Developing a strategy to optimize the return on investment of a patent portfolio requires both technical expertise and a solid understanding of the market and where it’s going. It always starts with the same question:
What are your most valuable patents?
This is the question IP executives and patent portfolio managers grapple with every day, and it is the most important question to answer in order to maximize the return on investment from IP.
Here is the answer: It depends.
While this is the typical answer expected from engineers and lawyers, in truth there is no algorithmic or automated way to determine the value of a single patent, or to identify a company’s most valuable patents.
First, it’s important to understand the distinction between patent value and quality. Patent quality is driven by legal criteria:
- is the patented invention properly disclosed and does the patent disclosure itself enable someone else to make and use the invention? (35 U.S.C. § 112)
- is the patented invention not obvious to one skilled in the art? (35 U.S.C. § 103)
- is the patented technology new? (35 U.S.C. § 102)
- is the patented technology something that you are legally allowed to patent? (patentable subject matter, 35 U.S.C. § 101)
Patent lawyers and patent agents are fully capable of making a determination and providing an opinion on patent quality – essentially whether a patent is likely to withstand the high level of scrutiny that opposing counsel will subject it to in a litigation or patent office action.
Patent value, on the other hand, is driven by different factors. A valuable patent must be of sufficient quality to withstand validity attacks. However, patent value is much more dependent on three quite different factors:
- Is the technology patent used in products?
- Is there a large market?
- Can you prove it?
If a patent claims an invention that is not used by anyone, it is likely not very valuable. Pure ‘blocking’ patents, e.g. a patent that is actively enforced to prevent others from using an invention even though the patent owner doesn’t use the invention, are a rarity in technology fields. A patented invention that is used but is one of many possible solutions is of lower value as an infringer has the option of designing around the invention by using an equally good alternative. Patents that claim inventions that are essential to a product or service are potentially the most valuable.
If a patent is used, but only in small niche markets, then the value is commensurately small. The most valuable patents cover inventions that are widely used in products that would be difficult or impossible to sell without the inclusion of that invention. These patents are Feature-Essential Patents (FEPs) rather than Standard-Essential Patents (SEPs). SEPs have become less valuable in recent years as the encumbrances of Fair, Reasonable, and Non-Discriminatory (FRAND) obligations become more stringent.
If a patent protects technology that is undetectable, even though it may be in wide use and it covers innovative and exciting technology, then that patent is not very valuable as enforcement of your patent rights to exclude infringers would be very difficult if not impossible.
Patent value is contextual, that is it is different to different people and in different situations. There is never a single answer to how valuable a particular patent may be. For example, let’s look at the patents for a capacitive touchpad or touch screen for fingers and active stylus input. This is a technology that is commonly found in a cell phone. In this case, the patents would have value to handset manufacturers and others, but the value differs to each entity depending on what they already have in their portfolios.
- Handset manufacturers such as market leaders Apple and Samsung may seek to acquire the patents to:
- take them off the market – it costs less to acquire the patents than to license them,
- add to their portfolio and improve their own licensing or cross licensing position, or
- leverage their business relationship with suppliers of touch screens.
- New market entrants such as Xiaomi may not have sufficient technology patents in that particular area would see value in adding the patents to their portfolio to improve their licensing and cross licensing position.
- Defensive patent aggregators such as RPx may want them to take patents that threaten their members’ freedom to operate off the market. RPX did this recently when it spent $900 million to acquire the former Nortel patents from Rockstar.
- Handset device suppliers and contract manufacturers or other companies in the eco-system, such as Qualcomm or Foxconn may see these patents as a means to protecting suppliers and downstream clients or for leveraging sales or acquisitions.
- Patent assertion entities such as Acacia will regard the patents purely from the perspective of how much money the patents can generate in patent assertion and monetization roles.
Each of these entities attaches a different value to these patents depending on their unique business strategy and what their existing portfolios already contain.
Matching patents to other company’s products demonstrates value and increases any patent’s marketability. Being able to show evidence of use with claim charts is the best way to prove value. A recent article on the 2015 patent brokerage market suggests that patents with evidence of use sell for ~30% more and are ~40% more likely to sell. Our experience is that solid evidence of use should at least double the market value of a patent.
Proving use begins by identifying the key elements of the claims and, most importantly, the differentiating or inventive concept. Then, using different methods of analysis, you can map the key elements to features found in a downstream product. For analyzing microelectronics and software enabled technologies we use the following types of analysis:
- Process analysis finds infringement evidence through structural and materials analysis of chips or packages to document how a device is built and what it is made from.
- Circuit analysis helps find infringement evidence in semiconductor designs. Experts can delayer any current or historical semiconductor chip enabling circuit analysts to extract and document the circuit design and understand how the device operates.
- System analysis finds infringement evidence in hardware, software, and networks using literature searches, standards, functional test, electrical microprobing or software extraction and analysis to document how a microelectronic system (hardware and software) operates.
An organization’s overall IP strategy should support business strategies and help increase the value of the company. IP strategy will be different depending on the business and market. Value is not always about how much money can be generated by patents. Companies may want to motivate employees; attract customers, attract business partners or investors; protect existing products and the ability to improve them in the future; block or intimidate the competition; license to improve market penetration, generate income or gain access to third-party technology; improve their return on investment, or generate income or savings through joint-ventures, mergers and acquisitions, or investing in start-ups, among other strategic IP goals.
Truly valuable patents are rare. Studies show that fewer than 5% of patents in a typical technology patent portfolio are valuable. Finding these rare valuable patents in a large patent portfolio is a challenging task. There are a number of tools that can be used to mine patents to help indicate the patents that are potentially the most valuable. These automated tools compare a group of patents with a target company’s technology and products to prioritize which patents should be read first. This pool can be hundreds of patents, and will include false positives and false negatives. These initially identified patents are screened quickly by subject matter experts – engineers – who select those that are most applicable to the targets and remove false positives selected by the automated tools. A preliminary evaluation of claims prioritizes patents based on whether it is believed that the invention is in use today and that this can be proven. This ensures that the majority of the time and resources are used understanding the best patents. Note that false negatives – valuable patents that the automated tools failed to identify as potentially valuable – are not flagged in this process. Different algorithms and tools are required to identify unenforceable or valueless patents if, for example, a portfolio triage to identify candidate patents for abandonment is being undertaken.
Finally, the patents must be matched to products. This helps companies understand; what demonstrably valuable patents they have, the products they may apply to, and how much revenue those products represent. When engaging in a license discussion with a prospective licensing partner, the goal is to identify a number of patents used in each product that represent key market areas and show potential infringement of your patents on as much revenue as possible from the target licensee.
Understanding the key valuable patents in your portfolio opens up the tactical options that can support your patent and IP strategy. There are many options, some that are compatible and some that are mutually exclusive.
Internal programs leverage the strong internal knowledge of portfolios, allow companies to retain ownership of patents and control over their strategy while potentially creating an ongoing revenue stream. Yet there is generally a significant time before revenue is realized and relying solely on internal resources may limit capacity and experience. Qualcomm and Ericsson are two examples of companies that generate billions of dollars in annual revenue from internal licensing programs.
External licensing programs create an ongoing revenue stream and can be done in combination with an internal program to more quickly ramp the royalty stream. In addition, they can be leveraged so internal resources learn best practices from the external team. Conversely, they are more expensive than internal programs.
Selling a patent portfolio or a portion of a portfolio is another option. Identifying portions of a portfolio containing valuable orphan patents, i.e. patents that don’t support your current or future business strategy and therefore are of little value to the business, can create an externally valuable asset. Selling a portion of a portfolio can provide a relatively quick time to money, typically between 12 and 18 months, and reduce maintenance costs in non-core areas. The disadvantage is that you are releasing potential future assets – there is no ongoing revenue as compared to licensing. Traditionally U.S. patents have driven the value of portfolios as this is where enforcement via courts has been the strongest. However shifting legal environments weakening patent rights in the U.S. and strengthening them in other jurisdictions such as Europe and China mean that increasingly buyers want to own technology patents on a worldwide basis.
Companies that may have orphan patents, small numbers of surplus patents, or too many patents in a particular area of the patent landscape may also choose to create or use a privateer. This allows companies to leverage outside resources to monetize non-core assets with minimal resource commitment. To increase potential returns, the company can opt to split the portfolio. Since there is a third party involved, any litigation is disassociated from the company and risk is assumed by the privateer. In privateering, the company does lose control of the patents and licensing decision-making. Many companies, for example Nokia and Ericsson, have set up privateers that pay some amount up front and then share the returns at the back end. The question every company must address is whether or not they want to be associated with entities that will be portrayed as patent trolls.
Finally, companies can leverage patent pools. This happens when several companies with patents applying to a specific technology put them together as an aggregate and license them as a group. This approach provides a quicker rate of return, a single royalty rate, and reduces administrative costs. Yet, there is often a limited return relative to portfolio value, FRAND licensing commitments, and shared royalties. In addition, it encumbers patents so they are not available for other programs. Many companies, e.g. Technicolor, make hundreds of millions of dollars each year by participating in patent pools.
In conclusion, patent values for big portfolios are increasing while values for individual patents are decreasing. The market trend is toward high quality patent portfolios, backed by evidence of use, that meet the criteria for value defined earlier. These have the potential to be extremely valuable. However, if a company has a single or a small number of patents, the value of the original investment is most likely declining. Second, litigation is a necessary component of most licensing programs today more than ever. While most litigation is simply failed negotiation, many potential licensors are turning to the courts to demonstrate the value of their patents to unwilling potential licensees. When it comes to litigation, the U.S. is still the primary battlefield, however many companies are looking for other enforcement venues, like Germany and, to a lesser extent, China, which is still considered too risky for most international litigation at this point. The bottom line; in any IP strategy in today’s patent environment is that patent value must be clearly demonstrated to achieve optimum returns.