Patent valuations are frequently required as part of due diligence for transactions, acquisitions, or investments. These valuations may be performed by engineers, patent agents, licensing professionals, auditors or accountants. While these professionals may perform in-depth analyses when evaluating patents, they do not have the same expertise as a patent litigator. As an exclusive right, patent value is sharply limited by the strength and validity of the exclusive right. Given the ever-changing patent enforcement landscape, having an experienced patent litigator participate in patent valuation can pay significant dividends.
The valuations performed by non-patent lawyers often ignore factors that can significantly impact the true value of the portfolios being analyzed. For example, where large portfolios are being evaluated, it is not unheard of for a value to be assigned to one patent and then simply multiplied by the number of patents in the portfolio. This ignores the fact that when it comes to large portfolios, the overall value is frequently driven by a small percentage of the patents, and the rest of the patents are tag-alongs with little added value. Thus, the respective contribution of each patent in the portfolio to the overall value is by no means equal to other patents in the portfolio. Furthermore, patents are wasting assets, meaning that they cost money to maintain and expire after a fixed term. The maintenance fees, which increase over time, and expiration, which draws nearer each year, along with other issues such as laches, compel patent owners to actively manage their portfolios. It is important when making decisions based on the value of patents, whether for acquisition, licensing, investment, or divestiture, to have an accurate valuation that accounts for the impact of the current legal environment.
Patents are creations of the law. They are authorized by the Constitution, codified by statute, and interpreted by courts. The subject matter patents describe and claim may be directed to engineers and scientists, but at the end of the day they are intangibles whose values fluctuate with Congressional acts, the rulings of courts and even public sentiment which can seep into jury deliberations. This is something patent litigators know all too well.
A patent litigator knows the ultimate truth about patents: their real value is only revealed in the gauntlet of litigation. In a bygone era, patents were reputed to have a statutory presumption of validity, the power to exclude by way of injunction, and the capacity to yield treble damages if an accused infringer were so wanton as to disregard a notice letter and fail to obtain an opinion of counsel. It was often unnecessary for a patent holder to flex its muscle by bringing suit to enforce its intellectual property rights. Instead, the arms-length Georgia-Pacific theoretical license negotiation might well have occurred even before the commencement of any infringement. Those days are over.
The once fearsome powers of patents have been whittled away by court decisions (eBay, Alice, Muniauction, Nautilus), statute (AIA), and disincentives to enforce (Octane) to the point where “efficient infringement” is the de facto way business is conducted. Corporate counsel and academics openly admit that the typical way to deal with a notice letter is to ignore it (and deride as bullies those patent holders that opt to skip that now-pointless first step in the licensing dance). Patentees who are audacious enough and sufficiently funded to actually assert their patents face an uphill battle with lower expected returns and a real possibility of facing sanctions if they are unsuccessful.
Against this backdrop, potential licensees have little incentive to renew old licenses or take new ones, and will instead drag out negotiations with no real intent of paying for the privilege of using someone else’s intellectual property. After all, if the worst that could happen to them is a remote chance that a court will force them to pay a reasonable royalty after a few years of unauthorized use, why would they volunteer to pay anything more than a nuisance value upfront? In addition, many companies quite rationally refuse to pay even a nuisance value for a patent they are infringing for fear of acquiring a reputation as an easy mark.
The defanging of litigated patents has depressed values of patents more generally, and licensors are feeling the pinch. In this era of change, interested parties require accurate information regarding the true value of their patents. A valuation that does not include a patent litigation reality check risks glossing over critical factors that can seriously impact the true worth of a patent.
An accountant or licensing professional might simply consider the relevant product market to which a patent is directed—smartphones! That’s a $XX billion/year industry!—and apply a “historical” royalty rate. But a patent litigator will account for apportionment of royalties in proportion to the contribution of the patented invention to the product as a whole. The experienced patent litigator will also base any infringement analysis on a reasonable claim construction, screen for potentially fatal flaws in each patent, and consider the litigiousness of the potential licensees.
A patent litigator can efficiently screen for potential legal deficiencies such as:
- claims that cannot be infringed by a single actor (and for which a multi-actor scenario does not have a “mastermind” actor who directs the others);
- claims that are likely unpatentable under 35 U.S.C. § 101; and
- claim terms that are impermissibly vague, unsupported by the specification, or not enabling to persons of ordinary skill in the art.
A patent litigator can also screen for problems with infringement and detectability of infringement. With first-hand knowledge of the vulnerabilities that can be exposed in the course of litigation, a patent litigator can more accurately forecast reasonable damages, and can also apply an appropriate discount – based in fact – for the possibility that an assertion would not succeed.
Will a valuation that includes input from a patent litigator be lower than one that does not? In many cases, the answer is yes. But knowledge is power, and it is generally better to possess accurate information than an unrealistically inflated valuation. A patent owner, investor, purchaser or licensee who is armed with an accurate valuation can make better-informed business decisions regarding patents.