Patent Settlement and Licensing Resource

 

Patent litigation is overwhelmingly resolved by settlement rather than decision by a judge or jury.  The parties to patent disputes find settlement preferable to litigation year in and year out.  That is why the parties and their lawyers should be expert at settlement.

 

John Schlicher has developed a way to analyze the economic forces governing settlement decisions.  Most people consider economic effects when deciding whether to litigate or settle.  This approach provides a quick, inexpensive way to help the parties with that part of the decision.  The approach involves collecting the necessary facts, making the necessary estimates, and translating the facts and estimates into dollar amounts showing whether various types of agreements are or are not in the economic interests of the parties.  The approach is described in a paper.  The approach has been implemented with EXCEL.

 

The paper has three parts.  Part 1 describes the economic theory of patent settlements.  Part 2 describes how to apply the theory to evaluate the likelihood and terms of settlement in a particular situation and assemble the necessary information.  Part 3 describes the empirical data on how patent litigation works.

 

Theory.  Part 1 describes the standard model of settlement decisions adapted to fit patent actions and the settlement and other options available in the patent context.  One settlement option includes a license for the future.  Therefore, part 1 describes the forces that influence the decisions to grant and accept a license and royalty amounts derived from each party’s view of the commercial and litigation situations.  This model includes an optional factor describing how a party’s aversion or preference for risk influences the perceived value or cost of litigation.  Part 1 describes the economics of settlement based on the parties’ perceptions of the effects of a judgment or settlement on the relations between them.  A patent rarely affects only the patent owner and one accused infringer.  The decisions to settle one action or grant one license are usually influenced by the parties’ perceptions of the impact of a judgment, settlement, or license on their relations with other companies.  Part 1 also describes settlement decisions when these added forces are at work.

 

Application.  Part 2 explains how the formulas developed in part 1 are applied to settlement decisions in particular situations.  This analysis includes an assessment of damages if the action is not settled.  Damages may be determined in the ways commonly used today and, if a party wishes, in the way damages should be determined.  The formulas are used to generate dollar amounts showing whether various agreements are in the economic interests of the parties.  These amounts are shown in charts generated in EXCEL.  These charts show whether the economic conditions for settlement are likely to be satisfied, the dollar magnitude of the important factors from the perspectives of the parties, and the gap preventing an agreement or the range of financial terms within which settlement is possible.  Some sample charts follow.  Any change in a party’s view on one fact or estimate may be easily reflected in the amounts of ultimate importance.  Part 2 illustrates the approach with several specific examples.  Part 2 also describes the tables and instructions for assembling the necessary facts and estimates from each party.

 

Data.  Part 3 describes the available empirical data he and others have developed on how patent litigation works.  It answers questions such as these.  How frequently are patent actions settled?  In what manner are those actions settled?  How much time passes from filing to settlement?  At what stage in the litigation process are actions settled?  Who win and who loses, if there is no settlement?  Who wins and loses on what issues?  How long does it take to obtain a judgment?  What are the damages?  How often are damages increased, and by how much?  How often are attorney’s fees awarded?  Are there trends in any of these factors?   This data should help people form realistic expectations about patent litigation.

 

Uses.  There are several ways to use this approach.  One is simply to understand the concepts and consider them in evaluating settlement.  Some actions are not going to be settled on any terms and the basic concepts are enough to identify those actions.  The other is apply the approach in a quantitative way.  This helps with the actions where settlement is possible.

 

Settlement prospects ultimately depend on how both patent owner and potential infringer perceive the situation.  Both parties to a dispute could apply the approach in a settlement negotiation.  Each party could apply it without revealing its view of the facts or estimates to the other party.  Using the approach in this way would help avoid the problems arising when one party is basing its settlement proposal on something other than economic results or sensible analysis of the options.  Both parties could also use it in connection with mediation or some other dispute resolution process.  If each party provided its views of the facts and the estimates in confidence to a neutral person and that person applied this approach, this person could assess settlement prospects and identify the nature and magnitude of the changes in the views of the parties needed for an agreement.  This person could then use that information in any way the parties desired.

 

This approach may also be used by one party to analyze settlement options, develop its bargaining positions and bottom line, and provide a sound basis for a business decision on a proposed settlement.  A party could use this approach to explain to the other party the sensible basis for its proposal.  A party may also use this approach to compare the financial terms the other party is proposing with facts and estimates that would be consistent with those terms.  If the other party is proposing terms consistent only with erroneous facts or unrealistic estimates, the approach may help demonstrate to the other these unnecessary barriers to an agreement.  

 

JOHN W. SCHLICHER

PATENTS, PATENT LITIGATION, PATENT DISPUTE RESOLUTION AND

SETTLEMENT, LICENSING, ANTITRUST, LAW AND ECONOMICS