Patent risk management has been moving up the boardroom priority list in recent years because the cost of ignoring the dangers posed by third party patents is simply too great. There is a cost to assessing that threat too, but with the right strategy you and your board can manage it and move on to the next priority.
One key reason for the increasing importance of patent risk management is because patent litigation is eye wateringly expensive. If you’re hit with a patent infringement action in the US, you can expect to be paying $1.6-2.8 million to defend a case according to the American Intellectual Property Law Association; maybe more for a high value case. If you settle, you may be able to reduce these costs, but you’ll likely have a chunky settlement fee. If you fight it to the end and lose, you could have multi-millions in damages to pay too. If that doesn’t paint a concerning enough picture, then it is worth knowing that according to Lex Machina, over half of patent infringement actions filed in the US are filed by patent trolls, companies that do not innovate themselves, but instead acquire patents for monetisation purposes. According to the Harvard Business Review, patent trolls cost defendants $29 billion per year.
Put simply, the potential costs you could be hit with if you don’t manage the risk of third party patents is so great it could kill your company. In fact, it is critical to realise that being hit by a patent infringement action is an inevitable part of being a successful technology company, but that doesn’t mean there is nothing you can do about these threats to your business. Therefore having a concrete patent risk management strategy is critical for any successful or aspiring business.
Starting your risk management journey
For early-stage and high-growth companies who don’t yet have a risk management strategy, the most common place to start is using a freedom to operate (FTO) approach. In short, FTO involves searching for patents that your company could infringe. If a risk is identified, you may also assess the likelihood of the owner of that patent asserting the patent against you. Will they see you as threat? Are they a litigious company? What would be the benefit to them taking action against you? If you conclude there is a risk then you may decide to take action to mitigate the risk. For example, you might design around the patent so that you no longer infringe. You might try to invalidate the patent. If it is a patent application, you might track the progress of the application through prosecution and choose to take action later when you know the scope of the granted claims.
Nothing is perfect
FTO analysis is usually the best approach for managing patent risk to an organisation as it enables you to thoroughly understand the threats that are out there and take action to reduce the harm they could cause to your business. However, it does have some downsides too.
According to WIPO, as of 2020 there were over 3.2 million patents. This is a lot of data to look through to identify risks. Any risk management strategy involves balancing the risk to your company and the cost of managing risk. In other words, looking through 3.2 million patents is practically impossible so you have to make some assumptions to limit the dataset and the patents that you consider as part of your analysis. You need to be aware of the assumptions you are making and the risk that then brings.
There are other downsides too, reviewing third party patents and assessing their risk to your business takes time. An FTO process will likely delay the date on which you can bring a product or service to market by a number of weeks and sometimes months. For some companies this timing doesn’t make too much difference, for others it can mean losing the critical ‘first mover advantage’, or could mean missing the opening of a key retail window, like Black Friday.
If you identify a patent of concern and decide that the only way to manage that risk is to design around the patent then your product will likely be suboptimal and/or delayed. This could impact long-term sales, delay a release date, and could also be demoralising for your R&D team - most innovative people want to create new products or services, not spend their time designing around competitors.
There are also some risks to knowing about the existence of patents. In the US if you infringe a patent that you knew about, then you risk having to pay treble damages. Sometimes, it is better just not to know what is out there.
If you are in a slow-moving industry where your product is likely to have high volume sales over a sustained period, such as in the medical field, then the positives of an FTO approach likely outweigh the downsides. However, if you are in a fast-moving industry such as consumer electronics or software you may want to take a different route for your risk management.
Need for speed
Another approach to risk management is not to understand and mitigate the risk, but to prepare for the consequences of the risk head on. In essence, by building up an arsenal of patent rights that you could use as a counterclaim to any patent infringement suit brought against you, business risk can be reduced. This approach is often known as Freedom of Action (FOA).
When an FOA approach is taken a relatively large portfolio of patents is built up as a defensive wall, organically and/or through acquisition. It is often wise to understand your key competitors and understand any other companies that might present a patent risk to your business. Then, build a portfolio of patents that those companies that present a risk to your business could infringe. If they then come to you with an infringement action in the future, you should be ready with a patent infringement counterclaim. This usually results in a negotiation and some money may change hands or cross-licensing agreement may be put in place as a result. Importantly, expensive litigation or large one-way settlements can be avoided. Furthermore, even if your company is hit with a patent infringement claim, your legal team will be ready to resolve the issue and your business can carry on operating as normal.
Advantageously, when businesses take an FOA approach the R&D team can focus purely on what they are best at – innovating. The whole premise of FOA is that your well-considered patent portfolio manages your risk. In addition, under FOA you are not going to be redesigning your products to deal with risks, nor are you waiting for any patent due diligence before bringing your product or service to market. In short, with FOA you can bring better products to market faster and you hedge the expense of risk management with the positive benefits of a patent portfolio.
Always remember though that nothing is perfect. It is costly to build such a defensive wall of patents that you can rely on for counterclaims. Furthermore, by the nature of FOA you are more likely to be sued and you need to be ready for and accepting of that. In addition, there is always a risk, however large a portfolio and well-prepared you are, that you don’t have any assets that read onto to the company bringing the action against you. There is a limit to how much time you can spend identifying the risk companies and developing or acquiring the assets you need to form your defence. That’s why many companies in fact take a blended risk management approach, for example where FOA is used for their established market or product, but FTO is used when entering a new lesser known market where the risk is higher.
The big troll dilemma
As well as FOA can work for reducing the risks amongst your competitors and other operating companies in your space, the world of patents has shown that one of the likeliest sources of a patent infringement suit against you won’t be from anyone that will appear on your usual competitive landscaping. Non-Practising Entities (NPEs), companies that generate revenue by licensing their IP or litigating their IP in return for damages or settlements, are the most likely companies to sue you. NPEs are sometimes referred to as patent trolls. Trolls can be considered those NPEs that often have patents of questionable validity and are willing to settle for a fee just less than the cost of fighting the case. By definition, NPEs or trolls have no product or service and have no activity that could infringe any of your patents. So how do you manage this risk?
It is common for companies to set aside a defensive IP budget, e.g. to cover the cost of settlements for patent infringement claims against them, or to file revocation actions against patents asserted against them. Some companies have a clear no settlement policy and aim to attack any bad patents brought against them out of principle. However, in practice, sometimes settlement can be cheaper than challenge, which is part of the strategy of many trolls because it is cheaper to pay their demand than the legal cost of invalidating their patent.
It’s also worth looking at the anti-troll community, which offers various solutions to help with risk management. There are organisations like Unified Patents, which kills troll patents for its members – by working together the cost of killing troll patents is reduced. Then there are companies like RPX, which acquires high risk patents for its community. Pooling funds to get bad patents in good hands can reduce risk. The final big one is LOT Network, where companies provide a licence to other members of LOT to prevent trolls using patents against LOT’s members if the patents were ever to get into trolls’ hands. Then there are numerous industry specific organisations doing similar things such as HIMPP (Hearing Instrument Manufacturers Patent Partnership) for the hearing aid community and COPA (Crypto Open Patent Alliance) for the crypto industry.
Whatever approach you take with NPEs and trolls, it is clear that an approach to dealing with trolls needs to form a key part of your risk management strategy. This is only going to become a more important issue as the Unified Patent Court comes into play in Europe providing another forum, beyond the US, where trolls could look to monetise their assets.
Take a strategy to your boardroom
When companies start to think about patents and IP, most start with a very inward-looking view. They consider what they have invented and what they could protect. This is really important; patents can be hugely valuable assets for a business because they provide a monopoly right to what could be a key differentiator for your business or even a game-changer for your industry. However, the IP issues that could kill your business and bring the discussion of IP to your boardroom are more likely to be the patents of other companies, not patents of your own company. So that’s why it is essential that you not only put a patent risk management strategy in place, but you find one that allows your company to thrive, whether it is minimising patent risk or enabling your business to bring better products to market faster.
If your company is successful, patent risks will get to boardroom level. We recommend you get your patent risk management strategy to the boardroom before a multi-million-dollar patent infringement lawsuit gets there first.
If you’d like to discuss your patent risk management strategy then please contact Nick Shipp, or your usual Kilburn & Strode advisor.