General IP Strategy, In-House IP, Patent Strategy, Startup IP

Maximizing Value from Patents (Part 2: Benefits)

[Before you read this post, read the IP Strategist disclaimer]

Part 2 of this multi-part post focuses on the BENEFIT side of a cost/benefit analysis of obtaining patent protection.

As discussed in Part 1 of this multi-part post, the first question in determining prospective patent value (i.e., Is it worth seeking patent protection for that?) is:

Would valuable business objectives be achieved by securing protection of the territory in question (e.g., a particular innovation)?

Previously, we began to explore use of a cost/benefit analysis to address that question, focusing on the cost side of the analysis. In this post, we turn to the benefit side of the analysis.


PART 2: The BENEFIT side of the Patent Cost/Benefit Analysis

Tightrope

In Part 1, we concluded that it is only worth investing in patent protection if there is likely to be a good return on that investment (ROI). Further, it should not be enough for the costs to outweigh the benefits; the ROI should be at least as good as what you are likely to get from some other investment (e.g., from investing in stocks).

But how do you estimate the benefits of investing in patent protection?

Suppose you are purchasing a home insurance policy that would free you of liability for damage to people or property arising in your home from trespassing. What is the value? Well, what if after a number of years, no one has ever trespassed? Or what if they did, but no damage occurred “in your home”? Or what if damage did occur once, but a court decided that it didn’t actually “arise” from the trespassing? Or what if it turned out that the damager actually had some right to be there and wasn’t a trespasser after all?

In any of those cases, you might feel the policy had no value and was a complete waste. But what if, the next day, a trespasser causes millions of dollars of damage, and the policy completely covers the damage. Now, you might say that the value of purchasing the policy was at least those millions of dollars. And what if investors who helped you purchase the house were only willing to put up funds if you got that type of insurance? Or what if purchasing such insurance allowed you to more lucratively rent out the property?

Patent benefits can be thought of similarly. There are many types of benefits from investing in patent protection, though most of the benefits are prospective and uncertain.


Monopoly Value

monopolyA first category of patent benefit stems from the patent right, which is a right to prevent others from trespassing on (generally making, using, selling, or importing) your innovative property for a limited amount of time (generally around 20 years from filing). This confers a limited, government-sanctioned monopoly right on the patent holder, and the value of that right is whatever it is worth to keep competitors out of your way for the time, and to the extent, allowed by the patent. This can also be expressed as how much you are likely to lose (market share, revenue, reputation, etc.) if competitors can free-ride on your innovation.


Fungible Value

A second category stems from the fungible nature of a patent asset. Patents can be fully or partially transferred in various ways, including through assignment, license, or security. An assignment is generally a full transfer of rights (e.g., a sale) from one party to another, while a license is a partial transfer of rights (e.g., a limited right to practice the patented invention for some amount of time, in some geographic region, in some technology area, etc.).

Anecdotally, I have heard of some major patent assertion entities (PAEs) transacting individual patents for amounts as low as $50K per patent, but publicized portfolio transactions (e.g., auctions, company acquisitions, etc.) rarely fall far below $100K per patent. One notable example is the Kodak portfolio sale in 2013, in which 1,100 patents sold for $527MM, or about $500K/patent, (though it may have been more like 2,300 patents selling for just $94 million, or $40K per patent in the end by some later estimates). Similarly, in 2012, Google purchased Motorola and its 17,000 patents and 7,500 patent applications for $12.5B (about $500K per patent if you count the entire purchase towards the patent portfolio), and a consortium purchased the Nortel patent portfolio of 6,000 patents at auction in 2011 for $4.5B (about $750K per patent).

This graphic from Tynax (a patent brokerage firm) is highly simplistic, but very instructive for getting a sense of U.S. transaction values. Image Credit: Tynax, at Tynax.com

Group A includes patents that are expired, invalidated, etc. These occasionally have value, but are typically worth nothing. At times, these can be valuable for bolstering the value of a larger portfolio. By some estimates, about half of all patents fall into this category.

Groups B – F include patents with increasing claim breadth, market impact, potential infringers and/or licensees, etc. Those that have not yet been tested (e.g., in litigation or on the market), as in Groups B and C, are typically valued in the $10K – $100K range. Those that have been through some litigation and leveraging activities, such as patents drawing multiple competitive bids, can often support valuations of $100K – $500K. And those that have been successfully defended in litigation can be worth upwards of $1M, especially if there is a likely future licensing windfall from known big-ticket infringers.

The pinnacle of the triangle includes the small number of “industry standard” patents that have high competitive value and large potential licensing and infringement revenues. These can command valuations of well over $1M per patent. These tend only to be found in areas where a single patent covers a market-changing innovation, such as in pharmaceuticals. For example, last year, a jury awarded Idenix (a subsidiary of Merck) $2.5 billion for its hepatitis C drug in Idenix Pharmaceuticals LLC v. Gilead Sciences Inc., which certainly supports a very high valuation for that patent.

In addition to the above types of fungible value, patents can bring additional types of value as a fungible asset. For example, some jurisdictions (e.g., some countries) provide tax benefits to entities as an incentive for patenting innovations. Further, increasing numbers of opportunities are becoming available for using patents as security for loans, and the like.


Litigation Value

A third category stems from actual or potential damages in litigation. Taking even a Most patents never see a courtroom, and most of those that do never see a verdict (e.g., the case is settled prior to the end of trial). So litigation value tends to be meaningful to patent holders in highly litigious areas, or where there are identified, clear, high-roller infringers. Unfortunately, this type of value is what supports the business model of patent trolls.

juryOn average, litigation tends to cost about $1-5M per side, depending on the stakes, and a large portion of that is spent pre-trial (e.g., in discovery, Markman hearings, etc.). Patent cases tend to take about 2.5 years to go to trial, and about 80% of those are jury trials. It is important to remember that the costs of litigation are not just the attorney’s fees and court costs. Rather, litigation can be extremely expensive in lost inventor and executive time, distraction to the business, impact to share value and reputation, and in other ways.

In general, litigation value comes from monetary damages, injunctions, or settlements. Monetary damages include awards of money by a court to compensate the victim of infringement and/or to punish the infringer. Over the past 20 years, the median damage award has been close to $6 million for trials going all the way to verdict. Of course, much of that award goes to pay the attorneys and other litigation costs. Injunctions are essentially orders from the court for an infringer (or accused infringer, in the case of a preliminary injunction) to stop producing and selling the infringing products. For practicing entities, injunctions can be extremely expensive; often much worse than monetary damages.


Indirect Market Value

A final category stems from public impression of patents and patent holders. While these are rarely evaluated in any explicit way, they can be significant drivers of value in the market. Some of these tend to fall into the category of rights that I call Quasi-IP rights (see post on A-PLuS approach).

PatentedOne example is that patents can create the appearance of technological superiority. This is the classic late-night infomercial statement of “our patented formula for X.” Though getting a patent on something does not mean that thing is superior in any way, the public seems to think it does; and that can add tremendous value, especially for small, consumer goods companies

Another example is that filing and receiving patents can demonstrate that a company is focused on being innovative and on protecting their innovations. Having a reputation for being innovative can be highly valuable for attracting talent, including smart and innovative employees, executives, and board members. Also, demonstrating that you are innovating and are protecting those innovations can be highly valuable for attracting investors, stockholders, strategic partners, and the like.


So there are many potential sources of benefit from a patent asset. But you have to be willing and able to leverage that benefit. Do not think that, as soon as you get a patent, people will be knocking down your door looking for ways to pay you for it. Rather, extracting monopoly value, fungible value, litigation value, and even indirect market value can take significant amounts of time and money.

That said, when patents are acquired with the right coverage and for the right reasons, the benefits can massively outweigh the costs; the value can be tremendous.

So how do you decide what is the right coverage for patents? Stay tuned… Part 3 will explore strategic approaches to optimizing the scope of patent coverage.

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