Granting a License—Pitfalls to Avoid (Part 5 of 5)

Regarding basics for patent licensing, you must know (1) what patents are being licensed, (2) the type of license you are granting, (3) who will obtain the license, (4) what activity will be licensed; (5) and how to protect your damages base.

In this post, I’ll be discussing (5).

5. Protecting your damages base.

A monetization campaign is a strategy to realize revenue over a several-year period.  Ideally, your campaign will generate a steady stream of revenue, over the course of its life.

In campaigns where you have a number of defendants, you may choose to settle with parties early in the litigation (e.g., 3 months after filing suit), while letting the campaign continue against other parties (e.g., roll the dice at trial).

But when granting a license to parties that settle early, you’ll want to ensure this will not negatively impact your patent’s valuation against similarly-situated parties, for which you’ll be going the distance.

To illustrate a problematic scenario, say you sue company A and B, each market leaders and of comparable size.  If you settle with company A for US $1M, but you go long against company B (e.g., you have a non-discounted ask price of US $50M), company B will have an argument that the license is only worth US $1M as to company B, because company A paid US $1M.  Therefore, rather than paying US $50M, company B should only pay US $1M.

To avoid your discounted, early settlement with company A to adversely impact your monetization strategy against company B, include justifications in your settlement agreement with company A as to why the settlement is a discounted one, and why it should not justify a discounted settlement for company B.

Examples include representations and/or whereas clauses indicating the settlement is discounted, because (1) you are settling early in the litigation, before each side incurs significant costs (e.g., prior to the start of discovery), (2) the licensee’s damages base is small, because the number of accused product-sales is less than X (explicitly list of limited set of accused products in the licensing agreement); (3) the licensee’s annual revenue or infringing business unit’s revenue is less than US $XM (if applicable); (4) the licensee’s extent of infringement is minimal; and (5) the licensee is providing some other collateral (e.g., providing you with other patents to monetize).

All these are examples of clauses you can leverage to distinguish a discounted settlement from company A, from a non-discounted ask price against company B.

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