Patent Hawk - Patent Valuation

Patent valuation herein refers to estimating the market value of a patented technology, not an accounting treatment.

For sale or licensing purposes, proper patent appraisal requires a mosaic of estimation. The dynamics of the marketplace preclude precision in valuation, but reasoned arguments backed by evidence have repeatedly swayed courts, and make the strongest possible case in negotiation.

Ultimately, patent valuation is a risk appraisal. As a negative grant, a patent license only confers protection as a form of insurance against enforcement litigation and consequential penalties.

There are two applied aspects to patents: usage and infringement. Valuations of usage include licensing and assignment (transfer of ownership). Damage assessment resulting from infringement is a separate valuation. Different techniques are employed for these different scenarios.

Conceptually, a patent's value reflects the scope of its claims, and the demand for the claimed technology as an improvement over the prior art. Demand takes place over time, and relates to whether the adoption of the technology is inevitable, or marginally advantageous. Of course, with a limited life span, the demand for the patented technology must occur during a patent's enforceable life.

Using a real estate analogy, a patent property lives in a neighborhood of related patents. The closer a patent lives to its neighbors, including "free" space of non-patented technology, the less valuable it is, as its property is small, and hemmed in. The greater the distance to the neighbors, that is, the broader the scope of its claims, the larger the lawn, and the more green that a patent has potential for.

A modest improvement may be worked around, or left unincorporated. A breakthrough technology carves a compelling path to follow - marketplace adoption is inevitable.

The market value of a patent is ultimately a measure of the potential sale of products or services that use the technology which the patent claims. For patents that represent an advancement or refinement, rather than a whole new product type, patent value is properly estimated by incremental improvement in sales. By contrast, in a much simpler case, the entire revenue base of a product may be attributed to a patent protecting a product that creates a new market.

The consequence of patent infringement by a competitor is that the infringer gained while the patent holder lost: lost sales, and lost profits, to an infringer reaping the rewards of a patented technology.

Any valuation through time must account for the time value of money.

Patent ownership and licensing are appraised based upon future earning potential. Infringement is appraised on past potentials.

An interest rate reflects the value of holding an asset into the future. A discount rate is applied to bring future earnings into the present. Net present value analysis brings a stream of cash flow through time into a single current sum by appropriately applying interest and/or discount rates to future sums.

Courts are willing to grant a patent holder compensation for all economic losses that are reasonably attributable to infringement, but the patent owner shoulders the burden of convincing the court of the causality and measure of loss.

The method for determining damages from infringement is proposed by the plaintiff in a patent suit. There are two basic approaches: lost profits or, more often, reasonable royalty. Lost profits is multi-faceted, and can be difficult to quantify. The magnitude of consequences for either varies case by case.

For causation, a patent owner must establish bases for what was foregone by infringement: increased sales, higher prices, lowered costs/expenses. For a publicly-traded corporation, an attribution of a drop in stock price to infringement is generally considered too remote.

Lost profits owing to patent infringement equates in part to sales gained by the infringer attributable to infringement. The degree to which sales were made owing to product features which infringed requires reasoned argument and evidence, particularly when the patent covers only a portion of an infringing product's feature set.

The courts often consider as pertinent evidence the infringer's actual profit performance over the duration of infringement.

Infringement can shift the demand curve for a product, resulting in price erosion.

Infringement may have collateral benefits, and the courts have enhanced rewards in such cases. There may be "convoyed" sales of associated products, such as parts, supplies, and accessories, which could be expected to flow from selling an infringing product.

A time lag may be considered, as infringement does not instantly cause market distortion, and market distortion does not necessarily stop with the cessation of infringement. A factor analysis of changes in sales by product division during infringement provides insight into the effect of market distortion from which projections may be made.

The concept of reasonable royalty revolves around a rate that willing parties might negotiate for a license without the threat of a suit, or resulting from litigation. Historical evidence weighs heavily. The basis for an established royalty are prior actual licenses for comparable products. Reasonable royalty is the most common damage model used.

For licensing or assignment, the first step in proper patent appraisal is getting to know the neighborhood of related art. This requires prior and current art searches and analyses. Most crucially, is the patent valid - would the patent withstand litigation and be found enforceable in court? Second, is the patented technology competitive?

Small patentable differences may make for substantial improvement. This is especially true if the patented technology significantly improves operation or lowers cost as a practical consequence.

The neighborhood defines how compelling adopting a patented technology is. For assignment or licensing, acquisition is a cost that a prospective purchaser will bear only to the degree that adoption promises to be more profitable than a substitute solution. In a crowded neighborhood with available substitutes, patent value drops.

But the issue of desirability is more than a question of technical substitution. It is also a question of competitive advantage. Perception drives sales. If something is perceived as even a little better, its sales may accelerate at the expense of the competition. Especially with the Internet, information flows as never before - commercial network effects can be sudden and intense.

A company buys a patent license hoping to gain sales using the patented technology. The net present value of estimated incremental revenue over the life of the license is the basis for license appraisal. But a valuation may not be as straight-forward as a simple revenue projection.

As an amorphous good, patent license terms are a significant factor in appraisal. Paying a royalty lessens incentive for widespread adoption within a company relative to a flat-fee license, but a pay-as-you-go royalty based on sales minimizes risk for a potential licensee when the ongoing value of a patent is uncertain. The royalty term may itself may be quite significant.

The scope of a license may also be significant. Particularly for software, an open-ended license may allow propagating the licensed technology, in the case of incorporation into a tool that creates an application embedding the patented technology.

The terms of patent license are myriad, and the value of a license depends upon its terms. Assessing the value of patent license begins with the terms on offer.

Assignment is transfer of patent ownership. Assignment appraisal comprises assessing the total economic potential of a patent over its remaining life. For a potential purchaser, knowing the neighborhood gates the value of a patent, because the possible workarounds are known.

Owning a patent affords licensing it to others. The value of patent ownership can be viewed either in denying it to the competition, or selling licenses to the competition.

In denying others, patent valuation is a measure of increased sales for the owning company over the life of the patent at the expense of others.

As described foregoing, licensing potential is company-specific with regard to revenue impact. For valuation of licensing potential when considering assignment, a relevant industry-wide evaluation of adoption prospects and attendant revenue consequences is done. The patent neighborhood and prospective licensing terms are considerations.

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	this page: Patent Valuation Theory The Time Value of Money Damages The Patent Neighborhood Licensing Assignment email: info@ patenthawk.com Phone: 503.922.2433 (Portland)206.529.5146 (Seattle) *The Patent Prospector* (patent weblog)	Patent Valuation Theory Patent valuation herein refers to estimating the market value of a patented technology, not an accounting treatment. For sale or licensing purposes, proper patent appraisal requires a mosaic of estimation. The dynamics of the marketplace preclude precision in valuation, but reasoned arguments backed by evidence have repeatedly swayed courts, and make the strongest possible case in negotiation. Ultimately, patent valuation is a risk appraisal. As a negative grant, a patent license only confers protection as a form of insurance against enforcement litigation and consequential penalties. There are two applied aspects to patents: usage and infringement. Valuations of usage include licensing and assignment (transfer of ownership). Damage assessment resulting from infringement is a separate valuation. Different techniques are employed for these different scenarios. Conceptually, a patent's value reflects the scope of its claims, and the demand for the claimed technology as an improvement over the prior art. Demand takes place over time, and relates to whether the adoption of the technology is inevitable, or marginally advantageous. Of course, with a limited life span, the demand for the patented technology must occur during a patent's enforceable life. Using a real estate analogy, a patent property lives in a neighborhood of related patents. The closer a patent lives to its neighbors, including "free" space of non-patented technology, the less valuable it is, as its property is small, and hemmed in. The greater the distance to the neighbors, that is, the broader the scope of its claims, the larger the lawn, and the more green that a patent has potential for. A modest improvement may be worked around, or left unincorporated. A breakthrough technology carves a compelling path to follow - marketplace adoption is inevitable. The market value of a patent is ultimately a measure of the potential sale of products or services that use the technology which the patent claims. For patents that represent an advancement or refinement, rather than a whole new product type, patent value is properly estimated by incremental improvement in sales. By contrast, in a much simpler case, the entire revenue base of a product may be attributed to a patent protecting a product that creates a new market. The consequence of patent infringement by a competitor is that the infringer gained while the patent holder lost: lost sales, and lost profits, to an infringer reaping the rewards of a patented technology. The Time Value of Money Any valuation through time must account for the time value of money. Patent ownership and licensing are appraised based upon future earning potential. Infringement is appraised on past potentials. An interest rate reflects the value of holding an asset into the future. A discount rate is applied to bring future earnings into the present. Net present value analysis brings a stream of cash flow through time into a single current sum by appropriately applying interest and/or discount rates to future sums. Damages Courts are willing to grant a patent holder compensation for all economic losses that are reasonably attributable to infringement, but the patent owner shoulders the burden of convincing the court of the causality and measure of loss. The method for determining damages from infringement is proposed by the plaintiff in a patent suit. There are two basic approaches: lost profits or, more often, reasonable royalty. Lost profits is multi-faceted, and can be difficult to quantify. The magnitude of consequences for either varies case by case. For causation, a patent owner must establish bases for what was foregone by infringement: increased sales, higher prices, lowered costs/expenses. For a publicly-traded corporation, an attribution of a drop in stock price to infringement is generally considered too remote. Lost profits owing to patent infringement equates in part to sales gained by the infringer attributable to infringement. The degree to which sales were made owing to product features which infringed requires reasoned argument and evidence, particularly when the patent covers only a portion of an infringing product's feature set. The courts often consider as pertinent evidence the infringer's actual profit performance over the duration of infringement. Infringement can shift the demand curve for a product, resulting in price erosion. Infringement may have collateral benefits, and the courts have enhanced rewards in such cases. There may be "convoyed" sales of associated products, such as parts, supplies, and accessories, which could be expected to flow from selling an infringing product. A time lag may be considered, as infringement does not instantly cause market distortion, and market distortion does not necessarily stop with the cessation of infringement. A factor analysis of changes in sales by product division during infringement provides insight into the effect of market distortion from which projections may be made. The concept of reasonable royalty revolves around a rate that willing parties might negotiate for a license without the threat of a suit, or resulting from litigation. Historical evidence weighs heavily. The basis for an established royalty are prior actual licenses for comparable products. Reasonable royalty is the most common damage model used. Read more about patent infringement damages. The Patent Neighborhood For licensing or assignment, the first step in proper patent appraisal is getting to know the neighborhood of related art. This requires prior and current art searches and analyses. Most crucially, is the patent valid - would the patent withstand litigation and be found enforceable in court? Second, is the patented technology competitive? Small patentable differences may make for substantial improvement. This is especially true if the patented technology significantly improves operation or lowers cost as a practical consequence. The neighborhood defines how compelling adopting a patented technology is. For assignment or licensing, acquisition is a cost that a prospective purchaser will bear only to the degree that adoption promises to be more profitable than a substitute solution. In a crowded neighborhood with available substitutes, patent value drops. But the issue of desirability is more than a question of technical substitution. It is also a question of competitive advantage. Perception drives sales. If something is perceived as even a little better, its sales may accelerate at the expense of the competition. Especially with the Internet, information flows as never before - commercial network effects can be sudden and intense. Licensing A company buys a patent license hoping to gain sales using the patented technology. The net present value of estimated incremental revenue over the life of the license is the basis for license appraisal. But a valuation may not be as straight-forward as a simple revenue projection. As an amorphous good, patent license terms are a significant factor in appraisal. Paying a royalty lessens incentive for widespread adoption within a company relative to a flat-fee license, but a pay-as-you-go royalty based on sales minimizes risk for a potential licensee when the ongoing value of a patent is uncertain. The royalty term may itself may be quite significant. The scope of a license may also be significant. Particularly for software, an open-ended license may allow propagating the licensed technology, in the case of incorporation into a tool that creates an application embedding the patented technology. The terms of patent license are myriad, and the value of a license depends upon its terms. Assessing the value of patent license begins with the terms on offer. Assignment Assignment is transfer of patent ownership. Assignment appraisal comprises assessing the total economic potential of a patent over its remaining life. For a potential purchaser, knowing the neighborhood gates the value of a patent, because the possible workarounds are known. Owning a patent affords licensing it to others. The value of patent ownership can be viewed either in denying it to the competition, or selling licenses to the competition. In denying others, patent valuation is a measure of increased sales for the owning company over the life of the patent at the expense of others. As described foregoing, licensing potential is company-specific with regard to revenue impact. For valuation of licensing potential when considering assignment, a relevant industry-wide evaluation of adoption prospects and attendant revenue consequences is done. The patent neighborhood and prospective licensing terms are considerations.
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