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.

In this post, I’ll be discussing (4).

4.  What activity will be licensed?

According to 35 U.S.C. 271(a), infringing activity includes making, using, offering to sell, selling, or importing into the United States any patented invention.

Hence, a license for a given party need only include a right to perform the above activities.

Nonetheless, licensees typically attempt to cover upstream (e.g., the licensee’s supplier) and downstream (e.g., the licensee’s distributors and customers) actors.  This is a reasonable request, because a licensee will want to protect its, e.g., suppliers from being sued for supplying goods and services to the licensee.  And a licensee will want to protect its distributors and customers from being sued, for selling or using the licensee’s products (although downstream actors may be covered regardless, due to Quanta—I’ll discuss this in another post).

While the licensee may negotiate to have such upstream and downstream actors covered by the license, you’ll want to be careful to not grant a blanket license to the upstream and downstream actors for all activities, because you may lose your infringement claim against them, if they are performing corresponding activities for an infringing, but non-licensed party.

Put another way, you may have an independent infringement claim against those upstream and downstream actors for their activities with respect to entities similarly-situated to the licensee (e.g., a supplier infringes on two counts when it supplies chipsets to Apple and Samsung).

Hence, when granting a license to upstream and downstream actors, carve out the license such that it only covers activities performed for or on behalf of the licensee (e.g., a supplier manufacturing a chipset specifically for use in licensee’s products, or a distributor specifically distributing licensee products).

This will help you preserve your infringement claim against those upstream and downstream actors, for their infringement by or on behalf of other infringing, but non-licensed parties.

In this post, I’ll be discussing (3).

3. What type of license are you granting?

Typically, a licensee will want a license for itself, along with a license for all companies in its corporate structure, e.g., its parents, subsidiaries, and sister companies.  This is a common and reasonable request, because a licensee will not want to pay $X for a license, and then have you turn around sue its subsidiary.

In this scenario, you’ll need to make sure you have an understanding of who is being included in the license.

To do so, have a firm understanding of the corporate structure of the licensee.  If you grant a license to a smaller entity at a price point reflecting its size, but it is a subsidiary of one of the larger targets you plan on suing down the line, then you will inadvertently grant a license to the larger entity, at a suboptimal price point.

As such, you’ll need to know who’s included in the corporate structure of the licensee and price the settlement accordingly.

For public entities, this is relatively easy, because this is public knowledge and should be available in the company’s SEC filings.

For private companies, this is more difficult to ascertain, because this is not public knowledge.  If you are negotiating with a private company, have all related corporate entities listed in the settlement agreement and have an explicit recitation that no other entity will be obtaining the license.

In this post, I’ll be discussing (2).

2. What type of license are you granting?

When granting a license to a third party, you want to ensure that the third party cannot grant licenses to any other party.  If so, this will create a loophole in which, rather than paying you for a license, potential licensees will pay the third party for the license—this is detrimental to your monetization campaign.

To ensure that the third party cannot grant licenses to other parties, have the following terms in the licensing language:

1. No right to sublicense.  If a third party has a right to sublicense, then it has the right to grant licenses to other parties–this is a loophole you don’t need.  Explicitly note in the agreement that you are not granting a right sublicense the patents-at-issue.
2. Non-exclusive license.  If you grant an exclusive license, then only that third party can grant future licenses, not you.  Again, not what you’re looking for.  Explicitly note in the agreement that you are granting a non-exclusive license.
3. Non-transferrable / Non-assignable.  When granting a license to a third party, you want to ensure that only that party will have the license and that it will not flow to some other party.  Explicitly recite that the license is non-transferrable and non-assignable.

If you grant a license to a third party, but you inadvertently grant them a right to sublicense, or if there is a hole in which additional parties can obtain a license without going through you, then you are enabling a loophole in which you are giving away licenses without additional consideration.

This is absolutely fatal to your monetization campaign.

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.

I will be discussing these topics in five successive posts.

1. What patents are being licensed?

When negotiating for a license, most licensees will want a license to all patents owned by the entity that initiated the lawsuit (“suing entity”).  To illustrate, if you own a company that has ownership interest in ten patents, but you only assert three patents in the litigation, the licensee will typically want a license to all ten patents.  This is a reasonable request, because the licensee would not want to pay you $X to settle the litigation by taking a license to the three patents, but then have you sue them the next day on the other seven patents.

If you are engaging in settlement discussions, expect to license all patents owned by the suing entity and price the settlement accordingly.

But if you own multiple companies that each own separate patent portfolios, you must be extremely careful that you do not grant a license to the other affiliate entity patents. If you do, you may end up granting a license to all patents owned by each company in which you have an ownership interest.

This loophole typically comes up when “affiliate” language is included in the agreement.  An affiliate is any entity related to a party to the settlement agreement, where a party has at least, e.g., 50% ownership interest in the affiliate. If you own multiple companies and have more than, e.g., 50% ownership interest in the other companies, all of the companies would be an affiliate to the suing entity.

When granting a license, be sure that only the suing entity is granting a license to the patent it owns, and that no other affiliate patents are included in the license.  You can do this by explicitly listing the patents being licensed, indicating that no other patents are being licensed, and stating that no affiliate entity’s patents are included in the license.

What is a license?

A license is a right to use a patented invention–specifically, a right to make, use, sell, offer to sell, and import into the U.S. a patented invention.

A patent holder, and only the patent holder, has the right to grant a license to third parties (provided the patent holder does not grant an exclusive license or the right to sublicence to other parties–I’ll be discussing this in successive posts).

This right stems from the government issuing the patent, and agreeing to enforce the patent holder’s right to prevent others from practicing the invention.  A third party can practice a claimed invention only after a patent holder grants a license to the patent.

From a monetization perspective, the more licenses you grant with respect to your patent asset, the more you are realizing the patent asset’s monetization potential.  Hence, your goal as a patent owner is to grant as many licenses as possible, at a price point that maximizes value.