How Litigation Strategies & Risk Management Works

A Real World Problem*
We are a small pharmaceutical company with good patent protection in a profitable market niche which we dominate. Another small player trying to expand in our market has a new, much improved product which patent counsel thinks infringes on one of our key patents. Our corporate counsel must choose among three courses of action: do nothing, enter a cross licensing agreement, or sue for patent infringement.

If we do nothing, our margins and market share will erode over time more rapidly than they would if we maintained our protective posture.

If we cross license, we would be letting a competitor into our market, but we would be able to have some small measure of control and we would extract some of their profits.

If we sue them, they will almost certainly sue us for violating one of their patents. All of the combinations of our patent being valid, their infringing it, and their patent being valid and infringed by us would have various impacts on our market share, our margins, licensing fees and revenues. Of course, there will also be significant litigation costs.

How should we choose among the three alternatives? The first step is to build a simple influence diagram to make sure that we have included all the major factors that must be considered and to understand the relationships among them.

*This case is adapted from an actual problem. The analysis is simplified here for illustrative purposes.

The next step is to construct a decision tree to help lay out our alternatives, the possible outcomes and their consequences. In the tree we can show the probabilities of the events and outcomes obtained from the appropriate counsel and our own business and marketing people. We can then calculate the expected value (the probability weighted average) of each alternative to use in the decision-making process.

The tree shows that the expected loss for “Do Nothing” is $136 million; for “License,” $54 million; and for “Sue/Be Sued,” $17 million. The tree also shows that there is about a 5% chance of essentially losing the company if the competition does not infringe our patent and we are found to infringe theirs.

We can also generate a probability distribution to show the range of outcomes and their likelihood . This distribution shows some small chance of a big loss, and a broad range of possible outcomes from -$150 million to $125 million.

Finally, we can construct a chart that allows us to determine how sensitive the expected value is to any of the inputs to show us where we need to spend further time thinking about the issue in question, to show us which issues we should focus on at trial, and to resolve differences of opinion.

The customary decision in most situations like this would be to license, especially when there is any threat to the viability of the company. Litigation Strategies & Risk Management allowed the corporate counsel to show senior management the exact scenarios and their likelihood (~5%) that could lead to the feared outcome. Counsel also could make them understand that the events leading up to this outcome could be monitored and that (with further analysis beyond what we have room for here) effective contingency plans existed and could be executed in a timely manner.

Furthermore, the contingency plans would reduce the probability of the disastrous outcome to less than 2%, and raise the expected value of “Sue/Be Sued” by $7 million. With this information, and knowing that their own inputs had been used for the business impact analysis, senior management felt comfortable and confident about proceeding with the litigation.

The court ruled that, while our patent was valid, it was not infringed, nor did we infringe on their patent. We could not prevent this company from entering the market, but the finding that our patent was valid strengthened our hand in dealing with other potential competitors. Overall, the net gain was $67 million over the conventional decision to license.

“… gives me an entirely new way to communicate to non-lawyer management about litigation risk and strategy using a language they understand.”
Sally R. Phillips, Assistant General Counsel Pinkerton’s, Inc.

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