What’s the value of this patent? This is a very hard question to answer on a number of levels, but mainly because a patent’s value isn’t just based on what it covers technically, but commercially as well. Without both points of view, the valuation is incomplete. And of course, commercial context is not covered in a patent document.

When I was a portfolio manager, my team was responsible for making bids on incoming “cold-offered” portfolios. Often running the gamut as far as topic, it was difficult to determine what was “interesting” about the patent from a licensing perspective, and then make a decision whether to bid or pass, all within one week.

In order to be successful, I used a rating system for the patents to better gauge their licensing potential. The rating system was made up of the following seven criteria, or areas, that I would then examine and analyse. Once I was done, I usually had a good handle on a patent’s general licensing value, and thus, what type of purchasing offer, if any, to make.

Scope of Problem and Efficacy of Solution

  • Related Art
  • Design Around
  • Infringement Detection
  • Current Use
  • Future Use
  • Market Size
  • Let’s break it down.

Scope of Problem and Efficacy of Solution

This one is pretty straightforward. My experts would brief me on how far-reaching the problem ran, as well as how the patented invention fit into the product in question. It should not surprise you that if a patent solves a “huge problem” faced by “everyone” in a “really effective way,” that it might have high commercial value. Or that if a patent “is simply not effective,” that it may be less so.

The key here is the overlap between theory and practice. Since the patent represents a right to exclude, the practice or use of the technology is where the value exists. It’s very hard to determine the value of the patent, using only the patent document itself.  Typically, subject matter expertise is needed to provide an initial assessment on the practice, or use, of the invention.

Related Art, Design Around, and Infringement Detection

The next three criteria involve scarcity and switching costs. If the solution is “one of many,” meaning there are a lot of different ways to solve the problem effectively, then the potential licensee has options (i.e., leverage to negotiate), which will affect the price they are willing to pay. Conversely, if it’s difficult or expensive for them to move to a different solution, it will affect their willingness to shift to that different process. Finally, for a court to find in your favour, it’s required that use be proved by a “preponderance of evidence.” In some very rare cases, there might be only one way to do something, or there might be an industry standard that specifies or requires the use of the patented invention. In these cases, it can be very difficult, or even impossible for someone in a market to avoid infringing on the existing IP — giving those patents huge predicted value with the potential to license entire industry segments. On the other hand, if the infringement is not detectable in the finished product, it could be impossible to prove—greatly lowering the value of that patent.

Current Use, Future Use, and Market Size

The last three criteria pertain to the size of the market and how much of that market value the patent can affect. Once again, a big market with a high- and growing-use of an invention has all the makings for a valuable asset.  But as technology is constantly evolving, you must consider the future. Think about a technology on its way out —historically “the de facto standard” — where use will drop over time. Alternatively, is a revolutionary technology that will likely be a dominant technology in the near future, though it’s not being used now. All this to say that patents take on the value of the products they touch. It should surprise no one, that these are also what the courts consider when they look at settlements.

In summary, the value of a patent relies on the invention being a technically-sound solution, as well as the ability to understand and prove the infringement in court.  From there, the patent then takes on a portion of the value that it can exclude.

Other analysts or managers may also consider factors like competition and technical advancements in the field. I’ve always felt that the monopoly power of the patent will overcome those obstacles, because no matter what else is going on, the patent is still a right to exclude. And while “counter exclusions” may have an impact on a decision to bring suit or not, they don’t change what the patent touches, and therefore, won’t fundamentally change the standalone value of that patent.

Read Determining the Value of a Patent (Part 2)

Are you using the right software for your analysis? Get a free copy of the Buyer’s Guide