The setting is familiar: a large corporate asserter uses its patents against a smaller, high-growth company with no patents. Companies like Qualcomm, IBM, Nokia, and Microsoft regularly assert their patents. This case study describes how one of our clients included patent buying into their patent strategy to successfully defended against a corporate assertion by acquiring patents in the open market.
When the corporate asserter arrived at our client’s door, the asserter wanted: (1) to obtain both a cross-license and revenue from a patent license and (2) to increase our client’s purchases of the asserter’s products. Our client had virtually no patents of its own. To shift the negotiation, the decision was made to purchase defensive patents (counter-assertion patents). The reasons were that invalidating the asserter’s 10,000+ patents would be expensive and would take too long. Also, putting revenue from the asserter’s products and services at risk would change the dynamic of the negotiations to our client’s benefit.
We designed a buying program and were able to help our client acquire patents that significantly reduced the royalties owed. In the process, we also built an return on investment (ROI) model that helped the IP team communicate the financial value of the strategy to their executive and financial teams. The rest of this article will review the process used (see Figure 1) and the results in more detail.
Step 1. Identify target technology areas and market segments
Our goal wanted to acquire patents where the asserter’s products and services clearly infringed. A successful purchase would change the dynamics of the negotiation because the asserter would now owe a balancing payment to our client. We analyzed the asserter’s business and identified technology areas and market segments that had high revenue and high growth. We prioritized these areas because infringement here would have the greatest impact on the asserter.
Had our client had a patent portfolio, we could have supplemented our analysis by mapping each company’s portfolios against the other’s. Overlapping patent portfolio areas might then indicate technology areas for potential buying. However, we recommend some caution when using the overlaps. Patent portfolio overlaps are not the same as infringing revenue and we wanted to buy patents where the asserter makes the most revenue.
Step 2. Source relevant patent packages
With a well-defined technology filter, our client still needed a process for sourcing relevant patent packages. ROL Group continuously gathers data on available brokered packages in the market. The filter and the information on the already available packages allowed us to set up a search, and it allowed our client to efficiently get a list of relevant deals in the marketplace. Careful design of the sourcing process and filters reduced the costs. Additionally, the client could see what other companies, including the corporate patent asserter, had bought in the focus technology areas. The client greater insight into what patents and patent packages might work the best in a counter-assertion.
We then began sourcing new packages, but this takes time. So, we continuously sourced new packages (step 2) while evaluating and modeling previously received packages (steps 3 and 4).
Step 3. Sequence the evaluation of the patents
Detailed patent assessment and diligence are vital parts of the acquisition process, but it is also a costly part of that process. We worked with our client to sequence the diligence to reduce overall costs (see Figure 2). The diligence process was split into substeps: general technology filters, targeted technology filters, patent validity and prior art analysis, and building and testing EOUs (evidence of use or claim charts). At each stage, we asked whether, given everything that we know about the patent at this stage, it could still be used effectively in negotiations. If yes, the patent moved on to the next stage of diligence.
The criteria we used at each stage were company-specific and included factors such as specific technology area, deal price, remaining life of the patents, country coverage, and specific product infringed. By applying technology filters first (stage 3a and stage 3b), we reduced the number of packages undergoing the more detailed reviews in stage 3c and stage 3d by more than 75%. Thus, the client could spend time and financial resources focusing on packages with patents most likely to present a strong infringement case against the asserter.
Step 4. Assess the value of the patents and communicate the value to the executive team
In the next step, we built an ROI model to help our client present the financial return for patent purchase. The ROI model compared the expected return from buying different packages. The ROI model also supported better communications between the IP, financial, and executive teams.
Building a good ROI model is a key component of a successful counter-assertion strategy because it facilitates management’s understanding of the transaction and eases approval of the purchase.
Step 5. Buy the patents
In the final step, we bought the patents. Relative to corporate M&A, patent purchasing is straightforward. In this case, the seller was a smaller company with no licenses and no significant encumbrances. The representations and warranties were negotiated to ensure that the client could use the patents for counter-assertion.
For pricing, we used our database of over 90,000 patents across more than 4,000 patent packages to help determine a market price for the patents. You can find our annual reports here. Typically, purchases close within 30 days of making the formal offer to the seller.
Conclusions: Now what?
Our client bought a package of patents from the brokered patent market. The purchased patents forced the corporate asserter to rethink its plans and reduce its royalty demands. The purchase resulted in a positive ROI; specifically, the savings in royalties vastly exceeded the cost of the patents.
Buying patent packages in the brokered market for counter-assertion is a patent strategy that works. By following a clear process, you can efficiently purchase relevant patents with strong infringement cases against large corporate asserters. The purchases should focus on the asserter’s high-impact technology areas and market segments.