Case Study: IP Monetization Due Diligence

[Some information in this case study has been redacted to preserve client’s confidentiality requirements.]

BACKGROUND

Company

We were contacted by a company (“Client”) specializing in development of vehicle safety solutions. The Client was ultimately interested in monetizing their patent portfolio.

The Client had previously received services from a third-party firm. In fact, the Client had claim charts, also known as Evidence-of-Use (EoU), and damages analysis against a particular infringer and wanted us to use those reports in pursuing a monetization effort.

The Client’s patent portfolio consisted of seven patents—four issued and three pending—directed towards automotive applications.  Additional international filings were pending at the time of valuation.

APPROACH

We reviewed the Client’s existing due diligence reports and found them inaccurate.  The preliminary damages model was initially requested to be directed against a particular product of a major automobile manufacturer (“Manufacturer X”).  Our analysis showed that the Client’s claim chart was flawed.  We also found many inconsistencies and inaccuracies in their financial analysis report.  As such, we undertook a holistic due diligence process including a thorough breakdown of infringing technologies and claim charts and an in-depth market research to derive a credible preliminary damages model.

DAMAGES

Pursuant to 35 U.S.C. § 284,^[1] when there is a finding of infringement, the patent owner is entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty[.]” Accordingly, we developed a damages model that determines the value of a patent portfolio using an Income Approach known as the Relief-From-Royalty Payment Method.  This approach measures a property’s value by quantifying the amount of income that could be generated from licensing the intangible asset and applying royalty rates from Comparable Uncontrolled Transactions (“CUTs” or “comparables”) to determine projected royalty payments.

Initially, the Client had consulted with a third-party firm to obtain a damages analysis against Manufacturer X, but their analysis was incomplete and inaccurate.  It did not account for a crucial factor that was essential to determine an accurate valuation.  As such, we revised this analysis in our damages model after performing additional market research.  We determined the relevant time period for analysis to be from the launch of the infringing technology by Manufacturer X in Q2 2020 through present.  In order to calculate an appropriate value on damages, we conducted market research to obtain the number of asset months from vehicle sales in specific time spans.  We then applied appropriate royalty rates to derive a more accurate value of damages from infringement by calculating both the Nominal^[2] and Net Present Values^[3].

INFRINGMENT

After further discussions with the Client and closer examination of the technology developed by Manufacturer X in a claim chart analysis, we found that their technology did not meet the limitations of the Client’s patent to the extent of infringement.  However, we considered the possibility of another automobile manufacturer (“Manufacturer Y”) infringing on the Client’s patent.  From our in-depth research of Manufacturer Y’s technology, we found sufficient evidence to prove infringement.

As a result, we produced a separate damages model from the one we made for Manufacturer X.  Like the damages model for Manufacturer X, we used the Relief-From-Royalty Payment Method of the Income Approach to determine the preliminary damages from infringement by Manufacturer Y.

We determined a Total Available Market (“TAM”) for vehicles with the required control system modules installed in the period of April 20xx through present.  Given that the damages analysis period begins in April, only two-thirds of 20xx sales were considered.  To determine an appropriate royalty rate, we considered two models: the average royalty rate in the automotive industry and the accrual of subscription-based payments for vehicle management.  The average royalty rate for patent licenses in the automotive industry is x.x%.  In addition, we considered vehicle management systems that contain features similar to the technology included in the vehicles produced by Manufacturer Y as a proxy.  Specifically, we used the average monthly subscription fees for these services and extrapolated this pricing to a year.  Given that Manufacturer Y’s vehicle control software is bundled with the vehicle and is not based on a subscription, we applied the yearly pricing to the average lifespan of their vehicles.  Furthermore, we assumed that Manufacturer Y’s software comprise only a portion of the vehicle management systems’ services, so we divided this figure by the average cost of a vehicle produced by Manufacturer Y to derive an appropriate royalty rate.  Based on this information, we determined three appropriate royalty rates: one for a conservative estimate, one for a medium estimate, and one for a high estimate.

Using the figures of vehicle sales and the royalty rate, we calculated the Nominal Values and Net Present Values of potential damages from Manufacturer Y, which were much larger in scale than the potential damages from Manufacturer X.

RESULTS

By our dedication to performing thorough analyses on both the technical and economic fronts, we were able to correct an erroneous damages analysis and infringement theory provided to the client by a third-party firm. Instead, the client received a patent monetization strategy that was far more reliable and lucrative with solid infringement and financial analyses against a much better-suited target infringer.

^[1] https://mpep.uspto.gov/RDMS/MPEP/e8r9#/e8r9/d0e305921.html

^[2] Nominal values refer to the unadjusted rate or current price, without taking inflation or other factors into account.

^[3] Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

ABOUT GHB INTELLECT

Whether a client is seeking to value, develop, sell, license, or assert a patent portfolio, GHB Intellect has the right resources to enable business objectives to be met.  Our experts comprise active industry leaders who are up-to-date and proficient in the state-of-the-art technologies and practices in order to provide the most useful and actionable consultations to firms and individuals.  Our work is highly respected by our clients and their associates for being accurate and thorough.  Please contact us to learn more about our IP monetization capabilities, including litigation support.