Developing and Realizing Value From a Patent Portfolio

by Bruce D. Sunstein
Bromberg & Sunstein LLP
Boston, Massachusetts

Intellectual Property Practice Basics
MCLE, Inc. 1997, 1996, 1995

This article has appeared in the 1995, 1996 and 1997 editions of Intellectual Property Practice Basics. The most recent version is reprinted below. Due to changes in the law and other factors, previous versions may differ from the version below.

Patents as a business asset
1. Patent portfolio development should be viewed in context of company's business goals.
  1. Patents may be viewed as tools for protecting the technological position of company in the market.
  2. Technological position of company is often best protected by seeking to develop systematically a portfolio of patents rather than by filing or acquiring on an ad hoc basis.
2. The value of a patent is typically based on the extent to which the patent is capable of foreclosing competing products from the marketplace.
  1. After all, a patent is an exclusionary right, namely, the right to exclude others from unauthorized making, using, or selling of the patented product or process.
  2. If the patented product or process has market value, the right to exclude competitors from making, using, or selling it will also have value.
3. Market value of a patent can be far higher than its book value, particularly
  1. if patent covers products or processes that have market value; and
  2. if there are no non-infringing alternatives available at competitive cost; and
  3. if the patent is likely to survive an attack on validity.
Developing the portfolio
1. Identify technology that has business importance
  1. to the company or
  2. to competitors (not necessarily the same as to the company).
2. Technology that is the most sophisticated is not necessarily the most important: it must be evaluated in relation to the company's mission, the potential to contribute to profit over the long term, and the strategic benefits to the company.
3. Assess the competition and the technological background.
  1. Employ prior art searches to gain information about
    1. level of development of competition, approaches of competition to solve various technological problems, and strategy of competition;
    2. risk of patent infringement suits; and
    3. state of the art (to establish areas for possible patent protection for company and for technical direction).
  2. Legal opinions can reduce risk of enhanced damages and attorneys' fees if infringement suit is brought.
4. Employ strategies to protect the technology.
  1. Patents
    1. Initial filings
      1. Filing can now be started by a series of one or more inexpensive informal provisional applications that are followed within a year from the first filing by a formal application.
      2. To avoid statutory bars preventing issuance of a valid patent, filing must be commenced within one year after first offer for sale of product or service embodying the invention and within one year after public use or disclosure of the invention; to protect foreign patent rights, the United States application must be filed prior to any public divulgation of the invention.
    2. Continuations, divisionals, continuations-in part, particularly where there is on-going development activity
    3. Foreign filings
      1. Expense requires careful planning of filing for maximum benefit in relation to cost.
      2. Consider use of Patent Cooperation Treaty and European Patent Convention to conserve costs.
  2. Trade Secrets
    1. Where patent coverage is unavailable; know how.
    2. Where harm of public disclosure makes patent coverage inadvisable.
    3. Caveats:
      1. Many "secrets" lose their proprietary status when employees change companies or when papers are published: a fertile area for litigation.
      2. Trade secrets offer no protection against independent development.
      3. A third party may be able to obtain patent coverage for the same technology and, under current law, prevent the company from practicing its own trade secret.
  3. Copyright
    1. Not in inherent conflict with patent protection.
    2. Valuable for computer software, but will not protect the theoretical approach.
    3. Protects artistic expression and hence can be used to protect packaging, designs, logos, documents, reports, etc. against copying.
  4. Trademark
    1. Can be used in connection with patented or proprietary products to help develop recognition of company as source, and may retain value even if patent or proprietary protection is lost.
    2. May also be available to protect non-functional aspects of product designs.
5. Consider "licensing in" pertinent technology and technology rights.
  1. Can provide valuable and sometimes core technology.
  2. Can work only if company avoids hostility to outside technology: "Not Invented Here" phobia.
  3. License payments do not have to be in form of traditional royalty installments over time. Consider, especially for start-up, but also for mature companies:
    1. Possible issuance of stock or stock options.
    2. Possible use of cross-license (i.e., also incorporating into the agreement a "license out") either of technology developed using the licensed-in technology (i.e., a "grant back") or of technology developed independently.
Realizing value from patents
1. Established companies often choose direct use of the protected technology, and use patents to maintain market exclusivity.
2. Licensing is available to a company regardless of size.
  1. Strategic considerations
    1. Licensing is too often ignored, but it is often difficult to find a suitable and willing licensee, particularly if the technology has not been commercialized.
    2. Licensing permits a company that has developed technology to concentrate on what it does best and to leave downstream tasks such as manufacturing and marketing to others.
  2. It is often valuable to include know-how and trademark rights in a license agreement.
    1. Know-how and trademarks can provide a basis for royalties to the licensor even if patent protection terminates or is unavailable.
    2. The licensee may need the know-how to speed product introduction and benefit from the trademark rights in marketing the products.
  3. Definitions are critical to the scope of the license.
    1. "Licensed Products" or "Licensed Processes" (or both)
      1. These are usually the subject of a license grant clause, giving the licensee the right to make, use, and sell them.
      2. They are usually referred to in a royalty clause, requiring the licensee to pay a royalty based on the dollar volume of them.
      3. They are themselves often defined only by reference to other definitions, which must be carefully drafted and scrutinized.
        
        They are commonly defined in terms of "Patent Rights".
        
        Unless their definition includes a reference to "Technology" or "Technical Information", the licensee may not have rights to know-how, technical information or trade secrets.
    2. "Patent Rights"
      1. Often these are defined by a reference to one or more issued United States patents or pending patent applications or both.
      2. Without a reference in the definition to "foreign counterparts", the licensee may not be granted rights under patents that have been granted outside of the United States.
      3. Without a reference to "continuation-in-part" patent applications, the licensee may not have been granted rights to practice improvements to the technology that have been developed after filing of the referenced patent application(s). (The right to improvements could be extremely important to the parties.)
    3. "Technology"
      1. This term may be used in connection with "Patent Rights" in defining "Licensed Products" and "Licensed Processes".
      2. Often it will be defined in reference to technical information contained in one or more technical disclosure documents, patent applications, or patents.
      3. Unless "improvements" are referred to in this definition or in a definition that refers to this definition, the licensee may not have a right to improvements.
    4. "Field"
      1. This term means "field of use", and commonly appears in a grant clause to restrict to a particular market or technological area the scope of rights granted with respect to Licensed Products or Licensed Processes.
      2. The definition of this term, if it appears, should be broad enough to give the licensee the rights it needs to commercialize the technology while (in the case of technology having wide application) preserving the right of the licensor to make other arrangements for different products and markets.
    5. "Net Sales"
      1. This term is usually a measure of gross revenue, although in unusual cases (which should be watched for because much harder to determine and verify) is defined in terms of net profit, i.e., gross revenue less overhead expenses.
      2. It is used in the royalty clause, wherein the royalty payable is determined as the product of the royalty rate and the Net Sales of Licensed Products (and any Licensed Processes).
  4. It is usually wise to provide for consulting to assist in the technology transfer.
    1. Payment for the consulting can be an additional source of revenue for the licensor.
    2. The licensee will want to argue that a certain measure of consulting should be provided as consideration for royalties payable.
  5. The royalty rate should be determined in relation to the financial structure of the market provide incentive to licensee to utilize and pay for the technology.
    1. The rate should be based on economic considerations in commercializing the technology.
    2. Consider manufacturing costs, reasonable general and administrative expenses, and the selling price to determine profit, and then a fair split of the profit, so the licensee makes a good profit after payment of the royalty.
    3. Use the profit split to determine the percent of Net Sales payable by licensee as a royalty.
    4. Royalties are usually reported and paid quarterly, with the licensor having the right to have the licensee's books reviewed by a certified public accountant.
  6. Assuring commercialization
    1. Up front payments may provide some incentives and compensate licensor earlier.
      1. License fee, often resisted by licensee, is a payment made in consideration for signing the license.
      2. Advance against royalties is a compromise characterization of an up front payment, permitting the licensee to credit the payment against future royalty obligations.
    2. Minimum royalties can be required by the licensor to be paid in each of a succession of years.
      1. The amount might increase over time.
      2. If the amounts are thoughtfully established, it may be hard for licensee to argue against payment, since there is usually some level of production below which it is not economically feasible for licensee to be utilizing the licensor's technology.
  7. Other considerations of importance
    1. Exclusivity (often essential to the licensee to justify the burden of commercializing)
    2. Sublicensing rights
      1. Often regulated by licensor
      2. Licensor can be compensated either by sharing in sublicense revenue or by requiring sublicensee to pay a royalty as if standing in shoes of the licensee
    3. Control over patent prosecution - to what degree can licensee become involved?
    4. Rights to institute and conduct infringement litigation against third parties and to retain any damages recovered
    5. Insurance, indemnification
    6. Dispute handling, arbitration
3. Strategic alliances and joint ventures are possible if the company is comfortable with a partner-like relationship. Partners require even more careful picking than traditional licensees, since a partnership is typically a more intimate relationship than one via a license agreement.
4. Sale of the business (via stock or asset sale) that is based on the technology is another alternative.
  1. Less involvement with acquirer of technology than in case of license.
  2. Caveat: any earn-out payments will depend on conduct of a business that seller will not likely be able to control.
5. Litigation should be evaluated for its utility in the context of its value to the company's business.
  1. To seek to maintain an exclusive position in the market.
  2. To seek to recoup damages (measured by at least a "reasonable royalty" or, in situations where there can be shown sufficient coverage by the patent of the market, lost profits) from unlicensed third party users of technology.
  3. To defend the company's right to enter a market dominated by patent holder.
Considerations preliminary to enforcement of patent rights
1. How difficult will it be to establish that claims of the patent(s) in question cover the offending technology?
  1. Literal infringement as a basis
    1. Requires correspondence between every element of each asserted claim of the patent(s) with a counterpart in the offending technology.
    2. Requires that each patent in question contain disclosure sufficient to enable a person of ordinary skill in the art to practice the invention (as defined by each asserted claim of such patent) without undue experimentation. 35 U.S.C. sec. 112 (first paragraph). (Sometimes called "enablement" requirement or requirement that the claims are properly "supported".)
    3. An element of a claim defined as a means for performing a specified function ("means-plus-function clause") covers only the corresponding structures disclosed in the patent for such element and equivalents of such structures. 35 U.S.C. sec. 112 (sixth paragraph).
  2. Doctrine of Equivalents as a basis
    1. Permits a patent holder to establish infringement of a claim by offending technology if it performs substantially the same function in substantially the same way with substantially the same result as the claimed subject matter. Graver Tank & Mfg. Co. Inc. v. Linde Air Prods. Co., 339 U.S. 605 (1950).
    2. Coverage under this doctrine depends heavily on the facts, and its scope is problematic. Hilton Davis Chemical Co. v. Warner-Jenkinson Co., Inc, 35 U.S.P.Q.2d 1641, 162 F.3d 1512 (Fed. Cir. 1995)(availability of doctrine of equivalents is a question of fact to be determined by a jury in a jury case), cert. granted, 1996 U.S. Lexis 1548, 64 U.S.L.W. 3574 (U.S. 1996).
  3. Wherever possible analysis of this question should be addressed with an actual sample of the offending technology at hand.
2. What is the risk that the asserted claims will be invalidated by a court?
  1. Although a patent (in fact, each claim of it separately) enjoys a presumption of validity, 35 U.S.C. sec. 282, a defendant who can produce prior art relating to the subject matter of the asserted claims - particularly prior art not considered by the Patent and Trademark Office when the patent was applied for - may be able to have the asserted patent claims invalidated by a court or, in a reexamination proceeding, by the Patent and Trademark Office.
    1. The invalidation may be on the ground that the claims are directed to subject matter that is anticipated by the prior art, 35 U.S.C. sec. sec. 102(b) (application must be filed within a year after any publication of the invention) and 102(a) (date of invention must precede publication of description of invention or public use or knowledge of invention) (an "anticipation" defense). Alternatively, invalidation may be on the ground that the claimed subject matter would have been obvious in light of the prior art, 35 U.S.C. sec. 103 (an "obviousness" defense); typically both grounds are asserted. U.S. patents can have prior art effect as of their filing date, even though they are not public when filed for. 35 U.S.C. sec. 102(e)(invention not patentable if previously described in a patent granted on an application filed in the U.S. before the invention date).
    2. To reduce the risk of a surprise attack on the patent(s) in question, it is usually advisable to procure a validity study of the asserted claims. A validity study involves a search of the prior art that is typically more comprehensive that a search conducted prior to filing of the patent application.
  2. Other bases of invalidation might also be asserted.
    1. Commercial or other public activities occurring too soon in relation to the filing dates of applications leading to the patent(s) in question. 35 U.S.C. sec. 102(b)(in public use or on sale more than 1 year before the filing date).
    2. Failure to make disclosure in the patent (i) sufficient to enable a person of ordinary skill in the art to practice the invention (as defined by each asserted claim of such patent) without undue experimentation (the "enablement" defense discussed in (IV)A(1)b above) or (ii) of the best mode contemplated by the inventor of carrying out the invention (the "best mode" defense). 35 U.S.C. sec. 112 (first paragraph).
    3. Inventors in the patent(s) were not the first to invent, 35 U.S.C. sec. 102(g), or the invention was derived from a prior inventor, id., and 35 U.S.C. sec. 102(f) (no patent if person not an inventor).
    4. Patent(s) obtained by inequitable conduct (often formerly called "fraud on the Patent Office"), such as failure by inventor, or company, or patent attorney to disclose a prior art reference bearing on patentability in the course of the administrative process of seeking a patent (i.e., during the patent "prosecution"). 37 C.F.R. sec. 1.56 and, e.g., FMC Corp. v. Manitowoc Co., 835 F.2d 1411, 1415 (Fed. Cir. 1987).
    5. Other defenses exist, including patent misuse, Windsurfing International, Inc. v. AMF Inc., 782 F.2d 995 (Fed. Cir. 1986), statute of limitations, 35 U.S.C. sec. 286 (six years), laches, and estoppel.
    6. The high risk that one or more of defenses such as these may be asserted requires that the "file wrapper" (i.e., the patent prosecution history) of the patent(s) in question be studied carefully before the assertion of an infringement claim. Similarly, the external circumstances surrounding the filing of the application (including for example, matters such as timing of offers for sale and public disclosure of the invention) should also be investigated.
3. Should remedial strategies be employed to strengthen the patents in question?
  1. Pre-enforcement evaluation should include (as suggested above) study of the asserted claims and the file wrapper, investigation of the external circumstances surrounding prosecution, and conduct of prior art searches. These activities can be expected to uncover potential weaknesses of the plaintiff's case.
  2. Where the weaknesses are serious enough, remedial strategies seeking to rewrite portions of the patent or to have prior art considered may be appropriate.
    1. Filing and prosecution of a reissue application. Can lead to broader patent claims if filed within two years after original grant of patent, 35 U.S.C. sec. 251, but only available if one can show an error arising without any deceptive intention.
    2. Reexamination proceeding is limited to consideration of effect of prior art on scope of claims. 35 U.S.C. sec. 301 et seq.
  3. Timing: can be simultaneous with maintenance of litigation, but a pending reissue or reexamination proceeding gives defendant grounds for seeking a stay of litigation pending outcome of the proceedings in the Patent and Trademark Office.
  4. Note that a similar effect may possibly be obtained if the company has pending a continuation in whole or in part of the application leading to the patent being asserted. In such a case, the pending application can be used as a vehicle to present hand-crafted claims directed to the offending technology and all known prior art can be cited to the Patent and Trademark Office in the course of prosecution of these claims.
4. What relief should be sought? The infringer's position in the marketplace vis-a-vis that of the patent holder may dictate the contours of the relief desired and to be sought.
  1. Damages: a reasonable royalty is a floor on recovery, 35 U.S.C. sec. 284; lost profits may be available if a sufficient showing can be made, Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir.), cert. denied, 439 U.S. 856 (1978); State Industries, Inc. v. Mor-Flo Industries, Inc., 883 F.2d 1573 (Fed. Cir. 1989), cert. denied, 493 U.S. 1022 (1990). If the infringement can be established as "willful", 35 U.S.C. sec. 284 and, e.g., Central Soya Co., Inc. v. Geo. A. Hormel & Co., 723 F.2d 1573 (Fed. Cir. 1983), they may be increased up to three times the actual damages; similarly in "exceptional" cases, attorneys' fees may be awarded. 35 U.S.C. sec. 285. Damages are available only from the point in time when the infringer has been given notice of infringement either (a) if a patented article is involved and it has been "marked" with the patent number or (b) by actual notice of infringement. 35 U.S.C. sec. 287(a); note the risk of a declaratory judgment action described in (IV)G(1)(b) below.
  2. Injunction: preliminary injunction is available only upon showing usually required: reasonable likelihood of success on the merits; irreparable harm to moving party if not granted; balance of hardships favoring moving party; and public interest served by grant. Cordis Corp. v. Medtronic, Inc., 780 F.2d 991, 994 (Fed. Cir. 1985). Permanent injunction ordinarily granted if infringement has been established. W.L. Gore & Associates, Inc. v. Garlock, Inc., 842 F.2d 1275 (Fed. Cir. 1988).
5. In the case of multiple potential defendants, who is an appropriate first defendant? There are several possibilities:
  1. The one causing the greatest harm.
    1. Makes the first case produce the most meaningful recovery if company is successful.
    2. May assert the most aggressive defense, making victory more expensive, elusive, and remote.
  2. The one most easily defeated.
    1. Provides an example to other defendants if company is successful.
    2. An easy victory may not deter more entrenched defendants and may only delay the time of a confrontation with them.
  3. Most or all of the potential defendants simultaneously.
    1. Provides an opportunity for resolution of all matters in a single setting.
    2. The opportunity is not likely to be easily realized, on account of the substantially increased magnitude and complexity of the litigation, which will entail substantially increased expense and human resources of the company and its counsel.
  4. Note that the decision to pursue a given defendant first should not preclude making appropriate demands on other defendants to avoid the assertion of equitable defenses by them. Hottel Corp. v. Seaman Corp., 833 F.2d 1570 (Fed. Cir. 1987).
6. How is the case going to be staffed? What are the expected costs of litigation?
  1. Counsel for trial should be familiar with patent law. Sometimes handled solely by patent counsel; sometimes general trial lawyers are used in association with patent lawyers.
  2. Experts are typically required. One or more technical experts for infringement questions. Where damages are at issue, one or more additional experts needed (for example, accountant, economist, marketing expert, licensing expert). Also, possibly a patent law expert for testimony as to claim construction, patent validity, and similar matters.
  3. Company staffing.
    1. Technology issues require interface between outside counsel and technical personnel of company.
    2. Business issues require interface between outside counsel and company management, accounting, and marketing personnel.
    3. Company's general counsel can appropriately manage this interface, which is important throughout: development of the case, discovery, trial preparation, and trial.
  4. Patent litigation that is contested with some vigor typically reaches dollar amounts into seven figures over time.
7. How shall the claim of infringement be asserted?
  1. Threaten litigation only if prepared to litigate.
    1. A hollow threat may ring hollow the first time, and will certainly ring hollow the second time. It may also provide the offending party with equitable defenses.
    2. Threatened litigation may give rise to an action for declaratory judgment by the threatened party in a forum of such party's choice, which may well be its home forum. Genentech Inc. v. Eli Lilly and Co., 998 F.2d 931 (Fed. Cir. 1993).
  2. A properly worded offer of a license may successfully avoid giving the offending party grounds for initiating a declaratory judgment action.
  3. The best forum, however, may not be a local forum, but rather the forum most likely to reach a fair and expeditious resolution of the dispute.
  4. Similarly, the best demand is not necessarily the one that avoids giving rise to an action for declaratory judgment.
    1. Consider filing suit without a prior demand: sometimes appropriate where speedy injunctive relief (temporary restraining order, for example) is needed. The suit itself can serve as notice for damages purposes. 35 U.S.C. sec. 287.
    2. Consider explicit threat of suit to make clear to offending party that it is expected to change its conduct forthwith.
8. What terms are appropriate for negotiation of settlement?
  1. Litigation as a tool for maintaining value of the company's technological position in the marketplace.
  2. Consider the likely recovery if litigation is successful times the estimated probability of success in relation to the estimated direct and indirect costs of the litigation.
  3. License royalty discussed in part III should probably be regarded as a floor for settlement purposes, assuming a good case on liability can be established


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