How to think about filing a major IP case with strategic business implications against a competitor using litigation decision tree analysis.

1. 34 Coquito Court, Menlo Park • California 94028 • Phone 650.854.1914 • www.litigationriskmanagement.com • bruceberon@lrmi.com
Litigation
Risk Management
Institute
Bruce Beron, Ph.D., President
Strategic IP Litigation
How to Make Better, Justifiable Decisions
Presented to Annual Meeting of LES, San Diego, Sept. 2003

2. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
IP litigation is often highly strategic, both in its conduct and
its consequences.
The litigation itself is complex, expensive and takes a long
time to resolve.
The potential outcomes of the trial can have a major effect on
the client’s business.
Having one fewer competitor in the market or being out of
the market for the particular products or services.
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3. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Strategic decision-making requires a very different
mind-set or perspective from operational decision-
making.
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For strategic decision-making, we need to focus on those
uncertainties that can change the decision.
Most operational/implementation issues are unimportant
for strategic decision-making.
These operational/implementation “details” may be very
important and must be taken into account once the
decision has been made and is being implemented.

4. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
A Litigation Strategy is a set of consistent decisions dealing
with all stages of litigation and business.
We define a strategy as a set of key decisions or policies, taken
consistently, that are intended to lead to the fulfillment of a goal,
vision, or direction.
Each decision, along with the interactions among the decisions,
can and should be made using the right decision tools.
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5. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
In order to design the best strategy, we need:
A way to make sure we are considering a broad enough range of
alternatives.
A way to understand risk.
A way to make the best decisions.
In order to make the best decisions,
we must understand the uncertainty!
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6. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
The art of litigation and business strategic decision-making
is the art of balancing risk and reward.
Business people and attorneys often do not have a clear definition
of Risk.
Requires a statement of likelihood like:
Could
Might
Will
Or, explicitly, .5, a probability (quantitative)
And requires a statement of consequence
Hit by a car
Lose our shirts
Or, explicitly, lose ten million dollars (quantitative)
.
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7. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Business people and attorneys do not always
consider rewards properly.
We almost always focus on the risks, the
downside.
There is someone’s name on the check.
The accounting system knows exactly how
much was misspent.
The potential upsides are never precise or
well defined: very few people get fired for
increasing sales by 30% when they should
have increased them by 40%.
The upside also requires a statement of
likelihood and a statement of consequence.
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8. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Case Study
The following case study is based on an actual case.
The presentation is greatly simplified here to focus on the concepts,
not the technical details of the analysis.
• Liability is shown for each side as a single node.
• In the actual analysis we considered validity, infringement, and damages
for many, many patents.
• Also not included here, but included in the original analysis, are
litigation and ongoing business costs.
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9. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Management at ABC kept revisiting a decision as to
whether or not to sue XYZ for patent infringement.
ABC had for many years been the dominant player in a
major technology market. After a few marketing blunders
and product entry delays, they had been eclipsed by XYZ
Corp., who had been so successful in the marketplace that
they held a near monopoly and maintained very fat
margins.
Engineers at ABC were sure that XYZ was infringing on
several of their fundamental patents and kept insisting that
management sue XYZ for patent infringement.
In attempted negotiations, XYZ consistently refused to
offer any meaningful royalties, insisting on licensing rights
to other IP in another area in which ABC held significant
patents and which had significant growth potential.
XYZ was a tough competitor and a scorched earth
litigator.
Furthermore, there was a fair amount of sales between the
companies in other areas.
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10. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Management at ABC kept revisiting a decision as to whether or
not to sue XYZ for patent infringement (continued).
XYZ would almost certainly counterclaim on their patents in the
same area.
Should we not prevail on one of our claims and they win and we would
face a significant risk of an injunction.
XYZ would become very difficult to deal with in other ongoing
business relationships with ABC.
In particular, a critical component of one of ABC’s biggest products was
supplied by XYZ and in short supply elsewhere. Should XYZ slow down
delivery or be uncooperative, there would be significant profit impacts
and management headaches for ABC.
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11. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
An influence diagram helps to make sure that we have
included all present and future business impacts as well as
the litigation consequences.
Net IP
Royalties From
This Litigation
Business Impacts
to ABC
One of Our
Patents Valid &
Infringed
Bus Unit
1
Bus Unit
2
Bus Unit
3
Bus Unit
4XYZ
Revenues
Injunction
XYZ Parts
Shortage
IP Royalties from
XYZ to ABC
Royalty
Rate
One of Their
Patents Valid &
Infringed
ABC
Revenues
IP Royalties from
ABC to XYZ
Royalty
Rate
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NPV to ABC

12. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
To understand and deal with risk and reward, we have to use
probabilities and structured scenarios.
A decision tree is a good way to show all the significant uncertain
events and their interrelationships.
We.Nail.Them
Yes
No
They.Nail.Us
No
Yes
No
Yes
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13. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
We need to know the dollar consequences of each scenario.
We.Nail.Them
Yes
No
They.Nail.Us OUTCOME
(millions)
No $2,000.
Yes $500.
No $0.
Yes -$500.
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14. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
The probabilities we will be using here are a
quantification of judgments, based on knowledge and
experience.
The probabilities we are trying to quantify are unique, one-
time events.
There is no right answer to a probability judgment.
The question we want answered is, “Will we a patent
infringement claim stick?”
For this question there is a correct answer, either “Yes” or “No”, we just don’t
know it.
If you assign a probability of .05 to an event and it happens, it
does not mean that the .05 was wrong.
These probabilities are different from things like the likelihood
of throwing a 7 with a pair of dice which can be right or wrong.
The best we can do is make a quantified, explicit judgment as
to the likelihood of an event.
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15. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
The probabilities we will be using here are a
quantification of judgments, based on knowledge and
experience (continued).
Words don’t work.
Extensive tests show they are ambiguous.
For one person, very likely means 90-100%, while to another it
may mean 60-70%.
We must combine several uncertainties to come to a decision.
We can’t do that with words, but we can with likelihoods
expressed as numbers - probabilities.
Probabilities change with new knowledge.
They shouldn’t change much unless something extreme or
unlikely happens that could influence our judgment.
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16. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
The probabilities we assign to each uncertain event can be
combined to determine the likelihood of any scenario.
We.Nail.Them
0.75 Yes
0.25 No
They.Nail.Us OUTCOME PROB
(millions)
0.30 No $2,000. 23.%
0.70 Yes $500. 53.%
0.30 No $0. 8.%
0.70 Yes -$500. 18.%
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17. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Our decision criterion will be the Expected Net Present
Value (ENPV) of monetary results.
Think of it as a probability weighted average.
Expected Value represents the average value —
if you could play many times.
We define Expected Value as the sum over all the
outcomes of each outcome times its respective
probability.
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18. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
At first glance, going ahead with the litigation, while
risky, has a positive ENPV.
950 =.3 x 2000 + .7 x 500
-350 = .3 x 0 + .7 x -500
625 = .75 x 950 + .25 x -350
6 2 5
We.Nail.Them
0.75 Yes 9 5 0
0.25 No - 3 5 0
They.Nail.Us OUTCOME PROB
(millions)
0.30 No $2,000. 23.%
0.70 Yes $500. 53.%
0.30 No $0. 8.%
0.70 Yes -$500. 18.%
As you follow a path through the tree, the numbers in the ovals represent the
expected value of the tree at that particular point, with all the previous decisions
made and subsequent uncertainties accounted for. The final value for the tree,
the expected win or loss is represented by the number in the oval at the far left
side of the tree.
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19. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Outside counsel advised that very few cases of this size had
ever gone to judgment, and usually settled for pennies on the
dollar.
•Management would see the case very differently:
• After several years of heavy legal bills.
• When the risks of losing became more apparent.
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20. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Taking into account the likelihood that ABC would really
stick to their guns to the very end, litigating, while still
positive, didn’t look like such a good idea.
The analysis shown here does not included litigation costs, business costs, and the cost of
management distraction which would make the decision much more of a toss-up.
7 9
Litigate
> Yes 7 9
No
Litigation
Settles
0.10 No
0.90 Yes
1
Dispute
Settles
1 9
0.10 Yes 1 1
0.90 No
Settlement
Amount
6 2 5
0.25 High
0.50 Medium
0.25 Low
0.25 High
0.50 Medium
0.25 Low
We Nail
Them
0.75 Yes 9 5 0
0.25 No - 3 5 0
They Nail OUTCOME PROB
Us (millions) Scenario
0.30 No $2,000. 2.3% 1
0.70 Yes $500. 5.% 2
0.30 No $0. 0.8% 3
0.70 Yes -$500. 1.8% 4
$100. 23.% 5
$25. 45.% 6
-$75. 23.% 7
$25. 2.5% 8
$10. 5.% 9
$0. 2.5% 10
$0. 90.% 11
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21. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Conclusion: After completing this study, senior management
made a final decision not to pursue it.
Unlike previous studies, this one came to a definitive
conclusion.
Management used the analysis to show those who had been
pushing for the suit, why it was not worthwhile to commence
such an action.
This saved senior management many hours and the distraction of
dealing with this decision again and again.
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22. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
Strategic Management of IP litigation and its business
consequences is the art of balancing risk and reward.
It is a way to:
Create innovative litigation and business strategies.
Measure the balance of risk and reward.
Seize the strategies with the best trade-offs.
Clearly communicate the rationale for the decision in
to all stakeholders.
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23. Litigation
Risk Management
Institute
© Bruce Beron 2014 LES 2003 Strategic IP
For further information, please:
Visit our website at:
www.litigationriskmanagement.com
Contact:
Bruce Beron
bruceberon at lrmi dot com
650.854.1914
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