Issue #16-1 | September 13, 2012

Attempts by the House to mitigate NPE litigation’s negative effect on competition may make it worse

The Congressional Research Service has taken a look at nonpracticing entities (NPEs), commonly referred to as “patent trolls,” to assess the net effect of NPE litigation on competition and to explore the need for legislative remedy.

NPEs are individuals or companies that own patents for the sole purpose of enforcing their rights without any intention to manufacture or sell products made possible by the patent. The CRS refers to them as patent assertion entities (PAEs) to distinguish them from research institutions. For the most part, these entities acquire the patents directly or indirectly from inventors, which defenders say provides liquidity to the system and value to patents. The CRS report states, “The PAE business model focuses not on developing or commercializing patented inventions but on buying and asserting patents, often against firms that have already begun using the claimed technology after developing it independently, unaware of the PAE patent.”

On August 1, the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act of 2012 (H.R. 6245) was introduced in the House and referred to committee. The bill would pave the way for a court to award full litigation costs to a defendant in a lawsuit “alleging the infringement of a computer hardware or software patent” if the patent holder “did not have a reasonable likelihood of succeeding” in the lawsuit.

IP Value Wire believes the law-of-unintended-consequences would attach to this bill should it gain traction in Congress. With the extraordinarily high costs of litigation in patent infringement cases, small, undercapitalized patent owners would have to add the attendant risk of being unsuccessful in asserting their patent rights to their own costs of litigating. Patent value would suffer, because value is directly related to the owner’s willingness and wherewithal to defend its IP.

Another significant wrinkle in the situation is that the CRS report itself has suffered sustained criticism. Joff Wild, in the Intellectual Asset Management blog, has raised the issue of significant bias in the CRS report. In his view, the problem is that the data and conclusions CRS relied on, which were provided by Boston University professors James Bessen and Michael Meurer, have been questioned.

For example, the methodology that Bessen and Meurer used to reach their well-publicized conclusions about the competitive harm caused by NPEs met significant criticism from David Schwartz of Chicago-Kent College of Law and Jay Kesan of the University of Illinois College of Law in their paper, “Analyzing the Role of Non-Practicing Entities in the Patent System.” The problem as described by Wild is that there is no reference to any of the criticisms in the CRS report; rather, there appears to be ipso facto acceptance of the Bessen/Meurer data, rendering the CRS study relatively useless.

Design patents in Apple v. Samsung determined the extent of compensatory damages

Brian J. Love, assistant professor of law at Santa Clara University School of Law, in an op-ed piece in the Los Angeles Times suggests that the appropriate compensatory damages in Apple v. Samsung should have been apportioned according to the number of patents infringed divided by the total number of patents that make up a smartphone, a number he puts at 250,000. But does that follow the law?

As BVR’s continuing reports on the tightening standards for recovery in patent infringement cases have made clear, federal courts now require financial experts to provide “in every case” an apportionment of damages between the unpatented and patented features of the product. This would parallel Professor Love’s line of thinking.

The twist in Apple v. Samsung is what IPVWire has been reporting on all along, the design patents were what mattered most. That strict apportionment standard, most recently articulated in Uniloc v. Microsoft as well as the Oracle v. Google litigation, applies only to suits based on infringement of utility patents. Compare that to the remedy under the Patent Act of 1887, which still entitles the holders of design patents to an “infringer’s entire profits” without the need to split damages between the patented design and the product bearing the design.

What Apple proved was that Samsung had “slavishly copied” the overall physical design, including the look of the icons and the home page, plus the packaging design of the iPhone—and Samsung then conveniently documented its intentions in a condemning email trail. What’s more, the look and feel of iPhone is not difficult to design around, as Google has demonstrated (see

Consequently, as reported previously, a jury last month handed the American-based Apple an award of $1.05 billion against South Korean-based Samsung. Samsung has vowed to appeal, while Apple intends to use the victory—and the federal recovery standard for design patent infringement—to launch similar suits against other competitors in the smartphone and computer tablet industry. Read the complete digest of Apple, Inc. v. Samsung Electronics Co., 2012 U.S. Dist. LEXIS 90877 (June, 28 2012) in the October Business Valuation Update. The court’s Daubert opinion will be posted at BVLaw.

Design patents require a unique perspective
from analysts

Design patents have understandably been the subject of many disparaging post-Apple v. Samsung opinions. Michael Hages,an intellectual property attorney with the firm Lerner David Littenberg Krumholz & Mentlik, has written extensively about the uniqueness of design patents, and his advice to designers and patent agents representing them is instructive for valuation analysts. These questions frame the nature of design and assist an analyst in determining its relative value:

  • What individual features of a design would the designer be upset to find in another product?
  • What about those features is unique, or how are they used in a unique way in the context of your overall design?
  • What are the considerations that lead to the ultimate design of those features? Do the features serve a purpose (such as causing eye movement or establishing dominance) or are they somehow related to other features of the overall design?
  • What would a potential infringer likely change about the design to try to avoid a basic design patent while making a knock-off of the design?

From the what-else-did-you-expect department, the design patent win by Apple appears to have encouraged a new patent strategy. Chinese phone maker GooPhone has quickly put together a smartphone based upon the rumored design features of Apple’s upcoming iPhone 5, which is reportedly set to launch, according to an announcement this week. Now GooPhone says it has patented that design in China, perhaps creating a significant barrier to entry into that marketplace for Apple.

Samsung strength in LTE patents could shape future skirmishes with Apple

According to current reports, Samsung is brandishing the LTE sabre with respect to Apple and future patent battles, suggesting any move by Apple to incorporate LTE communications technology into its new smartphones will be met by aggressive IP infringement defenses.

LTE (from Long Term Evolution) is an advanced standard for high-speed communication of wireless data, and most likely will become part of global standards. To separate bluster from reality, at BVR’s request, Mike Pellegrino did a search in his IP Analytx database to see comparative strength (in LTE-related patent numbers only) between Apple and Samsung. (Email the editor for a copy of the report.)

Apple has just 23 U.S. patents that mention LTE; Samsung has 121 and ranks number 4 overall. With this differential, it is not difficult to understand why Samsung is posturing.

Interestingly, the list reveals RIM as having 60 U.S. LTE patents, which Wall Street watchers will surely act on as the smartphone patent battlefield switches to high-speed communications. And an ITC judge has let it be known that two HTC patents in the LTE arena being challenged by Apple are likely valid.

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New BVR study benchmarks remaining useful lives of intangibles and provides valuable tool in noncompete valuations

To fill a gap in benchmarked data related to assigning remaining useful lives of intangibles in purchase price allocations, Business Valuation Resources has produced a study of 360 distinct business combinations that compiles and organizes “living” data by intangible and by industry.

Valuation analysts who advise on purchase price allocations will gain peace of mind from the one-of-a-kind resource, not only because it relates to how others are assigning intangibles’ remaining useful lives, but also because it specifically benchmarks the valuation of noncompete agreements by industry and deal size. Analysts many times feel as if they are working in a vacuum when allocating value to such noncompetes.


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