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What are the Options When the Big Bad Wolf Comes Knocking Demanding a Patent License? (1 of 2)

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Your successful startup has caught the attention of an established company brandishing a bunch of patents and asking you to take a license. How will you explain the complexities of this to your company's leadership?

Under your watchful guidance as an executive at Bo Beep, Inc., a startup company in the software space has grown phenomenally. Sales and new customers are up and to the right each quarter. You conducted a successful IPO. Revenues are approaching a billion dollars annually. All appears rosy... right?

One day, you receive communication from the licensing department of Big Bad Wolf, Inc. offering to show you some of their patents that they believe will "be of interest" to you. A few meetings later, the picture becomes clear: Bo Beep can either pay Big Bad Wolf a royalty fee at the industry standard rate of 2-3% of its revenues for a five year license to their patents, or face a really expensive, and vexatious, lawsuit.

Your company is making and selling something innovative without copying someone else's work. This seems a little unfair that you should have to pay someone else for that privilege. Unfortunately, U.S. patent law, like those of most other industrialized nations, pay little heed to independent creation. Because Bo Peep's developers felt strongly that patents are "bad," or at least "uncool," Bo Peep has very little in the way of ammunition to fight a patent battle with Big Bad Wolf. Surely, you think, the government/patent reform will rescue me, right? Sorry. Western governments remain squarely, intransigently in the strong IP rights camp.

It is time you had a heart-to-heart chat with Bo Peep's leadership. Resolving this issue is going to cost significant money no matter what avenue you take. To that end, you should arm yourself with viable alternatives. Although greatly simplified and with varying, real costs associated with each option, set forth are potential actions your company can consider:

1. Roll over and pay: This is the lowest risk strategy, but it is also pricey... not to mention, very unsavory for the technologists at Bo Peep to swallow - that they are not the true "disruptors" who are innovating in the field.

2. Brace yourself and defend the lawsuit: Bo Peep can refuse to take a license and elect to defend itself vigorously in the resulting claim for patent infringement brought by Big Bad Wolf. Who does not respect someone who stands up for what is right? But this one is going to cost a lot of money. Also, managing a lawsuit will be disruptive to the day-to-day operations at Bo Peep. Companies do not just stop what they are doing in order to play Perry Mason.

3. Challenge the Patents: Bo Peep might be able to avail itself of the re-examination or other procedures available for challenging the validity of patents. Especially if Big Bad Wolf's patents appear of questionable value, this appears to be a reasonable option. But, this option is quite pricey as well. Also, since each challenge is actually a legal proceeding, this option will be difficult to manage and obtain support from your management to enter into and maintain all of these legal actions. Further, if Big Bad Wolf has a great number of patents, this option will be difficult to scale - costs do not decrease with the number of patents challenged.

4. Buy some patents and menace them back: There is a transactional market for patents, which Bo Beep might be able to use to improve its patent holdings. In order to make this option work, you must locate a source of patents that implicate Big Bad Wolf's business. Also, you need to be able to "vet" the patents that you locate in order to determine whether the patents being offered to you will stand up to challenges by Big Bad Wolf. This is going to take expertise in the field of patents, so choose your advisors well.

5. Options 2 and 4: If Bo Peep finds itself embroiled in a patent lawsuit, it may try purchasing patents to assert its own offensive patent case against Big Bad Wolf in a counter-claim for infringement. Costs will include the addition of options 2 and 4.

6. Join an organization with a defensive library: Organizations such as patent pools and defensive patent aggregators jointly own patents to provide some benefit to their members. Bo Peep could try to obtain patents for use against Big Bad Wolf by joining such an organization, The Little Lost Sheep Industry Association, Inc., which holds patents in Big Bad Wolf's technology space and would be willing to assign some of them to Bo Peep to use against Big Bad Wolf in a lawsuit or license negotiation. Of course, the Association charges hefty fees for its services. You can tell yourself - and hopefully sell your management on - the belief that the Association is not profiting from your misfortune.

7. Sell or merge the company: Bo Peep could sell itself to, or merge with, an established company with a large patent portfolio to change the risk/reward calculus of Big Bad Wolf. However, the threat of impending patent litigation will adversely affect the price that Bo Peep's shareholders will realize from a sale.

It is critical to consult an experienced attorney who understands the specific ramifications of the law as it applies to all each option described above, as well as the tangible financial impact such an action will have on your company's bottom line. Although you have had to pay some money to do it (which has left an awful taste in your mouth), let's assume you have settled the matter with Big Bad Wolf. Bo Peep survives and continues to grow and be profitable. Even so, your job has only just begun. Big Bad Wolf will be back at the term of your license agreement to renegotiate the terms. Furthermore, there are other patent menaces out there. How do you prepare for future patent licensing opportunities?

Stay tuned for our next post... Part 2 of 2: The Big Bad Patent Wolf is Back - Preparing for Future Patent Licensing Opportunities.

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