Monthly Archives: January 2010

Guest Blogger: How Patent Vulnerability Impacts Valuation by David Wanetick of IncreMental Advantage

(This week, David Wanetick, Managing Director of IncreMental Advantage provides readers if the IP Asset Maximizer Blog with an excellent overview of the various factors that he believes affect patent valuation.  Please let me know if you would like to be a Guest Blogger.)

How Patent Vulnerability Impacts Valuation by David Wanetick of IncreMental Advantage

Many things can affect the value of patent rights

Many things can affect the value of patent rights

As I often tell business leaders who attend my course on Valuing Early-Stage Technologies, valuing patents isn’t rocket science. It is much more difficult. Or to paraphrase Winston Churchill, valuing patents is a riddle, wrapped in a mystery, inside an enigma.

Measuring even a well-delineated permanent entity is much more difficult than may be imagined. As Neil deGrasse Tyson (a renowned astrophysicist) and Benoit Mandelbrot (the father of fractal geometry) have discussed, no one really knows what the circumference of the coastline of the United Kingdom is. The tides will cause varying degrees of erosion on the coastline depending on the hour of measurement while the cumulative affect of choosing which rock formations to measure around will have a dramatic impact on the final assessment of circumference. Patent valuation is infinitely more difficult to determine than the measurements of a given land mass due to the interminable variation of underlying technologies, legal issues, business issues, and context in which patent valuations are conducted.

Companies that have patents often attempt to achieve a more attractive valuation by boasting about their patent portfolio. This is often a successful gambit as many investors, customers and media figures are impressed when a company reports a relatively large number of patents or pending patents in its portfolio. Thus, it is no surprise that many entrepreneurs and venture capitalists have admitted to me that they view patent preparation and filing costs akin to marketing expenditures.

However, valuation analysts should not reflexively assign a higher valuation to companies that own patents or are applying for patent protection. Companies can have a patent on a technology for which there is no possibility of commercializing or selling. Patents pending are particularly specious. Pendency (the length of time it takes the US Patent and Trademark Office to make a decision on a patent application) is now an average of 32 months. In some industries—such as semiconductors and electronics—pendency is more on the order of four to five years. Thus, the market targeted by a patent could become obsolete before the USPTO makes a decision. In fact, only between 2% and 5% of patents generate any royalties and another 45% to 50% don’t even have any strategic value. Further, two out of every three patents lapse because of failure to pay fees, most often because their owners believe that the thousands of dollars in maintenance fees exceeds the value of the patents. Continue reading

A New Framework for IP Strategy Conversations: Ex Post vs. Ex Ante (from IP P®OSPE©TIVE)

(Editorial Note:  I have gotten some great feedback from my recent post 9 Out of 10 Patents are Worthless:  Here’s Why and How to Keep it Happening from You (Part 1 of 4).  I am working on the next installment, so be on the look out for more of my thoughts on this meaningful topic.)

Readers of the IP Asset Maximizer Blog will probably enjoy this very smart post from Ian McClure of IP P®OSPE©TIVE entitled “A New Legal Landscape for IP:  Ex Ante will Join Ex Post Services“.  (While the post says some very flattering things about me, this is not why I am recommending it:  the IP P®OSPE©TIVE blog is consistently good, and Ian “gets” IP business issues.)  In this post, Ian frames IP Strategy in terms of “ex post” and “ex ante”–that is, instead of dealing with IP issues after it exists (i.e., ex post), IP Strategy addresses IP prior to its development in the course of developing value within the corporation as it relates to IP and intangibles.

Ian McClure explains:

[T]he IP legal profession has perhaps relied on [a post ante business model] to an even greater degree [than other lawyers], as the general lack of comprehension with respect to intellectual property in the business setting has resulted in the tendency of businesses to throw IP in the corner, put up fences, and send the dogs after anybody that seems to be an intruder. . . . This cause-and-effect business model relied upon by IP lawyers and law firms has been easy going – IP assets have been viewed as a necessary cost center which deserves a litigation budget to protect their prohibitive nature, i.e. monopoly power.  IP lawyers have gotten very good at protecting IP, sending cease and desist letters, prosecuting patents and trademarks, drafting non-competes and confidentiality agreements, and taking other ex-post or preventative measures.  This business model has not met its demise, as the demand for ex-post legal services will always exist. . . .[But a] shift in IP legal services has begun. Enter the decade of ex-ante IP legal services.  It is, after all, the decade of the intangible asset, and with this proclamation comes the announcement that strategic IP management services will become just as coveted as IP protection and prosecution.

Ian and I agree that consumers of legal services will be increasingly demanding IP legal services directed toward value creation, not just problem solving, but we may disagree on who will be able to provide those services, in that I think that IP Strategy is not necessarily a job for IP lawyers–but that is a conversation for another day.  Those of you interested in this topic (and anyone interested in the future of IP legal services) should read the rest of Ian’s post.

9 Out of 10 Patents are Probably Worthless: Why and How to Prevent this from Happening to You (Part 1 of 4)

If 90% of patents are worthless as business assets, then most patent spends are wasted.

If 90% of patents are worthless as business assets, then most patent spends are wasted.

I decided to start 2010 with a controversial premise:  what if 9 out of 1o patents–or 90 %– issued in the US were worthless?  Believe it or not, but this probably is not too far off the mark.  By “worthless,” I mean that it is likely that only 10% of patents in force today meet each (and every) of the below criteria:

1)  The patent directly or indirectly protects a product or technology that is being sold in the market today;

2)  The patent covers a product or technology where there is or likely will be viable competition in the marketplace such that a patent is needed to legally restrain competition; and

3) The patent owner is ready, willing and able to bring a patent infringement suit against an infringer or it is likely that your competitor believes that it will possibly do so.

Unless each and every criteria stated above are present, it is my strong opinion that the patent (or pending patent application) is effectively worthless as a business asset.

If you are someone who views the world of patents from a business or corporate perspective, you might recognize where my 90 % figure comes from.   For most people with such experience, an objective assessment would likely elicit a frank response that you saw more money wasted on patent filings than was actually seen as creating value for the organization.  But, far too few people enter the patenting process with such a realistic assessment of the actual likely worth of their efforts and, if they did, there would likely be significantly less patents filed every year. Continue reading