Author: Alok Samal
With the growing significance of Intellectual Property Rights, the IPR management has experienced an unprecedented growth in last two decades. Today, with almost every nation on the planet being a member of WIPO and TRIPS, there is a massive globalization going on in the IPRs. This has changed the way we used to value firms and today IP takes a centre stage in many technology intensive industries (the best example is the $12.5 billion deal of Google for Motorola of which the patent portfolio of 17000 patents constitutes a major chunk). Now, every firm with their limited resources wishes to maximize value through effective usage intellectual properties. While the big players tend to develop their own needs in their backyards through massive spending on R&D, the medium and smaller ones need innovations in choosing and valuing the right set of patents in the pool to maximize value in a given portfolio.
The biggest fish in the pond is the cost of infringement of Intellectual property which everyone tries to avoid. Medtronic, the world’s largest medical technology company paid $ 1.35 billion in 2005 to a Los Angeles surgeon for infringing on a patent. The next big fish is value from the sales of individual patents which has crossed the $100 million mark followed by Freedom to Operate (FTO) seeking (costs in the range of $1,50,000) and ‘patent preparation’ (costs nearly $ 20000) . In this context, the greatest skill of IP managers lie in forming an efficient portfolio or pool patents that can get the optimum risk to return figures. What I will be focussing here is not the sophisticated valuation methods (e.g. the cost, time, market condition, uncertainty, changing risk based methods) but rather the objective criteria that is employed by an IP manager to screen and value patents. So let’s leave the economic- analysis to the quant guys, and see how we can value any patent at hand.
So first, we need to look at the parameters on the basis of which we value a patent and then each parameter is assigned a score out of 1, 5 & 9 (we can also have the system of 1,3& 9) for that patent and finally the overall score is normalised to get an effective value. The parameters in their order of importance are the following: 1. Patent Pitch; 2. Claim Length; 3. Costs of Reverse Engineering; 4. Costs of Designing around; 5.Infringement Detection; 6. Citations; 7.Prosecution History Estoppels; 8. Divisionals; 9. Game Changer nature and finally 10. Freedom to Operate. Sometimes we may use somewhat fewer than the ones I mentioned above.
Now let’s discuss how the scores are assigned to each of the parameters. Under the ‘Patent Pitch’, generally a higher rating to given to product patent followed by process patents and improvement patents. Under the ‘claim length’ lesser the claims higher the rating (e.g. anything more than 5 lines is rated 5 and anything more than 15 is rated 1). The higher the cost of reverse engineering, greater the value of the patent. Similarly higher the cost to circumvent the patent i.e. cost of designing around, greater the value. The more easily a ‘patent infringement’ is detected greater the value. Larger the number of citations greater the value and higher rating. ‘Prosecution history estoppels’ is like a logbook with all details of the communications for the filing, granting of the patent etc. It is generally regarded that the longer the prosecution history lesser the value of the patent. Lesser the ‘Divisionals’ in the patent greater the value. If the patent has enormous game changer abilities (ability to significantly change the existing state) then a higher rating is given. Finally if the technology is clean and free from encumbrances a greater rating is given under Freedom to operate.
This method is used by several managers and auditors, and finally their scores are normalised to come a reasonable score which when compared to score of an already valued patent in the same domain will give a relative value. Now the value of our patent is the product of absolute value of the already valued patent and the relative value.“
References:
https://www.thomsoninnovation.com/
http://www.investopedia.com/articles/fundamental-analysis/09/valuing-patent.asp#axzz1ftg1mx7Q
http://bus6900.alliant.wikispaces.net/file/view/EJWP0599.pdf
http://www.wipo.int/sme/en/documents/freedom_to_operate.html
http://www.fenwick.com/docstore/pressroom/iplawbulletin_05_litigationsurvey.pdf
Innovation and Intellectual Property 