The most widely known fact about Patent Valuation is that it is one of the best kept secrets in the Tech Transfer world. Edward Cooke, in his article “A little knowledge can go a long way” rightly describes the need and lack of a clear patent valuation approach. A clear indication of the absence of even a near exact valuation approach is the court’s irrational damage estimate of $358 M in the Lucent Vs Microsoft case. Though the damages have now been overturned but this clearly is no excuse of why the court was vastly away from what Microsoft and many other experts had estimated. The legal intricacies apart, the court proceedings even include debates on whether or not a particular valuation technique is correct irrespective of this case.
Most books on Patent Valuation stick to defining the Cost, Income, and Market approaches without discussing their feasibility. The most widely used of the three, the Income Approach, too cannot be followed in its textbook form. It is extremely difficult to estimate the change in sales and profits of a particular television model due to a small change in one of its circuits. And all this is expected to be estimated when there are hundred other bigger or smaller changes in its circuits, along with probably a change in its sales policy or may be its competitor’s.
The very reason that valuation techniques are still a well kept secret has given rise to multiple variants of the three basic approaches discussed above. Variants based on the income model probably are similar in structure, but what definitely differs is their evaluation of risks and royalties associated with a patent. These evaluations vary with the objective of the person/entity who is evaluating the patent. During an M&A deal an investment banker on the buyer’s side might chose to consider the probability of a patent being valid and the one on the seller’s side might chose to completely ignore this risk. For an independent evaluator, for whom ignoring such risks is no option, the question boils down to the importance that such factors deserve in estimating the overall risk of the patent. Validity litigations are to some extent a gamble for even the best written patents. However, this does not justify that each patent transaction should be done at half the value to account for such risk.
Many practicing entities in the patent transaction world find the law of averages to be their best excuse of not knowing / wanting to know the various risks associated with the patent. They assume that most risks will disappear when considered for a large patent portfolio. I have come across some glaring examples of players in the transaction space defining a “per patent value” for a large portfolio and selling patents as if they were all the same. Such cases have become more prominent post sub-prime due to increased abandonments to save on maintenance costs. There is a high chance that the risks and rewards associated with such transactions may be sharply mismatched.
When the portfolios are large, a scrutiny at individual level might not be justified economically. However the chances of error can be reduced by doing two additional low cost studies. First, a quick and dirty ranking of the patents in the portfolio should be done using statistical scoring tools or expert assessments. Second, the portfolio should be categorized into broad technology domains to enable differential pricing.
Last but not the least; a second opinion does not hurt, especially when the first one is coming from an investment banker.
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