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Msg  10871 of 179743  at  6/26/2011 8:51:53 PM  by


The following message was updated on 6/26/2011 9:01:53 PM.

Standards - An Important Patent Portfolio Licensing Opportunity (June 2009)

This is an excellent article.  Several points apply to VirnetX.  I will highlight a few key points in the article.  But in general, when you read it, you get a sense of what VirnetX has gone through to get to this point.  They not only have a strong portfolio, but one that has high value.  Additionally, they are exposing their patents to the utmost scrutiny by not only litigating (patent validity challenged) but also declaring them essential as a non-member.  In other words, whatever they submitted as "essential", better indeed be essential because companies will think long and hard about wanting to pay VHC royalties.  After the ASM and my conversation with Larsen afterwards, I feel quite comfortable that VHC has covered all their bases in getting to this position.  Their plan really has to be bullet-proof.
Note:  The article is 7 pages, so I'm condensing it and only showing some of the highlighted sections.  You can read the whole article on your own if you want.
Standards—An Important Patent Portfolio Licensing Opportunity

By Robert A. Myers

June 2009
Patents and Standards—Strange Bedfellows4

Patents are rarely worth much if no one other than the patent owner is interested in practicing the covered invention. This is obvious if the objective of patenting is to maximize licensing revenue, but it also applies if an organization patents to exercise its exclusionary patent monopoly. In this case, too, if no one wants to copy a product or service, the “protection” provided by the patent is practically worthless. Where a patent is “essential” to the practice of a standard, this precondition is automatically met. Such patents are almost by definition valuable.


Thus, a very difficult but potentially very rewarding payoff for an active patenting program occurs when one can obtain a patent on a technology, method, or process which is central to a new or evolving standard. The bigger reward will most often be earned by an organization which is adequately prepared. For example, contention between researchers and management may arise when a researcher’s work is a candidate for a new standard. Standards bodies almost invariably assert that they will only consider proposals which are royalty free. The researcher’s personal and professional interest primarily lies in having his or her work recognized by his or her peers, and future royalties may be of little or no concern.


On the other hand, most standards organizations will agree to a reasonable, non-discriminatory royalty. A royalty of even one percent on a major standard can be very profitable,6 and intellectual property management must take a firm position against giving away a potentially valuable asset. No less important, even when the patents which are deemed essential for a standard have to be licensed for a nominal royalty, patents on features and enhancements can nevertheless be licensed for what the traffic will bear. Thus, patenting organizations need to be conscious of possible standards implications, and of the value opportunity they provide, so as to make their patenting decisions clearly appreciating any potential standards implications.


Technically Essential Patents

A valuable patent in the world of standards is a patent that must be practiced in order to meet the standard. Two types of essentiality are recognized: Technical Essentiality and Commercial Essentiality. A patent which is commercially essential to practicing a standard is little different from any valuable patent. It embodies an improvement which enables a valuable feature (manufacturing cost, very desirable functionality, etc) without which a product or service is not competitive.


On the other hand, a technically essential patent cannot be avoided at any price. The European Telecommunications Standards Institute (ETSI) thus provides this definition: “ESSENTIAL” as applied to IPR means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR.


A technically essential patent would be welcome in any portfolio. In the following, we will discuss how to make one, how to find one, how to confirm essentiality, how to validate its essentiality, and how to monetize it. For the most part, these will be seen to be a specific instance of good portfolio management processes, and may function as general guidelines.


Making an Essential Patent

Until a standard is formalized, it is desirable to extend the life of the application. Whether through continuations, amendments, or simply not rushing the examination process, the more opportunities there are to “tune” the claims to a standard, the more likely it is that the patent will, in fact, read on the standard.


Validating Essentiality

Abstractly, the process is straightforward. Examination of the independent claims readily points an expert to the relevant section(s) of the standard. A technical expert then generates a “claim chart”, listing on one side the steps that are mandated by the standard and on the other side the elements of a claim that may read on it. The expert then renders an opinion as to whether the standard can be practiced without practicing every element of at least one claim of the patent.


Note that there are, in fact, three distinct judgments that must be made. The expert must parse the wording of the standard to understand what it requires. He must then interpret the patent’s claim(s) [in a form of solo Markman10 exercise] and only then can he judge whether there is an avoidance path. When the opinion is positive, further legal analysis is needed to confirm that the patent is valid (or, at least, that it is plausibly valid, short of litigation).


Organizations that formally vet the essentiality of declared patents (such, as, for example, patent pools, where including a non-essential patent exposes the pool to patent misuse allegations) argue that due to the fundamental importance of the procedure, an investment of several days by experts in the technology and the standard (i.e., engineers), in the patents and in the prior art in the field (i.e. an attorney). Normally, more than one opinion would be needed to ensure a defensible result. The cost for competent experts can easily exceed $25K per patent. Even after such a rigorous process, however, such a patent isn’t “really essential” unless and until it has been litigated, as IP practitioners well know.


Ensuring the Patent is Valid

Good patenting “hygiene” requires paying attention to a number of bread-and-butter measures. Many engineers and inventors, however, are often unaware of such requirements or—perhaps more seriously—don’t appreciate their importance. It is important in any facility which as part of its regular work invents and patents that staff are made aware of these matters. Although there are many factors to be kept in mind when filing for a patent, we find two to be important to discuss: inventorship and searching for prior art.


However, the most common validity issue we have identified is that of “undiscovered prior art”, or a prior offering for sale of a product or service embodying the patented invention. Naturally, discovering a clear instance of anticipatory art can be a major factor in having a patent disallowed or—more likely—reducing negotiated royalty payments. As a practical matter, it is virtually impossible for an inventor and his attorney to accomplish an exhaustive search. Even when, as is usual, this searching is delegated to a service, the results of the search are necessarily incomplete.


In summary, the question of a patent’s validity, as is well known, is not firmly established until and unless the patent has been fully litigated. We do not advocate applying for a patent in the absence of a thorough search, but it is important to recognize that when a patent is asserted against you, it is a good bet that you will be able to discover some potentially disqualifying art. The Supreme Court’s KSR ruling makes this even more probable, as it permits arguing the relevance of art in an “unrelated” field.


Monetizing or Asserting an Essential Patent

Most IP practitioners are aware of the usual downside to asserting a patent against an alleged infringer, starting with the cost. Another major concern is that asserting a patent exposes it to the risk that the alleged infringer may succeed in having the patent declared invalid (for reasons noted above). Where the patent at issue is essential to a standard, however, the challenges are greatly increased. That is because a valid essential patent poses a financial risk to every company practicing the standard. The patentee can easily find himself up against a consortium of (rich) opponents, who have a lot to lose of the patentee prevails.


These risks are magnified if the patentee only owns a single essential patent. In theory, the owner of a single essential patent can “hold up” the industry if he so chooses since one can argue that all essential patents are “equal” in some sense. However, this is not a universally accepted position. Some parties argue that some patents are more essential than others, and should be weighted disproportionately. For example, in the case of an automobile, it has been argued that a patent on an automobile windshield wiper (assuming there were a standard for windshield wipers) would be less “essential” than a patent covering the transmission (again, assuming there were a standard for transmissions).


The analogy is fatally flawed in our opinion. Although the transmission is in some sense more central to the operation of an automobile, there are hundreds if not thousands of patents covering various variations and improvements on the transmission whereas there may only be a few dozen such patents on the wiper. Many of the transmission patents may in some sense be technically essential, but any single one is unlikely to be more “essential” than one of a few dozen wiper patents. What we find to be a key message is this: a single essential patent is considerably less valuable than a portfolio of essential patents simply because the single patent is much more vulnerable to invalidity challenges. The cost of challenging the validity of a dozen patents is much higher than that cost for a single patent.


The lesson in the standards context, even more so than in a generic assertion of infringement, is that a patentee should exercise great care before assertion, and an agreement of some sort, whether a cross license or a payment, is almost always preferable to the risks of litigation.

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