The Importance of Determining Whether a Patent Has Value
Posted on Jan 29, 2014 in Articles
This article originally appeared in The Legal Intelligencer on January 29, 2014.
In the TV show “Shark Tank,” a business owner stands before five potential investors (the sharks) and asks them to invest in a business in exchange for a percentage of the equity. Invariably the conversation turns to patents. “Do you have a patent on your idea?” the sharks ask. “Yes,” replies the business owner. With that final nugget of information, the sharks may offer $50,000, $100,000, or even more, in return for partial ownership in the company.
I’m always amazed when people base their investment decisions (at least in part) on whether someone owns a patent. True, patents can be worth substantial amounts of money. In 2013, Kodak sold 1,100 patents for $525 million, and Microsoft purchased 800 AOL patents for more than $1 billion. In 2011, Google purchased Motorola Mobility (with its 17,000 patents) for $12.5 billion, and six companies (including Apple and Microsoft) combined forces to pay $4.5 billion for 6,000 patents from bankrupt telecommunications company Nortel Networks.
The question, however, should not be whether technology is patented. Rather, the inquiry should focus on whether patents have value. Several studies suggest that, on average, 80 percent of the value of today’s companies is composed of their intangible assets. This includes patents, trademarks, copyrights, trade secrets and other business know-how. With such a high portion of a company’s value based on intellectual property, the risk of investing in a company doesn’t seem to be calculable without understanding what that intellectual property is worth.
Throughout my legal career, it has been rare for a client to believe they cannot get patent protection, and to subsequently stop trying to get that protection. Typically, when clients stop pursuing patent protection, it is because the technology they are trying to patent has lost commercial value, and the costs of patent procurement are no longer justified. There have been times when the U.S. Patent and Trademark Office has found a published reference that showed exactly what my client had invented, but those situations are extremely rare.
Typically, the patent application is filed, the examiner rejects the application, and modifications are made to the scope of the patent protection being pursued. At some point, the examiner will be convinced that the claimed invention is patent-worthy, and in due course a patent will issue. Just because the patent office has issued a patent, however, does not mean that the patent has any value. The scope of patent protection afforded depends on the claims. To quote Judge Giles Rich of the U.S. Court of Appeals for the Federal Circuit, “The name of the game is the claim.” For a competitor to infringe a patent claim, the competitor’s product (or process) must include every single feature of the patent claim. If a patent claim is short, with very few features, infringement might easily occur. If a patent claim is long, with many features, the chances of a competitor infringing the claim might be low.
Large institutional clients file U.S. patent applications by the thousands. In 2013, the award for “most U.S. patents” went to IBM with 6,809 patents, second place went to Samsung Electronics with 4,675 patents, and third place went to Canon with 3,825 applications. Many of these patents will lie dormant during their lifetimes, and will lapse unnoticed either by expiration of their terms or through nonpayment of maintenance fees (e.g., when it is determined that the maintenance fee payment is no longer justified). But some patents will go on to have significant value, by being asserted in litigation, sold, licensed, or creating deterrence to a competitor.
What causes a patent claim to have value? There are many factors.
As discussed earlier, one factor relates to how many features are included in the claim. The patent attorney needs to put enough features into the claim to distinguish from what was previously known in the technology (which, in patent circles, is called “the prior art”). Part of the trick is to put just enough features into the claim to distinguish from the prior art—and not one feature more. Because a single word can make or break an infringement claim, every word in the claim should be evaluated and any unnecessary words should normally be omitted.
Another factor relates to the arguments that were made to the patent office in the process of trying to convince it to grant the patent. Arguments can be interpreted as limitations on the scope of the claims (i.e., the arguments may be looked upon as limitations to the claims even though actual words have not been explicitly added to the claims). Arguments need to be worded carefully to avoid such implications.
A third factor relates to whether the patent attorney (and the applicants) followed critical rules in the process of procuring the patent. Because of the complexity of the patent procurement process, mistakes occasionally occur and mechanisms are available (in many, but not all cases) to make corrections. However, an intentional misrepresentation during the procurement process is typically fatal.
A fourth factor relates to the patent strategy in place when the patent was procured. Has a company filed a sufficient number of patents to adequately protect its innovations? Anyone can readily see all of the patents that a company has obtained by clicking on “patents” and “search” at the U.S. Patent and Trademark Office’s website: www.uspto.gov. Using this search tool, it is possible to find all of a company’s patents, as well as the patents of a company’s competitors. The patents in each company’s respective portfolio can be reviewed and compared to try to assess relative value.
A fifth factor relates to whether the technology being patented is truly innovative. This is a very subjective factor to assess. One way that patent valuation analysts address this issue is by counting the number of times a patent has been subsequently cited by other patents. The thinking is that the more frequently a patent is cited, the more important the technology that is covered by that patent.
Probably the most overlooked factor is whether the features in the claims relate to the root of the commercial value of the invention. I always ask inventors to tell me why their invention contains a commercial advantage over the products of their competitors. Perhaps they designed a battery and one of the components allows the battery to hold more charge than the competition. Or, maybe they created a process for making paper, and the angle at which materials are applied during the manufacturing process allows the paper to be produced faster. These features, or these characteristics, are what allows inventors to get their improved results, and these features need to be included in the patent claims. To clarify, I’m not necessarily looking to claim the good result (i.e., the battery holds more charge, or the paper is manufactured faster), but rather I’m looking to claim what causes the good result (i.e., why the good result is obtained). If there is some design feature that creates an advantage over the prior art, and if the design feature is neither found in, nor obvious from the prior art, then properly describing that design feature in the claims should result in a grantable patent. Keep in mind that “obvious” is a subjective concept, and disagreements with the patent office over what is obvious can be problematic.
Of course, the value of a patent is ultimately determined by how much income it ultimately generates. This can be direct income from the sale, licensing or assertion of the patent; or it can be indirect income, by keeping competitors away from the markets in which patented technology is used.
Patent valuation is a critical step when the value of a company is being assessed. While “Shark Tank” has wonderful entertainment value, a company’s worth cannot be ascertained by simply asking whether patents exist. Determining the value of a patent is complex, but it is a necessary prerequisite to making good investment decisions.
– by Lawrence Ashery