Last week, Research in Motion, Ltd. (“RIM”), makers of the “Blackberry” hand-held email device, agreed to pay $612.5 million to settle a patent claim that threatened its existence. The settlement amount constituted a year’s worth of RIM’s revenue.
How and why RIM chose to pay this amount provides important lessons in settlement advocacy and the use of negotiating leverage. This essay will examine the settlement and specifically discuss
How RIM evaluated the case
RIM’s use of the “creating alternatives” tactic
The role of timing
Other ways in which RIM might have created negotiating leverage.
Facts:
NTP, a Virginia-based patent holding firm established by an inventor and a patent lawyer, had sued RIM claiming the Blackberry infringed on several of NTP’s patents. In 2002, a federal jury found against RIM. RIM appealed and also took the fight to the Patent and Trademark Office (PTO), where it had initial success invalidating the NTP patents.
In 2005, the parties reached a tentative settlement for a lump sum payment of $450 million, but the judge refused to enforce the settlement. With a hearing scheduled to enjoin further sales of Blackberry’s, the parties reached their settlement last week. For its $612.5 million, RIM obtained a fully paid, perpetual license to use NTP’s patents.
Analysis:
RIM’s negotiating position had significant weaknesses:
A jury finding of infringement
An unsympathetic judge who had already rejected one settlement and who was unwilling to stay proceedings pending the PTO’s re-examination of the NTP patents
The prospect of an injunction against future sales
Pressure to settle from RIM’s customer base
Pressure to settle from the wireless carriers of Blackberry email.
Yet RIM knew that NTP would rather settle than shut down RIM. NTP is a patent-holding company. Its sole objective is to obtain licensing fees, since it has no business operations of its own. While the two sides played brinkmanship, with a pending injunction hearing, in the end RIM had no choice but to settle and knew that NTP wanted RIM to settle.
How RIM Evaluated the Settlement
The $612.5 million settlement amount can be looked at in several ways:
The settlement equaled a year’s worth of RIM’s revenue (forecast in the range of $610-620 million). Viewed this way, the settlement cost RIM a year of growth.
Analysts expected the settlement to cost RIM up to $1 billion and possibly more. The settlement was in the low end of expectations.
RIM has about $1.8 billion in liquid assets – more than enough to pay the settlement amount.
The uncertainty caused by the lawsuit had slowed RIM’s growth. RIM’s 4th quarter revenue was $55 million below expectations and its customer base showed a corresponding deceleration in new customer growth. Under the circumstances, RIM’s negotiators should be commended. The 19% jump in RIM’s stock price after the settlement announcement reflects investors’ evaluation of the settlement.
Settlement Timing
RIM also benefited from timing. It had previously accrued $450 million based on the earlier, unenforced, settlement. RIM booked the additional $162.5 million expense for its fully paid, perpetual license just before its March fiscal year end. Not only did RIM eliminate uncertainty going forward, but it contained the financial consequences of the settlement within fiscal 2006. RIM’s future stock price will thus be based solely on future operations, without the past baggage.
The “Creating Alternatives” Tactic
Despite its “bad hand,” RIM found negotiating leverage in two related tactics. First, when the federal jury in 2002 found that RIM had infringed on NTP’s patents, RIM caused the PTO to re-examine those patents. This tactic created uncertainty for NTP, reducing the value of any potential settlement.
Second, RIM devised a software fix for the Blackberry that might have avoided any alleged infringement going forward. It is unclear whether that fix would have worked – technically, legally, or commercially. But the effect, again, was to increase NTP’s sense of risk. Risk translates directly into settlement concessions.
Some Speculation
The wireless carriers of Blackberry emails had pressured RIM to settle the case. The Blackberry’s rapid growth had generated sizable profits for these carriers. The lawsuit’s pendency not only slowed RIM’s profit growth, but also that of the carriers.
Under these circumstances, might RIM have gone to the carriers requesting contribution to the settlement? The settlement benefited the carriers as well. Even if their customers had turned to alternative mobile email devices, it was uncertain whether such alternatives would match RIM’s sales growth.
Without knowing the players and the particulars, one cannot assess the business wisdom of this approach. Yet the tactic is useful to keep in mind: whenever someone benefits by what you are doing, consider them as a potential source of settlement contribution.
