Posts Tagged: "patent valuation"

As the battle over the adequate forum for Ericsson v. Samsung continues, the question arises as to how the court will eventually deal with the valuation of the standard essential patents (SEPs) at stake. Here, the U.S. courts are at an advantage. After all, the United States has from the outset illustrated global thought leadership on the valuation of SEPs. Historically, courts have accepted two principal methods to determine the value of SEPs: the Comparable Licenses Approach and the Top Down Approach. These methods have come to be seen as compatible with the Georgia Pacific Criteria, which set out the core valuation principles in the United States and, increasingly so, even beyond U.S. borders.

Imagine you are presenting to your boss and requesting approval of a $2 million purchase of four patent families. Already savvy about market prices, she is focused on the impact of the purchase to the business. Her question: “So what are these patents worth and what will the impact be of the purchase?” Unless you have done some sort of valuation to quantify the worth of these patents for the business, you may find yourself talking vaguely about synergies or avoided costs. This is because getting a valuation typically takes time and can be expensive. But what if there was a way to quickly model the worth of the patents to us?

Occasionally, we hear people say, “brokered patents are all junk.” This begs the question, “are operating companies and non-practicing entities (NPEs) spending hundreds of millions of dollars buying junk patents?” Luckily, the short answer is no. We know clients have successfully bought and used brokered patents to substantially alter their licensing and litigation posture at a lower cost than the alternatives. We also know that patents on the brokered market rank higher than average patents. So why this disconnect? We are victims of our own cognitive biases and the behavioral economic traps that make it harder for buyers to find and buy patents… When only a small fraction of what we are looking at is ultimately interesting to us, our brains can trick us. Using a structured decision-making process together with some tools can overcome those biases and allow us to identify and buy the patents that fit our business needs.

Suppose you are valuing a large patent portfolio with issued patents and pending applications in more than 20 countries throughout the world. One of your tasks would be to project how much royalties each patent could collect in each of the subject countries over time. After plotting out your expected revenue streams, you would have to apply a discount rate to these projected royalty revenue streams to reflect the risks associated with entering into governing licensing agreements. Which risks are embodied in discount rates (also known as costs of capital)?

AST, a provider of proactive patent risk mitigation solutions, recently announced the results from IP3 2017, a fixed price, fixed term, collaborative patent buying program. Launched this past August, IP3 2017 gave sellers an easy way to access the secondary market by streamlining the process of selling patents with a fixed price, rapid response model. Through IP3 2017 patent sellers…

Enforcement of patents through litigation occurs when licensing has failed to result in an arms length negotiated resolution. In other words, patent owners resort to litigation when there is a market failure… When Keller says that the value of a patent is inextricably tied to the value obtainable through litigation that is just an economic truism. If the patent has no value when enforced in litigation, whether because the subject matter of the innovation has become patent ineligible, or because of a bias that tends toward finding practically everything obvious, the patent has no enforcement value. These litigation realities spill over into the business dealings because a patent that has no enforcement value will have necessarily have no licensing value.

Whether one celebrates or decries the PTAB, there can be little doubt that it has worked a profound effect on the value of American patents—and, concomitantly, on incentives to invest in research and development… Compared to their judicial counterparts, PTAB judges are biased in favor of invalidity. Personnel differences also explain a more disturbing phenomenon, mainly, that the Patent and Trademark Office seems to be at war with itself. Frequently, the PTAB invalidates claims based on prior art that examiners considered during initial prosecution. The only explanation for such discordant outcomes is that PTO examiners take a more pro-patent view of validity than the judges who make up the PTAB.

At first sight Amazon´s patent portfolio is indeed remarkable, with respect to its total value as well as its development over time: the total value of the company’s patent portfolio shows a strong over-proportional growth within the past six years. Starting 2010 with about 550 patent families and € 130m, the patents have reached a total value in September 2016 an impressive total sum of € 1,15b with 4,162 alive patent families. For a company being recognized as a retailer this is indeed remarkable and shows the trend of being more and more a high tech company. This can be seen within their strong increase of total patent portfolio value but also the technical analysis.

Your CEO: “Why are we spending so much on patents?” Your CFO: “Do we have a financial model for this spend?” The path forward isn’t clear. Now what? Using a model that examined both patent risk and expected risk reduction allowed the client’s IP department to put a number on the value of their efforts. In turn, this enabled the executive team to grasp the return on investment (ROI) from the patent strategy. Our client now had a tool to use for making decisions on how to mitigate patent risk and where to spend money to build their patent portfolio. The implications extend further into setting metrics and plan objectives to ensure that the patent strategy is on track.

In many cases, the challenge of patent quality is reduced to questions of patent validity. However, in other cases, the quality of a patent depends on economic valuation, which is a market phenomenon. After all, if a patent lacks any value in market, why would infringers care about it at all? Only valuable patents that have market impact are directly attacked by incumbents. This observation leads to the revelation that all patent disputes are based, not on patent quality, but on patent valuation. In the main, most patents of high value are considered high quality inventions, with low quality inventions not having value in the market… The modern patent system originated in Venice. At first, it worked well. But eventually, a cartel of market incumbents exercised their market power, took over the system by modifying its rules and diminished the effectiveness of the patent system for their self-interest. The effects of these changes were disastrous as technological progress slowed and the economy floundered. We are seeing a repeat of this market phenomenon in the U.S.

“It’s not very helpful to talk about quality,” said former Chief Judge Michel. We agree. Quality has too many meanings for too many people. We all want quality patents, but we do not agree on what quality means. A better objective for patent strategy and patent management is the pursuit of valuable patents. “But wait!” you say, “Isn’t ‘valuable’ just…

We need to ask ourselves: what are the defining features of a “filler patent”? At least two things stand out. First, “filler patents” go through more rounds of prosecution than other patents. Secondly, the independent claims of “filler patents” are longer (have higher word counts) than other patents… A “round of prosecution” means an Office action from the USPTO and the applicant’s response. It is typical for “filler patents” to go through multiple rounds of prosecution, such as six or more rounds. At each round of prosecution, the claims are tailored, so that the scope of protection of the resulting patent is whittled down until essentially nothing is left. Then the application is allowed to issue.

Even though traditionally valuation professionals have used a combination of cost-based and market-based valuation, more and more practitioners are using income-based valuation in combination with market data.  The income-based model focuses on what potential monetization or potential impact on business a patent portfolio might have, and as such, it is much more dynamic and reliable… For patent portfolios of potential future value, technology risk is preferred over market risk and one could use current market data to benchmark future value while building an income-based valuation model.

While patent portfolios are entering the market other patent portfolios continue to leave the market having been purchased. Asking prices seem to have also reached an equilibrium point, according to Kent Richardson of the ROL Group. There are buyers on the market looking for good portfolios, both tech companies who themselves have thin patent portfolios who are looking to back-fill their portfolios. Some non-practicing entities that had previously left the market have also started to come back as buyers over the last 12 to 18 months, at least kicking tires and strategically acquiring where the assets are strong and the price is right.