A Multiple Patent Case - Using Decision Trees to Make a Complex Case Simple
- 1. Litigation Risk Management Institute A Multiple Patent Case Litigation Risk Management Analysis How To Make A Complex Analysis Simple Bruce L. Beron, Ph.D. 34 Coquito Court, Menlo Park • California 94028 • Phone 650.854.1914 • www.litigationriskmanagement.com • bruceberon@lrmi.com
- 2. Patent litigation with multiple patents and multiple claims can be very complex and difficult to model with decision trees. The approach presented here shows how to break the analysis into understandable (and presentable) pieces for each stage of the case for each patent. We will also show how to put these pieces together to come to an understanding of the overall value of the case. This approach also leads to insights as to which elements of the case are most critical. Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 2
- 3. National Precision Motor (NPM) had been having great success with its new line of micro motors. The motors were used in medical equipment, dental equipment and in semiconductor production machinery. Recently, United Micro Motors (UMM) had announced a new line of motors that touted features similar to NPM’s line. Sales growth of these motors for NPM had stalled, while UMM’s sales continued to grow. Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 3
- 4. NPM filed a patent infringement action against UMM, alleging infringement of 7 patents which fell into 4 areas. ‘123 Basic Patent ! Covered the armature configuration on the new motors. ! Clearly an enabling patent Direct, Instantaneous Speed Control ! Covered means and methods of controlling the speed of the motors Torque Readout ! Covered the means and method of the built-in controller to give a readout of the torque that the motor was applying •Power Saving Covered new circuitry in the controller that reduced power consumption under heavy load conditions by 35% Most customers were not concerned with this feature, as the motors drew very little power to start with. The sales force insisted that this was an important feature that they touted in their sales and marketing Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 4
- 5. Discovery is almost complete and a Markman hearing is imminent. USM has approached NPM’s in-house counsel about settling the case. We are helping NPM evaluate their case and decide what their reservation price should be in the upcoming settlement negotiations. We will need consider • Markman issues • Infringement, validity and willful infringement • Damages • Depend on which patents valid and infringed • Royalty rate determined by jury • Sales to which royalty applies To put all of this in a single tree for four patent groups would make the tree both intractable and useless for gaining insight into critical issues We will attempt to look at each of the factors in separate trees and pass along the relevant probabilities and outcomes to the other trees to end up with a relatively simple tree. Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 5
- 6. The first tree we will need to develop is the Markman or claim construction tree, as there are some interactions among the claim construction issues. Patent.Group Claim Alternating Coil Configuration Claim PROB Magnetic Field Focus 0.85 Good 55.% Overall Scenario Markman Outcome 1 Good 10.% 2 Bad 35.% 3 Bad 42.% 4 Good 23.% 5 Bad 35.% 6 Bad 49.% 7 Good 16.% 8 Bad 35.% 9 Bad 55.% 10 Good 45.% 11 Bad 0.65 Good 0.15 Bad 123 Patent 0.35 Bad Electrodynamic Braking Control 0.65 Good 0.65 Good 0.35 Bad Speed Control 0.35 Bad Nonlinear Interpolation 0.75 Good 0.65 Good 0.25 Bad Torque Readout 0.35 Bad Current Detection 0.55 Good Power Savings 0.45 Litigation Risk Management Institute Bad © 2012 Bruce Beron Multiple Patent Case 5/12 6
- 7. The next trees deal with the likelihood of infringement, validity and willful infringement for two patent groups. Patent Group Markman Outcome Infringed Valid Enhancement PROB Willful Scenario 0.20 Yes x 1.5 7.% 1 27.% 2 11.% 3 11.% 4 3.6% 5 14.% 6 4.% 7 22.% 8 3.3% 9 19.% 10 12.% 11 8.% 12 2.3% 13 13.% 14 8.% 15 35.% 16 0.75 Yes 0.80 No 0.80 Yes 0.25 No 0.55 Good 0.20 No 123 Enabling P Vld. & Infr. 0.60 0.20 Yes P Vld. & Infr. 0.51 x 1.5 0.80 Yes 0.80 No 0.50 Yes 0.20 No 0.45 Bad 0.50 No P Vld. & Infr. 0.40 0.15 Yes x 1.5 0.65 Yes 0.85 No 0.80 Yes 0.35 No 0.42 Good 0.20 No Speed Control P Vld. & Infr. 0.52 0.15 Yes P Vld. & Infr. 0.37 x 1.5 0.65 Yes 0.85 No 0.40 Yes 0.35 No 0.58 Bad 0.60 No P Vld. & Infr. Litigation Risk Management Institute 0.26 © 2012 Bruce Beron Multiple Patent Case 5/12 7
- 8. These trees deal with the likelihood of infringement, validity and willful infringement for the other two patent groups. Patent Group Markman Outcome Infringed Valid Enhancement PROB Willful Scenario 0.15 Yes x 1.5 2.9% 17 17.% 18 20.% 19 10.% 20 1.3% 21 8.% 22 17.% 23 26.% 24 4.0% 25 22.% 26 7.% 27 22.% 28 1.6% 29 9.% 30 2.7% 31 32.% 32 0.50 Yes 0.85 No 0.80 Yes 0.50 No 0.49 Good 0.20 No Torque Readout P Vld. & Infr. 0.40 0.15 Yes P Vld. & Infr. 0.28 x 1.5 0.35 Yes 0.85 No 0.50 Yes 0.65 No 0.51 Bad 0.50 No P Vld. & Infr. 0.18 0.15 Yes x 1.5 0.80 Yes 0.85 No 0.60 Yes 0.20 No 0.55 Good 0.40 No Power Saving P Vld. & Infr. 0.48 0.15 Yes P Vld. & Infr. 0.37 x 1.5 0.80 Yes 0.85 No 0.30 Yes 0.20 No 0.45 Bad 0.70 No P Vld. & Infr. 0.24 Litigation Risk Management Institute © 2012 Bruce Beron Title
- 9. We can combine all of the individual patent groups to calculate overall likelihood of success or failure. Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 9
- 10. We now need to consider the damages we would be awarded if the patents are found to be infringed and valid. Damages fall into three categories • Lost Profits • Not automatic, uncertain • Our damages are the profits we would have made on sales we lost because of the infringing product Need to calculate what our market share would have been had the infringing product not been in the market •We need to prove the infringer’s sales •We need to prove our incremental contribution to margin • Reasonable Royalties • This would be applied to those sales for which we do not get lost profits. • Up Front Payments Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 10
- 11. We also need to take into account the damage basis. •Do the royalties and lost profits apply to: • Foreign sales • 30% of their sales and ours are foreign • Motor mounts • 80% of our sales include motor mounts which add 20% to our revenue at an incremental contribution to margin of 50% Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 11
- 12. We can build a simple cash flow model to calculate the damage basis. Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 12
- 13. To calculate these damages for each scenario we have to consider the combination of patents that are valid and infringed. Scenario Numbers refer back to the tree in slide 6 Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 13
- 14. The damage tree for either 3 patents or the 123 patent and any other patent yields expected damages of $21M. Number of Patents Valid & Infringed Lost Profits % of Their Royalty MS for Rate Lost Profits Upfront Accessories Payment Included Foreign OUTCOME PROB Sales (millions) Scenario Included 0.45 Yes $30M $13.9 10.% 2 80% of Time 95% of Time $38.1 17.% 3 80% of Time 95% of Time $8.1 21.% 4 80% of Time 95% of Time $33.4 8.% 5 80% of Time 95% of Time $3.4 10.% 6 80% of Time 95% of Time $22.8 19.% 7 80% of Time 95% of Time $2.8 6.% 8 27 22 17 21 0.25 No Litigation Risk Management Institute 95% of Time 0.75 Yes $20M 4.% 80% of Time 0.25 No 3-4 Patents 123 + Other Non PS 0.25 Low 10% 1 0.45 Yes $30M 45 3.0% 4.% 8.% 0.55 No Exp. Fut. Royalties 0.50 Med 50% $43.9 0.55 No 22 95% of Time 0.45 Yes $30M 0.75 Yes 4.% 80% of Time 0.55 No 0.25 Hi 100% 5.% 18 © 2012 Bruce Beron Multiple Patent Case 5/12 14
- 15. The damages for other combinations of patents can be calculated similarly and are summarized here. Expected Present Value 3-4 Patents 123 + Other Non PS $21M Expected Future Royalties $45M 3.0% 2 Patents or 123 Only $12M Expected Future Royalties $45M 3.0% 1 Patent Not Power Saving $8M Expected Future Royalties $30M 2.0% Power Saving Only $3M Expected Future Royalties $15M 1.0% Litigation Risk Management Institute The Expected Future Royalties were included for negotiating an overall settlement with the defendants, but were considered separately from the trial outcomes. © 2012 Bruce Beron Multiple Patent Case 5/12 15
- 16. The separate pieces of the analysis can now be combined in one relatively straightforward and easy to understand tree that shows that our expected trial outcome is $13M. 123 Patent Speed Control Willful Torque Readout Willful Willful Power Saving TRIAL PROB Willful OUTCOME Scenario (millions) 0.37 Valid & Infr. 0.35 Valid & Infr. P= 0.15 0.37 Valid & Infr. $23 5.% 3 8.% 4 $23 4.% 5 $23 7.% 6 $14 8.% 7 $14 13.% 8 $22 2.4% 9 $13 4.0% 10 $13 4.% 11 $9 7.% 12 $13 4.% 13 $9 7.% 14 $3 7.% 15 $0 13.% 16 P= 0.15 19 P= 0.2 0.37 Valid & Infr. 0.35 Valid & Infr. 23 P= 0.15 0.63 No P= 0.15 0.63 No 17 0.37 Valid & Infr. 0.65 No 14 P= 0.15 0.63 No Willful Enhancement 1.5 0.37 Valid & Infr. 0.35 Valid & Infr. 17 P= 0.15 0.37 Valid & Infr. P= 0.15 0.63 No 13 P= 0.15 0.37 Valid & Infr. 0.65 No 10 P= 0.15 0.63 No 7 0.37 Valid & Infr. 0.35 Valid & Infr. 10 P= 0.15 0.63 No Expected Future Royalty Payments Expected Future Royalty Rate Litigation Risk Management Institute 2 $23 23 0.63 No 0.49 No 4.% $23 0.63 No 0.37 Valid & Infr. 0.65 No 13 1 P= 0.15 23 P= 0.15 0.51 Valid & Infr. 2.5% $23 23 $35M 2.3% P= 0.15 0.63 No 4 0.37 Valid & Infr. 0.65 No 1 P= 0.15 0.63 No © 2012 Bruce Beron Multiple Patent Case 5/12 16
- 17. This approach leads to an expected value of a complex case as well as concise overview of the range of possible outcomes and their likelihoods. There are several advantages and some drawbacks to this approach to the analysis. Benefits Each set of issues can be considered for each patent group. The trees remain relatively simple and straightforward. It is easier to get an overview understanding of the case. Drawbacks Some conditionality may be lost. It is difficult to calculate a probability distribution over all the outcomes. It is somewhat harder to do sensitivity analysis. Generally, benefits greatly outweigh the drawbacks. Litigation Risk Management Institute © 2012 Bruce Beron Multiple Patent Case 5/12 17