A Multiple Patent Case - Using Decision Trees to Make a Complex Case Simple

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LitigationRisk Management

Institute

A Multiple Patent CaseLitigation Risk ManagementAnalysis

How To Make A Complex Analysis Simple

Bruce L. Beron, Ph.D.


Institute © 2012 Bruce Beron Multiple Patent Case 5/12

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.

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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.

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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 patentDirect, Instantaneous Speed Control! Covered means and methods of controlling the speed of the motorsTorque Readout! Covered the means and method of the built-in controller to give a readout of the torque that the motor was applying•Power SavingCovered 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

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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 issuesWe 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.

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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 Claim PROB OverallAlternating Coil Scenario MarkmanConfiguration Outcome

0.85 Good 5 5 . % 1 Good0.65 Good

0.15 Bad 10.% 2 Bad123 Patent

0.35 Bad 35.% 3 Bad

0.65 Good 4 2 . % 4 Good0.65 Good

0.35 Bad 23.% 5 BadSpeed Control

0.35 Bad 35.% 6 Bad

0.75 Good 4 9 . % 7 Good0.65 Good

0.25 Bad 16.% 8 BadTorque Readout

0.35 Bad 35.% 9 Bad

0.55 Good 5 5 . % 10 GoodPower Savings

0.45 Bad 45.% 11 Bad

Magnetic Field Focus

Electrodynamic Braking Control

Nonlinear Interpolation

Current Detection

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The next trees deal with the likelihood of infringement, validity and willful infringement for two patent groups.

Patent Group Markman Infringed Valid Enhancement PROBOutcome Willful Scenario

0.20 Yes x 1.5 7 . % 10.75 Yes

0.80 No 2 7 . % 20.80 Yes

0.25 No 11.% 30.55 Good

0.20 No 11.% 4123 Enabling P Vld. & Infr.

0.60 0.20 Yes x 1.5 3 . 6 % 5P Vld. & Infr. 0.80 Yes

0 . 5 1 0.80 No 1 4 . % 60.50 Yes

0.20 No 4.% 70.45 Bad

0.50 No 22.% 8P Vld. & Infr.

0.40 0.15 Yes x 1.5 3 . 3 % 90.65 Yes

0.85 No 1 9 . % 100.80 Yes

0.35 No 12.% 110.42 Good

0.20 No 8.% 12Speed Control P Vld. & Infr.


0 . 3 7 0.85 No 1 3 . % 140.40 Yes

0.35 No 8.% 150.58 Bad

0.60 No 35.% 16P Vld. & Infr. 0.26

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Institute© 2012 Bruce Beron Title © 2012 Bruce Beron Title © 2012 Bruce Beron Title

These trees deal with the likelihood of infringement, validity and willful infringement for the other two patent groups.

0.15 Yes x 1.5 2 . 9 % 170.50 Yes

0.85 No 1 7 . % 180.80 Yes

0.50 No 20.% 190.49 Good

0.20 No 10.% 20Torque Readout P Vld. & Infr.


0 . 2 8 0.85 No 8 . % 220.50 Yes

0.65 No 17.% 230.51 Bad

0.50 No 26.% 24P Vld. & Infr.

0.18 0.15 Yes x 1.5 4 . 0 % 250.80 Yes

0.85 No 2 2 . % 260.60 Yes

0.20 No 7.% 270.55 Good

0.40 No 22.% 28Power Saving P Vld. & Infr.


0 . 3 7 0.85 No 9 . % 300.30 Yes

0.20 No 2.7% 310.45 Bad

0.70 No 32.% 32P Vld. & Infr.

0.24

Patent Group Markman Infringed Valid Enhancement PROBOutcome Willful Scenario



We can combine all of the individual patent groups to calculate overall likelihood of success or failure.

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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

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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%

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We can build a simple cash flow model to calculate the damage basis.

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To calculate these damages for each scenario we have to consider the combination of patents that are valid and infringed.

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Scenario Numbers refer back to the tree in slide 6



The damage tree for either 3 patents or the 123 patent and any other patent yields expected damages of $21M.

Number of Patents Lost % of Their Royalty Upfront Accessories Foreign OUTCOME PROBValid & Infringed Profits MS for Rate Payment Included Sales (millions) Scenario

Lost Profits Included

0.45 Yes $30M 80% of Time 95% of Time $43.9 8.% 10.25 Hi 100% 4.% 2 7

0.55 No 80% of Time 95% of Time $13.9 10.% 2

0.45 Yes $30M 80% of Time 95% of Time $38.1 17.% 30.75 Yes 2 2 0.50 Med 50% 4.% 2 2

0.55 No 80% of Time 95% of Time $8.1 21.% 4

Exp. Fut. Royalties 4 5 0.45 Yes $30M 80% of Time 95% of Time $33.4 8.% 53 . 0 % 0.25 Low 10% 4.% 1 7

0.55 No 80% of Time 95% of Time $3.4 10.% 63-4 Patents 2 1

123 + Other Non PS 0.75 Yes $20M 80% of Time 95% of Time $22.8 19.% 70.25 No 5.% 1 8

0.25 No 80% of Time 95% of Time $2.8 6.% 8

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The damages for other combinations of patents can be calculated similarly and are summarized here.

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ExpectedPresent Value

3-4 Patents $ 2 1 M123 + Other Non PS

Expected Future Royalties $45M3 . 0 %

2 Patents or 123 Only $ 1 2 M


1 Patent $ 8 M Not Power Saving


Power Saving Only $ 3 M


The Expected Future Royalties were included for negotiating an overall settlement with the defendants, but were considered separately from the trial outcomes.



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 Torque Readout Power Saving TRIAL PROBWillful Willful Willful Willful OUTCOME Scenario

(millions)

0.37 Valid & Infr. $23 2.5% 10.35 Valid & Infr. 2 3 P= 0.15

P= 0.15 0.63 No $23 4.% 20.37 Valid & Infr. 2 3

P= 0.15 0.37 Valid & Infr. $23 5.% 30.65 No 2 3 P= 0.15

0.63 No $23 8.% 40.51 Valid & Infr. 1 9

P= 0.2 0.37 Valid & Infr. $23 4.% 50.35 Valid & Infr. 2 3 P= 0.15

P= 0.15 0.63 No $23 7.% 60.63 No 1 7

0.37 Valid & Infr. $14 8.% 70.65 No 1 4 P= 0.15

0.63 No $14 13.% 81 3 Willful

Enhancement 0.37 Valid & Infr. $22 2.4% 91 . 5 0.35 Valid & Infr. 1 7 P= 0.15

P= 0.15 0.63 No $13 4.0% 100.37 Valid & Infr. 1 3

P= 0.15 0.37 Valid & Infr. $13 4.% 110.65 No 1 0 P= 0.15

0.63 No $9 7.% 120.49 No 7

0.37 Valid & Infr. $13 4.% 130.35 Valid & Infr. 1 0 P= 0.15

P= 0.15 0.63 No $9 7.% 140.63 No 4

0.37 Valid & Infr. $3 7.% 150.65 No 1 P= 0.15

0.63 No $0 13.% 16Expected Future Royalty Payments $ 3 5 M

Expected Future Royalty Rate 2 . 3 %

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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.

DrawbacksSome 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.

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A Multiple Patent Case - Using Decision Trees to Make a Complex Case Simple