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Basics of Patent Valuation Guriqbal Singh Jaiya Director SMEs Division ( wipot/sme/ ) World Intellectual Property Orga

Basics of Patent Valuation Guriqbal Singh Jaiya Director SMEs Division ( www.wipo.int/sme/ ) World Intellectual Property Organization (WIPO). Inventions. Of no economic value if not exploited Generally of higher economic value if protected by a patent (family of patents) and exploited

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Basics of Patent Valuation Guriqbal Singh Jaiya Director SMEs Division ( wipot/sme/ ) World Intellectual Property Orga

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  1. Basics of Patent Valuation Guriqbal Singh Jaiya Director SMEs Division ( www.wipo.int/sme/ ) World Intellectual Property Organization (WIPO)

  2. Inventions • Of no economic value if not exploited • Generally of higher economic value if protected by a patent (family of patents) and exploited • Leveraging: Unlike a tangible product, an inventions or a patent may be licensed several times over to many others for the same or different purposes, in the same or different geographical areas, for the same or different duration; easier to license if patented

  3. Phases of an Invention Investment Phase • development • filing and prosecuting patents Return on Investment Phase • commercialization • generating income

  4. Stages of Technology 1 • embryonic stage of development • new and needing further development • market proven • about to be supplemented or replaced by new developments

  5. Stages of Technology 2 • untested idea • outcome completely unknown • working model (bench top) • works in laboratory environment and justifies further development • prototype • feasibility shown, commercialization still not sure • commercialized • market success still not guaranteed

  6. Commercializing Patents by... • own manufacture and own marketing of patented product • licensing of patent (portfolio) • selling of (part of) the patent (portfolio) • Permutations/combinations of above

  7. Challenges in Valuation 1 Computing the value of a patent • always difficult; beauty/eye of the beholder ($$$) • more difficult in early stages than at the stage of marketing a technology/product • legal, technical and commercial risks change greatly during its legal life span • patent (granted with or without examination) • technology/product does not work • customer unable or unwilling to pay a profitable price

  8. Challenges in Valuation 2 Computing the value of a patent • claims: quality of drafting; defensive/offensive • part of a bundle or not (royalty stacking; core or not;defensive/offensive/prestige) • freedom to operate/use; convoyed sales; standard • complementary assets (other patents, know how, skills, equipment, networks, etc) • disputes (ownership; validity; scope) • risk of obsolescence (balance legal/economic life)

  9. Motivations For IP Valuation (1) • Traditional Bank Financing • Angel/Venture Capital Investing • Licensing • Sale, Merger, Acquisition • Employee Compensation, Gift • Bankruptcy/Liquidation • IP Investment Holding Company

  10. Motivations For IP Valuation (2) • Taxation/Transfer Pricing • Insurance • Joint Ventures/Strategic Alliances • Estate Duty • Capital Markets/Securitization • Enforcement/Litigation • Off-balance sheet financing

  11. Employees Investors Shareholders Investment Bankers IPO Specialists Wall Street analysts Merger & Acquisition Interests Licensees, Franchisees Internal asset Managers International affiliates The Media Other Stakeholders Valuation:Those Interested are...

  12. Standards of Value... • Fair Market Value • Market Value • Insurable Value • Fair Value • Collateral Value • Ad Valorem Value • Acquisition Value • Use Value • Investment Value

  13. Valuation • Of a Company • Of its IP Assets • Due Diligence (Evaluate, Valuation) • Accounting of Intangibles (Balance sheet)

  14. Valuation Steps A. Data Collection and Analysis (Due Diligence) B. Valuation Methods C. Economic Life Analysis D. Value Conclusion E. Reporting

  15. Due Diligence... • Cost of Valuation: May be high! • Expensive: To be amortized over the life of the loan as a higher rate of interest • Expertise: Quality of in-house or external valuation expert; team effort • When (Timing) • How often (Periodicity)

  16. IP Valuation Methods • Cost Approach • Market Approach • Income Approach • Judicial Approach

  17. Cost Approach • Economic principle of substitution • Reproduction cost (Exact replica) • Replacement cost (Different form or appearance)

  18. Cost Approach COMPONENTS • Materials • Labor • Overheads • Intangible Asset Developer’s profit/reward • Entrepreneurial Incentive

  19. Cost Approach OBSOLESCENCE • Physical • Functional • Technological • Economic

  20. Market Approach • Expected sale price at a specific time, in a particular market, based on comparable arm’s length market transactions • Extensive knowledge of comparable data required

  21. Income Approach Present Value of Future Income Stream • Future Income Stream (Economic Income) • Duration (Life: Legal, contractual, judicial, physical, technological, functional, analytical, economic) • Risk (Uncertainty of receiving expected income; interest rates and investment climate)

  22. Methods to Determine Income Stream • Residual Earnings Approach • Excess Earnings Approach • Loss of Income Approach • Relief From Royalty Approach • Stock Options (Black-Scholes/Merton Approach)

  23. Residual Earnings Approach • Business Unit Scale • Technology Scale • Product Scale • Trademark or Patent Scale

  24. Residual Earnings Approach Methods • Monte Carlo • Knowledge Capital Score Card • Tech Factor Method • Crystal Ball • Technology Risk and Reward Unit Metrics • Technology Review Patent Scorecard • @Risk

  25. Judicial Approach • Hypothetical Negotiation Between Willing Seller and Buyer • Georgia Pacific Factors (15)

  26. Georgia Pacific Factors (Patent) 1. Commercial success, current popularity, and profitability of Patented Product (PP); 2. Advantages of PP over old products; 3. Nature of patented invention, character of products embodying invention, benefits to those using the invention; 4. Likely profit margin on PP; 5. Portion of profit credited to patented invention;

  27. Georgia Pacific Factors (Patent) 6. Benefit to non-patented items by sale of PP; 7. Duration and other terms and conditions of patent license; 8. Extent to which infringer has made use of the patented invention; 9. Prior and existing licenses under the patent; 10. Terms for licensing other technologies by licensee;

  28. Georgia Pacific Factors (Patent) 11. Patent owner’s licensing and marketing policy; 12. Commercial relationship between the licensor and licensee; 13. Nature and scope of license: territories, field of use, exclusivity, etc; 14. Industry specific practices for comparable patents (established royalty agreements); and 15. Opinion of Experts

  29. Logo and Logotype Sub-brands Domain Names Trade dress Related Copyrights Secondary trademarks Advertising Concepts Graphics Labeling and Packaging design Product shapes Web-based assets Trademark or Brand-related Bundle

  30. Attributes Affecting TM Value 1 • Age • Use • Potential for Expansion • Potential for Exploitation • Associations • Connotations • Timeliness • Quality

  31. Attributes Affecting TM Value 2 • Profitability • Expenses of promoting • Means of promoting • Market share • Market potential • Name recognition

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