Patent Valuation: Improving Decision Making through Analysis

Praise for Patent Valuation

"With no nonsense or intellectual posturing, the authors tell us what a patent valuation is really about . . . in real life. Readable, sound, and eminently useful, the authors have presented many new and practical insights about the valuation process and about the nature of patents as business assets. While focused on patents, their insights apply to any intellectual property and, in fact, to any valuation. Professionals, corporate managers, attorneys, and anyone else in the IP world will find themselves attached to this clearly written book." Gordon V. Smith, author of Trademark Valuation and Intellectual Property

"Innovation is the key to success for individuals, companies, and entire nations. Patents are the key to providing a marketplace for innovation. In Patent Valuation, Murphy, Orcutt, and Remus cut through the legal complexities of patents to help you figure out your bottom line what are they worth?" Jon Dudas, President of FIRST®, Under Secretary of Commerce for Intellectual Property, and Director of the United States Patent and Trademark Office, 2005 2009

"Effective management of IP assets is enhanced when decision making takes into consideration the value of the assets. This new work by William Murphy, John Orcutt, and Paul Remus presents a number of accepted models for calculating value and practical application of these models. I highly recommend Patent Valuation as a reference for those IP professionals who want to leverage greater value from their IP assets." David Koris, General Counsel, Head of Intellectual Property, Shell International BV, The Hague, Netherlands

"Going beyond the conventional primer, this book provides a practical framework that incorporates the art of defining a value proposition with the science of quantitative examples to drive a productive dialogue of patent valuation." Rajiv Patel, Partner, Fenwick & West LLP

Preface ix

Acknowledgments xiii

PART ONE Foundations for Patent Valuation and Decision Making 1

CHAPTER 1 Valuation Basics 3

What Is Value? 5

The Valuation Process 7

Identifying the Subject Matter of the Valuation 9

Valuation Misconceptions 12

The Three Basic Valuation Methodologies 16

Limitations on Rationality in Valuation and Decision–Making Exercises 20

References 20

Notes 21

CHAPTER 2 Patent Basics 23

What Is a Patent? 26

Anatomy of a Patent 32

Criteria for a Patent 33

Transferring Patent Rights 36

Nationality of a Patent 39

References 40

Notes 40

CHAPTER 3 Using Valuation Analysis to Improve Patent Decision Making 43

Patent Decisions 45

Maximizing, Optimizing, and Satisficing: How Much to Invest in Valuation Analysis 52

Preliminary Portfolio Valuation Audit: A Practical Valuation Technique 58

References 65

Notes 65

CHAPTER 4 Disassembly 67

Disassembly and Decision Trees 69

Using Disassembly to Develop Higher–Quality Data 75

Using Disassembly to Understand Data Better 84

References 86

Notes 87

PART TWO Patent Valuation Techniques 89

CHAPTER 5 Preparing for the Valuation 91

Understanding the Bundle of Legal Rights 91

Ownership Interest in the Patent 93

Description of the Patent Rights 99

Encumbrances on the Patent Rights 100

Understanding the Patent Rights Neighborhood 102

Exploiting the Patent Rights 103

References 117

Notes 119

CHAPTER 6 Income Methods: Discounted Future Economic Benefits Analysis 121

Basic Arithmetic of the Discounted Future Economic Benefits Analysis 124

Garbage In, Garbage Out: The Challenges Lay in the Inputs, Not the Math 131

Projecting Future Net Economic Benefits 133

Developing Projections from Analytical Analyses 143

Estimating the Discount Rate 151

References 159

Notes 160

CHAPTER 7 Advanced Income Methods: Incorporating the Value of Future Decision Opportunities 161

Option Contracts and Their Value 164

Real Options 168

Valuing Patents Using Option–Pricing Insights 170

Using Decision Trees to Incorporate the Value of a Patent s Future Decision Opportunities 174

References 185

Notes 186

CHAPTER 8 Market Methods 189

Markets and Patent Rights 191

Competitive Exchange 198

Comparable Transactions 205

Alternatives to the Core Market Methods 207

References 214

Notes 216

CHAPTER 9 Cost Methods 219

A Few Accounting Principles 220

Cost of Development: Questionable Valuation Tool 224

Cost of Reasonable Alternatives: Establishing a

Maximum Price 227

References 230

Notes 231

PART 3 Patent Valuation in Practice 233

CHAPTER 10 Pricing Patent Licenses 235

Payment Structures 236

Determining the Price for a License 246

Less Formal Valuation Techniques for Setting Royalty Rates 248

References 264

Notes 265

CHAPTER 11 Patent Infringement Damages 269

U.S. Legal Framework for Calculating Damages in Patent Infringement Cases 271

Lost Profits 275

Reasonable Royalty 285

Additional Patent Damages Matters 297

Answering the Sue or Settle Question 299

References 306

Notes 307

CHAPTER 12 Unlocking the Potential Value within Patents 313

Keeping Pace with Economic Changes 316

Patents as Collateral for Secured Loans 317

Securitizing Patents 325

References 333

Notes 334

CHAPTER 13 Valuation in Patent–Based Tax–Planning Strategies 337

Examples of Patent–Based Tax–Reduction Strategies 339

Transfer Pricing 344

Determining Transfer Prices for Patent Rights 348

References 358

Notes 359

About the Authors 363

Index 365

William J. Murphy is a Professor of Law and Chair of the Commerce and Technology Law Graduate Program at the University of New Hampshire School of Law (formerly the Franklin Pierce Law Center), one of the top schools of intellectual property in the country. Murphy cofounded UNH Law′s Intellectual Property Valuation Institute and currently serves as its director. He is the author of R&D Cooperation among Marketplace Competitors. Murphy earned a JD degree from Pennsylvania State University′s Dickinson School of Law, and he holds master and doctorate degrees from Harvard Business School.

John L. Orcutt is the Associate Dean for Faculty Research and a Professor of Law at the University of New Hampshire School of Law. Orcutt cofounded UNH Law′s Intellectual Property Valuation Institute and its International Technology Transfer Institute. Orcutt is the author of Shaping China′s Innovation Future: University Technology Transfer in Transition. Before coming to UNH Law, Orcutt worked as a Silicon Valley investment banker and a capital markets attorney. Orcutt earned a JD degree from the University of California, Berkeley.

Paul C. Remus is a shareholder of the law firm of Devine, Millimet & Branch, P.A., in Manchester, New Hampshire. Remus concentrates his intellectual property practice in prosecuting patent applications, drafting noninfringement opinions, and licensing technology. He also mediates disputes involving intellectual property and is on the U.S. District Court Mediation Panel List. Remus also represents both companies and venture capitalists in private placements and other financing involving intellectual property. Remus earned a JD degree from the University of Michigan.