Category : Valuation

Any business professor will tell you that the value of companies has been shifting markedly from tangible assets, “bricks and mortar”, to intangible assets like intellectual property (IP) in recent years. IP in its various forms is increasingly used as the basis of many business and commercial transactions.  It is fundamental for company valuations (merger, acquisition, bankruptcy); negotiations (selling or licensing); dispute resolution (fair recovery and quantification of damages); fundraising (bank loans and raising capital); assisting in decision making (corporate strategy); and reporting (tax and accounting).

Intangible Assets

An intangible asset is an asset that lacks physical substance and includes patents, copyrights, franchises, goodwill, and trademarks.

The International Accounting Standards Board standard 38 (IAS 38) defines an intangible asset as: “an identifiable non-monetary asset without physical substance.”

IAS 38 specifies the three critical attributes of an intangible asset to be …

  • identifiability
  • control (power to obtain benefits from the asset)
  • future economic benefits (such as revenues or reduced future costs)

IAS 38 contains examples of intangible assets such as customer lists, copyright, patents and franchise agreements.

The Value and Valuation of Trade Secrets

The terms value and valuation and their cognates and compounds are used in a confused and confusing but widespread way in our contemporary culture, not only in economics and philosophy but also and especially in other social sciences and humanities. Their meaning was once relatively clear and their use limited. Value meant the worth of a thing, and valuation meant an estimate of its worth.

This blog will explore the subject of the valuation of one particular form of IP, namely trade secrets.Why trade secrets? Well, IAS 38 clearly indicates that a trade secret is also an example of an intangible asset, so long as it meets the three critical attributes – identifiability, control and future economic benefit. Trade secrets are a very important part of any IP portfolio. It is no exaggeration to say that virtually every business possesses trade secrets, regardless of whether the business is small, medium or large.

Trade secrets are an important, but oftentimes an invisible component of a company’s IP portfolio of assets. However, trade secrets can also be the crown jewels within the portfolio.

Why Conduct a Trade Secret Valuation

Before delving into the details of the valuation of a trade secret, it is important to appreciate that the rationale for conducting such a valuation may vary.

  • For management information purposes
  • For strategic planning
  • For value reporting
  • For accounting purposes
  • For liquidation reasons
  • To support a legal transaction
  • For licensing
  • For litigation support
  • For dispute resolution
  • For taxation planning and compliance
  • For fundraising purposes

Transfer Pricing

Throughout this blog, one particular valuation rationale will be analyzed, namely transfer pricing. Transfer pricing is probably the most important issue in international corporate taxation. In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions between enterprises under common ownership or control.

A transfer price is the price at which members of a group transact with each other, such as the trade of goods and services between group members..

Transfer pricing also comes into play when the transaction between group members involves intangible assets and IP like trade secrets. In other words, transfer pricing is not limited to just tangible assets. Due to the rather broad the definition of intangibles for transfer pricing established by the OECD, the scope of the valuation as well as the resulting value will often differ from analyses performed for accounting and management information purposes; as stated in the OECD Guidelines (paragraph 6.7):

Intangibles that are important to consider for transfer pricing purposes are not always recognized as intangible assets for accounting purposes. For example, costs associated with developing intangibles internally through expenditures such as research and development and advertising are sometimes expensed rather than capitalised for accounting purposes and the intangibles resulting from such expenditures therefore are not always reflected on the balance sheet. Such intangibles may nevertheless be used to generate significant economic value and may need to be considered for transfer pricing purposes”.

With trade secrets being a prominent example of Intangibles that are not being reflected on the balance sheet, but which may nevertheless generate significant economic value, it is evident that trade secrets cannot be disregarded for transfer pricing purposes. Trade secrets are explicitly recognized within the OECD Guidelines in Chapter VI Section A.4.2.

Tax practitioners which fail to identify relevant trade secrets as well as to develop a clear understanding of the attributable economic value face a high degree of uncertainty in respect to the question whether their transfer prices reflect an arm’s length compensation for the intangibles contributed by individual group members. Hence, with the growing importance of intangibles as the core value drivers within highly integrated value chains, understanding how to properly cope with intangibles and IP like trade secrets in transfer pricing is one of the key challenges faced by tax practitioners. Conducting a thorough stock-tracking analysis and compiling a respective analysis will be invaluable first steps to reduce uncertainty and risks.

The Requirements for Trade Secret Valuation

Conducting an IP valuation exercise requires transparent inputs, reliable and sufficient data, and objectivity of the person conducting the valuation. This applies also if the IP in question is a trade secret. Ideally, the valuation of the trade secret should have …

  • Transparency – Qualification of the valuation inputs, assumptions, risks, sensitivity analysis, and disclosure
  • Validity – Valid inputs and assumptions as of the value date.
  • Reliability – If a valuation is repeated, it should reliably give a comparable and reconcilable result
  • Sufficiency – The valuations should be based on sufficient data and analysis to form a reliable conclusion
  • Objectivity – The appraiser should conduct the valuation free from any form of biased judgment
  • Various financial and legal parameters – When performing a monetary IP valuation, various financial and legal parameters should be taken into account

From a transfer pricing perspective observing and documenting the above requirements will greatly contribute to the defensibility of the valuation. Tax practitioners need to be aware of in this context that tax authorities are extremely sensitive about the effects of information asymmetries. The basic assumption here, whether justified or not, is that tax authorities are generally at a disadvantage when assessing transactions involving intangibles. As a result, they will frequently second guess the valuations during tax audits. The recent discussion in the context of the BEPS point towards an increased (even reversed) burden of proof for taxpayers, as the OECD explicitly stated in the implementation guidance for hard-to-value-intangibles (BEPS Action 8, Public Discussion Draft, 23. May 2017) that:

“This guidance protects tax administrations from the negative effects of information asymmetry by ensuring that tax administrations can consider ex post outcomes as presumptive evidence about the appropriateness of the ex ante pricing arrangements. At the same time, the taxpayer has the possibility to rebut such presumptive evidence by demonstrating the reliability of the information supporting the pricing methodology adopted at the time the controlled transaction took place”.

Without observing the above requirements for the valuation process, rebutting presumptive evidence (hindsight) presented by tax authorities will be challenging indeed.

Trade Secret Valuation Techniques

Let’s now delve into the details. There are a number of techniques / methods in use when conducting IP valuation exercises. Here are some of the quantitative IP valuation methodologies used.

Income approach

The income approach measures the value of the IP by reference to the present value of the economic benefits expected to be received over the remaining life of the IP

Market approach

The market approach measures value based on what other purchasers in the market have paid for assets that can be considered reasonably similar to those being valued

Cost approach

The cost approach measures the value of a IP based on the cost invested in building the IP, or its replacement or reproduction cost

Discounted cash flow

DCF analyses use future free cash flow projections and discounts them, using a required annual rate, to arrive at present value estimates.

Typically discounted cash flow is the methodology used when conducting a trade secret valuation exercise. Discounted cash flow analysis is a method of valuing an asset using the concept of the time value of money. All future cash flows associated with the asset are estimated and discounted by using cost of capital to give their present values.

When conduction a discounted cash flow analysis in the context of transfer pricing (i.e. a sale of intangible assets and / or the relocation of corresponding functions), one should be aware that the valuation should consider the perspective of the buyer as well as the perspective of the seller (i.e. at arm’s length the buyer will generally anticipate to earn higher profits from the use of the intangibles than the seller and the parties will negotiate a price within a corresponding bid-ask range).

Considerations

Here are some of the rational economic considerations when attempting to calculate the valuation of a trade secret. They may be broken down into four ‘buckets – costs, timing, benefits and risks. These are the inputs as such which feed into the discounted cash flow valuation calculation.

Associated Costs

Investment outlays. The economic outlay to create or develop the trade secret. This may include such details as the time taken to develop the trade secret, time taken to test it, labour costs involved, investment in physical capital (e.g., equipment, property, etc.) plus other related expenses.

Protection outlays: The economic outlay to provide reasonable protection to the trade secret, and may include administrative, legal and technical protection mechanisms deployed to protect the trade secret over time.

Associated Timing

Protection period: The anticipated protection period as impacted by the likelihood of a competitor discovering through reverse engineering or other proper means. Of course, the trade secret owner himself may decide to declassify the trade secret after a period of time for various reasons. Alternatives: The existence or expected development of acceptable alternatives or substitutes that could diminish or eliminate competitive advantages provided by the trade secret.

Associated Benefits

Investment returns. The economic benefits expected as a result of the trade-secret’s use in a product or service, such as greater sales, price premiums, or cost reduction. Internal capabilities: The benefits gained by the organisation possessing the trade secret in terms of its internal capabilities, and/or improved efficiency and effectiveness.

License or sale:  a trade-secret owner might also consider licensing or selling a trade secret—whether as part of a specific IP transaction or as part of a larger business transaction.

Prior User Rights: Having a trade secret in use prior to another entity filing a patent application gives the trade secret owner prior user rights. The trade secret owner does not require a license to continue to use the patent belonging to that other entity.

Recovery of damages: While typically not a preferred way of generating a ROI on a trade secret, litigation involving misappropriation can also provide investment returns through the recovery of damages.

Associated risks

The risk that the company themselves fails to treat the information as a trade secret, by not controlling access and not putting reasonable protection mechanisms in place. The risk that the trade secret is misappropriated by say a disgruntled employee, a former executive, a collaboration partner, a competitor or a hacker. The risk that an independent party either patents or publishes the information thereby putting the information into the public domain.

All of these economic considerations are also relevant for transfer pricing professionals. Having access to respective information will greatly enhance the reliability (defensibility) of respective calculations.

Trade Secret Valuation Report

A proper and professional trade secret valuation report should ideally contain the following sections.

  • position and status of the appraiser
  • purpose of the IP valuation
  • identification of the subject IP
  • details of any IP-related assets valued
  • addressed audience/addressees
  • premise of the IP value
  • approach and methods used
  • valuation date
  • value date
  • data sources used
  • key assumptions and sensitivities
  • limitations

When compiling the report, it is highly recommended to keep the Corporate Tax Department / Function and/or the external Accountancy & Tax Firm in the loop, as the contents will also be of immediate value for transfer pricing purposes. Not only does an overview (list) of the intangibles constitute a compulsory part of the required transfer pricing documentation, the so-called Master File (see OECD Guidelines, paragraph 5.19), it will also be an invaluable source of information to verify whether the trade secrets have been adequately taken into account in the context of intercompany transactions.

Final thoughts

Trade secret valuation is a challenging task that frequently fails to demonstrate transparency in terms of how it reaches conclusions on asset value. In general, trade secret valuation requires thorough analysis and deliberation, the application of complex methodologies, and good levels of business judgement.

We trust that this overview of the valuation of trade secrets is of interest and of value.

Donal O’Connell & Oliver Treidler

Author: 7 months ago

Geen onderwerp staat zo vaak in de belangstelling als de vraag naar de waardering van rechten van intellectuele eigendom.

De opkomst van octrooiveilingen – in 2006 gestart door Ocean Tomo [1] in de VS – heeft in elk geval voor een lichtpuntje gezorgd in het zichtbaar maken van de waarde van een octrooi. Veel is er gezegd en geschreven over de betekenis van immateriële waarde (“intangibles”) van intellectuele eigendom en octrooien in het bijzonder. Zowel in de fiscaliteit als in economische verhandelingen wordt algemeen erkend dat octrooien als een “immaterieel” activum of goed moet worden behandeld [2]. Dit heeft echter niet geleid tot een grotere inzichtelijkheid in de “waarde” van een octrooi. De veilingen hebben in elk geval een popularisering van het octrooi als waardefactor tot gevolg gehad. De waarde op een veiling is immers welk bod een – al dan niet anonieme [3] – bieder voor een octrooi doet tijdens de veiling. Zo eenvoudig ligt het echter in de alledaagse werkelijkheid niet.  De waarde op de veiling is de prijs die voor het octrooi wordt geboden. Als de “reserve price” maar laag genoeg is (dat is de prijs waar beneden de octrooihouder niet wil verkopen) dan zal een bod al gauw tot een verkoop leiden, dus tot een verkoopprijs. Is dat echter ook de “waarde” van het octrooi? Het ligt eraan wie je het vraagt. Voor de veilingkoper waarschijnlijk wel en ook voor zijn accountant. Die zullen de betaalde prijs als verwervingskosten opnemen op de balans in de vorm van goodwill. Als in de toekomst dat octrooi licentie-inkomsten gaat genereren dat weer leidt tot een hogere opbrengst dan de verwervingskosten dan heeft dat octrooi een “waarde” verkregen die geen enkele verhouding meer vertoont met de prijs waarvoor het octrooi werd gekocht op de veiling.  Als die kennis bekend zou zijn op het moment van veiling, bv. in de gevallen waar een octrooi wordt verkocht dat al licentie­ inkomsten genereert, dan geeft dat een “houvast” voor de waardebepaling. Vraagt men dat aan een advocaat of curator die zijn cliënt of de rechter commissaris moet adviseren over de waarde van een (aangeboden dan wel in de boedel aangetroffen) octrooi dan zal hij dat doen aan de hand van een risico analyse. In de juridische wereld betekent dat meestal een opinie waarin staat dat ergens ter wereld een prior art publicatie is opgedoken die het octrooi waardeloos maakt (immers nietig doet zijn). In een faillissement situatie wordt bij de waardebepaling rekening gehouden met het feit dat het onderliggende IE recht niet langer onderdeel uitmaakt van een “running concern”. In dat opzicht is een IE recht in feite bederfelijke waar geworden[4].  Wordt diezelfde vraag echter aan een IP bedrijfsmanager gesteld dan zal hij de waarde laten afhangen van de plaats die het octrooi inneemt in de gehele organisatie.  Afhankelijk van het feit of het octrooi ter bescherming dient van eigen producten dan wel leest op producten van de concurrent, waardoor hij “octrooi vrede” kan afdwingen of onderwerp van een kruislicentie wordt.

Naast de juridische betekenis van “waarde” van een IE recht heeft de term uiteraard ook –en soms juist– een economische,  sociologische of filosofische betekenis, welke ik, tenzij de context dit vereist [5], in dit artikel terzijde laat.

Waarderingskarakteristieken IE rechten

Als immaterieel activum, wordt intellectuele eigendom door een aantal eigenschappen gekenmerkt die waardering ervan tot een nogal bewerkelijke aangelegenheid maken. IE rechten zijn:

  1. overdraagbaar; de aan een IE recht behorende exclusieve rechten zijn binnen een identieke business context even waardevol
  2. vergankelijk; producten van intellectuele eigendom kunnen uit de mode raken, in het auteursrecht denken we bv. aan een artiest die zijn populariteit verliest, in het octrooirecht kunnen technologie cycli beperkt zijn, een merk kan door niet normaal gebruik zijn waarde verliezen
  3. riskant; succesvolle IE creatie vereist creativiteit, inventieve arbeid, commercialisatie, alle fases waarvan zijn behept met risico’s
  4. context afhankelijk; zie hieronder, onder “Waarde is Context”.
  5. niet-rivaliserend in consumptie [6]; IE kan simultaan worden gebruikt door een ieder zonder dat de waarde daalt
  6. nuttig uitsluitingsmiddel; IE verschaft een uitsluitend recht anderen van het gebruik uit te sluiten (een octrooipositie kan freedom to operate verschaffen, een auteursrecht verschaft het monopolie op exploitatie, het merk kan het gebruik ervan voor identieke goederen of diensten verhinderen)

 Dat alles maakt waardering van deze rechten tot een ware kunst, zo niet wetenschap. Waarderingsvraagstukken zijn tot nu toe vanuit juridisch oogpunt onderbelicht gebleven. Slechts accountants, economen, investeerders en faillissementscuratoren komen regelmatig met waardevraagstukken in aanraking. De juridische wetenschap heeft zich vrijwel afzijdig gehouden in de discussie over waardebepaling van IE.

Binnen de accountancy[7] gaat het dan om “fair valuing”, bv. om de vraag of de op de balans opgenomen waarde[8] van intellectuele eigendom (meestal in de vorm van goodwill en afschrijving daarop) een “impairment test” [9] kan doorstaan. Een dergelijke test kan gevolgen hebben voor de jaarrekening (en derhalve mogelijk op de prijs van het aandeel van het bedrijf).

In de financiële en economische literatuur en praktijk speelt (waardering van) intellectuele eigendom een rol in “structured finance” met “off balance” financie­rings­constructies, zoals securitisatie van muziekauteursrechten dan wel merk- of octrooilicentie inkomsten) [10].

Waarde is Context

In vele gevallen gaat het bij waardebepaling van IE rechten om de context waarbinnen die “waarde” moet worden vastgesteld.  Alhoewel dit in principe geldt voor alle IE rechten is het bij octrooien het meest zichtbaar. Een octrooi onderscheidt zich als immaterieel activum van andere IE activa. Als een fabrikant van elektronica voor het verhandelen van zijn producten behalve componenten ook octrooirechten van derden moet “inkopen”, bv. in de vorm van een licentie, wordt de waarde van de ingelicentieerde octrooien vastgesteld op de “inkoopwaarde” van die rechten, dus de “licentie prijs” die betaald is om die rechten, die noodzakelijk zijn het product aan de man te brengen, te verwerven. Is er echter een partij die –met de rug tegen de muur – in een juridisch octrooigevecht is verwikkeld, dan is de “waarde” van een octrooi dat hem in staat stelt een tegenvordering in te stellen om zo marktuitsluiting te voorkomen, vele malen groter dan de “objectieve waarde” van een dergelijk octrooi onder normale marktomstandigheden.  En zal dus ook de prijs die de koper bereid is te betalen, hoger zijn dan in “normale” omstandigheden gerecht­vaardigd is. Ondanks het feit dat de door de markt gerealiseerde prijs vaak “fair value” wordt genoemd, is het maar de vraag of dit zo “fair” is, aangezien de “markt” voor octrooien zich niet voorspelbaar, noch logisch gedraagt.

De prijs daarentegen van een activum als onroerend goed is het transactiebedrag dat in de markt tot stand komt als resultaat van vraag en aanbod, of, in een niet-veiling context, het bedrag als uitkomst van een onderhandelingsproces. Deze prijs kan dus hoger of lager zijn dan de waarde. De prijs zal bepaald worden door omstandigheden op de markt, door sterk subjectieve motieven zowel van de koper als van de verkoper, en door hun onderhandelingstalent. De aldus vast te stellen waarde is dan de marktwaarde, ofwel de prijs die de markt bereid is te betalen,  afhankelijk van kwaliteit van het onroerend goed, staat van onderhoud, ligging en algemene marktomstandigheden als toegang tot financiering e.d.

Een ander voorbeeld dat in dit verband wellicht tot de verbeelding spreekt is de waarde van beleggingen (aandelen, obligaties en andere waardepapieren). De heersende theorie in kringen van waardepapier beleggingen gaat uit van een “efficiënte markt”.  Dat idee gaat ervan uit dat de markt van beleggingen alle relevante factoren efficiënt incalculeert, en dus redelijk voorspelbare markt­bewegingen tot gevolg heeft. Het gebruik van “benchmark”-data wordt daarbij als uitgangspunt genomen voor aan- en verkoop beslissingen. Een dergelijk generiek marktconcept voor intellectuele eigendom is – voor zover ik weet – niet ontwikkeld noch breed geaccepteerd. De “markt” voor octrooien is dus alles behalve “efficiënt”.

Waardebepaling en Best Practices

Waarde is een niet alleen een regelmatig terugkerend onderwerp op octrooi­congressen maar leidt tot velerlei discussies, vragen, én academische verhandelingen. Het is ook een nog redelijk onontgonnen terrein, waar standaards en “best practices” ontbreken. Dit blijkt alleen al uit het feit dat er op dit moment over de honderd waarderingmethodes voor octrooien bestaan.  Die onzekerheid over de waarde van octrooien zal zeker niet bijdragen tot een bredere acceptatie van octrooien als een factor waarbinnen de organisatie rekening moet worden gehouden, noch tot een besef dat octrooi beleid tot een vast onderdeel van elke ondernemingsstrategie hoort.  Met waardering van overige IE rechten is het al niet beter gesteld.

Faillissements­curatoren hebben vrijwel geen ervaring met waardering en lijken zich vooral op verklaringen van en accountant te baseren. Het probleem met accountancy is dat men ook daar geen brede ervaring met IE rechten heeft en geneigd is naar in het verleden behaalde resultaten te kijken om die vervolgens te extrapoleren naar de toekomst, al dan niet door berekening van de  NAV (Nett Asset Value), of contant making van toekomstige licentie-inkomsten.

Waardebepaling wordt er voorts niet gemakkelijker op als men zich bedenkt dat waarde­toevoeging wordt beïnvloed door de verschillen in materiële IE rechten.  Bij octrooien speelt de omvang van het geclaimde recht een rol, hoe breder de octrooiconclusies hoe groter de kans dat er een veelvoud aan producten of werkwijzen onder valt. Aan de kostenzijde van de balans van de wederpartij van een octrooihouder –concurrent, toekomstige licentienemer –  betekent dat hoe meer claim elementen hoe groter de kans dat product development dan wel de licentie duurder maakt. Bij brede conclusies zal de concurrent die een zelfde product op de markt wil brengen, meer kosten moeten maken voor bv. design arounds.  Tegenover de kosten van de concurrerende producent, staat echter niet een gelijke “waarde” vermeerdering aan de kant van de octrooihouder, omdat die “waarde” – namelijk de macht om de potentiële concurrent van de markt te houden – zich niet onmiddellijk vertaalt in een hoger (markt)prijs of geldelijke waarde.

Een verdere omstandigheid die waarde van een octrooi beïnvloedt is het recht van de octrooiaanvrager afsplitsingen van zijn oorspronkelijke aanvrage in te dienen waarbij hij de beoogde omvang van zijn recht kan uitbreiden (waarbij veelal gekeken wordt naar concurrerende producten op de markt om, na verlening, in staat te zijn de concurrentie te dwingen een licentie te nemen of met behulp van het octrooi van de markt te weren).

Anders dan bij octrooien, waar de duur van het uitsluitend recht beperkt is, kan bij merken de waarde in hoge mate worden bepaald door intensiteit van het gebruik. Een bekend merk is waardevoller dan een onbekend merk. De waarde van een brand of merk kan voorts worden vergroot door cognitieve gebruiksmaximilisatie (elementen van marketing te deponeren zoals verpakking, slogans, kleuren, opmaak, etc.). Door de mogelijkheid “derivatieven” apart te licentieren (verschillende gebruikers voor verschillende, onder het depot vallende, warenklassen) kan eveneens waarde worden toegevoegd.

In het auteursrecht staat de lange duur van het recht  – 70 jaar na overlijden van de auteur – in geen verhouding tot een industriële creatie die tot octrooi leidt en slechts 20 jaar na aanvrage bescherming biedt. Dit verhoogt de potentiële waarde van een auteursrecht, al was het maar omdat langer royalties over het gebruik van het auteursrechtelijk beschermde werk geclaimd kunnen worden.

Waarde en Experts

Voorspellen welke uitvinding, welk merk, welk auteursrecht of industrieel ontwerp van grote waarde zal blijken te zijn, is niemand gegeven. Eén van de redenen dat er vele octrooien worden aangevraagd op uitvindingen die de tekentafel nooit zullen verlaten, is de inherente onmogelijkheid om aan te geven welke uitvinding ooit zal worden toegepast of  welk geoctrooieerd product een marktsucces gaat worden . Geen uitgever kan voorspellen welk boek of welk muziekstuk de hitlijsten zal halen en dus waarde creëert, voor de maker, ontwerper, maar ook voor de samenleving. Dat er niet zoiets als een “expert” bestaat die op alle waardevraagstukken een sluitend antwoord kan geven blijkt wel uit het feit hoe vaak in het verleden dergelijke experts er naast hebben gezeten als het gaat om het waarderen van een nieuwe vinding of nieuwe ontwikkeling zoals blijkt uit de in noot [11] gegeven “voorspellingen.

Dat maakt waardering van IE rechten een fascinerende bezigheid. Wetenschappelijke studies over waardebepaling van IE rechten zijn, anders dan bijvoorbeeld de waardering van onroerend goed of zelfs van andere immateriële activa,  schaars [12].  De behoefte aan verder onderzoek en unificatie blijft onverminderd groot.

Severin de Wit (Den Haag, IPEG, Intellectual Property Expert Group)

www.ipeg.com – www.ipegconsultancy.com ((severin.dewit@ipeg.com)

____________________

[1] Ocean Tomo organiseerde de “auction business”, die echter tot minimale opbrengsten leiden, met gemiddeld een opbrengst die lager ligt dan de historische kostprijs, ondergebracht in een kleinere eenheid en heeft met zich meer gericht op lucratievere activiteiten zoals bv. litigation support en “expert witness” werk.

[2] Margaret Blair en Steven M.H. Wallman (ed.) ”Unseen Wealth: Report of the Brookings Task Force on Intangibles”, Brookings Institution Press (Washington, DC, 2001). R.M.S Wilson en J.A Stenson,“Valuation of information assets on the balance sheet: The recognition and approaches to the valuation of intangible assets”, Business Information Review, 2008, p. 167-182.

[3] De meeste bieders op de door Ocean  Tomo georganiseerde veilingen boden per telefoon (anoniem dus), kwade tongen beweren dat in de afgelopen veilingen vooral “patent aggregators” als Intellectual Ventures (Bellevue, WA, USA) geboden hebben, zie ook Millien en Laurie, “Established and Emerging IP Business Models” , The Eighth Annual Sedona Conference on Patent Litgation conference paper (2007)

[4] Zie “Patent Perishables”, IPEG blog (http://www.ipeg.eu/blog/?p=670)

[5] zie de volgende paragraaf over de kenmerken van IE rechten

[6]  Economen zien industriële eigendomsrechten als tijdelijke monopolies gesanctioneerd door de staat. IE rechten zijn gebruikelijk beperkt tot zogenaamde niet-rivaliserende goederen. Dit betekent dat het IE recht nogmaals of tegelijkertijd “geconsumeerd “ worden (dus gebruikt worden of het genot ervan hebben) door andere consumenten.  Het gebruik door de één sluit gebruik door de ander niet uit, dit in tegenstelling to “rivaliserende” goederen als bv. kleding, dat slechts door één consument tegelijkertijd kan worden gebruikt.  Een mathematische formule daarentegen kan door welk aantal mensen dan ook tegelijkertijd worden gebruikt en is dus niet rivaliserend. Sommige bezwaren tegen de term “intellec­tuele eigendom” hebben dan ook te maken met het argument dat “eigendom”  alleen kan worden toegepast op rivaliserende goederen. Omdat niet-rivaliserende goederen door velen op eenzelfde ogenblik en onafhankelijk van elkaar (elk tegen minimale marginale kosten) gebruikt of gekopieerd mogen worden , behoren producenten van deze goederen een niet geldelijke aansporing te krijgen om dergelijke goederen te produceren en wel in de vorm van een monopolie of exclusief recht.  Het probleem met monopolies echter is dat deze “marktinefficiënte kenmerken” vertonen (producenten rekenen hogere prijzen en produceren minder dan sociaal wenselijk is). De verlening van IE rechten vertegenwoordigt derhalve een “trade-off” tussen de belangen van de samenleving in de creatie van niet rivaliserende goederen (door hun productie te stimuleren)  en de problemen van monopolie­macht. Aangezien die “trade-off” en de relevante voordelen en kosten voor de samenleving afhankelijk zijn van vele factoren die voor diverse producten (i.c. IE rechten) kunnen verschillen wordt wel verdedigd dat de “waarde” voor de samenleving, gelet op de marktinefficiënties, voor elk IE recht varieert. Zie Padraig Dixon en Christine Greenhalgh, “The Economics of Intellectual Property: A Review to Identify Themes for Future Research”, Oxford Intellectual Property Research Centre, Oxford, United Kingdom, November 2002. Zo ook, Greenhalgh en Rogers, “The value of intellectual property rights to firms and society, Oxford Review of Economic  Policy (2007, issue 23, p. 541-567)

[7] Zie voor een overzicht van de aspecten van waardering vanuit GAAP accounting principes, Hunter, Webster & Wyatt,  “Identifying corporate expenditures on intangibles using GAAP”, Intellectual Property Research Institute of Australia Working Paper No. 07/09 ISSN 1447-2317 (Mei 2009).

[8] Over de vraag waarom IE rechten meestal niet anders dan tegen verwervingskosten op de balans worden opgenomen, zie noot 2.

[9] De –financiële – test of de waarde waarvoor een IE recht in de boeken staat, moet worden herzien vanwege al dan niet recentelijk opgetreden “risico factoren”). Zie “Patent Perishables”, IPEG blog, ipeg.eu/blog/?p=670

[10] Zie John S. Hillery, “Securitization of Intellectual Property: Recent Trends from the United States”, CORE (www.wcore.com),  Washington 2004 en F. Scott Kieff, Troy A. Paredes, “An Approach to Intellectual Property, Bankruptcy, and Corporate Control”, Stanford Law and Economics Working Paper No. 305; Washington University School of Law Faculty Working Paper No. 05-07-01.

[11] Een greep uit wat publicaties en uitspraken bevestigt dat beeld (met dank aan dr. Ton Tangena, ex-Philips, octrooigemachtigde bij Tangena en van kan):

“The concept is interesting and well-formed, but in order to earn better than a ‘C’, the idea must be feasible”  – een management professor van Yale Universiteit in antwoord op Fred Smith’s paper waarin hij een betrouwbare “overnight delivery service” voorstelt. (Smith richtte vervolgens Federal Express Corp. Op -FedEx)

 “The advancement of the arts, from year to year, taxes our credulity, and seems to presage the arrival of that period when human improvement must end”  –  Ellsworth, US Commissioner of Patents in 1843

“We don’t like their sound, and guitar music is on the way out.” Een Decca Recording Co. bestuurder die niets ziet in de Beatles, 1962

“I think there is a world market for maybe five computers” , Thomas Watson, bestuursvoorzittter IBM, 1943

“So we went to Atari and said, ‘Hey, we’ve got this amazing thing, even built with some of your parts, and what do you think about funding us? Or we’ll give it to you. We just want to do it. ….And they said, ‘No’. So we went to Hewlett-Packard, and they said, ‘Hey, we don’t need you. You haven’t got through college yet’.” Apple Computer Inc. oprichter Steve Jobs over zijn pogingen om Atari en HP geïnteresseerd te krijgen in zijn Steve Wozniak’s personal computer.

[12] Wie wil weten wat waardebepaling in elk geval niet omvat, leze Patrick H. Sullivan en Alexander

  1. Wurzer, “Ten common myths about intangibles, value and valuation”, IAM (Intellectual Asset Management) Magazine, 2009, Special Report, p. 17-20
Author: 7 months ago

Intellectual Property (IP) valuation is easily one of the most misunderstood topics surrounding the management of intangible assets. Over the last 20 years we have seen the migration of IP valuation from being a tool for estimating IP damages into more “main stream” applications, and with the explosive growth in IP transactions, the need for assigning a monetary value to IP assets is higher than ever.  Having said that, inside the IP community there is a high degree of frustration expressed by all constituents when it relates to IP valuation: buyers, sellers, lawyers, consultants, etc.

Much of the confusion and frustration around IP valuation stem from an interesting paradox that results from the lack of alignment between IP transactions, deal pricing and reporting requirements. As long as most IP transactions are not being properly valued, while most IP valuations that are done don’t really matter since they happen after the fact, there is no incentive to develop better valuation processes nor is there ever going to be a better set of comparables to refer to.

We lay out a very pragmatic framework to approaching IP valuation: provide a high level view of the evolution of the field, explore the current landscape of valuation circumstances and the problems they present, and offer a path forward for the future.

The Evolution of IP Valuation: From Litigation to Monetization

With its origins in the IP litigation of the 1980’s and 1990’s, the valuation of IP (primarily patents) in the United States was initially limited to damages calculations in legal cases involving claims such as patent infringement.  With the introduction of tax planning involving IP, such as transfer pricing and patent donations, the valuation of intangibles became critical in non-litigation circumstances as well.  Companies were required to include in their tax reporting the fair market value (FMV) of IP involved in transactions, such as the inter company transfer of IP or the donation of a patent to a university.  New accounting GAAP rules related to business combinations, introduced in the early 2000’s, expanded the need for IP valuations even more, as companies were now required to report the Fair Value (FV) of intangibles that were purchased with a target in an M&A deal.  These “Compliance” situations – litigation, accounting, and tax reporting –carry with them a high degree of scrutiny by the court or regulating authorities, and require a third-party, IP valuation expert’s opinion in the form of a report or testimony.

In parallel to the proliferation of tax and accounting rules which mandated the valuation of IP in certain transactions, around the same time (late 1990’s- early 2000’s) the field of intellectual asset management (IAM) was starting to gain momentum with US corporations.  Large companies with significant patent portfolios were leading the way, and with the increase in sophistication of active IP portfolio management, came the need for valuation.  The types of activities where a valuation became increasingly important include: spin-offs, in kind contributions, licensing, patents sales, and other commercialization activities.  Since many of these activities are done for planning purposes or do not result in tax or accounting reporting requirements, these circumstances can be referred to as “Non-Compliance”.  In these situations, due to the low to medium degree of scrutiny and the lack of reporting requirement, the valuation is often done in house or between the parties, without the involvement of a third-party IP valuation expert.

The chart below displays the IP Valuation Spectrum, the compliance vs. non compliance situations and when a valuation expert may be needed (“Compliance” situations are highlighted in a box):

The IP Valuation Paradox

The distinction between Compliance and Non-Compliance situations is critical in understanding the problem with IP valuations. There’s a fundamental difference between the types of valuation done in compliance vs. non-compliance situations (excluding litigation, which is a special case):

In compliance situations, the valuation is usually done after the fact, when the deal has already been finalized, and so the IP valuation is not driving the transaction but rather reporting the transaction. There is single point value that needs to be recorded (as opposed to a range of values that needs to be negotiated).

Non-compliance situations fall intoone of two categories:

  1. 1. Deals involving intermediaries (brokers or patent funds) – there is usually no monetary valuation done before the deal; so the valuation is not driving the deal nor is it reported after the deal;
  2. 2. Direct negotiations between buyer/seller – There are usually valuations done on both sides for purposes of negotiations and therefore there would be a range of values that needs to be reconciled and negotiated between a buyer and a seller.  Here, too, the valuation is not always reported after the deal and so future similar deals cannot refer to it as a comparable.

Hence lies the paradox: most IP transactions today are done in non-compliance situations where the valuation is either not required, not reported or not done; and in compliance situations, where the valuation is required and reported as a single number, it doesn’t really matter since it’s done after the deal is closed.

There do we go from here? Make IP Valuations Matter, and Report Them!

The most common complaints with IP valuation usually fall into three categories:

1. Lack of active markets and a good set of comparables

2. Lack of transparency in valuation methods

3. The nature of intangible assets makes their value “contextual”, such that it’s difficult to assign one value to an asset or to agree on a value between buyer and seller

We argue that the root problem with IP valuation is not in the lack of markets, comps or methods; these are all symptoms of the real problem.  The key to a better IP valuation environment lies in more “Compliance”: higher deal scrutiny, more reporting requirements, and making IP valuation an integral part of deal pricing.  We should strive to undo the paradox: get to a point where most IP transactions are done in a compliance situation, where the IP valuation is required and reported; IP valuations should be done prior to the deal and have a meaningful impact on deal pricing.  This is a long process which could require regulatory, cultural and structural changes which could face many hurdles, but the problem needs to be identified and dealt with.

Let’s take the analogy of buying a house: we all like to refer to the real estate market as a very active market with lots of great comparable transactions for appraisers to work with.  These comps are readily available because every deal is reported somewhere: in the county records, in the local papers, in realtor’s brochures – and with a great degree of detail that allows a thorough comparison and adjustment between properties.

Why cannot intangibles be like that? As long as most IP transactions are not being properly valued, while most IP valuations that are done don’t really matter since they happen after the fact, there is no incentive to develop better valuation processes nor is there ever going to be a better set of comparables to refer to.  And while the value of intangibles will always be contextual in nature, there could be more information available in the marketplace to support a comparison and adjustment of market transactions, as is so successfully done in real estate markets. We need to make IP valuation matter, and we need to report it!

Efrat Kasznik is the President of Foresight Valuation Group, LLC, a boutique consulting firm focusing on IP valuation, strategy and litigation, and is based in Palo Alto, California

Author: 7 months ago

Transfer pricing is probably the most important issue in international corporate taxation. In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions between enterprises under common ownership or control.

A transfer price is the price at which members of a group transact with each other, such as the trade of goods and services between group members. Transfer prices are used when individual group members of a larger multi-entity firm are treated and measured as separately run entities.

Transfer pricing also comes into play when the transaction between group members involves intangible assets. In other words, transfer pricing is not limited to just tangible assets.

With the growing importance of intangibles as the core value drivers within highly integrated value chains, understanding how to properly cope with intangibles in transfer pricing is one of the key challenges faced by tax practitioners.

Arm’s length principle:

Transfer pricing rules are based on the arm’s-length principle.

The arm’s length principle is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an “arm’s-length transaction”.

The OECD and World Bank recommend intra-group pricing rules based on the arm’s-length principle, and almost all of the G20 countries have adopted similar measures through bilateral treaties and domestic legislation, regulations, or administrative practice.

Countries with transfer pricing legislation generally follow the OECD ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ in most respects.

So, transfer prices between group members of a multinational enterprises should be established on a market value basis, i.e. reflect prices that independent parties would agree under similar conditions.

Transfer pricing is not a tax avoidance practice:

Although transfer pricing is sometimes inaccurately presented as a tax avoidance practice or technique, the term ‘transfer pricing’ refers to a set of substantive and administrative regulatory requirements imposed by governments on certain corporate taxpayers.

Identifying market prices:

For the majority of transactions, it is often difficult or impossible to identify market prices that can be directly utilized as transfer prices, simply because the economic conditions of the controlled transaction do not exactly match the conditions that can be observed on the market (i.e. for which sufficient data is available).

By conducting appropriate adjustment calculations, it will, however, in most case be feasible to find a price (or a range of prices) that are reasonably close (approximate) market prices and thus ensure an arm’s length allocation of profits.

As acknowledged by the OECD, however, transfer pricing is not an ‘exact science’ and transfer prices are routinely challenged by tax authorities in cases that have absolutely nothing to do with tax avoidance or aggressive tax planning.

The tax risks:

The tax risks resulting from these challenges are immediately proportionate with the degree of uncertainty (subjectivity) involved in determining transfer prices. Considering that intangibles are by definition highly idiosyncratic (i.e. comparables are scarce and adjustment calculations highly subjective), it is notoriously challenging to determine arm’s length prices for transactions featuring intangibles.

In order for taxpayers to stand a chance to minimize the related tax risks, it is a pre-condition to have a detailed internal data of the intangibles. In addition to the fundamental information on ownership and costs, the data should also include information on the functions performed by the related parties for the Development, Enhancement, Maintenance, Protection and Exploitation of the intangibles (so-called “DEMPE”-functions).

In view of the increasing importance of intangibles, it is no coincidence, that one of the main features of the 2017 revisions of the OECD ‘Transfer Pricing Guidelines resulting from the BEPS project was the introduction of the DEMPE concept as a measuring-rod for an arm’s length allocation resulting from the exploitation of intangibles.

Hence, aligning the applied transfer pricing with the intangibles utilized by a MNE, including trade secrets, should feature prominently on the to-do-lists of transfer pricing professionals post BEPS.

Transfer pricing and trade secrets:

Yes, transfer pricing also comes into play when the transaction between group members involves intangible assets such as trade secrets.

This should not be a surprise, as trade secrets may be among some of the most valuable assets within an organisation. Transfer pricing professionals may, however, be prone to underestimate the impact of trade secrets, due to the fact that they do not have a clear understanding of what qualifies as a trade secret.

The EU Directive on Trade Secrets defines a trade secret as information that:

  • is secret
  • has commercial value because it is secret
  • has been subject to reasonable steps to keep it secret

Trade secrets are a very important part of any intangible asset portfolio. It is no exaggeration to say that virtually every business possesses trade secrets, regardless of whether the business is small, medium or large.

A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers. The scope of trade secrets is virtually unlimited.

Examples of transfer pricing involving trade secrets:

There are many times when trade secrets have to be considered:

  • One group member may transfer its assets including its trade secrets to another group member (for example as part of the re-organisation of the business, in preparation for a spin-out, in preparation for a divestment, to support some JV activity by that other group member)
  • One group member may license its assets including its trade secrets to another group member (for example when those assets are needed by the other group member to support its activities, such as R&D or Operations)

The challenge for transfer pricing with trade secrets:

Unfortunately, most companies are unorganized when it comes to their trade secrets and their management of such assets.

  • Trade secrets are poorly managed
  • There is a lack of ownership
  • Documentation is poor.
  • Protection mechanisms are poor or non-existent.
  • There is a lack of any classification of such assets.
  • Details on whether trade secrets have been shared is often missing
  • Trade secrets not properly addressed in agreements & contracts
  • There is no audit trail.

Neglecting to implement processes for managing and accounting for trade secrets can be extremely costly for companies. Many organizations are failing to properly protect these valuable assets, and this failure is not unique to any one specific stage in the business life cycle.

This list below captures some of the typical trade secret incidents we see befall businesses:

  • A founding member leaves the company and takes some trade secrets with him and then establishes another competing start-up.
  • The company fails to understand that certain things should be kept secret and shares too much information with an external party.
  • A potential investor walks away after asking the company about their trade secret policy, processes and systems to properly protect such valuable assets.
  • A disgruntled employee leaves the company and takes some trade secrets with him, put onto a memory stick on his last day of employment.
  • A new starter joins the company but has stolen trade secrets from his previous employer, and shares that trade secret with his new colleagues
  • A supplier entrusted with one of the trade secrets of the company shares it with a competitor.
  • Cyber criminals hack the network of the company and steal some trade secrets. Cyber criminals are after the trade secrets of the company, the confidential business information which provides an enterprise with a competitive edge.
  • The company divests one part of the business but mistakenly gives away some trade secrets as well.
  • A collaboration partner accuses the company of stealing one its trade secrets, breaking the terms and conditions of the collaboration agreement.

In addition to these traditional trade secret incidents, tax risks are of increasing importance in a post-BEPS world. Lack of communications between the personnel designated to managing intangible, including trade secrets, and  the transfer pricing department further exacerbates these risk, as aligning transfer pricing with intangibles without the required internal data will prove to be a tricky exercise indeed.

Proper and professional management of trade secrets is required:

Trade secrets are an important, but an invisible component of a company’s intellectual property portfolio of assets. They can add tremendous business value, so they need to be properly and professionally managed, and looked after.

Trade secrets should already be on the agenda of any in-house Legal/IP function as well as on the agenda of any Legal/IP Firm advising organizations.

However as these are important assets with associated costs and value, they are more and more on the agenda of the in-house finance and tax function as well as on the agenda of any Accountancy and Tax Firm advising clients.

Good practice:

As stated earlier, many companies are poor when it comes to trade secret asset management. However, those exceptional companies who have this mastered tend to have the following 5 things in place:

  • A Trade Secret Policy
  • Education of Employees about Trade Secrets
  • Robust Fit for Purpose Trade Secret Process & Procedures
  • A System to Underpin that Process
  • Trade Secret Governance

Having these five things in place will simultaneously and without any additional effort help those involved with transfer pricing with addressing the challenges identified above.

Donal O’Connell is IPEG consultant and managing director of Chawton Innovation Services Ltd.  Oliver Treidler is managing director of TP&C GmbH. His company offers a wide range of transfer pricing services (http://www.tp-and-c.com/)

Author: 9 months ago

Intellectual property assets (IP Assets), primarily patents and software, have been the driving force behind high tech companies, but often times investors fail to understand their unique value as strategic business assets.  Investors tend to focus on the defensive value of IP Assets, as it relates to protecting the company’s own products, but that is a very narrow point of view that entirely misses the full value of these assets for investors.  This problem gets exacerbated as more and more startups turn to leverage their IP Assets for funding, as we are often seeing in our Silicon-Valley based IP valuation practice.

In order to improve the IP valuation understanding and communications between startups and their investors, we have developed the Startup IP Valuation Model, which is presented in Chart 1 below.  This model establishes four types of investor/investment combinations, and identifies the main source of value that IP Assets can bring investors in each of these situations.  IP value is contextual, as it largely depends on the IP holders and the uses they find for the IP Assets.  Our model highlights the association that the investment type creates with the asset, as well as the types of investors and what sets of capabilities they have to leverage the IP Assets in conjunction with other assets that they hold.

Chart 1.    The Startup IP Valuation Model Kasznik_afbeelding

The Startup IP Valuation model is best illustrated through an example, which is taken from one of our client engagements (all identifying details have been modified).  Our client, which we will refer to as CoolData, was looking to raise a large Series A round of funding of $25 million, which it was planning to invest in its data center cooling technology that required massive upfront capital investment.  CoolData created some IP Assets that it was trying to leverage for fundraising, including: a patent portfolio of about 20 US patents, mostly issued and some pending applications, as well as a set of fully developed data center management software tools that have been in use by several data centers.  We turn next to apply the IP Valuation Model to this example.

IP Valuation and Financial Investors

CoolData could approach a financial institution that engages in early stage funding, such as a venture capital (VC) fund or banks that specialize in venture lending. The investment by such institutions is financial in nature, and can take on one of two forms: Equity (investment for stock) or Debt (collateralized loan).  The type of investment is critical to the association between the investor and the company’s underlying assets, which, in turn, determines what type of value they can generate from the IP Assets.

Equity investments are done in return for shares (usually preferred shares) of ownership in the company. Based on data from the National Venture Capital Association (NVCA) and PwC MoneyTree report, VC investment in the US has grown from $24 billion in 2010 to $59 billion in 2015. As shareholders, VC funds and other financial investors are participating in the growth of the company: as the company’s assets grow, so does the value of their share in those assets.  In that regard, they are less concerned with the immediate liquidation potential of the IP Assets, and more concerned with the IP Assets’ potential to serve as a platform for innovation and growth, not only for the company’s current products, but for future products and markets as well.  In our Startup IP Valuation Model, this is referred to as the Growth (Pivot) Value. The word “pivot” is used in the startup world to represent a shift in business model.  It is not uncommon for a startup to fail with the first iteration of its product, or it could be targeting the wrong market.  While IP Assets should provide exclusionary rights as those relate to the current product, these assets should be created in a way that covers a wider range of ideas, encompassing future product iterations regardless of the market.  That gives the company the ability to “pivot” into other products or markets while leveraging on the same IP foundation.  In the case of CoolData, the Pivot Value lies largely in the patents, not so much in the software.  Code is particular to one implementation and deteriorates in value quickly. Patents, on the other hand, cover more conceptual methods and processes; with well-written claims and some vision, those could lend themselves to additional implementations so they could serve the company in entering new markets, or could be licensed to others.

Venture Debt is more difficult to obtain, as only a handful of banks or funds offer this type of funding to startups that are looking to use IP Assets as a collateral.  Some of the financial institutions that offer Venture Debt lending include Silicon Valley Bank and Fortress Investment Group.  Venture Debt is a senior secured loan that has liquidity preference above all other debt or equity holders.  The note will most likely be secured by 100% of the assets of the business, and the lender will typically lend 25%-75% of the fair market value of assets.  Lenders (debt holders) are mostly concerned with operating cash flows, and the ability of the company to pay back the loan and accrued interest.  The company’s IP Assets serve as a collateral securing the loan; should the company default on its loan payments, the debt holders can take over the assets and liquidate them.  In our Startup IP Valuation Model, this is referred to as the Liquidation Value.  Debt holders don’t participate in the growth of the company’s assets, as their return is fixed in nature (pre-determined interest rate).  Not all IP assets have a strong liquidation value; in the case of CoolData, it was actually their software assets that carried more liquidation value than the patent assets.  The patents were forward looking, not covering technology that is widely deployed in the market yet, a factor that determines a lot of the current market value of patents.  The software, on the other hand, has already been used and could have been easily licensed to additional data centers, and therefore much of the Liquidation Value in that particular case came from the software.

It should be mentioned that one hybrid financial instrument that is common to early stage investments is the Convertible Note, which starts out as Debt and could convert into Equity. Convertible Notes are usually issued to avoid the need to assign a valuation to the company’s common stock at a very early stage (Seed or Angel stage) with the creation of a bridge loan that can be converted to equity at the price of the next large round of funding.  Convertible notes are popular with Angel and other early stage investors, not so much for $25 million Series A investments as sought by CoolData; nevertheless, for purposes of our model, we are treating them as Equity instruments, as most of these end up converting into equity.

IP Valuation and Strategic Investors

CoolData could also approach strategic investors, such as corporate venture arms of large corporations (also known as corporate venture), which have grown in prominence in recent years. According to Forbes, in 2015 corporate venture funds have more than doubled their share of venture investments over the past five years. In aggregate, corporate venture groups invested $5.4 billion across 775 deals in 2014.  Leading the way are companies like Google, Intel, Microsoft, Dell and Qualcomm, all of which have very active corporate venture arms.

Equity investment by corporate venture arms is carried out using investment models that are very similar to VC investments, with the main exception being that the money invested is that of the corporation itself.  Another key difference is that the corporate venture group has ties to the corporation’s complementary business assets (manufacturing, marketing, customers, infrastructure), which could provide for synergies with the IP Assets of the startups in which they invest.  In CoolData’s case, it would make a lot of sense to approach corporate venture arms of companies that are either heavy users of data centers and could benefit from the cooling technology (Google) or ones that make networking equipment for data centers (Cisco).  In our Startup IP Valuation Model, this is referred to as the Synergistic Value, which represents the value-add that the a corporate investor brings, as opposed to a financial investor, which cannot provide that type of value.

Corporate lending is less frequent than corporate equity investment, but could be structured as part of a proof-of-concept (PoC) collaboration, as an example, which is a common way for large corporations to participate in the development of startup products.  Those types of agreements could include a line of credit or some other type of lending, as well as access to equipment and engineering resources.  IP Assets are often time the only assets that a startup could have to secure the corporate loan.  Should CoolData default on its loan and the corporate lender were to take over its IP Assets, the corporate lender could generate more than just the liquidation value that the financial lender could generate.  This is due to the fact that the corporate lender has IP Assets of its own, such as patents, that could be aggregated with CoolData’s own IP Assets and monetized (through licensing, as an example).  In our Startup IP Valuation Model, this is referred to as the Monetization Value.  Even if the corporate lender taking control of the collateralized asset does not find much synergistic value with its own products or resources, it can still monetize them better than the financial lender, which at best can sell them in a liquidation sale.

Conclusion

CoolData ended up raising the requested $25 million using a combination of debt and equity investments from private equity and other financial investors.  Differentiating between the Liquidity Value (which resided largely in the software assets) and the Growth Value (as reflected in the patent) helped communicate the right value premise to each type of investor.  The model has worked really well in many other instances, as it is based on the contextual nature of IP valuation and applies it across four common combinations of investors and investments.  As IP Assets fill an increasingly larger role in startup funding, and as more types of investors and financial instrument show up in the market, the understanding of IP valuation becomes more important than ever before for successful investment.

Efrat Kasznik, President, Foresight Valuation Group LLC (Palo Alto, CA)

Author: 2 years ago

On Tuesday February 2, 2016 IPEG Consultant Severin de Wit gave a Workshop for the Netherlands Association of Insolvency Attorneys (Insolad). The presentation for that workshop “Intellectuele Eigendom en Insolventie” is in Dutch and can be found here (for videos, click on the picture and you will see a bar with a “play” and “pause” button). Enjoy!

Op dinsdag 2 februari 2016 gaf IPEG consultant Severin de Wit een workshop voor de Vereniging Insolventierecht Advocaten (Insolad) onder de titel: “IE en insolventie” in een fantastische vergaderloctaie, Boerderij Mereveld te Utrecht.

Author: 2 years ago

“What’s the value of my IP” is a question that comes up in the mind of a lot of IP owners, enticed by news of lavishly priced IP rights, they would like to see if they can get their IP monetized in a similar lucrative way. For the companies that receive the question whether they can valuate the IP this is not always good news. “It depends”  is mostly not a reply that is welcomed by a hopeful IP owner, who expects immediate enthusiasm by the valuator and a strong confirmation of his own ideas about how valuable his IP is.

For those that are in the valuation business this may be a familiar sound-bite.

Let’s start by saying that there is nothing like a “fair” valuation. Owners of IPRs have – only experienced market players exempted – way overheated expectations of the value of their IPR. Economists have called this the “endowment effect”. We come to that in a minute. First, in the absence of a specific value that someone is willing to attach to a certain IPR due to specific circumstances, we concentrate on fair value of IPRs.

What is “fair value”? Under US GAAP accounting rules, fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, or transferred to an equivalent party, other than in a liquidation sale. However nice that sounds, in IPR this supposes a market in which both buyers and sellers are equally well informed, both have experience in buying or selling IPR, both operate in a fully transparent market (buyers and sellers are known or can easily be found) and conditions for sale are constant, identifiable, transparent and equally accessible to both purchaser and seller. Most importantly fair value supposes a fair market. That’s the problem in IP as there is no such a thing as a “fair market” for IP.

The endowment effect is particularly present in monetizing of IPR and will hence have a significant negative effect on valuation of IPR. The gap between what people are willing to accept (WTA) to sell their asset or property and what others are willing to pay (WTP) for those assets is commonly termed the “endowment effect” and has been detected for many forms of property. A survey of endowment effect experiments found that the discrepancy between WTP and WTA tends to be highest for public and nonmarket goods such as health and safety measures, lower for ordinary private goods such as mugs and candy bars, and lowest for objects associated with monetary payments, such as lottery tickets.

Buccafusco & Sprigman, in “Valuing Intellectual Property – An Experiment” (2010) performed a test of the endowment effect in a setting intended to mirror an IP market especially with the intent to see whether the endowment effect can be extended also to goods that an owner has created. In all previous experiments, the owners have either simply been given the goods that they are then asked to value or, occasionally, have done something to earn them. None of the previous experiments asked subjects to actually create an object and then value it.

The assumption would be that with IP rights (which are so called non-rivalrous goods, meaning goods that may can be possessed or consumed by more than just a single user) only a reduced endowment effect is likely as these forms of property involve only partial alienation, especially with copyrights. Rights in a creative work such as a poem, novel, screenplay, or even most photographs and other graphic arts does not deprive the original rights holder of possession of a copy of the work. So Buccafusco and Sprigman organized a series of experiments intended to simulate a market for buying and selling creative works to test whether there are any endowment effects in transactions in non-rivalrous creative works.

Their experiment demonstrated a large valuation asymmetry between creators of new works and potential buyers and hence a strong endowment effect (read Buccufusco & Sprigman’s article for the details of their experiments.

Although not measured in case of patents and trademarks, it leads us to believe that the endowment effect in IPRs is particularly prevalent and strong. Making valuations that satisfy both sellers and buyers an almost impossible task. Therefor a caveat is in order for those that seek “honest” or “fair” valuations: there is no such a thing. Don’t let yourself be fooled by valuation companies pretending to give the ultimate professional valuations providing glossy graphs, statistics and attractively designed brochures and opinions.

Be realistic and take any IPR valuation with ‘a grain of salt’, actually pounds of it.

Author: 2 years ago

Altobridge was a privately held Irish technology company that developed wireless network solutions. Its products were designed to enable telecoms operators to deliver low-cost GSM and 3G wireless broadband to unconnected rural and remote communities. The company was founded in Ireland in 2002 by Mike Fitzgerald, Guy Waugh and Bart Kane. Their goal was to use research and development to remove technical and commercial barriers that often denied remote communities from affordable mobile voice and mobile internet connectivity. Their ‘lite-site’ solution was designed to be easily transportable and easily assembled on-site. The site installation and commissioning process took two or less days to complete. This ‘lite-site’ solution served subscriber communities of up to 100 to 1,500 people. In the early years, the company developed and commercially deployed the solutions behind the first commercial GSM service on board passenger aircraft, as well as the first commercial deployment of GSM connectivity on board deep-sea merchant maritime vessels. Altobridge even installed a Remote GSM Solution at Australia’s Antarctic station for its resident scientific team at ‘Casey’ on the continent’s Bailey Peninsula.

The key people involved

CEO, Mike Fitzgerald, had been a Head of Business Unit at Ericsson, working in Ireland, China and the USA. Guy Waugh, was the COO, having spent time at GEC Avionics, Ericsson, Microcellular Systems and InterWAVE. Richard Lord became CTO, having spent many years at Alcatel. Bart Kane was CFO at Altobridge with Jerry O’Sullivan taking over the CFO role in 2012. Dick Spring was Chairman of Altobridge. He was a member of the Irish Parliament (Dáil Éireann) from 1981 — 2002. Formerly leader of the Irish Labour Party, he served as Deputy Prime Minister in three Governments between 1982 and 1997. He also held several ministerial offices: Foreign Affairs, Justice, Energy and Environment.  Board members included David Summers from Advent International, Gunnulf Martenson a consultant at the World Bank and Damien Callaghan from Intel Capital.

Investments in the company

In its early years, Altobridge received significant state investment as a start-up in addition to several million euro invested by the founders, employees and their connections. In early 2011, Altobridge announced that Intel Capital and IFC together invested US$ 12 million in the company. This Series C funding round led by Intel Capital provided the company with additional capital to accelerate the pace of roll out of its wireless communications platform. The funding also allowed the company to commercialize its mobile broadband solution. In early 2013, Altobridge announced that Intel Capital and IFC (International Finance Corporation) had both made a follow on investment of US$ 7.8 million in the company.

Altobridge in the news

As a hi-tech start-up, Altobridge received frequent news coverage. In 2007, Altobridge announced that it had licensed its patent pending Local Connectivity Platform to Ericsson. This agreement enabled Ericsson to provide local switching across its GSM Base Station portfolio. This was a major change for Ericsson who were known to prefer developing all of their own functionality in house. In early 2010, Altobridge announced that it had bought ADC’s GSM Base Station and Switching Product Portfolio together with associated intellectual property. In September 2011, the World Economic Forum selected Altobridge as a 2012 technology pioneer. To be selected as a technology pioneer, a company must be involved in the development of a major technology and/or innovation and have the potential for long-term impact on business and society. Previous winners of this award included Google (2001) and Twitter (2010). In 2011 Altobridge won a Deloitte ‘Best Managed Company’ award plus a Wall Street Journal Innovation Award.

Bankruptcy, administration and asset sale

However, in 2014, Intel Capital and the IFC (subsidiary of the World Bank) who were the larger shareholders in the company, confronted with continuous losses in Altobridge, called in a receiver to recover loans provided to Altobridge. Jim Luby of McStay Luby chartered accountants was appointed receiver of Altobridge Ltd on 30 May 2014. This was a dramatic change from 2011 when the company had a turnover of $16.1 million and had raised US$19.8 million in investments from both Intel and the World Bank’s International Finance Corporation. It is difficult to say when exactly the company started to face serious business challenges. Clearly a few members of the company’s management realized that the company faced financial difficulties as far back as 2011. Forty five jobs were lost at Altobridge in Ireland when it ceased trading in June 2014. The company which had offices in Ireland, Malaysia, North America and China, employed a total of 130 staff internationally.

iDirect, an international satellite communications firm bought the company out of receivership. iDirect is owned by ST Engineering, an $11 billion Asian defense and engineering conglomerate. Altobridge assets were sold by the receiver for €4million to iDirect, with the majority of these funds being returned to Intel Capital and the IFC who had advanced monies under a secured loan arrangement. Interestingly, the company which acquired Altobridge, namely iDirect, was primarily interested in the intangible assets of the company, namely the patent portfolio and the software.

The patent portfolio

Entrepreneurship is not for the faint hearted. Some hi-tech start-up companies manage to grow their business successfully and get through the tough times while others unfortunately fail. Entrepreneurship is a constant roller coaster that most people aren’t willing to ride, and start-ups often need to change and adapt and fight through the bad times before making it to the next stage.

There are many companies like Altobridge out there, with an interesting technology, good people and significant investment, but which ultimately fail to gain a sustainable competitive advantage. Did Altobridge however miss a trick? We would argue that this is the case with Altobridge. We would furthermore argue that Altobridge (more importantly: it’s senior management)  failed to fully appreciate their patent portfolio, the potential value of these assets and the different models available to them to monetize such assets. Leveraging their patent portfolio may have helped Altobridge through their tough times.

plaatje 1True, Altobridge were aware of their patent portfolio. A detailed analysis of their patent portfolio was actually conducted in 2011 and presented to the company. A few in the company pushed to have the patent portfolio put on the Executive Management team’s agenda.

plaatje_2Portfolio Composition -Deltasight

A leading IP Broker was subsequently shown details of Altobridge’s patent portfolio. He positively advised on the value of the patent portfolio and expressed his excitement that many patents in the portfolio showed many “forward citations” from some multi-billion dollar companies (see figure below). Additionally, the geographical coverage of the patent portfolio was impressive. However Altobridge’s management failed to understand the results from this analysis of their patent portfolio and failed to act.

Another fact was timing. At the same time the Altobridge patent portfolio was valued the consultant advising the IP staff of their patent potential pointed out that at the same time, around mid 2011, Nortel Networks Corp., the defunct Canadian telecommunications giant, auctioned off its portfolio of six thousand patents and drew an astonishing winning bid of $4.5 billion from a group of companies that included both Apple Inc. and Microsoft Corp. Unfortunately management did not act upon the monetization advice and could not be convinced to do so, despite the right timing and market conditions, as well as the potential great value of the portfolio.

plaatje_4

 

 

Conclusion

As this case study shows not only is it important to value the patent portfolio properly but more importantly timing and market conditions are equally important for management to act on a proper valuation of the patent portfolio when a start-up is facing financial difficulties in its ongoing business. The sad truth of the matter is that Altobridge’s case is most likely not an exemption rather a the rule in business practice that senior management fails to take action to truly appreciate the intangible assets of the company and act upon it, after careful considerations of market, timing and pricing conditions.

 

by IPEG consultant Donal O’Connell. For completeness sake: Donal was also involved in the valuation of Altobridge’s patent portfolio. Opinions expressed above are his personal views on the Altobridge case.
The figures used in this article originate from Deltasight. Deltasight’s mission is to utilize its data mining and analysis technologies to bring transparency to global innovation and technologies.
Author: 2 years ago

This article appeared in a publication commemorating the 100 year existence of the Dutch “Patent Act 1910”, published by the Netherlands Patent Office (“Octrooicentrum Nederland”) in 2010 by Severin de Wit

It is not generally known that the Patent Act 1910 marked the end of an era in which no patent legislation existed. A major feature of the latter half of nineteenth-century Europe was that of an anti-patent sentiment, but it was primarily in the Netherlands that it actually gained a foothold.1 In 1864, the whole industrial sector presented a petition to the King, requesting that the current patent system, which had been introduced in 1817, be abolished. There were several reasons for the movement. Some critics put forward philosophical arguments, such as whether or not intellectual ideas should have ‘owners’, who would be able to monopolize their use (the present-day equivalent is the idea that information should be free).

Others were in agreement with the patent principle and accepted the argument that it was beneficial to society as a whole to encourage innovation by rewarding inventions. Those favoring this view asserted that it would be too difficult to create a system in which ‘real’ innovation would be rewarded. This was summarized by The Economist in 1851:

‘The community requires (…) that skilful men who contribute to the progress of society be well paid for their exertions. The Patent Laws are supported because it is erroneously supposed that they are a means to this end’ 2

The patent system was abolished in 1869, but it is noteworthy that this did not mean that there were no more innovations or technological changes – the groundbreaking invention of Willem Einthoven that led to the electrocardiogram (the string galvanometer3) is a case in point. Schiff4 (1971) researched inventive activity in Switzerland and the Netherlands in the ‘patent- free’ period (1869 to 1912 in the case of the Netherlands) with that of countries with a patent system. He began by asking whether patents markedly increased the level of inventive activity, before examining whether, if so, this also resulted in a more rapid rate of industrial development in a country. No clear picture emerged from his findings in relation to the first question, but there nevertheless appears to be enough evidence that the reintroduction of a patent system in 1910 did lead to greater levels of inventive activity.5 The lack of patent protection did not have any noticeable effects on the rate of industrial development.6

As we celebrate the hundredth anniversary of the Patent Act, little appears to have changed compared to the situation that prevailed as the nineteenth century ended and the twentieth began. Once again, there is growing resistance to patents, the patent system and the quality of patents. This is particularly noticeable among entrepreneurs with small and medium-sized businesses and the IT industry, not least – as far as the IT industry is concerned – because of the emergence and success of open source.7 Many people point to the rise of the IT industry in Silicon Valley in the 1980s, the enormous growth of which came about without the need to worry about patent protection. By the time a patent was granted, the software in question would have become outdated. Software and other IT specialists enjoyed a great deal of freedom in their field of operations, unfettered by copyright or patent restrictions. But it was the growth of open source and open innovation projects that caused many people to wonder whether or not patents were necessary for encouraging technological progress, or whether they actually served to hinder innovative and technological developments. It was no wonder that the introduction of a Software Directive by the European patent community led to unrest among a significant proportion of the IT industry, so much so that when the European Commissioner responsible for the Directive visited the Krasnapolsky Hotel in Amsterdam, he was greeted by a large demonstration.

It is mostly foreign – American in particular – economists who have involved themselves in the debate about whether patents stimulate innovation. There has recently been an increase in anti-patent publications, as apparent from a large number of anti-IP bloggers8 and academic publications.9 This has been caused by the discussions about the activities of the music industry in taking legal action against children and grandmothers for illegal mp3 downloads, the use of patents in developing countries resulting in their having reduced access to anti- AIDS medicines, for example, royalty stacking10 and the consequences for downstream R&D, to name but a few. The rise of an actual Pirate Party,11 which secured no fewer than seven per cent of the votes in Sweden at the last European elections, is a further sign that anti-patent sentiment is no longer at the smouldering stage, but instead is threatening to turn into a burning issue.

It is interesting to see how academics are analyzing this anti-patent trend. Two well-known American economists, Michele Boldrin and David Levine, recently published a book12 in which they fulminate about the patent system, which they assert serves only to inhibit innovation.13 Abolition is the key.14 These are not lone voices in the wilderness, but part of a movement that appears to be gaining ground, as evidenced by the wide-ranging support that opponents of patents are receiving from blogs and academic publications.15 The increasing criticism of the way the patent system works has, in the United States at least, led to greater activity in government and the courts in recent years. In 2003 – after extensive hearings where testimony was heard from anybody with even the remotest connection with the patent system

– the US Federal Trade Commission published its report entitled ‘To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy’,16 containing recommendations for modernising and improving the stuttering patent system. The recommendations are very much worth reading, and are relevant to Europe, too. In the US, this not only immediately unleashed a heated discussion,17 but also resulted in action on the part of Congress, which set about making a major overhaul of the system.18 The country’s courts, too, became involved between 2003 and 2009. The criteria for granting patents were tightened up, and the opportunities for taking out short-term injunctions for patent infringements were drastically curtailed. In academic circles, it is primarily economists who are at the forefront of the discussions on patent reform and its effects.19

This does not mean that the way the patent system works has been ignored in Europe, but it has to be said that, in typical European fashion, there have only been words, recommendations’, and surveys. Little progress has been made on the legislative front, as shown by the attempts at creating a Community Patent.20 The process has been deadlocked for years with successive EU Commissioners trying to breathe new life into it, but to little effect. It has been reported that one EU Commissioner described IP as a ‘headache’ for which no electoral gain was to be had.21

There is now a deafening silence in the Dutch academic IP community, which at present appears to be concerned only with knowledge of substantive patent law. Publications on the relationship between patents and innovation are very thin on the ground, as is awareness of the significance of the economic and legal value of knowledge and the role that patent management, for example, has to play in it. There is also a willingness to leave criticism of how the patent system works to others outside the Netherlands, which is surprising given that academic tradition in patent law has been dominated in recent decades by practitioners from the legal profession and the courts who, as a result of their background and experience, are primarily interested, and have expertise in, the interpretation of aspects of substantive patent law. It is these people, with practical experience, who occupy the Chairs of Intellectual Property at Dutch universities. There is not a single legal or economics faculty at a university in the Netherlands that has a Chair in Intellectual Property Management or a related subject where the social, economic and market aspects of patents are taught.

Industrial expertise in the field of knowledge management and appreciation of industrial property is generated by practical business experience, and not as a result of universities offering a relevant curriculum for young entrepreneurs or lawyers or economists. No serious attention is paid to the role of patents in the economic process, the importance of patents in innovation processes, the value of patents, the conversion of patented knowledge into ‘value’ for an organization or patent strategy at any legal or economics faculty.22

All this will have consequences for the way in which future generations of entrepreneurs regard the economic significance of patents. The lack of any university teaching of economics-based patent management will also be reflected in the actions of politicians and, in more general terms, in the users of patented knowledge.23 Last but not least, it will impact upon Europe’s competitive strength vis-à-vis major powers like China as well.24 It is therefore no great surprise to learn that most CEOs and CFOs have no idea what role, if any, patents play in their organizations. There are a few exceptions: Philips and Thomson in Europe, for example, and many American companies (where, unsurprisingly, education places a much greater emphasis on the subject of IP management).

How will this be reflected in the Patent Act in 2110, assuming for the purposes of our argument that future generations of lawyers and economists can be persuaded to take patent protection seriously? As has been shown in the US, the way in which patents are granted and subsequently interpreted will, to a large extent, determine whether or not we will still have a Patent Act (or European equivalent if it ever reaches that stage), as will a greater focus in the education system on the significance of non-substantive aspects of the patent system. This brings us to the question of where the growing criticism of the quality of patents is coming from, and whether that will affect how substantive patent law will evolve and whether or not we will still have a Patent Act in 2110. Or perhaps we will see a revival of the anti-patent movement of the kind that existed in the nineteenth and early part of the twentieth century?

The emergence of patent auctions in 2006 – started by Ocean Tomo25 in the US – has at least gone some way towards highlighting the value of patents. Much has been said and written about the meaning of intangible intellectual property and patents in particular. It is generally recognized in both tax and economic-related dealings that patents should be treated as intangible assets,26 although this has not led to a clearer insight into the ‘value’ of patents. What the auctions have done is to raise the popularity of patents as a value factor. The value at an auction is, after all, determined by the level of the bid for the patent by the bidder, anonymous or otherwise27. However, the day-to-day reality is not quite that simple. The value at an auction is the price that is offered for the patent. As long as the reserve price is low enough, then a bid will soon result in a sale – in other words, in a sale price. But is that actually what the patent is worth? It depends on whom you ask. For the buyer and his accountant, it probably is: they will record the price paid as acquisition costs on the balance sheet in the form of goodwill. If, in the future, it starts to generate patent license income that leads to a greater return than the acquisition costs, then the patent will have acquired a ‘value’ that bears no relation to the price for which it was bought at the auction. If that knowledge is available at the time of the auction, for example in cases where a patent is sold which is already generating license income, then that will provide a firmer base on which to determine its value. If you ask a lawyer who has to advise his client about the value of a patent on offer, then he will base his answer on a risk analysis. In the legal world, that usually means an opinion in which a prior art publication has popped up somewhere in the world which makes the patent worthless (as a result of being made null and void). However, if the same question is put to an IP manager in a company, then he will set the value according to where the patent fits into the organization, and that depends on whether it serves to protect the organizations own products or those of a competitor, allowing him to obtain a ‘patent truce’.

This is where patents, as intangible assets, are different to other assets. Value is contextual. If, in order to be able to trade its goods, an electronics manufacturer has to ‘buy in’ patent rights from third parties – in the form of a licence, for example – as well as components, the value of the licensed patents is set at the ‘purchase value’ of such rights: in other words, the price of the licence that has been paid to acquire the rights that are needed to get the goods to market. However, if a party has its back to the wall in a patent-related legal dispute, the ‘value’ of a patent that enables it to launch a counterclaim is many times greater than the ‘objective value’ that a similar patent would be worth in normal market conditions. The price that a buyer is willing to pay would therefore be greater than what would be considered justifiable in ‘normal’ market circumstances.

The price of an asset such as real estate is the transaction amount that is arrived at through market supply and demand or, in a non-auction context, a process of negotiation. This price may therefore be higher or lower than the value. It will be determined by market conditions, by strongly subjective motives on the part of both the buyer and vendor, and by their negotiating skills. The value arrived at in this way is the market value – the price that the market is prepared to pay – depending on the quality of the real estate, its location and general market conditions such as access to finance and so on. However, the market for patents is neither predictable nor logical.

Another illustrative example in this context is that of the value of investments (shares, bonds and other negotiable instruments). The overriding theory in this field assumes an ‘efficient market’ that the investment market calculates every relevant factor efficiently, thereby resulting in reasonably predictable market movements. The use of benchmark data is used as a starting point for buying and selling decisions. Unfortunately, a similar generic concept for intellectual property has not been developed, nor has the need for one been very widely accepted. The ‘market’ for patents is therefore anything but ‘efficient’.

Value is not only a topic that returns again and again at patent seminars, but also one that leads to many kinds of discussions, question and academic debates. It also remains a reasonably untapped field, in which standards and best practices are lacking. This is apparent just from the fact that there are presently in excess of one hundred patent valuation methods. Such uncertainty about the value of patents will undoubtedly not help achieve a wider acceptance of patents as something that organizations should factor into their activities, nor to the realization that patent policies should be an integral part of every business strategy.

Any contribution to a publication marking the hundredth anniversary of the Patent Act should end on a positive note, if only because a law that has lasted a century and forms the basis of the day-to-day activities of a large group of IP specialists and academics, merits such appreciation. However, it is not easy to be positive, not least because it is impossible to dismiss the impression that genuine renewal of the patent system continues to elude us. In addition, the courts in Europe, unlike the Supreme Court in the US, are insufficiently willing to take the lead in creating legal certainty and predictability in patent-related decisions. Hopefully, though, this is something we will be able to face up to the next few decades, resulting in a modern, Europe-wide, simple variant of the Patent Act 1910.

 

Notes:

1 Machlup F. & E.T. Penrose (1950) The Patent Controversy. The Journal of Economic History, X(1), 1-29.

2 Jaffe A. & J. Lerner (2004) Innovation and Its Discontents. Princeton University Press, 86-87.

3 Barold, S.S. (2003) Willem Einthoven and the Birth of Clinical Electrocardiography a Hundred Years Ago. Cardiac Electrophysiology Review 7(1).

4 Schiff, E. (1971) Industrialization without national patents, The Netherlands 1869-1912, Switzerland 1850-1907. Princeton

5 See Dutton, H.I. (1984) The patent system and inventive activity during the industrial revolution 1750-1852. Manchester University Press, 5-6.

6 For some interesting examples of industrial development in the Netherlands in the second half of the nineteenth century, when no patent

protection existed, such as the emergence of two national industries – from Philips to margarine factories – see Cullis, R. (2007) Patents, inventions and the dynamics of innovation: a multidisciplinary study. Edward Elgar, 212-213.

7 Kogut B. & A. Metiu (2001), Open-Source Software Development and Distributed Innovation (Wharton School, University of

Pennsylvania), Oxford Review of Economic Policy, 248-264.

8 Techdirt, (techdirt.com/articles/20090921/0131126257.shtml), Patently-Silly (patentlysilly.com/), Lawrence Lessig’s blog (http://www.lessig.org/blog).

9 See, for example, Nobel Prize winner and economist Professor Stiglitz, J. (2006) Making Globalization Work. Norton & Company. See also

note 2.

10 Lemley M. & C. Shapiro (1992), Patent Hold Up and Royalty Stacking. Texas Law Review, 85, 249.

11 See piratpartiet.se/international/english

12 Boldrin M. (University of Minnesota) & D.K. Levine (University of California, Los Angeles) (2008), Against Intellectual Monopoly, may be downloaded freely from dklevine.com/general/intellectual/againstfinal.htm, available in hardback via Cambridge University Press.

13 When warnings were issued in the 1980s – I think it was by S.K. Martens – about the anti-competitive aspects of intellectual property, the IP world was too small.

14 See also Jaffe & Lerner, note 2.

15 This is also the conclusion on quantitative and econometric grounds, see the authors listed under note 12, Boldrin, M. & D.K. Levine. (2005), The economics of ideas and intellectual property. National Academy of Sciences, PNAS, 102(4) 1252-1256, who assert: ‘Our own conclusion, based on empirical as well as theoretical considerations, is that on balance it would be best to eliminate patents and copyrights altogether’.

16 ftc.gov/os/2003/10/innovationrpt.pdf.

17 See, for example, Merrill, S.A., R.C. Levin & M.B. Myers (2004) (eds), Seven Recommendations for a 21st-Century Patent System, Committee on Intellectual Property Rights in the Knowledge-Based Economy, National Research Council.

18 The Patent Reform Act, for an overview see one of the best-known patent blogs in the US, ‘Patently-O’,

patentlyo.com/patent/2007/04/patent_reform_a.html.

19 Gallini, N.T. (2002), The Economics of Patents: Lessons from Recent U.S Patent Reform. Journal of Economic Perspectives, 16(2), 131- 154.

20 Community Patent; the most recent position at the time of writing of this article is the ‘Recommendation from the Commission to the Council to authorise the Commission to open negotiations for the adoption of an Agreement creating a Unified Patent Litigation System’ (March 2009).

21 See also EU Commissioner McCreevy on EPLA, IPEG blog, http://www.ipeg.eu/blog/?p=48.

22 Not to be confused with litigation strategy: acquiring the most effective protection for IP by strategically using litigation tools and geographical opportunities.

23 See Maskus, K.E. (June 2005), Emerging Needs for Including Intellectual Property Education and Research in University Curricula,

paper for WIPO International Symposium on Intellectual Property Education and Research, Geneva.

24 Even in China, the country that we in the Netherlands like to assert has little respect for IP, there is a university with IP Management on its curriculum, the University of Technology (Tsinghua University). See Hua Guo, Jones Day, China, Case Study: IP Management at Tsinghua University,   (iphandbook.org/handbook/ch17/p09/).

25 Ocean Tomo has recently moved the ‘auction business’, which has only produced minimal yields averaging less than the historical cost-

price, to a smaller unit and focused increasingly on more lucrative activities such as litigation support and expert witness work.

26 Blair, M (2001), Unseen Wealth: Report of the Brookings Task Force on Intangibles. Washington DC: Brookings Institution Press. Wilson, R.M.S & J.A Stenson (2008), Valuation of information assets on the balance sheet: The recognition and approaches to the valuation of intangible assets. Business Information Review, 167-182.

27 Most bidders at auctions organized by Ocean Tomo did their bidding by telephone (that is, anonymously); it has been maliciously suggested that most bidders in recent auctions were patent aggregators like Intellectual Ventures (Bellevue, WA, USA); see also Millien and Laurie (2007), Established and Emerging IP Business Models. The Eighth Annual Sedona Conference on Patent Litigation conference paper.

 

 

 

 

 

 

Author: 3 years ago

Patents contribute to a company’s results, revenue, stock performance and reputation – they are one of the most important strategic assets for R&D-intensive firms. Patents have been highly influencing firms’ value in different ways, being at the same time a sort of signalling device to consumers, competitors, venture capitalists or other investors. They are recognized as a monetary asset as valuable as a bond or currency by world trade regulation. This chapter is intended to review the various ways patents are used and valued today, to identify emerging trends and to outline areas where further research is needed.

Let’s focus for the moment on the private value rather than the social value of patent rights. The key question here is whether the patent owner finds the patent valuable, not whether the patent in question contributes to social welfare. The value of a patent is different from the value of the patented invention. It can be understood as the difference between the value of the invention when the inventor holds a patent right (monopolistic situation) and when the inventor has no patent on it (competitive situation). The value of patents is not uniform, it is highly skewed – only few patents are valuable, and a majority of them are associated with very little or no value. For example, a 2005 large scale study (PatVal-EU, 2005) showes that only 7.2 % of the patents in the sample were worth more than 10 million Euros (around 1% worth more than 100 million), while about 68% of the patents from the same sample produced less than 1 million Euros (with about 8 % worth less than 30.000 Euros). These results are mirrored in the fact that many patents (inventions) are never exploited, and only a few of them are translated into commercially profitable innovations.

The fact that the distribution of patent rights value is skewed means that it is not possible to use row count of patents in order to compare values of companies’ portfolios or single patents; and induces two crucial questions: which patents are valuable and if valuable, how valuable they are. Knowing which patents are valuable is especially important for those who make decisions about the usage and management of patents. It can help businesses to determine company value and settle on mergers, license deals and do acquisitions. It is important to measure and compare innovative output of companies and countries. Furthermore, it can help determine damages in litigations. Finally, value is important to policy makers because it can help to distinguish important from insignificant patents, and consequently to design a patent policy focused on more important patents.

Following these priorities, economists, business scholars, practitioners and policy makers have sought to measure patent value for a long time. However, the task of assessing the value of patent rights is a particularly difficult one because patents exist in a blind market with high information asymmetry (Lemley & Myhrvold, 2008) and their value depends on highly idiosyncratic details, including the strategic function they have in a competitive environment (Cohen et al., 2000).

In order to design value-weighted patent counts, scholars have been using patent statistics searching for reliable predictors and estimates of the economic value of patents. As a result, they come up with different empirical strategies, valuation algorithms and various predictors that could be used to produce value-weighted patent counts. The literature on these topics can be roughly organized into two broad categories based on value indicators employed and two categories based on the type of value proxies.

Value indicators

Articles in the first category are based on value indicators that could be readily extracted from publicly available databases. Thus, we refer to these indicators as objective value indicators. Until today, a variety of objective value indicators have been tested in empirical surveys. From Trajtenberg’s study of medical scanning devices (1990), forward citations had been validated as indicators of patent value in numerous subsequent surveys (e.g.: Harhoff et al., 2003; Lanjouw & Schankerman, 2001; Allison et al., 2009). It is argued that the number of forward citations measures the technological value of a patent (Lee, 2009). Backward references, to both patent and non-patent literature, have been frequently found to be positively correlated with patent value (e.g.: Harhoff et al., 2003; Allison et al., 2004). While backward citations to scientific articles are understood as a proxy for the ‘science intensity’of patents (Callaert et al., 2006) and its inventive step (Sternitzke, 2009), citations to patent literature are seen as an operationalization of market potential (Harhoff et al., 2003). The family size indicator represents the number of countries in which protection is sought for the same invention. It is one of fairly well validated indicators (Lanjouw & Schankerman, 2001; Reitzig, 2004; Harhoff et al., 2003). The scope of a patent, measured as the number of different International Patent Classifications (IPCs) into which an invention is put by the PTO was proposed as a predictor of patent value by Lerner (1994) and used by several other authors (Guellec & van Pottelsberghe, 2002; Harhoff et al., 2003; Allison et al., 2004) with mixed evidence about its importance. Patent life time (age) was considered as a value indicator in numerous studies, starting from Nordhaus’ (1967) early work. Also, the number of claims (Lanjouw & Schankerman, 2001; Allison et al., 2009), grant decision (Guellec & van Pottelsberghe, 2002), patent oppositions (Harhoff et al. 2002), prosecution length (Allison et al., 2004) and the number of pages (van Zeebroeck et al. 2009) are recognized as a value indicator. The highest degree of theoretical and empirical validation shows forward citations, backward citations and family size variables.

A second stream in the literature is based on value indicators which are collected mostly as experts’ responses and thus, they are subjective by nature. In this category fewer variables have been used. Klemperer (1990) and Gilbert and Shapiro (1990) used the patent breadth in order to capture its generality or degree of protection afforded to an invention. Greene and Scotchmer (1995) introduced novelty (technical non – obviousness) and disclosure as indicators which impact on the patent value. Gallini (1992) suggested and Reitzig (2003) demonstrated that the difficulty of inventing around a patent is of importance in determining its value, while Teece (1986) highlighted importance and dependence on complementary assets. Finally, Reitzig (2003) showed that learning from competitors through disclosure influence the present value of the patents. Obviously, collection of subjective value indicators is a more costly and thus less popular approach.

Patent value

The above mentioned indicators are used as independent variables or predictors of patent value. On the other hand, in the literature diverse dependant variables, proxies of the patent value are used as well. There are two broad approaches for measuring the value of patents. In the first, approximation of patent value is based on objectively observable data: firm market value (Lerner, 1994; Trajtenberg, 1990; Lanjouw & Schankerman, 2004; Hall et al. 2005), renewal data (Pakes & Simpson, 1989; Schankerman 1998; Lanjouw 1993; Bessen, 2007), new firm creation (Shane 2001), infringement and challenge suits (Lanjouw & Schankerman, 2001) and litigation (Alison et al., 2009).

The market value or portfolio approach is based on regression of firm market value on various firm characteristics including the patents owned by a firm. Using this approach Hall et al. (2002) found that one additional patent per million dollars of R&D increases a firm’s market value by 3 per cent. Renewal data help understanding the distribution of the value of patents by looking at how many patents are renewed at different lifetimes. Finally, Allison et al. (2009) used litigation as the proxy of patent value. Based on the findings about characteristics that distinguish the most-litigated patents from other patents they concluded that that the most-litigated patents are also the most-valuable patents (Allison et al., 2009).

The second group is based on patent owners or inventors survey with an idea to elicit an estimate of a patent’s value. This approach is subjective by nature. Here authors rely on the monetary value of each patent estimated by inventors and owners and collected through surveys (Harhoff et al., 2003, Gambardella et al., 2008) or on the present value evaluated by experts on a value scale (Reitzig, 2003). For example, Gambardella et al. (2008) found that the mean value reported by inventors for their patents is 3 million euro with a median that is one tenth that value.

Different proxies of patent value have resulted in very similar findings (Hall, 2009): the distribution of patent rights value is skewed, with most patents worth very little and a few worth a lot; chemical and pharmaceutical patents are worth more on average, followed by electronics, computers, and communication equipment.

To summarize, many potential methodologies to approximate the value of a patent have been used, relying on different objective and subjective value proxies and a wide variety of indicators, objectively observed or subjectively determined. Finally, this can be visualized as a matrix on Figure 1, where the size of the cycle in each matrix field presents the relative size of the body of the literature.

figue 2 is figure 1

Emergence of a new strategy

Although the literature has been describing a variety of functions of patents, two fundamental principles of their strategic exploitation can be recognized (Hall, 2009). These distinctive functions of patents usage are: patents as exclusion rights and patents as “bargaining chips” used for cross-licensing. In the first, more traditional concept, patents are used as a means to exclude others from the use of patented intellectual property and to prevent litigation (Cohen et al., 2000). Chemistry, pharmacy and biotechnology are examples of discrete industries where patents are used in this way, providing the period of monopoly and an opportunity for extra profit.

In contrast, in complex product industries (e.g.: semiconductor industry, telecommunications, consumer electronics) firms are patenting for cross-licensing and trading/negotiation purposes, as well as to prevent litigation (Hall & Ziedonis, 2001). In these industries innovation is complex and dependent on information from a multitude of sources and patents are used as so-called “bargaining chips” that allow companies to enter cross-licensing negotiations which are crucial for the survival of a company within these sectors.

However, the beginning of the 21st century has brought non-producing patent dealers to high technology market. These new players are sometimes recognized as patent aggregators and patent distributors, sometimes as patent trolls and sharks (Millien & Laurie, 2007; Detkin, 2007). Common for all of them is that they do not produce goods but rather deploy their (originally developed or acquired) intellectual property to earn the majority of their revenues (Yanagisawa & Guellec, 2009) though the strategy of “being infringed” (Reitzig et al., 2007). This new stream in the strategic use of patents is based on idea to license or sell patented technology to a manufacturing firm but only at a point in time when one side can credibly argue that the other party has already infringed the patent (Reitzig et al., 2007). This is a perfectly legal activity because the law grants patent owners exclusive rights and a very profitable idea because they have the ultimate bargaining power in “negotiation” (with infringers) when infringement is detected. In these situations, there are only limited exit options, all of which lead patent owners to higher profits than from offering the technology to a manufacturer before infringement (Reitzig et al., 2007).

This new strategy turns around the whole system in industries with cumulative technologies (e.g.: telecommunications, semiconductor, consumer electronics and computer industry) where patents were used as a means to “exchange technology” with competitors (Rahn, 1994), because the traditional response to infringement threat does not work anymore. Namely, counter-claim of infringement and the subsequent stalemate by cross-licensing is not possible anymore because new competitors do not make or sell any products, so they can not infringe anyone else’s patents (Rivette & Kline, 2000).

The IP playfield has changed and a new type of player has arrived. Specialized patent dealers have emerged as market intermediaries without an interest in producing products. They accumulate and deploy their IP in order to generate supra-normal returns on patent-protected technology, threatening producers with litigation. As great chess grandmasters, patent dealers know that the threat is stronger than the execution and after sending the first cease-and-desist letter they will let the threat of litigation create new advantages and a possibility of an out-of-court settlement. These specialized patent intermediaries have derived numerous business models from this idea (Detkin, 2007; Millien & Laurie, 2007) and made patent ecosystem evolve towards the market for patents.

Patent dealers have been around for some time. However, their impact on business has recently reached an exceptional scale and scope (Patent Freedom, 2012). Lawsuits initiated by patent dealers affected 2,150 different companies through 5,842 lawsuits and totalled about $29 billion in direct cost (including the costs of non-litigated assertions, but excluding indirect costs such as diversion of resources, delays in new products, and loss of market share) in 2011 (Bessen & Meurer, 2012).

Patent dealers affect companies of all sizes in many industries, not only in the high technology sector. Bessen and Meurer (2012) find that patent dealers in recent years increasingly seek to enforce their patents against small and medium-sized companies and that these companies account for 37% of the above mentioned direct costs (about $10.7 billion). On the other hand, Patent Freedom (2012) reports that patent dealers are increasingly targeting the users and sellers of technology, especially companies in retail and financial services, automation and transport industries. Finally, some of the largest patent holders (e.g. Intellectual Ventures) are buying hundreds of patents in the biotechnology industry. Bearing in mind the evolving nature of the mentioned industries, patent dealers could very soon become an issue for companies in these industries as well. Therefore, it is of value for companies across industries to understand how they impact patent value.

Changing notion of patent value

From an economic viewpoint, value can be classified into two types: use-value and exchange value (Marx, 1867). The exchange value of an object is equal to the relative proportion with which a certain product can be exchanged for another product (commodity) of a different kind. Its closest approximation is product’s market value. On the other hand, products have use-value – an intrinsic utility or usefulness to whoever owns or purchases them. This value is beyond market value. It is realized only by use or consumption.

Patents are commercially transferable by definition and some authors (e.g.: McDonough, 2007) see patents as commodities. However, it is not completely true because their valuation is based on highly idiosyncratic details. Namely, commodities are of uniform quality and interchangeable, while patents are not. Understanding this, as well as the distinction between the two types of value, help us to shed more light on the nature of patents’ value under the new strategy. Valuing patents under the being infringed strategy is based on identifying use-value other subjects realized by a using specific patent. If high use value is detected, like in case when a patent covers one component of a complex, profitable, and popular product, high exchange (monetary) value can be obtained (because of the threat of an injunction) negotiating royalties far in excess of the patent holder’s true economic contribution.

Under these circumstances patent value is not determined anymore by the firm market value or the owner’s willingness to pay renewal fees on the patent, but by the ability to create credible threat of litigation (McDonough, 2007; Detkin, 2007). The value of patents relates not to the actual infringement by other companies, but merely the prospect of infringement (MacDonald, 2004).

Bearing the above mentioned in mind, a patent’s (monetary) value under the new strategy is principally driven by the fact that there is evidence about its infringement. When this condition is fulfilled, a variation of the frequently used definition by Harhoff et al. (2003) can be applied to size (monetize) the value. Namely, it is necessary to consider prices, costs, and sold quantities of patent-protected products by the infringers in order to come up with the monetary value of a patent.

Our recent research (Tekic & Kukolj, 2013), one of the first based on data from patent dealers, quantitatively proved that threat of litigation is the main mechanism that encourages the exchange in the patent market and supported the main premise of the threatening with litigation strategy: the higher the threat of litigation the higher the (monetary) value of the patent. At the same time, the data provided showed that a majority of patents are of very little or no value and there are only a few worthy ones. Although value assessment was tailored to capture the values of patent rights under the new strategic perspective, this result is completely in line with other assessments of the patent value – only few patents are valuable, and a majority of them are not.

Emerging challenges

When patents are used in two fundamental strategic ways – as exclusion rights (Cohen et al., 2000), or in cross-licensing negotiations with competitors (Hall & Ziedonis, 2001) a lot of facts are known and empirically supported. The standard set of indicators which have been found to be positively correlated with the value of patents includes: forward and backward citations, renewal information and family size. Under the new strategy, all these results should be re-checked and verified to link practice and theory and to offer technology managers an inside view of the patent valuation process in the world of patent brokers.

The strategy of threatening with litigation is not such a recent development. Practitioners have been assessing patent value under the new circumstances and the changed notion of patent value for at least ten years. However, there are no quantitative empirical studies of patent value and patent value indicators under new strategy; case studies are dominant. The reason – the patent market is not transparent and exact data about patent monetization are not available to researchers. Considering both the change in strategy employed to extract value from patent rights as well as the importance of patent evaluation in a booming market, there is an urgent need to provide and analyse large-scale empirical evidence on patent value under the “being infringed” strategy. In particular, its goal should be to provide initial answers to some of following questions:

  • How to identify valuable patents based on their individual (bibliographic) characteristics?
  • Which patent value indicators determine an individual patent’s value under the “being infringed” strategy?
  • How do they relate to previously used value indicators?
  • How does the strategy change influence used patent value indicators?
  • Finally, are there any indicators that can help in sensible search of patent databases in order to identify patent infringement or does expensive human work still not have an alternative?

The first steps toward this goal have been made. Tekic and Kukolj (2013) used a dataset of 392 US patents invented by one consumer electronics firm between 1989 and 2006, and sold on a market by a patent dealer during 2010 and 2011, and gave a profile of patents which create high threat of litigation: they are older, they cover (small) part of mainstream technology which is currently used, they are broadly drafted and it is possible to provide ambiguous evidence about their infringement. The authors claim that combination of these factors results in a patent posing high threat of litigation because its broadness makes differentiation between the patented inventions harder; its long lifetime and closeness to mainstream technology make it possible to relate the patent to many existing products and therefore make infringement speculations easier. Finally, because the goal is to threaten competitors it is more important to provide ambiguous facts that patent is infringed than complete evidence.

The common denominator for the above mentioned questions is the need to create a more successful model for predicting patent value under new strategy. This is the most interesting question and topic for further research. The model developed by Tekic and Kukolj (2013), based on five significant predictors explains more than 40% of the variance of patent value. Although this result is better than the results achieved in some other studies (e.g., Harhoff et al., 2003; Gambardella et al., 2008) it is based on expert assessment, which is time consuming, expensive and subjective in nature. Therefore, there is need for new research in this field based on bibliographic (patent statistics) data to understand the unexplained residual. The first step in this direction would be to use a dataset with patents originating from different companies, in different technological areas and with different function in order to overcome the problems influenced by industry (technology) or company specific issues.

figure 1 Dragan article

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On the other hand, challenge is to try to use the new generation of indicators, probably based on patent full text analysis, to detect patents which overlap or “free space” where new patents (inventions) are possible. For this purpose, existing patent should be used. This expectation is based on the fact that patens are a unique information resource. Patents are extremely valuable as a source of technical information because approximately 80% of all scientific and technical information can be found only in patent documents (Ruotsalainen, 2008). In addition to technical data, a patent document provides legal as well as business and public policy relevant information. All information found in a patent document is collected and verified according to internationally agreed procedures. They are presented in a systematic manner, as a combination of structured and unstructured data, and published in a unified format. Information is either published in a patent document or derived from analyzing patent filing statistics. Table 1 summarizes the format and information contents of patent documents. The availability of all this information inside patents offers a full spectrum of possibilities for using them in key areas of technology management, including patent value assessment.

However, it is not easy to extract useful information from patents nor to track evidence about all patents that may be relevant. The most important barriers to frequent and efficient usage of patent information are: extremely high number of patents produced every year, increasing number of pages per patent, difficult language used in patents and lack of ability to understand relations between patents. World Intellectual Property Indicators for 2012 (WIPO, 2012) show that despite economic recession, around 2.14 million applications were filed and almost a million patents were issued around the world in 2011. With more than 65 million patent applications since the patent system was established, have been published; 7.88 million patents in force in 2011 and doubled number of granted patents over the last 15 years (WIPO, 2012) it is possible to imagine the size of a problem and understand why it is important to develop tools which will allow easier patent portfolio analysis and enable in-depth understanding technology trends, market place and competitors.

Bearing this in mind, a research group, composed of academics from the University of Novi Sad and practitioners from RT-RK Computer Based Systems LLC, has started developing a tool for patent data analysis and management (Tekic et al., 2012a; Tekic et al., 2012b). The tool is named PSALM and it is designed to analyse both structured and unstructured patent data, and to visualize the results of both categories. The tool is based on MySQL database and web robot, both supported by routines developed in Java and PHP. The PSALM collects data on patents from publicly available data bases (USPTO and EPO) and analyses their bibliographic parameters (like: title, inventor(s), applicant, date of application, priority date, country of publication, priority number, priority country, references cited by the patent, patents citing the patent, abstract, international patent classification) but also does patent mining.

Text analyses includes analyses of patent text (abstract, description, claims or other data) using Term Frequency – Inverse Document Frequency (TF-IDF) as a weighting scheme for keyword extraction and data dimensionality reduction using Multi-Dimensional Scaling (MDS) method. TF-IDF is a statistical method for determining the importance of words within a document, which belongs to a larger set of documents (Wu et al., 2008). The importance of words within a document is directly proportional to the number of repetitions of the word in the document, to thereby compensate for the number of repetitions of the word in other documents. The output of the MDS is a 2 dimensional matrix that can be easily used to visually present patents similarities (Drazic et al., 2013). Two-dimensional matrices are further analysed and clustered which is the task of the software module named “clustering”. Clustering helps identify meaningful patterns, undetected or unexpected groups from a set of unlabelled objects.

Unsupervised clustering technique groups the given unlabelled collection of patent documents into meaningful clusters without any prior information of patent documents. It is shown that at least four clustering techniques (i.e. k-means, the neural-gas, fuzzy c-means and RONN) can be used in practical realizations of patent data analysis tools, because of similar clustering performances and classification accuracy (Kukolj et al., 2012). Figure 2 presents main structure of PSALM tool.

The PSALM software consists of the following functional modules (Tekic et al., 2012a): web robot, text clustering, multidimensional scaling, visualization, analysis of the IPC codes, extraction and display of citing and cited patents, progress report module, module for recording data in the CSV file, and patent evaluation.

The PSALM enables visualizations of high (free text) as well as low-dimensional (bibliographic) data. The PSALM tool enables visualizations high-dimensional data based on patent mining by mapping the documents and clusters in proportion to each other, i.e. creating patent maps. Documents with similar subjects appear close to each other in maps. This makes it very easy to locate the most developed areas in the technology. It also shows outliers in the data, patents that do not have much to the subject but are in the data by accident. Low-dimensional (structured) data are presented as bar charts and pie charts of bibliographic data and could also help in better understanding of the technology areas, changes in the technology development, company competiveness etc.

Patent data analyzes will still be hard, time and manpower consuming experts’ work, but PSALM could help people involved in IP management to focus their time and efforts on the most interesting and most promising patents, but also to save time in preliminary grouping them. For example, based on PSALM results (Figure 3 is an example) it is easier to target technology week areas or to select with higher probability patents interesting for infringement purposes.

figuur 2 artikel Dragan

figuur 3 artkel Dragan

Knowing which patents are interesting and why they are interesting is important especially for those who make decisions about usage and management of patents. The results should offer grounds for developing powerful tools and improve results of patent valuation in new competitive environments, resulting in easier assessment and acquisition of interesting patents and portfolios.

Conclusions

Patents are a powerful business tool for companies. When they are used as exclusion rights or in cross-licensing negotiations with competitors, a lot of facts are known and empirically supported. However, recent emergence of a new strategy has changed some of basic postulates in understanding the use and value of patents. Therefore, there is a vital interest, both from a theoretical and applied standpoint, in revisiting and validating as many previously established facts as possible. This chapter represents an effort in that direction. Starting from the literature review, the various ways patents can be valued are shown, and the changed role of patents in a knowledge-based economy explained. In its second part the chapter links current practice and existing theory improving the overall understanding of patent value in the booming patent market, identifying emerging trends and outlining the areas where further research is needed.

This contribution is part of an article, first published in a book from DAAAM International (Vienna, Austria), an international network for scientific, academic and industrial cooperation, as DAAAM Scientific Book 2013, Vol. 12, ISSN 1726-9687, ISBN 978-3-901509-94-0, Editors: B. Katalinic & Z. Tekic, Chapter 25. The original title is: “Towards Undertanding the Role and Value of Patents in a Knowledge- based Economy , by Tekic, Z., Kukolj, D., Drazic, M., Vitas, M.
The List of References, used in this publication, can be found here with links to the original publications
Author: 3 years ago