America Invents IP Blog

David Kappos, USPTO Director, when in charge of managing IBM patents, said, “Right now, what you’ve got is a marketplace where nobody knows what the asset is worth.” Perhaps, but IBM has made over ten billion dollars licensing its patents, so somebody knows the asset is worth an awful lot. Microsoft has been assessed over a billion dollars in patent damages in a single case, so it “monetized” a patentee (Lucent-Alcatel) in a huge way. An individual, Jersome Lemelson made over a billion dollars licensing bar code technology and set up the Lemelson Foundation. So, patents can be worth “real money.” Patents need to be valued to get a substantiated idea-to-profit conversion, a real return on real money spent on R&D. “Patent value” refers to the estimated market value of a patent. Monetization refers to getting money for that value. Since patents, and other intellectual property (“IP”) often account for more than half a technology company’s valuation, it is important to know what factors are important to how patents are valued, and how companies can monetize that value, i.e., get money from or for their patents. So, gleaned from my 40 years as a patent attorney attempting to create protections to protect creations and then extracting money from those protections, here are the factors I have found most relevant:

1. How Thorough is the Strategy? When I worked at Winchester during the peak of the Cold War,  Winchester decided to expand from small caliber sporting ammunition to tank ammunition and military weapons. That took a hundreds of millions of dollars in R&D to develop the new tank ammunition and weapons. Patents and trade secrets were a key to locking up those creations to protect them from competition and to force the Government to compensate Winchester, so the products could be developed and sold to get the money back with a profit. Over a period of years, this resulted in about a 1000% profit, that is ten times the money spent on R&D and patents, and several spin-off companies. Thirty years later, one of those patented products is still Winchester’s biggest profit generator due to sole source Government contracts resulting from the patented technology. Winchester was unusual in this because its biggest asset was thought to be its world famous WINCHESTER trademark, and indeed I was able to set up a licensing program on that, as well, but that is another story. To gain and keep a competitive edge in the marketplace, a company needs to have a well-crafted patent strategy in place. An effective strategy encourages spending sufficient resources, both time and money to make it likely the company will always consider the patentability of ideas as the company continues the development of ideas into technologies so that what is developed can be protected and thus made exclusive. The diligence of the company in patenting its new technologies makes the company and its ideas worth more since investors get a reasonable expectation that the company will continue to protect its new technology and, with it, the investors value. Investors will also look at the deployment of the patented technology to meet the company’s business objectives to determine how practical the ideas being developed by the company are, sense ideas that are implemented are worth more than ideas that may never be practical or put into use. Investors will all so want to see continual improvements to the of company’s technology and continual patenting of such improvements so that investors know their value will continue to grow and expand profitably if a company has a good patent strategy, investors are willing to put more money into the company.
2. How Good Is the Timing? Since a well-known crucial factor in tapping the potential of a patent is timing, investors will want to see that a company is good at addressing the current needs of the industry. This is called “timing”. A patent may encompass a useful, breakthrough, or disruptive technology, but if the sale is ill-timed, the utility of the patent will decrease over time. Many famous inventors received very little for their inventions because they were so far ahead of their time that it took virtually forever for their inventions to become adopted. Companies need to be watching their market and timing the release of their new products to market conditions. Steve Jobs has become known as the “master of the universe” at good timing for Apple with its introduction of iPod, iPhone, and iPad.
3. Will The Patented Invention Sell? Thomas Edison said this best: “Anything that won’t sell, I don’t want to invent. Its sale is proof of utility, and utility is success.” http://www.brainyquote.com/quotes/authors/t/thomas_a_edison.html#ixzz1H9IjtZFS
4. Is It Useful? A patent’s worth is in the utility of the invention, as just noted above by Thomas Edison. The utility of the patented technology in addressing a market need is evaluated to determine the profitability that will accrue from use of the patented technology and the advantage of deploying the new patented technology. The more useful a patent is, the more likely that the patent will produce money. Samuel Lemelson’s patents on “machine vision” made him over $1 billion because they were successfully enforced against barcode users. Thomas Edison’s patents on light bulbs and electricity were the foundation for his formation of General Electric Company, one of the biggest and best recognize companies in the world.
5. Is It Transformational? A patent is evaluated for its ability to replace existing technology, or, to start a new technological trend. There are currently more than 100 patent infringement lawsuits relating to smart phone technology because smart phones are transforming the world and replacing telephones and computers of all types to a substantial degree. Nowadays, almost every person has a smart phone.
6. How Broad Is the Patent? A patent is valued based on the scope of a patent’s claims. The claims of the patent are what is really important. The detailed description and drawings of the patent merely support the claims. The claims define what is covered by the patent, not the description or drawings, although the description and drawings are frequently used to interpret the scope of the claims so that the claims are not totally inconsistent with the description. It is easily get a patent if the claims are written very narrowly, but narrow claims are not worth very much because they do not cover very much, that is, they are not “broad”. Many patents sharing a given technological space with narrow claims are less valuable than a patent with broad claims.
7. How Big Is the Market? A key patent on a smart phone is going to be worth more than a patent on a toothpick. Valuation of a patent depends on the $ amount of the market as a whole for the patented technology.
8. What Share of the Market Will the Patent Command? The iPhone was so successful because it captured a huge share of a huge market. Microsoft, Windows was so successful because it captured an even larger share of an even larger market. The projected market share that the patent can capture from the overall market, and the projection of the market share in $ over the life of the patent and on any subsequent improvement patents to extend the patent monopoly are very important to the value of the patent and how much money can be extracted from the patent during its lifetime.
9. Will Anyone Buy the Patent? The quickest path to monetizing a patent or patent portfolio is to sell it to companies that are in the business of purchasing patents. Outright sale of a patent eliminates the financial outlays of starting a business or a company around a patented product. However, the monetary returns on patents may be low because the purchaser has to spend money to either enforce the patent or develop a market for the patented item. Also, most investors will insist on getting control of the patent yet many inventors hate to lose control by forfeiting ownership of the patent.
10. Will Anyone License the Patent? By licensing the patent, the patent holder retains ownership of the patent and earns a royalty of about 5-20% on future sales of the product over the life of the patent. A license can be either exclusive, sole or non-exclusive. An exclusive license will command the most money, but the patentee is excluded from competing in the market itself. A “sole” license will command less money but allows the patentee and licensee, but no one else, to practice the invention. A non-exclusive license commands even less money but allows the patentee to license as many companies as the market will allow. A good licensing agent or patent attorney should be able to help the patentee determine which of these options is most likely to produce maximum return. IBM’s revenues from the licensing of its patents are in excess of $1 billion, annually. Most of the software giants like Microsoft, Sun Microsystems, etc., obtain a significant part of their revenue from licensing of their software patents.
11. Can You Borrow Against The Patent? Another way of extracting money from a patent is to borrow money from financial institutions using the patent as collateral.
12. Can You Sell The Patent With A Grant Back? Yet another way of monetizing patents is a hybrid where the patent holder sells the patent(s) to a purchaser, with a royalty-free non-exclusive license back to the patent holder plus a percent of the royalty that the purchaser earns on the licensing of the patent(s). You will need a patent attorney experienced in patent licensing to do this because it is rather complex, but it is particularly advantageous for getting money out of currently unused patents while still reserving the option to use them in the future if your company’s business changes.
13. Is the Patent a Blockbuster? A “crown-jewel” patent protecting a significant, first of its kind technology may be used to dominate an industry and block competitors and create an exclusive market-niche for the company. Even a solitary crown-jewel patent may sometimes form the basis for a start-up or spin-off companies, and you may be able to get money from investors who are eager to join that new start-up.
14. Is the Patent Part of a Minefield of Patents? A minefield of many patents can sometimes be used to make it so dangerous and troublesome for a competitor to enter the relevant industry that the collection or “minefield” of patents has great value, just due to the number of patents. Donald Weder of Highland,, Illinois, has 1359 patents on flowerpots, floral paper, floral grass, and floral supplies. This amazing volume of patents and one small industry has allowed his Weder Family Trust, which owns these patents, to license virtually the entire floral industry and made him a very rich man. Most of these patents, by them selves, our fairly narrow, but collectively they make it virtually impossible for somebody to enter the field without tripping up upon one of his thousands of patent claims, so it is much easier for a floral company to just take a license from him as a sort of “insurance” policy. Kia Silverbrook of Australia has over 3600 patents relating to his “MEMJET” super-fast ink-jet-array printing technology. The company in its right mind will enter the inkjet-array industry without getting a license from his Silverbrook Technologies.
15. Does the Patent “Fence In” a Competitor? One fairly effective patent strategy is to get a large number of patents on improvements to a competitor’s core technology to “fence in” that competitor by patenting all conceivable improvements over the core technology so they cannot expand their business without infringing one of your patents. This allows you to make them give you something to license one or more of your patents in order to expand their business or improve their products to stay competitive. Another reason for doing this is to obtain a license from the other company to that core technology in return for a license to your improvement technology. This is called a “cross-licensing”. Cross-licensing is prevalent amongst companies with overlapping core technologies. Sony and Samsung Electronics have entered into a 5 years cross-licensing agreement covering over 24,000 patents in an effort to reduce cost and potential friction.
16. Does the Government Require the Patented Technology? The panel law provides that the government cannot infringe a patent, however, the Fifth Amendment to the US Constitution provides that the Government cannot take a person’s property without just compensation. This is enacted into law (35 USC 1498) requiring the Government to pay a reasonable royalty for use of a patented invention. Value can be extracted from the Government in various forms in lieu of this “reasonable royalty”. For example, the Government may issue a sole source contract to the patentee for production of the patented item, which guarantees the company a profit. The Government may also require any contractor to pay a royalty to the patentee as part of a Government contract. So, a company should not overlook the possibility of obtaining a patent early because the item will be used exclusively by or for the Federal Government.
17. Is There an Infringer? Another method for monetizing patents is proactively finding products that infringe the patent and thereafter offering to license the patented technology to the infringer, or seeking treble damages for willful infringement if the infringer refuses to stop. Infringement damages in the billion dollar range are not uncommon. Recently Microsoft settled an infringement action by Alcatel for $1.5 billion for infringement of Alcatel’s patented MP3 technology and RIM (Blackberry phones) paid over $600 million for use of patented e-mail “push” technology. There are several companies (commonly called “patent trolls”) whose sole business is enforcing patents against prominent infringers. It may be possible to either “partner” with one of these companies or sell your patented position to them if there is active infringement.

Lesson to be Learned: The value of the patent should not be overlooked, even if it is not actively being used. Although a patent is often classified as an “intangible” asset, with prudent choices of action, it may be possible to turn that.” Intangible asset unquote into real, tangible money. In fact, patents are like a deeds to real estate. If the “real estate” is valuable, it can often be converted into money, sometimes BIG money.