How to build a patent portfolio, including budget control, patent searching and licensing considerations.

1. PATENT PORTFOLIO
DEVELOPMENT AND USE
Philip McKay
pmckay@hawleytroxell.com
208.388.4824

2. TYPICAL EVOLUTION OF A PATENT PROGRAM
(PART ONE)
• Start up Phase – “Too busy for IP” focus is on product out
the door.
• Success! – Company starts to make money, becoming a
name in the market – “Still too busy for IP.”
• Market share increases. Competition takes notice – An “offer
to take a license” is made.
• Company has no patents with which to trade, cross license, or
counter threaten. Company pays for a license from one or
more of its competitors. Funds come right off the bottom line
and typically out of R&D budget – OUCH! In extreme cases
this can be the end of the company and the story.
• If the company survives, a patent program is started – Time
is found.

3. TYPICAL EVOLUTION OF A PATENT PROGRAM
(PART TWO)
• Company files on everything and
everywhere – gets expensive fast.
• Company gets huge bills (especially from
foreign filings).
• Costs are cut, foreign cases are allowed to
go abandoned. Wasted money.
• Company grows and diversifies its product
line – Portfolio grows.

4. TYPICAL EVOLUTION OF A PATENT PROGRAM
(PART THREE)
• Company attempts to recoup cost of portfolio by making it a
revenue source – Patent program shifts from defensive to
offensive posture.
• Attorneys are hired to analyze patent portfolio. Typically, the
portfolio is examined for the first time in light of the
competition’s products, instead of the company’s own
products. This is a day late and a dollar short. Claims are
only now reviewed in light of the competition. Opportunities
lost are revealed. Finger pointing begins.
• Company begins to approach the competition, asking if they
would like to “take a license” – if the company has survived
thus far, the evolution has come full circle, however, at a very
large cost and in a very inefficient manner.
• The Company begins to include revenue from patents in its
annual budget.

5. A BETTER WAY (START UP)
• Start up Phase – Make time for IP.
• Keep accurate lab notebooks with witness lines and dates.
Not as critical as pre-AIA (first to file) but still important.
• Identify what features of your product you think are going to
give you an edge in the market; i.e., why are you getting into
this business and making this product? What are your key
competitive features?
• Early in the process, file applications on these key features. If
short term costs are a real problem, work with your outside
counsel. Explore provisional applications if necessary. File
utility applications if at all possible.
• At this point, focus primarily on the crown jewels. This may
mean only one or two applications; however, defensively this
may be enough and at least you are in the game.

6. A BETTER WAY (START UP CONTINUED)
• Cost concerns:
– Try to avoid jumbo or full system patents unless your approach
or product is truly revolutionary - Jumbo patents rarely actually
save money and can create significant strategic and tactical
complications.
– Try to avoid foreign filing by carefully determining whether there
is a foreign competitor AND a foreign market.
• If U.S. is the only significant market, use the ITC to stop a foreign
producer.
• If there is a foreign competitor and market, and a significant
potential revenue from foreign sales, consider using the PCT to
postpone significant costs.

7. A BETTER WAY (PHASE TWO)
• Success! – You start to make money, you are becoming a
name in the market – Don’t forget IP! As the company starts
to take off, so should the patent program.
• Start building a trading base. At this stage your focus should
evolve beyond your own product to solutions that the
competition will either need or want. File on these, in addition
to your immediate crown jewels and future product lines.
• At this point, foreign filing should be considered but used very
sparingly.
• Your goal now is to ensure freedom of use and to create
enough portfolio value to force larger competitors to cross-
license.

8. A BETTER WAY (PHASE THREE)
• Continued success – This is where a successful patent
licensing program is begun. Continue to file on crown jewels.
Start to file on specific implementations. Start to file even on
research projects that are never incorporated in product.
• Most importantly, file with an eye to the competition’s products
and start watching the competition’s portfolio and product
line(s). Then file a percentage of your applications in areas
where you think the industry is heading. Gamble a little and
communicate often with engineering.
• Build the portfolio beyond defense and carefully review each
claim set with an eye to broadening and capturing more
competitors.

9. A BETTER WAY (PHASE FOUR)
A decent portfolio is built, assuming you are fairly well protected
from the competition, and you that have patents to trade, now
consider your options:
1. Proceed to produce and rely on the portfolio to protect you - Safe
and probably what the company intended in the first place.
2. Cross-license with as many “threats” as possible, but avoid
revenue generation per se - Also relatively safe, however, you are
now in the game and resources will have to be devoted.
3. Approach the competition with “offers to take a license.” - Playing
with fire. No risk, no gain, but can become very costly and
management must be made aware of the risks and PR issues.

10. WHY BUILD A PORTFOLIO ?
• Defensive uses:
– Freedom to operate and freedom to use your
own invention.
– Minimizes royalty payments to competition –
avoids funding competition’s R&D (endless
cycle).
– Establishes company as a technology leader.
– VCs and investors want to see it.

11. WHY BUILD A PORTFOLIO? (CONTINUED)
• Offensive uses:
– Prevent competitors from copying your
invention/product.
– Tangible return on R&D. See IBM.
– Keep selected technologies open.
– Place a rent charge on each of the competitor’s
products and thereby keep a cost advantage in
your product.

12. HOW TO BUILD A PORTFOLIO
• At start up stage – See previous discussion.
• Once the company is established and selling
product:
– Presentations to each Engineering group on a regular
basis. At a minimum:
• When group is formed;
• Mid-way through design cycle;
• Before tape-out or Alpha; and
• After tape-out or Beta.
– Disclosure program – Automated if possible with central IP
function outside normal reporting chain.

13. HOW TO BUILD A PORTFOLIO (CONTINUED)
– Efficient use of outside counsel
• Task them with becoming familiar with a given
group. Use them to flush out disclosures and to
keep engineers thinking of patents.
– Patent bonus program
• Disclosure bonus – Cap, employee at disclosure
only.
• Filing bonus – Cap, employee at filing only.
• Issue bonus – Employee at issuance only. Plaque
and recognition function.

14. HOW TO BUILD A PORTFOLIO (CONTINUED)
– Use of in-house counsel time
• Use in-house counsel, if any, to coordinate filings
and keep portfolio focused.
• Probably not most efficiently used for writing
applications unless company is quite large or very
small.
• Most effective at keeping management and
engineers thinking patents.
• Also needed to manage budget and monitor
competition’s portfolio.

15. HOW TO KEEP THE BUDGET UNDER CONTROL
• Unless there is an idetnifibale foreign threat,
i.e., a foreign maker to sell into a foreign
market, concentrate on U.S. patents.
– Most bang for buck. Fees and Attorney costs.
– ITC can be used to stop foreign made products
from entering U.S.
– No translations.
– Can file foreign from U.S. as much as a year
later.

16. HOW TO KEEP THE BUDGET UNDER CONTROL
(CONTINUED)
• If foreign applications are required:
– Consider the PCT:
• Initial filing fee relatively low.
• Allows significant delay before expense of
translations is incurred – This gives the product
time to prove itself before real costs are incurred.
• At National Phase, once again choose carefully
with an eye to the considerable cost.
• Note - Not all countries of interest are members of
the PCT.

17. HOW TO KEEP THE BUDGET UNDER CONTROL
(CONTINUED)
• Avoid Jumbo and/or full-blown system level
patents.
– Not less expensive, usually more expensive, than
several more focused patents.
– All your eggs are in one basket.
– Always evolving, never filing – Best mode issues.
– Easier to invalidate.
– One bad Examiner can result in a very long wait to
get any patent.
– In the end, if you are lucky, you get one patent only.

18. HOW TO KEEP THE BUDGET UNDER CONTROL
(CONTINUED)
• Keep the patent applications focused on a
single, digestible innovation:
– Easier on engineers.
– Lower attorney fees.
– Less confusing to judges and jury.
– Easier to broaden beyond the scope of a
particular embodiment.
– More patents and faster.

19. HOW TO KEEP THE BUDGET UNDER CONTROL
(CONTINUED)
• Efficient use of outside counsel:
– Avoid piecemeal assignment of cases.
– Assign entire engineering groups, and groups of
related patents, to a single attorney or firm.
– Hire, and develop relationships with, the
attorneys writing the applications, i.e., make it
clear that you are hiring the attorney, not the
firm.
– Use multiple attorneys at different firms.

20. HOW TO KEEP THE BUDGET UNDER CONTROL
(CONTINUED)
• Efficient use of outside counsel (Continued) :
– Make it clear to your outside counsel that you
need them to help you develop patent-minded
engineering groups.
– Communicate with outside counsel and try to
keep work flowing at an even pace. Do not
become a 35 U.S.C. Section 102 nightmare
client.

21. HOW TO KEEP THE BUDGET UNDER CONTROL
(CONTINUED)
• In-House Counsel:
– Carefully review all disclosures.
– Rank disclosures and/or hold disclosure evaluation
boards with engineering management.
– Monitor outside counsel and get feedback from
inventors. Make sure outside counsel is not wasting
your inventor’s time and that there is a good
technology and personality match.
– Make sure outside counsel maintain deadlines.
– Monitor all costs.

22. HOW TO KEEP THE BUDGET UNDER CONTROL
(CONTINUED)
• In House Counsel (Continued):
– Prepare patent procedure guidelines including:
• Caps, if any;
• Target filing dates;
• Inventor contact;
• Bar dates; and
• The need to communicate early and often.

23. A WORD ABOUT PATENT SEARCHING
• The IDS catch 22:
– Probably safest to file all items found via a
search in an IDS; any other approach is open to
attack.
– If you file a huge stack of references you
become vulnerable to attack on grounds of
burying the relevant references – damned if you
do, damned if you don’t.
– Watch out for related cases and Foreign cases.

24. A WORD ABOUT PATENT SEARCHING
(CONTINUED)
• Willful versus Non-Willful infringement:
– Non-willful viewed as an accident – reasonable
royalty.
– Willful viewed as bad actor – treble damages
and possibly attorney fees.
• Corporate awareness – In some instances, all it
takes is one engineer knowing to bring down the
whole company.

25. A WORD ABOUT PATENT SEARCHING
(CONTINUED)
• The examiner perspective - one point, one
file.
• Search sites:
– Best to use only the official PTO site.
– Warn engineers.

26. LICENSING CONSIDERATIONS
• How it really works
– Over 7,000,000 patents – Are they really all “light bulb” level
inventions?
– Virtually every major Silicon Valley player is infringing someone
else’s patents.
– Cost for Opinion letter is a minimum 20 to 40 K - PER PATENT.
– The more colorable patents you can assert, or “offer the
competition to examine”, the more likely your company will be
deemed too expensive or uncertain to sue and the more likely
you will get a cross license or reduced payment deal.
– Good news for the little guy; reasonable royalty is typically a
percentage of revenue.

27. LICENSING CONSIDERATIONS
(CONTINUED)
• To threaten or not to threaten:
– Litigation, or the threat thereof (offers to take a license
are viewed as threats to sue), is a major step. It is
almost always cheaper to force a cross-license and
continue to rely on your product for revenue:
– Any communication to potential “licensee” must
be very carefully worded. You are opening a can
of worms, from the very beginning, approach this
as carefully as you would a hostile litigation - it
may well end up as one!

28. LICENSING CONSIDERATIONS
(CONTINUED)
• Very resource intensive – Key people’s time;
research money; outside counsel, etc.
• Can be a source of bad PR.
• Makes you a target.
• Easy and routine life will vanish quickly.
• Opens up company to declaratory relief.
• You are beginning a war-like process. Be
prepared and don’t approach this lightly.

29. LICENSING CONSIDERATIONS
(CONTINUED)
• Reasons to sue, or threaten suit:
– Survival of the company is at risk (AMD v. Intel).
– Customers force your hand.
– To establish yourself as a viable threat.
– To establish a particular patent as litigation proof.
– Product is not selling – See TI in the 80’s.
– Because management has decided to attempt to turn
the portfolio into a revenue generator – See IBM.
• In this instance, you should be sure to warn management -
as loudly, and as well documented, as politically feasible - of
the risks.

30. LICENSING CONSIDERATIONS
(CONTINUED)
• If you sue, whom to sue and whom to license:
– Don’t try this alone, from the beginning of the
process, i.e., before the first offer to take a license
letter is drafted, consult with litigation and/or
licensing attorneys – This is very dangerous
territory.
– Size up competition (big player, medium player, small
player, or mix?).
– If the true target is smaller players, consider strategic
licensing of one or more big players:
• Consider licensing big guys first and cheaply with right to
disclose name but no right to disclose terms.

31. LICENSING CONSIDERATIONS
(CONTINUED)
– If a big player or medium player is the eventual target,
consider suing little guys first to establish patent in
litigation.
– If there are several players, consider approaching
them one at a time, as time allows. This helps avoid
pooling of resources by opponents, but watch out for
latches.
– AGAIN - Don’t try this alone, from the beginning
of the process, i.e., before the first offer to take a
license letter is drafted, consult with litigation
and/or licensing attorneys – this is very
dangerous territory.

32. Philip McKay
pmckay@hawleytroxell.com
208.388.4824
208.344.6000
www.hawleytroxell.com