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IP, IP Asset, Patent

Is Microsoft The “Clear And Convincing” Winner In The Patent Validity Battle?

By now you’ve heard that the Supreme Court decided the most anticipated patent case of the year, Microsoft v. i4i.  The software giant’s attempt to change decades of tradition was, by most accounts, a complete failure.  In the first unanimous Supreme Court patent opinion in what seems like a generation, the justices ruled 8-0 (with  Chief Justice Roberts abstaining) that in order to invalidate an issued patent, a challenger must present “clear and convincing” evidence of invalidity.  As a result, Microsoft will have to pay the patent owner a $290 Million damages award.

During the briefing stage, I mentioned that the outcome of this case held the potential to greatly affect patent value across the board.  While there’s many ways of measuring a patent’s value, one key measure is the ability to collect licensing revenue from companies that practice the claimed technology.  Meanwhile, a company will use patent validity (among other counterarguments) to resist paying license fees, or as leverage to bring a patent owner’s overall price down.  Any decision that makes a potential licensee believe (regardless of reality) that it is easier to invalidate patents will motivate more resistance and hold-outs.  This translates into additional time and additional expense for patent owners, along with possible smaller licensing revenue to boot.  If it costs you more time, and more money to extract the same, or even less revenue from an asset, then the asset value has gone down no matter how you look at it.

But that didn’t happen.  Instead, Microsoft took a verbal beating back in April, and a financial one yesterday. The Court entirely disagreed with Microsoft’s argument, saying ” Squint as we may, we fail to see the qualifications that Microsoft purports to identify in our cases.” But if their argument was so bad, how did they get there in the first place?  From Hal Wegner’s analysis, Microsoft persuaded the Supremes to take the case by quoting some statements in its earlier decisions suggesting that the high burden of proof seemed “much diminished” when the prior art being considered was not before the patent office.  However, upon fully briefing the case, Microsoft “got greedy” by asking the burden of proof to be lowered across the board, reversing decades of precedent and effectively allowing courts to entirely second guess the patent office.

While you might expect a company to go-for-broke when facing a $290 Million damage award, Microsoft’s gambit failed.  Or did it?

Microsoft has spent the past few decades building up key assets in software products, and IP governing rights to use a number of key technologies that are prevalent today.  Its patent licensing program is getting more aggressive, not to mention more productive.  Besides maintaining a world-wide patent campaign to license Android-based devices, Microsoft already makes more money from its license with HTC than it does from selling its own mobile software.

In addition, Microsoft’s patent portfolio is consistently rated one of the top in its industry, prompting Joff at IAM  Magazine to ask, whether Microsoft owns the world’s most valuable IP portfolio. And the Supreme Court just effectively added a layer of armor plating (or, perhaps, rejected Microsoft’s attempt to remove a layer) further enhancing that portfolio’s value. But, while patent owners across the board gained value, does that mean Microsoft was a net winner yesterday?  In other words, did their patent value increase enough to cancel out the $290 M it now has to pay i4i?

Microsoft reportedly owns about 18,000 patents.  Assuming an average cost of about $10,000 each in attorneys fees, patent office fees and overhead just to obtain the patents comes to about $180 M.  This doesn’t even take into account the inventor’s salary, any “token” paid to incentivize the workforce, and any expenses involved in developing technology. Microsoft would not spend $180 Million to acquire patents if they didn’t seem some value in them, so the cost of acquisition presents a baseline.  Next, knowing that most patents are worthless, and a few may be worth a lot, let’s assume Microsoft expects, overall, to double its patent investment, placing a value on the portfolio of $360 M.

If you think that sounds high, consider that one license deal with HTC is reportedly bringing in $150 M.  That’s one company licensing one set of patents, out of a portfolio of 18,000.  As another data point, consider the Nortel auction of 6000 patents, where Google’s stalking horse bid of $900 M is believed to drive the selling price past a billion dollars.  Is it that inconceivable that Microsoft’s portfolio, at nearly 3 times the size and at least as equally controlling fundamental and prolific technology rights, would be worth at least half a billion, if not well over a billion itself?

At $500 M, the court decision would cancel out the i4i judgment if Microsoft valued its portfolio 60% higher than it does today.  At a billion dollars, a 30% boost would have the same effect.

While it may not be a net win today, Microsoft already owns a prolific patent portfolio, and it has the incentive to increase the value of its portfolio even further by maintaining a focus on IP protection as it continues to develop.  The IP strategy described by Marshall Phelps’ book, Burning The Ships (as reported here) has the potential to be even more lucrative in the future:

The IP creation process in the context of forward invention sessions is very different from that of the traditional invention process, for which the basic question is, “Can I patent this innovation that I’m working on in such a way that it will still be valuable in five years?” In the context of the forward invention process, however, the key question is, “What are we not yet working on that could become important in five or 10 years? Should we do some inventing in this space and develop some intellectual property that could give us a seat at the table of an exciting new opportunity?”

In other words, if they haven’t already, it won’t take Microsoft long to earn back the measly $300 M it lost yesterday.

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Discussion

2 thoughts on “Is Microsoft The “Clear And Convincing” Winner In The Patent Validity Battle?

  1. I’m quite pleased that the Justices defied pundits’ predictions and issued this ruling — I always thought i4i had the stronger arguments, not to mention many years of tradition and precedent on its side. Moreover, I think there’s a decent argument that a strong presumption of validity is indicated in the Constitution; and, on a policy note, in countries with weaker patent rights, there lurks always the danger that well-funded entities can use that lesser standard to bankrupt patentees, or even to deprive them of their IP altogether. Thank you, SCOTUS; well done.

    Posted by patent litigation | June 13, 2011, 6:57 pm

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  1. Pingback: Patent Owner Vindicated As Winston Drives Hyundai Off A Cliff « Gametime IP - June 18, 2011

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