A case study: IPR value directly correlates to the ability to protect it

Nothing paints the picture of how the value of IP only exists and grows when the IP rights owner has the willingness (stomach) and wherewithal (resources) to protect those rights more than a case study of a small, undercapitalized inventor, as told last week in the LA Times.

Larry Lockwood received patents in 1994 and 2001 covering e-commerce systems to market merchandise and services. To protect his inventions, Lockwood sued retailers for alleged infringement and developed out-licensing deals with some big companies. Reportedly, his patents had a value as high as $100M.

In 2003, Century City law firm Sheppard Mullin Richter & Hampton filed a re-examination petition (see 35 U.S.C. 302 Request for reexamination) for Lockwood's patents with the U.S. Patent Office. Lockwood's pending infringement lawsuits were put on hold and potential licensees refused to make deals until the re-examinations were completed.

The re-examination process took four years; one fifth of the patent’s life disappeared without any related benefit stream or effective business development activities, and who knows how much of the patent’s useful life was chewed up as competitors gained valuable design-around time? Though the patents were upheld, the delay (read opportunity cost, which Lockwood estimated at $32M) and legal expenses were crippling. In any model of IP valuation, significant degradation occurs when four of the most productive years in the IP’s life cycle are removed.

The Lockwood case gets even murkier, as he accused the law firm of fraudulently filing the requests for reexamination (for which there is unfortunately little recourse). Whether or not that will be litigated is up in the air. Clear is the fact that the system set up to foster innovation may work against individual inventors, which makes a case for the oft-criticized value preservation and enhancement services provided by so-called “patent trolls” or NPEs (non-practicing entities), companies willing to compensate inventors and take on the risk and expense that comes with IPR ownership.

IPB continues to hammer the theme that valuators in due diligence must make every effort to test the IPR owner’s willingness and ability to protect what they have.