Valuation of Settlement Positions Alexander Poltorak, Ph.D. General Patent Corporation October 31, 2006 © General Patent Corporation All rights reserved.

2 Overview  Rational Approach:  Taking emotions out of the equation;  Patent litigation as risk management.  Litigation Risk Analysis:  Decision Trees;  Choosing probabilities.  Other Decision-Making Tools:  Monte Carlo Simulation;  Game Theory.

3 Rational Approach: Taking emotions out of the equation  “Fighting to the death” is a sure way of getting your death wish.  “Never hate your enemies – it clouds your judgment.” – The Godfather  “It’s not personal, it’s strictly business.” – The Godfather

4 Rational Approach: Patent litigation as risk management  Quantum Mechanics of patent litigation.  Although patents are presumed valid, in reality, they are neither valid nor invalid until tried in court.  Collapsing the wavefunction, i.e. going to court.  Litigation as risk management.

5 Constructing a Decision Tree Baby Tree

6 Decision Tree for Patent Litigation

7 Choosing Probabilities  National statistics:  Validity: 65%;  Enforceability: 89%;  Infringement: 65%.  Statistics for your district:  EDT: 88%;  Massachusetts: 34%;  Statistics for your judge.

8 Refining Probabilities  Specific issues impacting on the merits of your case:  Questions of ownership;  Questions of inequitable conduct;  Willfulness;  Marking;  Latches and/or estoppel;  Other claims, e.g. breach of contract.  Delphi method.

9 Rolling Back the Tree

10 To Settle or Not to Settle

11 To Settle or Not to Settle  When the plaintiff is a NPE.  When the plaintiff is a competitor.  Valuing a patent monopoly.

12 Present Value of Patent Monopoly

13 Common Mistakes  Various outcomes are not statistically independent.  Jury bias.  Law of large numbers.  Catastrophic outcomes.

14 Other Decision-Making Tools  Monte Carlo Simulation  Game Theory

15 Conclusion Stay rational; Use of formal decision-making tools helps keep emotions at bay; Use of decision tree helps compare certainty of settlement with uncertainty of litigation; You get to play this game once – don’t gamble; Whatever the probability, if the result is unacceptable you cannot take the chance; Trial is an expensive Russian roulette.