American Intellectual Property Law Association
IP Valuation
John T. Johnson & Michael F. Autuoro
Fish & Richardson P.C.
IP Practice in Japan Committee
2014 AIPLA Mid-Winter Institute
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Phoenix, AZ
January 28-29, 2014
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Agenda
• Intro to IP Valuation
– What is it?
– Why the Increased Need?
– Circumstances Requiring Valuation
• Intro to Valuation Methods
– Quantitative Valuation Techniques
– Qualitative Valuation Techniques
• IP Valuation/Devaluation Events
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What is IP Valuation?
• An estimation of the worth of an IP
asset or a set of IP assets
• Many valuation techniques, ranging
from the simple to the extremely
complex
– Patents exist even on patent valuation!
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Increased Need?
Greater need for IP Valuation
today than in the past?
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Increased US Patents/Litigation More Opportunities?
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More NPEs/Aggregators  More Opportunities?
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Source: PatentFreedom © 2013. Data captured as of August 6, 2013
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Greater Availability of Information about IP
• Various information sources make valuation
easier?
– Litigation Searching & Analytics—e.g., Lex Machina,
DocketNavigator
– Patent Analytics
• Online File Histories (Public Pair), Assignment Information, Fee
Status, Patent Families
• Robust Patent Databases and Reporting (e.g., Thomson
Innovation)
• International Patent Databases (e.g., EPO)
– Internet search engines
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Know Why You Need to Valuate
• The objectives of the valuation will impact the
strategy as well as the type of valuation that is
appropriate
• What is the purpose of the valuation?
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Example Valuation Contexts
•
•
•
•
•
•
Negotiations to sell/license IP rights
Merger, acquisition, joint venture or bankruptcy
To support decision-making in patent disputes
Fund raising/loans/venture capital
Developing internal IP risk mitigation strategy
For accounting purposes
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Patent Valuation Methods
• Generally, two categories of valuation:
quantitative and qualitative
– Quantitative: focus on numerical and
measurable data
– Qualitative: focus on characteristics and
potential uses of the IP
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Quantitative Approach
• Examples of quantitative methodologies:
–
–
–
–
(1) Income-based method
(2) Market-based method
(3) Cost-based method
(4) Option-based method
• Overlap of methods
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(1) Income-Based Method
• Value of IP asset = the sum of expected income
flows it will generate over time, discounted to the
present day
– Offensive analysis: What are projected future cash flows
from licensing or enforcement?
– Defensive analysis: What are the savings (royalty
payments, litigation costs, design-around costs) due to
owning the asset?
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(1) Median Damages Awarded for Patent Cases
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2013 PWC Patent Study (available athttp://www.pwc.com/en_US/us/forensic-services/publications/assets/2013-patent-litigation-study.pdf )
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(1) Reported Royalty Rates by Industry
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2012 KPMG report: Profitability and royalty rates across industries: Some preliminary evidence
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(1) Income-Based Method Simple Example
• Company C is offered 100 patents for license, prior
to Owner offering for sale to third parties
– Due diligence on the patents suggests that there is risk of
infringement as to 5 patents
– If Company doesn’t acquire/license patents, what are the chances it
will be sued? (e.g., 80% chance of suit on a risky patent)
– Probability of loss? (e.g., 30%)
– Targeted activity and est. exposure in case of loss (e.g., $10M)
– Average Litigation costs? (e.g., $1M, win or lose)
Risk
Patents
5
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Hit
Rate
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80% =
Expected
Suits
Loss
Rate
Exposure
in Loss
4
x ((30% x
$10M)
Avg. Lit
Expenses
+
$1M)
Total
=
$16M
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(2) Market-Based Method
• IP value is estimated based on similar market
transactions (e.g. similar license/acquisition
agreements) of comparable patent rights
• Was it a similar transaction?
–
–
–
–
When did it occur?
What technology area?
What was purpose of deal?, e.g., was acquisition for offensive or defensive purpose?
Who were the parties to the deal?
• Were rights comparable?
– Was agreement a license, cross-license or acquisition?
– Perpetual term?
– Existing
Firmencumbrances?
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(2) Market Information Sources
•
•
•
•
•
The Internet
Press Releases
Company annual reports
Royalty rate publications
Court decisions
• Unlike real estate transactions, the terms of most
IP transactions are kept confidential.
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(2) Recent Market Transaction Data
Date
Seller
Buyer
Technology
Type
Deal Price
No of IP Assets
Per
Patent/Asset
9/13
Nokia
Microsoft
Mobile
Phone
10-yr
CrossLicense
1.65B Euro
Nokia’s portfolio
--
12/12
Kodak
RPX/IV Led
Consortium
Digital
imaging
Sale
$527 Million
~1,110 patents
$479K (per
patent)
4/12
Microsoft
Facebook
IM; Email;
Browsing
Sale/
License
$550 Million
650 patents, plus a license
to 275 patents
$594K - $846K
(per patent)
4/12
AOL
Microsoft
IM; Email;
Browsing
Sale/
License
$1.056
Billion
~800 patents
$1.32M
(per patent)
8/11
Motorola
Mobility
Google
Mobile
Phone
Sale/
Acquisition
$12.5 Billion
Acquires Motorola Mobility
and its ~17000 patents
$735K per
patent)
6/11
Nortel
Rockstar
Consortium
(Apple,
EMC,
Ericsson,
Microsoft,
RIM and
Sony)
Mobile
Phone
Sale
$4.5 Billion
~6,000 patent assets
$750K (per
asset)
11/10
Novell
CPTN
Consortium
Networking/
Software
Sale
$450 Million
~882 patents
$510K (per
patent)
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(2) Market Valuation Range Example
Kodak
(12/2012)
Novell/
CPTN
(11/2010)
$479K per
patent
$510K per
patent
Google/
Motorola
(8/2011)
Nortel
(6/2011)
Facebook/
Microsoft
(4/2012)
Microsoft/
AOL
(4/2012)
$735K per
patent
$750K per
patent
$594K to
$846K per
patent
$1.32M per
patent
Low
High
$479K
$1.32M
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Logosimilar to the deal at hand?
Which is
most
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(3) Cost-Based Method
• IP valuation based on the costs that were
expended in the development of the IP
• Two approaches:
– “Reproduction cost” method: Based on costs associated
with the purchase or development of a replica of the
patent under valuation
– “Replacement cost” method: Based on costs that would
be spent to obtain an equivalent patent asset with
similar use or function
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(3) Cost-Based Method
• Sources of costs:
– Direct expenditures, such as costs with materials, labor
and management, e.g., R&D, prosecution costs
– Opportunity costs; costs due to delays in market
entrance; lost investment opportunities
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(4) Option-Based Method
• IP valuation based on stock-option pricing models
– More complex
– Patent rights viewed as analogous to a “call option”
– Both give a right to exploit an asset in the future, and to
exclude others from using it
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Patent Valuation Methods
• Generally, two categories of valuation:
quantitative and qualitative
– Quantitative: focus on numerical and
measurable data
– Qualitative: focus on characteristics and
potential uses of the IP
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Qualitative Approach
• Valuation performed through the analysis of
aspects that can impact the value of an IP asset,
e.g., legal aspects, technology level of the
innovation, market details, company organization
• Not based on purely financial analytical data
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Qualitative Considerations
•
•
•
•
•
•
•
•
•
Incremental improvement?
Relevant market?
Who developed the IP?
How close to expiration?
Are continuations pending?
Subject to broadening reissue?
Nature of the claims? Method? System?
File History—clean?
Forward
Citations
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Valuation/Devaluation Events
Judicial/Legislative Events
Possible Effect
Obviousness—KSR
-
Algorithm Rule—Aristocrat
-
Divided Infringement—Akamai/Limelight (CAFC)
+
Venue—TS Tech/Volkswagen
-
Willful Infringement—Seagate
-
Injunctive Relief—eBay
-
Injunctive Relief for NPEs at ITC
+
Entire Market Value Rule Damages—Lucent
-
IPR/Prost-Grant Review
-
Inequitable Conduct Heightened Requirements—
Star Scientific/Therasense
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Legislative
Patent
+
Patentable Subject Matter—CLS Bank/Alice
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THANK YOU! ANY QUESTIONS?
John T. Johnson
[email protected]
Michael F. Autuoro
[email protected]
Fish & Richardson P.C.
601 Lexington Avenue – 52 Floor
New York, NY 10022
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