What is the best way to assess the potential value of a patent portfolio?

By Terry Ludlow
October 30, 2016

Financial valuation button with business hand on blurred backgroundPatent portfolios come in all sizes, and can grow exponentially over the years through invention, mergers and acquisitions, portfolio purchases and other means. When in its infancy a portfolio is relatively small, making it straightforward and easy to identify patents that have the most potential use and value. As portfolios grow, this becomes more and more challenging. However, maintaining an up-to-date assessment and understanding of a portfolio is an essential business practice, especially for technology companies. IP managers are left wondering, “What is the potential value of our portfolio?”

Patents can hold potential value in a wide range of business transactions. For example a portfolio may be licensed or sold. A company may identify a new opportunity or use for an existing patent as technology evolves. This is especially true right now with the Internet of Things (IoT) where we see converging technologies giving rise to new use cases. Patent value should be a factor in any merger or acquisition, or when seeking additional investments. This begs the question, “What is the best way to assess the potential value or use of a patent portfolio?”

Before we examine this, it’s important to clarify that a patent only has value in the context of its place in a portfolio and in how the portfolio is used to support the organization’s business strategy. Let’s look at two examples. A Patent Assertion Entity will evaluate patent value based solely on the potential revenue that will come from a licensing program. On the other hand, an operating company typically places a higher value on patents that provide protection. This can be the ability to defend leadership in a profitable market category or the ability to offer protection as a sole-sourced product’s revenue stream.

In any case, the concepts presented here are intended only to offer guidance to companies that are actively transacting or licensing patents.

The traditional patent valuation techniques, cost, citation, market, and income based, are not particularly relevant to IP and licensing professionals. Since they have no bearing on the true value of patents from a strategic business perspective, they will not be discussed in this article. Instead, we’ll focus on the three essential factors that impact patent value:

  • Patent validity.  This has to do with how claims were written, their ability to stand up to scrutiny under current legal systems, and whether or not they were truly new or could be subject to prior use assertions. Essentially, a consideration of is the patent valid?
  • Technical merit. This looks at the usefulness of a patent’s claimed invention. It includes its unique ability to solve a problem or be used in a particular product/product type. It is important to consider here whether or not the claims accurately reflect the invention.
  • Essentially, this refers to how widely the invention protected by the patent is used in various products and markets. It takes into account its competitive position and the revenue it generates. It also examines whether or not the invention is part of an industry standard.

We follow the Five Step Patent Evaluation Process to help our clients identify patents with high potential value and use.

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Figure 1: The Five Step Patent Evaluation Process

The Five Step Patent Evaluation Process

1. Identify targets that support your company’s strategic business goals.

Patent brokers and PAEs consider who is using the patented technology, and whether the technology generates profits, reduces costs, and differentiates their potential licensee’s products. They research how much revenue the products generate and how much the patented technology contributes to that profit. Typically, a PAE will only be interested if a licensing program has the potential to generate more income than it will cost.

Corporations also are interested in evaluating the potential for cross-licensing deals that provide access to new technology. This may generate new products and revenue for both parties. They are most interested in information on competitive advantages, revenue and profit margin protection.

Regardless, focusing on specific targets with clear licensing objectives will better target the patent mining process and limit costs.

2.  Complete patent mining to assess value.

While subject matter experts (SMEs) are the best source for reading, analyzing and mapping each patent and its claims, this approach can be time and cost-prohibitive and hybrid approaches may be preferred. Today, sophisticated software allows patent mining to be completed prior to hands-on screening and analysis by SMEs. This pre-screening reduces the number of patents to assess and ensures that they have a high probability of value vis a vis the current program. Often, preliminary research and product reverse engineering – from teardown to semiconductor cross sections – is required in order to further focus patent mining.

Patent mining should use a combination of keyword, classification code and semantic language search as well as machine learning. Keyword searches require a good dictionary that accounts for synonyms, hypernyms and hyponyms. Classification code searches generally are useful only in the first phases of mining as critical flaws equate to poor precision (relevance of patents kept) and recall (relevant patents missed).  Semantic language searches enable a more-like-this search paradigm, which lessens the need for controlled technical dictionaries. Finally, machine learning trains algorithms to find patents in a portfolio based on example patents that represent the technology concept.

Patent topographic maps automatically render text-based technology clusters, which are used to find patents on technologies more likely to be used in target products and identify white space or gaps in a portfolio. Good mapping tools provide flexible color overlays and include machine learning algorithms and Boolean search to turn patents (dots) on / off. The most valuable topographic map strikes an optimal balance between detail and trend analysis, and conveys strategic information to all IP stakeholders. These tools should overlay lists of ‘proud’ or ‘star’ patents, competitor’s patents, date ranges, IPCs, existing hits or any other patent metadata, on a portfolio map to yield insights.

Remember, patent mining is inherently lossy and that outliers can be missed. Therefore, don’t automatically abandon patents that were not identified for further study.

3.  Screen for relevant patents.

SMEs should complete a quick review of the patents that the software tools produced. This helps refine the list of relevant patents and eliminates false positives, patents that may have been selected, but that don’t support the objectives or read on the target. This screening also identifies outliers or false negatives that have potential value. Recovering these requires further iterative mining steps with different parameters.

Screening is especially important if the first analysis failed to generate the desired number of potentially infringed patents. After screening, the patents are divided by subject and by some basic measure of value, e.g., high/medium/low rankings. This process is often assisted by text mining, which allows you to direct smaller piles of patents to the correct SME for detailed evaluation.

4.  Evaluate.

During the evaluation process, the SMEs read and analyze the claims. A multi-part rating system can be applied to rate

  • the probability of use in industry
  • the ease of proof of the claims
  • the perceived risk of prior art/prior use being found

Identifying patents at risk allows analysts the opportunity to either eliminate a patent with prior art exposure or to better understand the claim limitations and improve the quality and enforceability of claims. A high priority patent is used in the industry and can be documented easily, while a medium priority patent is more expensive and difficult to document. Remember, all of the ratings are opinions based on the reviewers’ experience and quickly sourced references.

5.  Patent Product Mapping. Searching for Evidence.

Evidence of use is the cornerstone of most IP licensing and transaction negotiations. Without proof, these negotiations often fail. The most compelling evidence of use is accurate and detailed claim charts. These offer concrete evidence that a patented invention is being used in a product and show how the claims are being interpreted. Today, the most powerful claim charts often are developed using sophisticated instruments, complex analytical techniques, and highly skilled SMEs.

A patent to product matrix is developed that reflects the program objectives and the patent evaluation. The matrix maps high probability patents to products already being manufactured by potential licensing targets. Both the patents and the products can be segmented by a number of criteria that is used to assess potential risk, damages and royalty fees. These criteria include the patent rating, the market or current and forecasted future sales volume, and the product revenue.

The patent product matrix is an important tool. It demonstrates how effectively a patent portfolio covers a potential licensing partner’s product line and revenue. Using a standard damages model and royalty rates you can calculate the potential and cumulative value of your patents. The first patent covering a specific product and technology is always the most valuable. Subsequent patents covering the same products and technology diminish in value exponentially as the number of patents in this cluster grows.

Conclusion

Finding the valuable patents in a large portfolio is critical for IP executives seeking to effectively manage their IP, yet it can be a daunting task. The most effective approach to identifying valuable patents in any portfolio is to rely on a combination of proven processes, advanced tools and experienced SMEs.  Knowledge of the richness of your portfolio optimizes your licensing opportunities and enables the formation of a more effective patent and IP strategy.

The Author

Terry Ludlow

Terry Ludlow is the Founder, Chairman and Chief Executive Officer (CEO) of Chipworks. He is a recognized leader and pioneer in the use of advanced semiconductor reverse engineering processes to support innovative product design and to extract maximum value from Intellectual Property (IP).

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 2 Comments comments. Join the discussion.

  1. Paul F. Morgan October 31, 2016 1:45 pm

    An important value of patents [apparently less considered in the rush to sell patents to PAE’s these days] is their defensive value. How else can you protect a new product development before product launch from intervening patent application filings of others without requiring any public disclosures until at least 18 months later? [Protecting new product lead time.] Especially under the AIA?

  2. Paul F. Morgan October 31, 2016 1:56 pm

    The article correctly stresses the importance of guessing if any of the patents might be infringed. But at least some attention should also be paid to validity. It is not that hard to spot some claims that have a potential Alice-101 issue. Or claims that appear to be so broad for the state of the art at their filing date that one logically should ask what kind of prior art search was conducted before filing or after issue. One thing that has clearly been learned from the plethora of IPR decisions is the danger of relying solely on the limited prior art search time of PTO examiners to assume that is the best prior art available.

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