Risk Management

AuthorAusten Zuege
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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