Guest post by Marc Kaufman

Determination of the quantitative value of patents has been elusive.  Complex statistical analysis and accounting methods have been applied to patents in an effort to ascribe a value to individual patents and patent portfolios.  While these endeavors are useful, it is important to keep in mind the very basic elements of patent portfolio value in order to execute a patent acquisition program that creates maximum value, regardless of the accounting procedures used to determine quantitative value.

It is axiomatic that the primary basis for the value of a patent portfolio, or an individual patent for that matter, is the amount of revenue that “flows through” the patent(s).  This revenue is determined by the size of the market for infringing products and services and the value attributable to the infringing feature within that market.  Of course, the specific value can be the subject of complex models and market analysis.  However, for our purposes, it is still  helpful to think of this relationship at a high level.

However, merely establishing a large amount of affected revenue does not necessarily equate to high patent value.  As an example, imagine an inadequately funded sole inventor approaching  Company A with a patent.  Notwithstanding the infringement by the products of Company A, Company A is not likely to be disposed to write a large check upon being notified about the patent!

This gets at the secondary basis of patent value, context.  “Context” refers to the status and ability of the party asserting the patent.  In the example given above, we merely have a patent in the hands of an unsophisticated asserting party.  However, let’s change the scenario and imagine that the asserting party is Company B who is a well funded, litigious competitor of Company A.  The attention given the patent, and the likelihood of Company A willingly licensing the same, is increased.

The graphic below schematically illustrates the effect of context on the value of a patent.  A mere patent has a value that is only a very small percentage of the infringing market.  However, as we add resources to the mix, the value of that same patent increases.  Resources that can increase the value of a patent include the capacity to manufacture and distribute the corresponding products.   These resources add to the value of the patent by establishing a market for the product, establishing a basis for damages and generally increasing the stakes for assertion of the patent.  However, the value of the patent increases the most when the patent is in the hands of an asserter with the resources and ability to enforce the patent through litigation.

Of course, even with the imminent threat of litigation, infringing parties will not be prepared to settle for the full value of the infringement.   There is going to be some discount applied based on the uncertainty of the outcome of litigation.  In addition to the inconsistent nature of jury, and even bench, decisions, the primary uncertainties in patent litigation stem from the following three factors:

• claim construction issues
• validity issues
• other enforceability issues

Accordingly, in acquiring patents, the strategist should be looking to minimize these issues to maximize the certainty of the outcome of potential litigation.  For example, patent specifications and claims should be drafted, when possible, with the infringing products in mind.  The use of rich and broad “omnibus” disclosures and subsequent continuation practice can allow patents to be “designed” to capture specific infringing activities.  In such patents, the focused nature of the claims allows the practitioner to reduce claim construction issues.

Validity issues can be reduced by conducting thorough prior art studies, drafting focused claims and making sure that all relevant prior art is cited and considered during prosecution. Other enforceability issues include the inability to demonstrate a damages model and “divided” infringement issues.  To reduce the former, the drafter of the patent claims must have a solid understanding of the revenue models of likely infringers to make sure that the claims read on the revenue models.  The latter can be reduced by understanding the roles of the players in the marketplace and drafting claims that are focused on individual players, as opposed to activities that are accomplished by multiple players.  For example, a patent claim that requires the steps of creating advertisements, processing information about users, and targeting advertisements based on the information, may actually only be practiced by multiple parties in combination (the ad copy creator and ad server, for example).  Enforcement of such a claim can be difficult because of the legal requirement to establish that the various parties acted in cooperation with one another.

While the precise quantitative value of any patent will be determined in various ways and under various circumstances, it is important for the patent strategist to keep in mind the basic components of patent value in order to maximize the value of a patent portfolio.