Patent Valuation

Improving Decision Making through Analysis

William J. Murphy, John L. Orcutt, Paul C. Remus

• Verlag: Wiley
• Jahr: 2012
• ISBN:
  9781118235904
• Auflage: 1
• Thema: Derecho
• Thema: Derecho de la propiedad intelectual

A practical resource for valuing patents that is accessible to the complete spectrum of decision makers in the patent process

In today's economy, patents tend to be the most important of the intellectual property (IP) assets. It is often the ability to create, manage, defend, and extract value from patents that can distinguish competitive success and significant wealth creation from competitive failure and economic waste. Patent Valuation enhances the utility and value of patents by providing IP managers, IP creators, attorneys, and government officials with a useable resource that allows them to use actual or implied valuations when making patent-related decisions.

• Involves a combination of techniques for describing patent valuation
• Includes descriptions of various topics, illustrative cases, step-by-step valuation techniques, user-friendly procedures and checklists, and examples
• Serves as a useable resource that allows IP managers to use actual or implied valuations when making patent-related decisions

One of the most fundamental premises of the book is that these valuation skills can be made accessible to each of the various decision makers in the patent process. Patent Valuation involves narrative descriptions of the various topics, illustrative cases, step-by-step valuation techniques, user-friendly procedures and checklists, and an abundance of examples to demonstrate the more complex concepts.

Part One

Foundations for Patent Valuation and Decision Making

Chapter 1

Valuation Basics

One cannot make an informed decision without valuation. By definition, decisions require choosing between alternative courses of action. Putting aside for a moment what value actually means, a reasonable decision maker will seek the alternative that provides the best value. If a firm is considering whether to buy an asset, it will want to determine the asset's value to the firm and compare it with the acquisition cost. If a firm is choosing between business strategies or financing strategies, it will want to pursue the strategy that provides the most value to the firm. The realization that informed decisions require valuation is well understood in many business settings. You would be hard pressed to find a competent corporate finance manager who does not rely on valuation as the primary decision making tool.

Despite its acceptance in other business settings, valuation has been slow to develop as a wide-ranging decision-making tool for patents. In the patent context, valuation analyses tend to be conducted only when absolutely required. If a company is about to license its patent rights to a third party, for example, or needs a damages estimate for an infringement lawsuit, a value obviously must be placed on the patent rights. Consciously valuing the potential patent rights at other times is much less common. In effect, thoughtful valuation efforts are limited to when money is about to change hands on the patent rights or when an asset value needs to be placed on the books for tax planning or accounting purposes. Using valuation to make patent decisions in other circumstances, however, remains the exception rather than the rule. Twenty or thirty years ago, when patents tended to be less critical to firms’ success, it may have been permissible for companies to take a cavalier approach to valuing patents and making patent decisions. That is no longer the case. Today's successful manager, scientist, attorney, or governmental official involved with patents is constantly asked to make decisions, and that decision-making process can be significantly improved by understanding and using valuation analyses. Consider just a few of the common patent-related decisions that firms face on a daily basis:

Which R&D project should the firm pursue?

Should the firm obtain a patent?

In which countries should the firm obtain a patent?

How broadly should the firm's lawyers draft the patent's claims?

How should the firm manage its patent portfolio?

Should the firm sue a possible infringer?

How should the firm respond to a threat of an infringement suit?

How should the firm monetize a patent?

For those decision makers who purposefully or inadvertently try to avoid valuation analyses, their avoidance efforts will not be successful. Every decision involves a value judgment (the option chosen is better than the options not chosen), whether the decision maker appreciates it or not. When a company decides to prioritize one research and development (R&D) project over another, for example, the company has valued the winning R&D project higher than the other. When a company decides to settle a patent infringement suit, the company has valued the settlement alternative higher than the litigation alternative. Therefore, the choice is not whether to conduct a valuation analysis. Rather, the choice is whether to employ an intelligent valuation analysis that helps to inform the decision or to employ a sloppy process that ignores such valuable information.

Valuation has traditionally had a limited role in the patent context because it is perceived to be so complex and uncertain that the effort is not worth the information it generates. We could not disagree more with that line of thinking. This book is based on two foundational principles that we hope to prove throughout the text: (1) Reasonable valuation estimates can be generated for patents that significantly improve all aspects of patent decision making, and (2) conducting useful patent valuations is not that difficult. In fact, patent valuation skills can be made generally accessible to most actors in the patent industry and thereby improve decision making throughout the entire patent process.

In this chapter, we

Explain what is meant by value.

Provide a general overview of the valuation process and what it can accomplish.

Explain the importance of identifying exactly what is being valued: the invention, the patent rights, or both?

Examine some common misconceptions about valuation that obscure the ultimate benefits of the exercise.

Provide an overview of the three fundamental valuation approaches (income, market, and cost).

Consider limitations on rationality in valuation and decision-making exercises.

What Is Value?

A valuation analysis seeks to determine an asset's value. Most of us have an intuitive appreciation of what is meant by value: It refers to the benefits that come from the asset. The unifying benefit patents provide is the cash flow that patent rights help to generate. Why do firms buy, sell, or otherwise make decisions about patent rights? There are many specific reasons, but the overarching rationale that links each patent decision is the firm's desire to generate economic benefits. By their nature, most firms are profit-driven entities. Whether or not mandated by law (e.g., in the case of corporations¹), the fundamental purpose for most business firms is to generate profits. A firm's decisions to accumulate, use, transfer, enforce, or defend patent rights are therefore driven by the ability for that decision to generate “net” economic benefits—economic benefits that exceed related costs—that enhance the firm's economic position. Thus, a patent valuation analysis is an attempt to measure the net economic benefits that come from a firm's patent-related decisions.

How do patent rights help the rights holder to generate the net economic benefits that are the source of value? That is a topic we will cover throughout this book. For now, note that there are two choices: Economic benefits can be either direct or indirect.

1. Direct economic benefits: Patent rights can create a direct cash flow stream for the rights holder that could not be earned without those rights. For example, holding the patent rights may allow the rights holder to generate extra profits that stem from excluding competitors.

2. Indirect economic benefits: Patent rights can also generate indirect economic returns for the rights holder. Namely, the patent rights can (1) save money for the rights holder by reducing or eliminating certain negative costs and (2) indirectly help the rights holder to generate cash flow streams (e.g., a patent can signal R&D strength that helps the patent holder to raise investment capital and build other business lines).

On occasion, patents can also generate noneconomic benefits (see Box 1.1).

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Box 1.1: Instrumental versus Intrinsic Value

In this book, we will generally focus on instrumental value. Patents have value as instruments of commerce that provide rights holders with certain economic benefits (both direct and indirect). Because patents are typically held by companies and other commercial actors, the instrumental value of patents is the dominant focus for most rights holders.

It should not be forgotten, however, that patents may also have intrinsic value for some rights holders. Many inventors are driven to patent by the...