David Wanetick (Incremental Advantage) has shared with IP Finance his latest paper, entitled "How Patent Vulnerability Impacts Valuation". A copy of the full text can be found here. Wanetick considers four principal topics: (i) What makes a patent vulnerable? (ii) The impact of uncertainty on patent valuation; (iii) What makes a patent valuable? and (iv) Strategic considerations. I found of particular interest the factors listed by Wanetick that inter alia make a patent valuable. The list can be summarized as follows:1. Anticipated licensing revenues:Some of these factors are "real economy" considerations, namely, patents that facilitate commercial exploitation are more valuable. Other factors are more in the vein of indicia. After all, e.g., there is nothing inherently valuable in a patent that has been examined and granted by a more senior examiner, unless such a patent is connected with activities that have "real economy" value. The relationship between these two types of factors is not explicitly spelled out in the paper.
2. Ability to trigger sales of end products:
3. Ability to generate add-on sales;
4. Ability to generate sales in new markets;
5. Stage of development of commercialization (the earlier the stage, the more risky the enterprise and the less valuable the patent);
6. Quality of law firm (e.g., measured by the degree of success of the law firm in sustaining an invalidity challenge;
7. Quality of patent examiner (an examiner with a longer tenure and a record of granting patents that withstand an invalidity challenge);
8. Size of portfolio being sold (a patent family is most valuable when the portfolio includes between 25 and 76 patent families).
In comparison, there is the view of Allison, Lemley, Moore and Trunkey in their oft-cited article, “Valuable Patents” (The Georgetown Law Journal, vol. 92, n. 3, March 2004). Here, the authors distinguish between why a patent is filed and what is the indicium of a valuable patent. In a word, some patents are worth more than others because the patent has greater commercial value. And what is the proxy for determining this class of more valuable patents? According to the authors, the best indicium of a valuable patent, as so characterized, is that it is litigated. The article then goes on to discuss various characteristics of litigated patents.
While some patents are commercially more valuable than others, and the best proxy for determining a valuable patent is whether or not it is litigated, the authors do recognize that there are a variety of factors that may give rise to a patent filing. Thus
1. Patentees are simply irrational in their filing and registration practice;I am not quite certain about what the ultimate payoff is in this kind of analysis. Both studies agree that the most valuable patents are those with superior commercial value. They depart in their consideration of the indicia of such patents. What one ultimately does with this information is not totally clear, especially when indicia do not imply causality. That said, the question becomes whether it is worthwhile engaging in an analysis to determine what is a valuable patent. Perhaps the readers can shed further light on the answer to this question.
2. Valuable patents are overlooked by their owners (the "Rembrandts in the Attic" syndrome);
3. Patents are licensed without the need to resort to litigation;
4. Patents are used as signals to consumers, competitors, and the like;
5. Patents are used defensively to protect against third parties with their own patents;
6. Patents are a form of lottery where a small number of patents account for the lion's share of the payoff for registration.
The Search for the Valuable Patent
4 comments:
Neil
Interesting post. On the question of payoff from this kind of analysis, I carried out some work a few years back into patent vulnerability using US and UK data. Supported by IP insurers Miller Group, it was reported in Managing Intellectual Property, October 2002, pp65-69. I argued that the data could help to make IP Managers' risk management efforts more transparent to non-IP professionals such as senior management and investors, in particular help them to understand the justification for IP budgets and to appreciate those areas where significant IP risks remain. I have certainly used the data for that purpose in my professional activities.
Ian,
Thanks for the comment. I will try to track down your MIP piece, it sounds extremely interesting.
Neil
I think any of these analyses are useful, as long as we don't get hung up on putting "value" on the resulting IP. Rather, applying these concrete questions to the usual "black box" area of IP management allows us to develop processes that will result in a better end product and, presumably, higher value IP.
Another set of questions I like is this one from the EPO last year: IP Score (as long as you don't get too hung up on the results). http://www.epo.org/patents/patent-information/business/valuation/ipscore.html
Jackie,
Thanks as always for your great comments. Permit me several observations:
I come out of a University of Chicago tradition less well-known than the Chicago School of Economics, namely the "practical wisdom" tradition that ran from John Dewey from his U of Chicago days. The emphasis is on how and what we can do with knowledge. IMHO, practical wisdom has been hijacked by "policy", without enough attention how the knowledge percolates down to enable meaningful action.
The foregoing is a long way of asking the question whether meaningful IP management means we take the results of this or that study on valuable patents and try to massage it into something useful, or we create the categories of information, or in good John Dewey fashion, something in between?
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