Risk Management

• Author: Austen Zuege
• Pages: 329-391

8

Risk Management

This chapter will help you learn how to mitigate risks that are identi-

fied during freedom-to-operate (FTO) studies. Specifically, the chapter

will focus on:

• How to evaluate legal risk in light of business strategy

• Outlining strategies that can be used to mitigate specific risks, and

when these strategies should be employed

• Who should be involved in risk management decisions

• Long-term practices to minimize risk generally

8.1 Evaluating Risk

Legal departments in large organizations are sometimes unfavorably

viewed as the “Department of ‘No’” because legal counsel frequently

advise that proposed courses of action—for a product launch, adver-

tisement, or anything else—cannot be pursued due to the threat of

litigation. In the patent FTO context, risk management does not have

to be about binary yes/no or thumbs-up/thumbs-down decision-

making. As discussed in this chapter, there are opportunities to elim-

inate risks and propose less risky alternatives. However, knowing

how to navigate patent risk mitigation strategies requires a founda-

tional understanding of what really constitutes a risk and what level

of risk is really involved, as well as an understanding of the real likeli-

hood of success of risk mitigation strategies in a given context. These

aspects are all interrelated.

Even a well-executed FTO search and preliminary analysis often

leads to risk management decisions that require considerations far

beyond the mechanics of conducting a search and identifying rele-

vant patents. And yet, without a good understanding of the presence

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330 Patent Freedom to Operate Searches, Opinions, Techniques, and Studies

and magnitude of risks through a competent search and preliminary

analysis, selection of an appropriate risk management strategy can

take you down blind alleys and onto dead-end paths that waste time

and resources, or may fail to even present the opportunity for risk

management if problem patents are missed. The key is to match avail-

able risk management strategies to the particular situation at hand.

Simply selecting the cheapest approach to a patent infringement risk

is not always wise if the risk is tremendous—will it likely result in an

injunction that shuts down crucial revenue streams and maybe the

entire company? Conversely, despite vendors offering high-priced

solutions to infringement concerns, easy and inexpensive alternative

actions might be more than adequate in some scenarios. This chapter

seeks to provide an overview of common risk management strategies,

to facilitate appropriate decision-making suited to a particular busi-

ness environment.

As discussed in Chapter 3, the level of risk that a company is will-

ing to take on plays a major role in a company’s intellectual property

(IP) strategy. This strategy includes decisions regarding whether the

company undertakes FTO studies and other prior art searches. The

amount of risk a company is willing to take on also plays a role in how

a company responds to risks that are identified during FTO studies

or risks that are identified in some other manner. It is important for a

company to have a strategy for managing and mitigating risks as they

are identified, as not having a strategy could result in an avoidable risk

leading to costly lawsuits and damages awards. There is still an ele-

ment of persuasion needed when presenting risk management options

to business leaders. Even the best legal advice will not always resonate

with business executives. In some instances, advice from legal counsel

may be overruled by executive decisions, no matter how unwise that

may seem. In such cases, legal counsel may need to accept those busi-

ness decisions, and, if and when problems arise in the future, be ready

to make the case for a better course of action going forward.

Risk should be evaluated and mitigated not only as a reactionary

measure, but also as a precautionary measure. Having a strategy for

evaluating, managing, and mitigating risk can help a company ensure

its exposure to risk corresponds to its appetite for risk as much as

possible. This chapter will identify different precautionary and reac-

tionary measures that can be taken to evaluate, manage, and mitigate

risks as part of an overall IP strategy.

Example 8.1

Company A has undertaken an FTO study and four risks have been identi-

fied. Risk 1 is the identification of Competitor B’s patent in which Company

A has a reasonable noninfringement position. Risk 2 is the identification of

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Chapter 8: Risk Management 331

Noncompetitor C’s patent directed to different technology but with claims

that directly read on Company A’s proposed product. Risk 3 is the identifi-

cation of a patent with broad claims in which Company A has a reasonable

invalidity position. Risk 4 is the identification of a patent owned by a non-

practicing entity (NPE) that has been asserted against Competitor B and

others. The measures discussed throughout this chapter will help Company

A make decisions regarding evaluation and mitigation of Risks 1, 2, 3, and 4.

8.1.1 Evaluate Risk Using Both Business Judgment

and Legal Analysis

When a patent has been identified as being an infringement risk, it

is time to apply an IP strategy to mitigate the risk. There are many

considerations, with the most obvious being the cost and hassle of

being sued, including the risk of an injunction, a large damage award,

multiple damages awards, or an attorneys’ fees award being granted

if you lose. If a company is sued, there are additional considerations

too, such as possible negative publicity and loss of customer or inves-

tor confidence. An IP strategy should include both business judgment

and legal analysis, and requires cooperation and communication

between business leaders and the legal department. Below are a few

examples of how business judgment and legal analysis both can be

considered when evaluating different risks.

First, assume there is a risk to a product that is of “low value” to

the company. A product may be of low value to the company if there

are low sales, low profit margins, low strategic importance, a declin-

ing market, no other product sales depend on the sale of the product,

and so on. From a legal analysis standpoint, if a risk of patent infringe-

ment exists, it would make sense for the company to cease manufac-

turing and distribution of the product in order to avoid exposing

itself to a patent infringement lawsuit. Conversely, from a business

judgment standpoint, a company may decide that it will continue to

manufacture and distribute the product until it is accused of patent

infringement. The latter is especially likely if the company’s depen-

dency and exposure on the product is low, and/or if the company

wants to recoup some of the resources it invested into developing and

manufacturing the product. In the latter situation, a company is tak-

ing a gamble on the fact that a patent holder will not bring a patent

litigation lawsuit on such a product with low sales, due to the expense

involved with bringing such a suit. However, a company may open

itself up to a claim of willful infringement (and up to treble damages) if

it is later determined that the company’s infringement was egregious.

Ultimately, the benefit of continuing manufacture and distribution of

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