Your Patents Could Be Worth A Lot More (Or Less) Than You Think

 

From their origins as the blueprints for innovation, patents have evolved into tangible, increasingly important financial assets for large companies and startups alike, complete with their own marketplace. For those with existing patents or pursuing a patent, understanding the value of a patent portfolio is easier said than done; a good idea does not always translate into a valuable patent. To better understand portfolio valuation, consider the following and how they may impact patent value.

 

The patent marketplace is notoriously opaque, and many fluctuating factors can affect a patent’s value, including potential infringement, inherent usefulness, and/or the novelty of the patented idea. Other points for consideration include how the patented invention fits into the current and future marketplace, the strength of the patent claims themselves, and how the patent may or may not hold up under litigation.

 

The primary factor when assessing patent portfolio value is infringement, also known as “evidence of use.” If there is evidence of the patented innovation being used in existing products or services, then the value of that patent increases. This is because, by definition, patents are a negative right—the right to exclude. If there’s no one to exclude, because no one is using the patent claims, the patent’s value is pent up in potential future use. Thus, where there is a clear case of infringement by a particular product (or service), those portfolios will naturally generate a larger return when transacted within the marketplace, either via sale or licensing to the infringing party.

While infringement can generate a greater return on investment, infringement alone is not a guarantee of large returns. Even if infringement can be proven to exist, there are other factors to consider, including how strong and provable the evidence of infringement is, as well as the impact of the infringing product or the size of the company’s presence in that market. For example, clear proof that a trivial feature of a prominent product holds significantly less value to a company than proof that a primary feature of a lesser-known product is infringing on the patent.

When evaluating a patent’s value in the context of infringement, it is important to consider a variety of factors, including:

Prior Art

Prior art is evidence that shows an invention or process was already publicly known or available before the effective date of a patent. The existence of definitive prior art can be problematic for patent value greatly diminish value potential, (often times diminishing value entirely). Sometimes, even just the perception of prior art can negatively impact the value of a patent. If, for example, numerous other patent filings in the same technical space were filed around the same time, or if a patent is filed around the same time that a large number of companies and products were entering the market in that technical space, then just the perception of potential prior art may negatively impact value without definitive art even being uncovered.

Patents with earlier priority dates have potential to be more valuable because the earlier filing date indicates there is much less risk of prior art. Earlier priority dates can also improve the strength of infringement reads on competitor products or services which were clearly released after the patent’s priority date.

 

Market Importance / Market Impact 

In the context of a sale, if a patent portfolio is the only type of its kind that is available for sale in a certain tech area (scarcity), but claims a feature important to the field, then the value of that patent is positively affected. Likewise, perceived competition amongst buyers can also positively affect the value of a sale.

Additionally, the specific claims of the patent or portfolio can positively or negatively affect value depending on the novelty and relevance of the innovative features. A good way to consider this is defining the core innovation of a patents’ claims and determining the role it plays. Namely, is the innovation a key part of any resulting products or services? Is it a feature that is nice to have, but not crucial to why consumers buy the product?

Another factor is how novel or irreplaceable is the core innovation. This will likely affect value, particularly in cases of infringement. For example, if the primary patented feature is expensive to remove, or would greatly diminish the usefulness of the resulting product(s), the value of the patent would be positively increased. However, if the patented feature relevant to a product can be easily replaced with an alternative, particularly where the alternate feature no longer infringes on the patent claims, the value of the patent would naturally decrease.

This also applies to the specific areas of the market where the patent or portfolio is applicable – if, for example, the innovative technology lies embedded in a complex, unique computer chip and would therefore cost tens of millions in manufacturing costs to change the design, an infringing party would likely not be able to adjust to avoid claims of infringement. For simpler technologies, updating a product to avoid infringement may be easy and cost-effective, and would therefore diminish the value of the patent.

 

III. Litigation and Other Types of Patent Value 

 

Litigation

In some instances, patents are purchased for their usefulness in litigation, both as a sword and as a shield. Often, patents are purchased only to be used later (as a sword) by the purchaser acting as a plaintiff in a patent infringement action to obtain damages for infringement on the patent. In such cases, patent buyers perform a cost-benefit analysis of the purchase price of the patent against the anticipated amount of damages.

Patents are also purchased to be used as a shield in anticipated defensive litigation. For example, a company might purchase a family of patent portfolios in a particular area because that company anticipates bringing to market a product that uses similar technology. By purchasing the patent portfolio before entering the market, the buyer has effectively reduced the risk of future litigation, thereby avoiding the high cost of legal fees or licensing outlay, and ensuring an open market within which to operate.

Patent Portfolios At Face Value

Some patents may not initially appear to have market value, but not all value stems from monetization through a sale or cases of infringement. Some patent portfolios may appear to have a limited scope or may contain narrow claims that have very limited, if any, infringement or transaction value. However, companies sometimes possess patents for their face value as a promotional tool designed to enhance the company’s reputation as a leader in tech, or specific technological spaces which are perceived to have a strong place in the market. For instance, tech startups will very often file patents not only for their future potential, but because owning patents increases investor interest and shareholder confidence that the startup has is a valuable business. A young company’s patent portfolio may be a valuable company asset even if it wouldn’t fetch much value in a sale on the secondary market.

 

Many factors can affect a patent or a portfolio’s value. It has become increasingly important to understand the worth of a patent beyond its innovative merit, especially for businesses who rely on their intellectual property as primary assets of the company. To get the most accurate valuation and improve monetization of the patent during a transaction, many factors must be considered, by far the most important of which is infringement. It may be valuable to also consider working with an experienced patent broker who is already trained in researching, evaluating, and identifying a patent or portfolio’s strengths and weaknesses to ensure a more accurate understanding why a patent does, or does not, hold value.

The core team of patent consultants at Vitek IP, LLC have analyzed over 20,000 patents, while managing hundreds of buy-side and sell-side transactions for some of the world’s largest companies. Vitek’s founders have over five decades of experience in IP and tech, and have developed sophisticated patent sales and patent acquisitions strategies for some of the world’s largest companies. Vitek’s patent consultancy, brokerage group, and research organization provide clients exceptional guidance navigating the patent landscape. For more information, visit www.vitek-ip.com.