The Economics of Patent Litigation & Damages

October 2017

Brian Buss, CFANevium Intellectual Property Solutions

www.nevium.com

TrendsDamages

Challenges

How IP Creates Economic Benefit

Monopoly Barrier to entry, exclude others from using

Pricing powerMore volumeGreater profit margins

Permission Ability to be compensatedwhen others use

Value of license (PV of royalties+fees – costs)

Value if sold

PromotionSignals innovation,uniqueness, source of origin to consumers

Additional salesReduced marketingIncremental margin

Litigation Seek damages if others use

Litigation award (PV of award less costs)

Threat of litigation (force “Monopoly” or “Permission”)

Four Possible Avenues for Economic Benefit

The “Value” of Patents & IP

Price Sell at a higher price point, increase revenues

Volume Sell additional units, increase revenues

Cost Reduction

Lower expenses, increase profit margins

License / Royalty

Additional income, net of expenses

Promotion

Monopoly

Litigation

Permission

Four Ways Patents Can Impact Financial Performance & Value

Returns from Litigation• Net present value of

litigation can be less than expected

• Expenses still paid if unsuccessful

Patent Trends & Economics2017 PWC Study: • Decline in # of case filings• Median jury damages decreasing• Almost 2.5 years time-to-trial

Trends

DamagesChallenges

IP StatutesGuidance in Calculating Damages

Utility Patent

Trademark

Copyright

35 USC Section 284 Damages to compensate for the infringement, but in no event less than a reasonable royalty

Lanham Act Plaintiff entitled to recover: 1) defendant’s profits; 2) any damages sustained by the plaintiff

Design Patent 35 USC Section 289 Liable to the extent of infringers’ total profit (until Apple v. Samsung???)

Copyright ActOwner entitled to recover actual damages suffered, and any profits of the infringer attributable to the infringement

Trade Secrets State by State and DTSA

Owner entitled to recover its actual loss, also any unjust enrichment not compensated by its actual loss; alternatively recover a reasonable royalty

Utility Patents v. Design Patents: difference is apportionmentFor Patents, emphasis on royalty-based damages

No IP is Identical & Most Licenses are Unique

Reasonable RoyaltiesAdjusting Comparable Agreements Using Georgia Pacific in 2 Diagrams

Sharing Responsibilities Sharing Benefits

Tie the Forecast to the FactsTest for Reasonableness

• Market outlook & economic trends• Peer group analysis• Competitive product analysis• Pricing and discounting history• Product life cycle stage

Building Benefit Forecasts

Lost Profits

• Demand for the product exists• Absence of acceptable non-infringing

substitutes• Capability to exploit the demand• Amount of profit that would have

been made

Its all about the Forecasting

Test: Panduit Factors

ApportionmentIP depends on other assets and resources in order to generate economic benefits

Apportionment: Identify the portion of future economic benefits derived from use of the IP Assets

Trends

Damages

Challenges

Those license agreements that are publicly available are a small % of the universe of patent and technology licenses

Thorough can be expensive and burdensome to the Plaintiff

Reasonable Royalty Analysis“Noisy” and “Indiscriminate”

Economic Terms in License Agreements What’s the Royalty Base?

• Upfront payments• Minimum and maximum royalties• Variable royalty rates• Marketing & advertising commitments• Start-up, launch and market entry costs • Inclusion of other assets (trademarks, copyrights,

trade secrets, technology, etc.)

• Equity rights

• Gross or net sales• Performance measure other

than revenue• Entire product or service v.

smallest salable unit• Impact of competition and

substitutes

“Reasonable” depends on perspective

Patent Valuation & Lost ProfitsThe Challenges in Forecasting

The Economics of Patent Litigation & DamagesIn Summary

For Patent Owners For Litigators

• Value is derived from use• Most patents contribute to financial

performance through increased revenue and/or reduced costs

• IP creates value in association with other assets and resources

• A reasonable royalty calculation is mechanically simple, but often challenging to thoroughly support

• Damages calculations involve forecasting and forecasting is inherently uncertain

• Don’t underestimate the time and investment required to support a damages calculation

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