identifying their Risk from Intellectual Property (R.I.P.). Controlling this can be crucial for their survival. The following are a series of infringement threat scenarios in strength order, from weakest to critical:

A patent owned by a competitor/NPE could be infringed by the company’s own products but the patent is very likely to be invalid.

Almost harmless, a patent owned by a competitor/NPE could be infringed by the company’s own products, and the patent is likely to be valid but it would be very hard to detect infringement.

More harmful, a patent owned by a competitor/NPE could be infringed by the company’s own products, and infringement is detectable but at significant cost (e.g., reverse engineering, product teardown).

Worse still, a patent owned by a competitor/NPE is very strong and infringed by the company’s own products; infringement is easily detectable but the IP is not owned by a litigious entity.

Critical, a patent owned by a competitor/NPE is very strong and infringed by the company’s own products, and infringement is easily detectable and the IP is owned by a litigious entity.

Testing these potential infringement threats against the defensive strategy in place allow companies to better understand their Risk of IP. Following are a series of defensive positions that companies may take, in order of strength from weakest to strongest:

Very weak, with little defence available where some degree of product redesign is possible but at a high cost.

Weak, where the strategy is to sign a ‘cheaper’ royalty deal if a licence is taken early.

Less weak, where the company has the potential to acquire defensive patents (although it would not work against an NPE).

Strong, where next generation of products are starting to be redesigned and there is a potential to invalidate the patents but at a cost.

Very strong, where prior art has been found and a retaliation strategy is ready, if necessary, and where dangerous patents on the market were acquired (directly or via a defensive aggregator).

These are just potential scenarios, but as the financial community becomes increasingly IP savvy, it is possible to foresee a time when companies have to report IP risk in a detailed manner in their annual report. Failure by technology companies to systematically manage patent risks could prove fatal to their existence or to raising new investment.

Benoit Geurts is a senior consultant at ClearViewIP. He can be contacted on +44 (0) 7876 652 613 or by email: benoit_geurts@clearviewip.com.

Benoit Geurts

ClearViewIP