Patent Valuation

Question

What are ways to find the value of a patent. By value, I mean its selling price in the market.

Which is the most preferred method and if I need to go about it, how should I proceed/start?

Answer 1

As far as I can guess, it's probably very much like pricing any other asset, but with several caveats that are very specific to the patent system. One such significant caveat is the unpredictable effect of case law as it is made. As an extreme example, imagine if you had a "valuable" business method patent, and the Bilski decision had flat out ruled business methods as un-statutory. Suddenly your patent value basically drops to 0.

However, it certainly is possible; after all, licensing executives and damages experts in patent lawsuits do it regularly. The best person to comment here would be an experienced licensing executive, but I doubt we'll get one here anytime soon.

From some light research, hearsay and guesswork, here is an approach at a very broad level. (Disclaimer: I am not a lawyer, licensing executive or a business person, and it'll be obvious; Heck, I don't even have an MBA.)

1. Identify the potential target market for licensing. This may include: firms that would like to use the invention encapsulated in the patent and license it; firms that are already using the invention and thus infringing; or firms that are likely to infringe in the future.

2. Identify the finances of the potential licensee firms, such as annual revenue statements etc. from public records and quarterly reports. This is typically pretty straightforward market research, especially for public companies.

3. Identify the value of the invention with respect to the annual revenues above, i.e. what portion of their revenues could be attributed, either directly or indirectly, to this patent. Now this is a very complex problem because, as you can imagine, such detailed information is rarely available. Sometimes it is only accessible on discovery, which means a lawsuit has been filed and you're at one of the most expensive stages. Even with discovery things are complicated. For instance, a company may not be making any meaningful revenue from the product that practices the invention itself, but from other auxiliary sources. An example of this is Google's use of Java in Android in Oracle vs. Google; since Google mostly licenses Android for free and makes money from ads, Oracle had to work a bit to show how much advertising revenue could be attributed to Android's alleged infringement of their Java patents.

4. Once you get a number, say F, for the fraction of annual revenues attributable to the invention, determine the number of years, say T, left until your patent expires, and the period of past infringements during its term, if any. Multiply the number of years T by the fraction F to get a value V.

You now have a rough idea of the value V of the patent over its term based on the fraction of the revenues of potential licensees which could be attributable to the invention. However, no business is simply going to pay up that amount without negotiation, if at all they even bother to negotiate before filing a Declaratory Judgement to preemptively torpedo you. So this number is more of a rough upper bound on the value of that patent, since the actual value will typically be much lower. It may be higher, but I'd guess such cases are rare; say, for instance, if you can prove willful infringement and get treble damages.

So now the task is to identify the various factors, costs and risks involved in monetizing this patent. I discussed a few of the risks in the second half of this previous answer. Rest assured there are many more (such as the imaginary Bilski scenario above.) More interesting are the various factors that come into play. The value of the patent will change drastically depending on how you assert it:

1. Would the potential licensee be amenable to a license, or do they have a strict "anti-patent troll" stance (for whatever their definition of "troll" is)? If they don't license easily, a lawsuit is in the offing and will reduce the value to you greatly.

2. Can the potential licensee bring a countersuit against you? If so, the value of the patent would be offset by the liability of the countersuit, or you may be forced into a cross-license.

3. Are you cross-licensing it? If so you have to estimate a value in terms of the value of the patents being offered for cross-license, and monetary value may well be 0.

4. Are you practicing the invention yourself? If so, your case becomes stronger as you could show damages from lost profits, which may raise the estimated value. If you're not practicing the invention yourself, your estimate should be lower.

5. Are you asserting through your own lawyers or a licensing executive? If so, their fees will add a very significant cost that could reduce the value of that patent.

6. Alternatively, are you asserting through a NPE/patent assertion entity or a "contingency" law firm? If so, the value of the patent to you is much lower, because the NPE /contingency firm is taking most of the upfront risk, and as such will negotiate to keep most of the winnings, if any. Typically, the longer the case goes on, the greater their effort and risk and hence more of the pie they get. For instance, if the licensee settles immediately, they may keep less than 20%, but if the case goes all the way to trial and a jury decision, they may keep more than 50%.

To reiterate, note that this is a very simplified and generalized approach. Actual methods would be much more sophisticated, taking into account many more factors I can't even begin to contemplate, such as industry-specific nuances. I imagine huge, complex, multi-sheet spreadsheets would be involved.

However, as in the other linked post, I simply want to emphasize that monetizing patents is not nearly as easy as many people think, and it begins right from estimating a "value" for the patent.

Answer 2

Too often the patent is viewed as a "commodity" and traded as such. This (in my opinion) detracts from the concept of patent protection - where an inventor's idea is to be protected. To answer the question - whatever the market will bear. Presumably the patent is for something useful, that some business entity may be interested in mass producing and marketing it. And there are always "patent trolls" (aka NPEs) that will be more than happy to buy out any trivial patent with the hopes of suing everyone on the left side of the room.

Answer 3

A very simple answer is by comparables, like real estate. Or net present value of a proven income producing ability, like a fully rented out apartment building, in the case of a patent with an existing, diverse royalty stream.

And (in my opinion) it is good to have a liquid market in patents. An inventor may not be in an optimum position to exploit his or her invention but still deserves a way to get value for it.