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  1. Business and Legal Strategies for Dealing with “Love Letters” Which Assert Infringement of U.S. Patents G & B Seminar2006 Daniel Moon

  2. What is a Love Letter?

  3. A Love Letter is… …A letter making your company aware that a U.S. patent exists, and that you need to pay for the privilege of using the patent, or that you must stop infringing activities.

  4. Why do we care about Love Letters? It is simple…

  5. Why? Money …Money …Money ¥ ¥ ¥

  6. Exemplary Damages Awarded by U.S. Courts through the Years $56 million Pfizer v. International Rectifier 1982 $205 million Smith Int’l v. Hughes Tool 1986 $873 million Polaroid v. Kodak 1991 $96 million Honeywell v. Minolta 1992 $22 million Conair Rotron Inc. v. Matsushita 1994 $68 million Fonar v. General Electric 1997 $505 million IGEN International Inc. v. Roche Diagnostics, GMBH 2002 $521 million Eolas v. Microsoft 2003 $29.5 million MercExchange v. eBay 2003 $25 million St. Clair v. Sony 2004 $128 million Freedom Wireless v. Boston Communications 2005 $51 million Medtronic v. BrainLAB AG 2005 $54 million NTP v. Research In Motion ($600 million settlement) 2006

  7. “SOFT” Love Letters A love letter can be soft, in the form of an offer to license a patent.

  8. Sample “SOFT” Love Letter In this case, patentee has not likely risked the counterattack of a declaratory judgment action.

  9. “HARD” Love Letters Or… a love letter can be hard, threatening an infringement lawsuit if you do not stop infringing and/or pay the money demanded by the patentee.

  10. Sample “HARD” Love Letter In this case, patentee has likely risked filing of a declaratory judgment action.

  11. “GRAY” Love Letters Or…a love letter can be somewhat “intermediate,” in other words, not hard or soft – a “gray” letter.

  12. Sample “GRAY” Letter This letter puts the recipient on notice of Company A’s patent, and insists that the recipient stop infringing, but does not expressly mention that Company A will go to court to enforce its patent.

  13. Love Letters… But whether the “love” letter that you receive is soft, hard, or gray, you can be certain about one issue when you receive it…

  14. Money…Money…Money The patent owner wants… $ …¥ …€

  15. Why Worry about Love Letters? • Willful infringement • Starts damages running if no marking • Up to treble (i.e., triple) damages • Attorney’s fees • Injunctions against sales/manufacture/importation in U.S. • Temporary • Permanent • DO NOT IGNORE !

  16. SRI v. ATL Washington • SRI International Awarded Damages In Patent Infringement Case MENLO PARK, Calif. (May 20, 1996)-SRI International, a nonprofit corporation, today announced that the U.S. District Court for Northern California has awarded SRI damages of $27.9 million, plus interest of approximately $4.5 million and legal fees, in a patent infringement lawsuit against Advanced Technology Laboratories (ATL). The court trebled the $9.3 million awarded in compensatory damages having found that ATL willfully infringed SRI's patent. • Infringement Damages - $9.3 million • Total Damages – $32.4 million

  17. How Should Your Company Deal With/Respond to a Love Letter? • Practical issues • Legal issues

  18. I. Practical Issues You should… A. Evaluate risk B. Establish and flexibly execute strategy to minimize risk • Remember — this is a business matter!

  19. A. Evaluating The Risk • What does the letter say/mean? • Who is asserting the patents? • What is the value of the patents to your company?

  20. 1. What Does the Letter Mean? • Details of letter • Patent Owner’s Request • Reading “between the lines” • Any Relevant Information Revealed?

  21. A. Details of Letter • Specific Patents identified? • Specific products identified? • Is it Notice of Patent for willfulness? • Is it sufficient actual notice for damages to start? • Does it provide a basis for you to file a declaratory judgment?

  22. B. Patent Owner’s Request/Demand • Past damages • Future royalties • Immediate cessation of infringing activity • Information about process used – 35 U.S.C. § 295

  23. C. Reading Between the Lines • Real meaning of letter • Tone of letter – “Scare Tactics” • Start licensing discussions? • Stopping sale of competitor’s products? • Desire cross-licensing of your patents?

  24. D. Any Relevant Information Revealed? • Existing Licenses/Licensees • Related Litigation • Foreign Patents

  25. 2. Who Is Asserting The Patents? • Types of Patent Owner • U.S. or foreign company (e.g., potential ITC issues) • Publicly traded company • Competitor • Manufacturer • Patent Licensing Company • University • Individual B. Original Assignee or Purchaser?

  26. 2. Who Is Asserting The Patents? C. Size of Owner D. Attorney Involved? If so, what type? 1. In-house 2. Contingency Fee Based 3. Hourly Fee Based 4. Previously Involved in Matter? E. Past Enforcement History 1. Aggressive 2. Negotiation-based

  27. 2. Who Is Asserting The Patents – Identifying The Owner’s Goals A. Royalty sought 1. Lump sum 2. Running royalty rate (i.e., per unit/volume) B. Market share 1. Injunction threat – possible change in law 2. ITC action

  28. 2. Who Is Asserting The Patents C. Study owner’s financial status 1. SEC reports (i.e., l0k) for publicly traded company 2. Analyst reports 3. News reports D. Relationship to your company 1. Customer? 2. Supplier? 3. Joint venturer?

  29. 3. What Is The Value of The Patents To Your Company? • Patent Issues • Valuation Issues

  30. A. Patent Issues • “Vetting” the Asserted Patent(s)/Limitations on Possible Damages • Non-Infringement • Invalidity • Unenforceability

  31. Patent Issues: “Vetting” The Asserted Patent(s) • It is important to properly scrutinize an asserted patent, to ensure that it is in fact valid, that no problems or weaknesses have arisen during the procurement of the patent, and to check for any other factors which may weaken the asserted patent. • A standard process for checking each of the most common such factors should be employed, using a checklist, for example:

  32. Patent Issues – Vetting the Patent/Limitations on Damages • Maintenance fees paid? • Terminal disclaimers filed? • Reissues/Reexaminations filed?

  33. Patent Issues - Vetting the Patent d. Litigation status (1) District Court (2) I.T.C. (3) Foreign Litigation e. Interferences? f. Certificates of correction? (1) Only effective before litigation starts – See, e.g., Southwest Software v. Harlequin Ltd., 226 F.3d 1280, 1294, 56 USPQ2d 1161, 1172 (Fed. Cir. 2000) and 35 U.S.C. § 254

  34. A. Patent Issues – Vetting the Patent g. Status of foreign counterparts h. Continuing applications? i. Assignment/Ownership Status Correct? j. Patent extensions (e.g., pharmaceuticals) k. Patent Term Adjustment l. Licenses m. Previously asserted? n. Attorneys previously involved?

  35. A. Patent Issues – Evaluating Infringement 2. Evaluating infringement a. Review product b. Review prosecution history c. Review relevant court decisions – especially Markman results which interpret claims d. Use U.S. standards to evaluate infringement

  36. Patent Issues – Evaluating Invalidity 3. Evaluating invalidity a. Prior uses/sales/knowledge b. Foreign cited prior art c. Prior products/brochures d. Inventors’ own prior work e. Magazines/Tradeshows/Speeches f. Use U.S. standards g. Disclosure of Best Mode/Enablement – i.e., §112 problems h. Prior litigation

  37. A. Patent Issues - Unenforceability • Unenforceability • Duty of Disclosure Satisfied – 37 C.F.R. § 1.56 – What Information Can Be Used As Basis For Arguing Inequitable Conduct? • All Prior Art Known by Inventor • Previous Patents/Publications of Inventor or Company • Prior Sales/Sales Efforts in the United States • Work by Competitors Known by Inventor/Company • Joint Efforts with Other Companies • Prior Art Cited in Foreign Counterpart Applications

  38. A. Patent Issues - Unenforceability • Unenforceability b. Failure to disclose best mode • Determine if actual product existed when application filed • If so, review application for missing features c. Bad Affidavits (§ 131, § 132) d. Specific Problems with Execution of Documents 1)ImproperlyExecuted by Others 2) Misdating 3) Executed in Blank – no knowledge of obligations

  39. B. Valuation Issues • Existing licenses a. When executed • Royalty rate or payments • Non-monetary “payment”, e.g., cross-licenses • Type of existing licensees (e.g., competitors, suppliers) • Relevant litigation • Impact on your decision/strategy • Waiting until decision reached — can increase/reduce payment • Settling during other litigation — more certain result obtainable • Status • Obtain owner’s arguments • Jury Verdict(s) • Expert Opinions

  40. B. Valuation Issues 3. Possible time limitations on damages • Patent marking – 35 U.S.C. § 287? • Actual notice provided in love letter? • Possible limits on past damages • Damages only due after actual or constructive notice 4. Expiration/Date Issues • Continuing Applications-other patents with similar claims • Terminal Disclaimers • Extensions/Patent Term Adjustments • Maintenance Fees – possible intervening rights – 35 USC § 41 • Reissue Applications – possible intervening rights – 35 USC § 252

  41. B. Valuation Issues 5. Laches and equitable estoppel – possible limit on past damages (1) When did patent owner become aware of your sales? (2) Did patent owner ever send earlier threat, and fail to follow up? What about previous owner? (3) Possible Effects of Laches/Equitable Estoppel • No damages owed prior to litigation – Laches • No damages owed at all – Equitable Estoppel

  42. B. Valuation Issues 6.Importance of patent(s) a. Technically - Key component? b. Value-added - only a minor component? – Possible Change in Law c. Is design-around possible? (1) Timing issues (2) Cost issues

  43. B. Valuation Issues 7. Past Damages – Can only recover for six years past • 35 U.S.C. § 286 • Except as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action.

  44. B. Valuation Issues 8. Risk of injunction (temporary/permanent/ITC) 9. Other licensees in industry a. Similar components? b. Similar products? 10. Possibility of cross-license a. Value of your portfolio b. Covering your competitors’ products (1) Develop your own effective prosecution strategy!

  45. C.Establish and Flexibly Execute a Strategy • Identifying your company’s goals • Negotiating with patent owner • Fighting against patent owner

  46. 1. Identifying Company’s Goals • Minimize overall payment (1) Use lump sum: (a) Buy down royalty rate (b) One-time payment can allow unlimited (or fixed amount of) sales (c) Useful when “unexpected sales” increase occurs (2) Use running royalty: (a) When future sales are unpredictable/flat/lower (b) When “design around” to avoid patent is possible (c) When company wants/needs to “pay over time” for financial/business reasons

  47. 1. Identifying Company’s Goals B. Set precedent for future matters(1) Do not want to be viewed as “easy” target – typical U.S. view of Japanese companies (2) Fighting in court when you believe you are right (3) Becoming the “last domino” approached, if at all

  48. 1. Identifying Company’s Goals C. Timing of settlement – when many companies are being threatened 1. Advantage of being first a. The “Domino” Theory – Helping determine the outcome by settling early – bring the “first domino” b. Most favored licensee (i.e., market/price advantage) – getting the “best” deal (e.g., credit for later settlers) 2. Advantage of not being first a. Will never be a “lone” licensee b. Initial Price Advantage in sales/Possible Gain in Market Share 3.Needs of Patent Asserter a. End of Year/closing? b. Personal Goals of Negotiators

  49. 1. Identifying Company’s Goals D. Timing of litigation when many companies accused (1) Advantages of being first (a) “Untested” patent owner (b) Surprise factor (c) Court more open to defenses (2) Disadvantages of being first (a) Unknown claim construction (b) No benefit from other defendants efforts

  50. 2. Negotiating With Patent Owner A. Timing of initial response • Need enough time to adequately study issues and develop defense • Early Letter may “buy” time – inform patent owner that you are “engaged” for settlement discussions