Patents are a unique type of commercial investment. They can be used to keep out competitors, defend against litigation aggression and enable cross-licensing opportunities.
Patents, like other intangible, non-commodity goods, often do not have an easily calculable market rate. The quickest way to get a benchmark is to see if someone already set one. Existing patent licenses in the same industry or technological area are possibly the most significant factor in determining future license terms, both in the market and in litigation.
If no relevant licenses exist, some initial things to consider are the size of the market, the profit margin and the importance of the patent for the product. You’ll also want to consider the general cultural feeling toward patents in the industry. For example, software and anything else Silicon Valley tends to be fairly anti-patent, while others, such as high-end bicycle components, are very respectful toward patents. The casino industry leans toward the respectful side, which makes it a bit easier to get more out of the license.
Enforcing a patent is not necessarily an alternative to licensing, it’s just a different path to obtain that license. It might be that the companies using your patents refuse to pay a fair royalty. Litigation forces them to accept terms that a jury believes to be fair.
During pre-litigation negotiations, the other side has potential litigation in mind, and will base its negotiations on some fraction of this potential litigation verdict. If you’re successful, the imposed license will likely be on far better terms than the other side ever would have agreed to before litigation.
For example, willful infringement is often a patent owner’s best issue, and can as much as triple the damages award. An injunction, a court order that stops the infringer from selling the patented product, is a massive hit that can drive up licensing rates. In addition, you’ve now set a much higher benchmark. This means those better licensing terms will carry forward to some extent into future agreements with other entities making their own versions of the patented product.
The downside of enforcing a patent is the cost—it takes a lot of lawyer hours to handle a patent case properly, including the due diligence necessary before litigation is even started. Enforcing a patent also takes several years, and if things go badly, your patent(s) could even be invalidated. But for those who stick it out all the way, the returns can be significant.
The basic process of enforcing a patent involves progressing through a series of milestones. These milestones are similar to hurdles, as a patent owner needs to make it through all of them to ultimately get to a verdict of infringement and the damages that come with it. Successfully passing a milestone usually means significant improvement to licensing terms if a settlement occurs, which it does in more than 90 percent of patent cases.
The first milestone happens before the case is filed, when the pre-filing due diligence is done. This is a crucial step, as your legal team will be thoroughly researching and analyzing the merits of your case, which helps to understand the likelihood of good and bad outcomes. Once a case is filed, if you’re in Nevada or one of several other jurisdictions with local rules that apply to patent cases, things follow a fairly rapid, consistent schedule over the next several months.
Next, in the Markman stage, the judge in your case will make a legal ruling about what your patent actually covers. This ruling often decides most of the merits in the case, which can result in the jury trial usually being more focused on damages instead of other issues. Finally, the last milestone is the appeal process, and if you’ve been successful thus far, the odds are in your favor.
While all of the above is going on, the defendant has the option of challenging the validity of your patent(s) at the Patent Trial and Appeal Board. These challenges occur in most cases and will proceed separately and on a different schedule, and some courts will put the main patent case on hold while that challenge plays out. As an independent parallel proceeding, where this milestone occurs in your case, if it does at all, varies significantly. Successfully navigating it, however, is an unofficial stamp of approval from the Patent Trial and Appeal Board that can significantly increase the value of your patent.
While this is a high-level summary, hopefully it will help you ask the right questions and consider the right issues to make the most out of your patent investments.
Michael Rounds is a shareholder and Adam Yowell is of counsel at Brownstein Hyatt Farber Schreck.