`through Analysis
`
`WILLIAM J. MURPHY,
`
`JOHN L. ORCUTT,
`
`PAUL C. REMUS
`
`WILEY
`
`John Wiley 85 Sons, Inc.
`
`AMERIGEN 1054
`
`
`
`Copyright © 2012 by William]. Murphy, John L. Orcutt, Paul C. Remus. All rights reserved.
`
`Published by John Wiley 84 Sons, Inc., Hoboken, New jersey.
`Published simultaneously in Canada.
`
`No part of this publication may be reproduced, stored in a retrieval system, or transmitted in
`any form or by any means, electronic, mechanical, photocopying, recording, scanning, or
`otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright
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`(201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
`
`Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best
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`accuracy or completeness of the contents of this book and specifically disclaim any implied
`warranties of merchantability or fitness for a particular purpose. No warranty may be created
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`
`Library of Congress Cataloging-iwPublication Data:
`Murphy, William]. (William Joseph), 1949-
`Patent valuation : improving decision making through analysis /William J. Murphy, john L.
`Orcutt, Paul C. Remus.——1
`p. cm.—(Wiley finance series)
`Includes bibliographical references and index.
`ISBN 978-1-118-02734-9 (hardback); ISBN 978-1-118-22213-3 (ebk);
`ISBN 978-1-118-26082-1 (ebk); ISBN 978-1-118-23590-4 (ebk)
`1. Patents—Valuation. 2. Decision making. 3.
`Patents-—Accounting.
`II. Remus, Paul C., 1945- III. Title.
`HF5681.P3M87 2012
`657' .4—dc23
`
`2012005831
`
`I. Orcutt,]ohn L.
`
`Printed in the United States of America
`
`10987654321
`
`
`
`
`
`PPEHICB
`
`Acknowledgments
`
`PART lll\lEi. V’ 7 s
`Fnundationsiiiiflatelii ilaliiaiiinii alid iiiécisiihhiiiiiakingi
`
`A
`
`A
`
`3
`
`CHAPTER 1
`valuation Basics
`
`What Is Value?
`The Valuation Process
`
`Identifying the Subject Matter of the Valuation
`Valuation Misconceptions
`The Three Basic Valuation Methodologies
`Limitations on Rationality in Valuation and
`Decision—Mal<ing Exercises
`References
`Notes
`
`BHAPIEB 2
`Patent Basics
`
`What Is a Patent?
`
`Anatomy of a Patent
`Criteria for a Patent
`
`Transferring Patent Rights
`Nationality of a Patent
`References
`Notes
`
`ix
`
`xiii
`
`Z3
`
`26
`32
`33
`36
`39
`40
`40
`
`
`
`Vi
`
`CHAPTER 3
`
`CONTENTS
`
`Using Valuation Analysis to Improve Patent Decision Making
`
`Patent Decisions
`
`Maximizing, Optimizing, and Satisficing: How Much to
`Invest in Valuation Analysis
`Preliminary Portfolio Valuation Audit: A Practical Valuation
`Technique
`References
`Notes
`
`CHAPTER 4
`Disassembly
`
`Disassembly and Decision Trees
`Using Disassembly to Develop Higher—Quality Data
`Using Disassembly to Understand Data Better
`References
`Notes
`
`PART TWO
`
`5
`
`5
`
`5
`
`Patent Valuation Techniques
`
`CHAPTER 5
`
`Preparing tor the Valuation
`
`Understanding the Bundle of Legal Rights
`Ownership Interest in the Patent
`Description of the Patent Rights
`Encumbrances on the Patent Rights
`Understanding the Patent Rights’ Neighborhood
`Exploiting the Patent Rights
`References
`Notes
`
`CHAPTER 6
`Income Methods: Discounted Future Economic Benefits Analysis
`
`Basic Arithmetic of the Discounted Future Economic Benefits
`
`Analysis
`Garbage In, Garbage Out: The Challenges Lay in the
`Inputs, Not the Math
`Projecting Future Net Economic Benefits
`Developing Projections from Analytical Analyses
`
`43
`
`45
`
`52
`
`58
`65
`65
`
`67
`
`69
`75
`84
`86
`87
`
`91
`93
`99
`1,00
`102
`103
`117
`119
`
`121
`
`124
`
`131
`133
`143
`
`
`
`
`
`,,n,W..M_.,,..W4,.W.,«,,“...,.a,4_m,.Wag.~,~”.,..aa..««.a,,.—“rnasr.a¢~......,,..w_.c.,,gt,W...e.,,r.,~...,.7v.,_,,,,i..,,,.,.t,Wl.,,,,.,Wa,...,,...rw.,,,.~._,...m.;,...a.,.~g5..,.t,..,.,,;
`
`Contents
`
`Estimating the Discount Rate
`References
`Notes
`
`CHAPTER 7
`
`Advanced Income Methods: Incorporating the value ol
`Future Decision flnuorlunities
`
`Option Contracts and Their Value
`Real Options
`Valuing Patents Using Option—Pricing Insights
`Using Decision Trees to Incorporate the Value of a Patent’s
`Future Decision Opportunities
`References
`Notes
`
`CHAPTER 3
`Market Methods
`
`Markets and Patent Rights
`Competitive Exchange
`Comparable Transactions
`Alternatives to the Core Market Methods
`References
`Notes
`
`CHAPTER 9
`cost Methods
`
`A Few Accounting Principles
`Cost of Development: Questionable Valuation Tool
`Cost of Reasonable Alternatives: Establishing a
`Maximum Price
`References
`Notes
`
`PART 3 V
`
`A
`
`V
`
`7
`
`Patent Valuation in Practice
`
`CHAPTER 10
`
`Pricing Patent licenses
`
`Payment Structures
`Determining the Price for a License
`
`Vii
`
`151
`159
`160
`
`161
`
`164
`168
`170
`
`174
`1 85
`1 86
`
`189
`
`191
`198
`205
`207
`214
`216
`
`219
`
`220
`224
`
`227
`230
`231
`
`233
`
`235
`
`236
`246
`
`
`
`Viii
`
`CONTENTS
`
`Less Formal Valuation Techniques for Setting
`Royalty Rates
`References
`Notes
`
`.
`
`CHAPTER 11
`Patent Infringement Ilamages
`
`U.S. Legal Framework for Calculating Damages in Patent
`Infringement Cases
`Lost Profits
`Reasonable Royalty
`Additional Patent Damages Matters
`Answering the Sue or Settle Question
`References
`Notes
`
`CHAPTER 12
`unlocking the Potential Value within Patents
`
`Keeping Pace with Economic Changes
`Patents as Collateral for Secured Loans
`Securitizing Patents
`References
`Notes
`
`CHAPTER 13
`valuation in Patent-Based Tax-Planning Strategies
`
`Examples of Patent—Based Tax—Reduction Strategies
`Transfer Pricing
`Determining Transfer Prices for Patent Rights
`References
`Notes
`
`About the Authors
`
`Index
`
`248
`264
`265
`
`289
`
`271
`275
`285
`297
`299
`306
`307
`
`313
`
`316
`317
`325
`333
`334
`
`337
`
`339
`344
`348
`358
`359
`
`363
`
`365
`
`
`
`
`
`Preparing for the Valuation
`
`efore launching into a detailed valuation exercise, a valuator should do a
`fair amount of preparatory work. This work involves analyzing the legal
`rights that make up the patent being valued. As we explained in Chapter 2,
`patents are a multifaceted property interest that involves a complex bundle
`of legal rights. Understanding which rights are involved with a particular
`patent and how those rights are to be employed is crucial to understanding
`what value can be generated from the patent. Immediately launching into
`some form of income, market, or cost method of valuation analysis without
`first considering the following fundamental questions will almost certainly
`lead to an inaccurate valuation or incomplete analysis:
`
`1. What exactly is being valued: the use of the invention, the patent rights,
`or both?
`
`2. What are the specific legal characteristics of the patent rights being
`valued?
`
`3. How will the patent rights be used?
`
`We addressed the first question (does the valuation cover the use of the
`invention, the patent rights, or both) in Chapter 1. This chapter covers the
`remaining two questions.
`In this chapter, we
`
`Explain how the bundle of rights that come with a patent affect its value.
`% Explore the alternative uses that can be made of a patent because differ-
`ent usages can generate very different values for a patent.
`
`UNDEHSTANBINE THE BUNDLE OF LEGAL RIGHTS
`
`The work required to value a patent bears many resemblances to the work
`that should go into any type of property valuation. Take, for example, a
`
`91
`
`
`
`
`
`92
`
`PATENT VALUATION
`
`classic real estate appraisal. Most real estate appraisal checklists will remind
`the appraiser to determine the following:
`
`@ What is the ownership interest that is being valued?
`What is the description of the property being valued?
`% Are there any encumbrances on the property rights?
`% What are the characteristics of the neighborhood surrounding the
`property?
`
`For patents, a similar exercise needs to be done. Although the ques-
`tions are formulated slightly differently than for real estate and the focus
`of the inquiries is largely about understanding a complex web of legal
`rights, the essence of the exercise is the same. Box 5.1 provides a compari-
`son of the standard real estate appraisal preliminary work questions and
`the corresponding analysis that is required for a patent valuation. This
`chapter examines each of these patent—Valuation preliminary questions
`and explains how to incorporate such information into a patent-rights val-
`uation analysis.
`
`BIIX 5.1: SIMILABITES BETWEEN THE PBEEIMINARY
`
`WBRK HEQIIIREB EAR A REAL ESTATE APPRAISAL
`AND THAT REQIHIBED EBB A PATENT iIAl.l.lATEfl|\!
`
`Real Estate Appraisal
`
`Patent Valuation
`
`Ownership interest in the property
`
`1. Does the “owner” possess valid
`title to the property?
`\/ Can the chain of title be
`established?
`
`2. What type of property ownership
`does the party have?
`/ Is the interest fee simple
`(absolute title to and
`possession of the land)?
`/ Is the interest leased fee (a
`third party has a lease right to
`the property)?
`/ Is the interest a leasehold estate
`
`1. Does the “owner” possess a valid
`interest in the patent?
`/ Is the patent still in force?
`/ Are there any potential
`invalidity challenges, such as
`obviousness, lack of novelty,
`enablement of best mode
`
`defects, or filing errors?
`/ What is the remaining life of
`the Patent? .
`.
`/ C3“ the Chm“ of “tie be
`established?
`
`(it is the lessee’s interest in the
`property that is being valued)?
`
`
`
`
`
`
`Preparing for the Valuation
`
`W
`
`. Is there any co-ownership of the
`property?
`
`Description of the property
`1. What is the description of the real
`property?
`‘
`V
`V
`J What are the property’s
`boundaries (e.g., what are the
`property’s metes and bounds)?
`J What does the property i
`i
`include within its boundaries?
`
`ii Encumbrances on the property rights
`,1. Are there any liens against the _
`property?
`
`—2. Are there any restrictions, on the
`’
`owner’s right to exclude?
`J Are there any easements?
`
`
`
`93
`
`W 2. What type of patent ownership
`does the party have?
`J Does the party own the
`patent? If yes, is the patent
`subject to any existing license
`agreements?
`J Is the party the licensee? If yes,
`is the license exclusive or
`nonexclusive?
`
`W 3. Are there any joint owners?
`J Are necessary assignments
`properly completed?
`
`1. What is the description of the
`patentrights?
`J What are the “claims” for the
`
`patent?
`
`1. Are there any liens against the
`patent? i
`
`2. Are there any restrictions on the
`patent owner’s right to exclude?
`J Did the government fund the
`research for the invention?
`’ J Are there any “shop rights”?
`J Are there any compulsory
`license requirements?
`
`Understanding the neighborhood
`
`1. How do neighboring pieces of
`property affect the value of the
`property?
`
`1. How do neighboring patent
`rights affect the value of the
`patent?
`J Are there blocking patents?
`‘J Are there synergistic patents?
`
`
`OWNERSHIP INTEREST Ill! THE PMENI
`
`As with real estate valuations, questions about the ownership interest in a
`patent
`involve three issues.
`It
`is necessary to determine whether the
`
`
`
`94
`
`PATENT VALUATION
`
`owner possesses a valid interest in the patent, what the type of ownership is,
`and if there are any joint owners.
`
`Does the “owner-" Possess a Valid Interest
`in the Patent?
`
`There is no point in valuing a patent unless a valid ownership interest in the
`patent can be established. Is the patent still in force? Are there any potential
`invalidity challenges to the patent? \‘(/hat is the remaining life of the patent?
`Can a chain of title be established to show that the current holder of the
`
`patent rights has proper title to those rights?
`
`is the Patent still in Force?
`
`One of the first inquiries that a valuator should undertake is to determine
`whether the relevant patent is still
`in force. Just because a patent was
`granted does not mean that it remains in force. The simplest way for a pat-
`ent to lose force is failure to pay the required maintenance fees (also referred
`to as renewal fees or patent annuities). The economic premise behind main-
`tenance fees is to discourage the maintenance of dormant and low—va1ue
`patents. If the patent is not worth paying the maintenance fee, which is typi-
`cally not very high, the patent holder will abandon the patent and allow the
`knowledge covered by the patent to enter the public domain. Most devel-
`oped countries have some type of maintenance fee system.
`In the United States, maintenance fees are required for utility patents,
`but not for design and plant patents (see Chapter 2 for a discussion of the
`different types of U.S. patents). Maintenance fees for utility patents must be
`paid to the U.S. Patent and Trademark Office (PTO) within 31/2, 71/2, and
`111/2 years from the date that the patent was grantedl (see Table 5.1). U.S.
`patent law allows for a 6-month grace period for paying a maintenance fee,
`although a late payment surcharge is then added to the maintenance fee.2 If
`the maintenance fee and surcharge (if applicable) have not been paid by the
`expiration of the grace period, the patent will expire at the end of that grace
`period.3 If a patent has expired due to failure to pay maintenance fees, lim-
`ited options do exist to revive the patent.4 A maintenance fee analysis
`should be done for each country or jurisdiction covered by the patent right
`that is being valued.
`
`Potential Invalidity Throughout the world, a large number of patents are
`incorrectly granted by patent examiners each year. These patents should
`have been denied, for example, because the invention was obvious or
`lacked novelty,
`the inventor did not satisfy the enablement or best
`
`
`
`Preparing for the Valuation
`
`95
`
`TABLE 5.1 US. Patent Maintenance Fees for Utility Patents
`
`Due Date
`(M93513ed
`from
`Grant
`Date)
`
`39/; years
`7‘/2 years
`111/zyears
`
`
`
`Maintenance Fee
`——-——-————
`Small
`Entity
`
`Standard
`
`Grace
`Period
`
`Expimtmn
`Grace Period
`D3“:
`Surcharge
`———————— (Measured
`Small
`from Grant
`Entity
`Date)
`
`Standard
`
`$1,130
`$2,850
`$4,730
`
`$ 565
`$1,425
`$2,365
`
`6 months
`6 months
`6months
`
`$75
`$150
`$75
`$150
`$150
`$75
`
`
`4 years
`8 years
`12years
`
`Source: U.S. Patent and Trademark Office.
`
`mode requirement, or the patent application was not filed within the 1-year
`grace period (see Chapter 2 for a discussion of the requirements for a valid
`patent). Although granted patents are presumed to be valid,5 these in-
`correctly granted patents risk invalidity challenges from third parties that
`may decide to
`
`a Request a reexamination of the patent, which could result in the patent
`being limited or declared invalid.
`m lnfringe the patented technology and seek to limit or invalidate the pat-
`ent at trial if challenged.
`
`When valuing a patent right, the valuator should have an understanding
`of the patent’s reexamination and litigation history. If the presumed value of
`the patent right is sufficiently high, it may be worthwhile to conduct a prior
`art search to estimate the probability that a subsequent infringement case will
`be brought and the probability that such a case would be successful.
`
`If the patent remains in force, the valuator
`Remaining lile III the Patent
`should determine its remaining life. For most of its history, the United States
`measured its patent terms from the date the patent was issued. That
`changed, however, in 1995. For patents filed after June 8, 1995, the poten-
`tial duration for a patent is 20 years from the date the patent application
`was filed. For patents in force on, or issued on applications filed by, June 8,
`1995, the potential duration for the patent is the greater of 20 years from
`the date of filing or 17 years from the date the patent was granted. For pat-
`ent rights that involve foreign patent protection, a review of the relevant
`duration law for each country or jurisdiction covered by the patent right
`should be conducted.
`The remaining life of the patent places a quasi cap on the premium pric-
`ing that may flow from a patent’s exclusivity rights. Alternative
`
`
`
`93
`
`PATENT VALUATION
`
`Clean Chain of Title
`
`Break in Chain of Title
`
`
`
`Alpha Corp.
`
`
`
`V Assigned November 27, 2002
`
`
`
`,
`
`I
`
`I Assigned November 27,2002
`
`
`Alpha Corp.
`
`No Assignment
`
`
`
`
`
`Assigned April 21, 2007
`
`
`
`I Assigned May 21, 2009
`
`Gamma Corp.
`
`
`
`:3 Gamma Corp.
`
`FIGURE 5.1 Chain of Title
`
`
`
`Assigned May, 21 2009
`
`technologies, however, will frequently extinguish that premium pricing long
`before the expiration of the patent.
`
`Establishing chain at Title Like other forms of property, proving ownership
`of a patent right requires establishing a chain of title. In the United States,
`initial patent ownership (title) is granted by the federal government when it
`issues the patent. That ownership interest may be assigned (see Chapter 2) to
`subsequent parties who then become the owners of the patent. To establish
`ownership, the current patent owner must be able to document each assign-
`ment from the original patent to the current ownership (see Figure 5.1).
`In theory, documenting the chain of title should be relatively easy. Ini-
`tial patent ownership is easy to document, and each assignment should be
`recorded with the patent office and therefore be easy to prove. In the United
`States, however, such recordation is optional and not mandatory. More-
`over, the PTO does not confirm the accuracy of the assignment, so an in-
`accurate assignment could be recorded. Assignees, however, do have a
`substantial incentive to properly record the assignment because the U5. Pat-
`ent Act provides that
`’
`
`an assignment, grant or conveyance sball be void as against any
`subsequent purcbaser or mortgagee for a valuable consideration,
`ivitlyout notice, unless it is recorded in tbe Patent and Trademark
`Office u/itbin tbree months from its date or prior to tbe date of
`such subsequent purcbase or mortgage.6
`
`
`
`
`
`Preparing for the Valuation
`
`97
`
`what Type oi Patent ownership Does
`the Holder Have?
`
`Once it is determined that the patent right remains valid and the chain of
`title can be established, the next step is to determine what type of patent
`ownership interest is being valued. Is the relevant patent right owned or li-
`censed? If it is licensed, what type of license is it? What the rights holder can
`do is largely defined by the type of ownership interest in the patent. Ignoring
`co—ownership rights for the moment (which will be discussed immediately
`below), there are three broad categories of ownership interest that a holder
`may have in a patent: (1) owner; (2) exclusive licensee; or (3) nonexclusive
`licensee.
`
`owned Patents The simplest form of ownership is to own the patent. For
`valuation purposes, owned patents can be divided into two categories: (1)
`those that are not subject to any existing license agreements (absolute pat-
`ents) and (2) those that are subject to existing license agreements (encum-
`bered patents).
`In the case of absolute patents, the valuator can focus on
`the absolute potential of the patent without concern for restrictions that
`prior license agreements may have placed on the patent. In determining the
`highest valued use for the patent, any legal usages can be considered. With
`encumbered patents, the valuator must take into account the various con-
`tractual obligations that are associated with the patent. These existing
`license agreements are not
`inherently good or bad for the valuation
`(see Box 5.2), but instead must be examined on a case—by—case basis.
`
`
`
`K
`V
`TypicalNegative Aspects
`a May be at below-market royalty rates that depress future cash
`flows from the patents. V
`I
`.
`.
`V
`.
`V
`. May impose unfavorable restrictions on the future use of the pat-
`
`entithat prevent the current or future holders from employing the
`
`highest valued use of the patent.
`I
`
`Box 5.,2:IvI=icALPinsI1IvE AND Nranravr
`ASPEBI8 rnom rxismim uerausr AGREEMENTS
`
`I
`r
`,
`I Typical Positive Aspects
`% May produce predictable cash flow from the patent that helps to
`reduce uncertainty about the Value of the patents.
`
`
`
`98
`
`PATENT VALUATION
`
`licensed Patents As we explained in Chapter 2, there are two types of pat-
`ent licenses:
`
`1. Exclusive licenses: The patent owner promises to provide one or more
`patent rights to one party and nobody else. The exclusive license can
`cover the entire patent, or it can be limited to cover a specific geo-
`graphic region, field of use, or both.
`2. Nonexclusive licenses: The patent owner promises to provide one or
`more patent rights to multiple parties and does not promise any exclu-
`sivity to any.
`
`A patent license, whether exclusive or nonexclusive, can cover the
`entire patent or be limited in any number of ways. Typical limitations in-
`clude manner of use limitations, geographic limitations, field of use limita-
`tions, and transfer limitations. These limitations allow the patent holder to
`tailor the bundle of rights associated with the patent to suit the particular
`needs of individual licensees. For example, if one licensee does not value the
`rights to use the patent in a particular field of use, those rights can be
`excluded from the license and instead licensed to another licensee who Val-
`ues those rights and is willing to pay for them. In this way, the patent holder
`can develop an ideal mix of licenses that generates the most value. Some-
`times that will mean providing a single license for the complete bundle of
`patent rights, whereas at other times it will mean dividing up the patent
`rights into multiple patents (see Figure 5.2).
`
`Joint owners
`
`In addition to the obvious patent owner, there may be joint owners of the
`patent that could substantially alter its value. U.S. patent law requires that
`the inventor, or a party authorized by the inventor, make the patent applica-
`tion. If someone is named as inventor who is not an inventor or if an inven-
`tor is omitted and the mistake is not corrected, any resulting patent can be
`invalidated. Determining who should be listed as an inventor can be chal-
`lenging, in particular for inventions that result from large research teams or
`collaborative research projects. Who is the inventor when multiple employ-
`ees for a firm all work together to develop the invention? To address this
`issue, employers in research and development— (R&D) centric industries
`typically require employees to enter into invention assignment agreements
`that pre—assign their patent rights to future work-related inventions. Failure
`to obtain such invention assignment agreements can materially affect
`the value of the patent for the employer firm. Under US. patent law,
`
`
`
`Preparing for the Valuation
`
`99
`
`Value
`
`Field of use
`restricted
`licenses
`
`Territorially
`restricted
`licenses
`
`Single license
`for complete
`bundle of
`rights
`
`Resale
`restricted
`licenses
`
`Quantity
`restricted
`
`llcenses Low
`
`
`Option 1
`Moption 2
`
`FIGURE 5.2 Increasing Value by Division
`
`employee inventors are co—owners of the resulting patent and, as such, have
`the right to “make, use, offer to sell, or sell the patented invention within
`the United States, or import the patented invention into the United States,
`without the consent of and without accounting to the other owners.”7 In
`short, joint owners have the right to exploit the patent, including licensing
`it to third parties, without having to pay anything to the other joint owners
`absent an agreement to the contrary.
`
`DESEBIPTIBN 0|‘ THE PATENT RIGHTS
`
`With real estate, the boundaries of the real property rights are set forth by
`the deeds description of the property (such as metes-and—bounds descrip-
`tions of the property). The same principle applies for patents. The claims
`section of the patent (see Chapter 2) provides the description of the property
`rights in the invention that are conveyed by the patent. The breadth of the
`claims will define the breadth of the exclusivity rights. When valuing a pat-
`ent, particular attention should be paid to the claims (see Figure 5.3). If the
`claims are drafted narrowly, their economic benefit potential will be more
`restricted. At the same time, the invalidation risk for the patent will be
`lower because there is less of a chance that the claims are impermissibly
`overbroad. If the claims are drafted broadly, the economic potential will be
`greater, but the invalidation risk will also be greater.
`
`
`
`
`
`100
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`PATENT VALUATION
`
`Value plummets as
`overbroad claim
`leads to successful
`
`
`
`validitychallenges
`
`/
`
`Value starts to
`decrease as
`litigation
`challenges mount
`to overbroad claim
`
`ClaimContributiontoValueofPatent
`
`High
`
`Low
`
`value as claim
`becomes less
`narrow
`
` Increasing
`
`Narrow
`
`Broad
`
`Breadth of Claim
`
`FIGURE 5.3 Narrow Versus Broad Claims
`
`ENCUMBRANCES ON THE PATENT RIGHTS
`
`An encumbrance is a claim against the title of property held by someone
`other than the owner. Encumbrances on the patent .rights include liens and
`restrictions on the right to exclude.
`
`liens
`
`With real estate, the encumbrance is most often created by a mortgage loan
`and is held by a bank (or its subsequent transferees). Similarly, patents may
`have encumbered titles that are created when patent holders contract with
`creditors to provide the patent as collateral for a debt. To protect its interest
`in the collateral, a creditor needs to establish a valid claim against the collat-
`eral that will take precedence over other potential claimants. To do so, an
`asset encumbrance system needs to have a public notice system so the credi-
`tor can determine if there are prior pledges against the property, or liens,
`that could interfere with the creditor taking control of the collateral should
`default occur. Likewise, a creditor taking a security interest in an asset must
`give notice to the public that the asset is now encumbered by the security
`interest, or lien, so as to ensure priority of that interest over subsequent
`third—party creditors.
`In the United States, security interests in personal property (which in-
`cludes intellectual property as a generic category) are governed by individ-
`ual state laws based on Article 9 of the Uniform Commercial Code (UCC),8
`
`
`
`-,~‘:~‘=7':wr-r'«~rr"-«*7-"*‘*“-.T‘»<-~rs~,:‘f‘”~.“‘”“’\““-°\“*‘“'““‘“-”‘""
`
`
`
`
`
`
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`Preparing for the Valuation
`
`101
`
`unless preempted by federal law. Unfortunately, there is some uncertainty
`as to where and how to file, what constitutes notice of a security interest,
`who has priority, and what property is covered by a security interest. Article
`9 sets out a comprehensive scheme for the regulation of security interests in
`personal property and fixtures. Under the legal framework of Article 9, a
`security interest is an encumbrance and is divorced from title to the under-
`lying property. The situation is somewhat complicated because Article 9
`does not adequately address issues relating to security interests in general
`intangibles involving the UCC’s step—bacl< provisions. The step—bacl< provi-
`sions apply when the parties’ substantive rights are governed by a federal
`statute or when a federal statute provides for a national system of registra-
`tion or specifies a place of filing different from the UCC.9 This issue can
`develop when one creditor files a conditional assignment at the PTO at-
`tempting to use a particular patent asset as collateral and another creditor
`attempts to create a security interest under the UCC in a state. When such a
`conflict arises for a patent asset, the priority is resolved in favor of the state
`UCC filing.” For a more extensive discussion regarding security interests
`involving patents, see Chapter 12.
`
`Restrictions on the Right to Exclude
`
`A few legal doctrines may restrict the patent holder’s exclusivity rights and
`thereby reduce the value of the patent rights. Three of the more common
`such doctrines are the following:
`
`1. Government—funded research: The government accounts for a significant
`percentage of RSCD spending throughout the world. In the United States,
`for example, the government accounts for more than 20 percent of US.
`R&D expenditures annually.“ As the invention’s funder, the government
`may have certain rights in the invention, such as a nonexclusive, royalty-
`free license to practice inventions resulting from the funded research.
`2. Shop rights: When an employee, during working hours and using her
`employer’s resources, conceives and develops an invention that she later
`patents, the employer is entitled to a nonexclusive right to practice the
`invention.” These so-called shop rights are not transferable to an un-
`related party, except in the case of a sale of the employer’s business as a
`whole.” Despite the shop rights, the employee’s rights to license or as-
`sign the patent are not restricted. 14
`3. Compulsory licenses: Patent laws in many countries (typically develop-
`ing countries) call for compulsory, fixed—price patent licenses for certain
`inventions that affect public health and safety. Compulsory licensing,
`when implemented, tends to involve pharmaceutical patents.
`
`
`
`
`
`T02
`
`PATENT VALUATION
`
`UNDERSTANDING THE PATENT RIGHTS’
`NEIEHBIIBHIIOD
`
`Everyone has heard the adage that the three most important things about
`real estate are “location, location, location.” Not surprisingly, real estate
`valuations are heavily influenced by the quality of the surrounding neigh-
`borhood. A good neighborhood can boost the value of a piece of property,
`whereas a bad neighborhood depresses it. The same concept applies to pat-
`ent valuations. The value of a set of patent rights can be heavily influenced
`by the property rights that surround the patent. Throughout this book, our
`discussion of patent valuation tends to focus on valuing the rights associ-
`ated with a single patent rather than a portfolio of related patents. We do
`that to keep the valuation concepts as simple as possible. Commercially val-
`uable products, however, frequently involve a complex web of separate pat-
`ent rights rather than a single patent operating in isolation. There may be
`bloc/eing patents that could significantly detract from the value of the patent
`right. There may also be synergistic patent rights that could significantly
`enhance the value of the patent right. Understanding this web of patent
`rights is critical to understanding the value of each patent right in the web.
`
`Blocking Patents
`
`A blocking patent is a patent that blocks a rights holder on a different pat-
`ent from exploiting the different patented invention without a license to the
`blocking patent. To understand the concept of blocking patents, one needs
`to understand that patents do not provide an affirmatiz/e right to make, use,
`or sell the patented invention (a patent does not provide the right to practice
`the patented invention). Instead, a patent provides a negative right to
`exclude others from making, using, or selling the invention.” See Chapter 2
`for a description of the exclusionary rights that come with a patent. There-
`fore, having a patent does not automatically provide the rights holder with a
`freedom to operate in some particular use of the patent. An existing patent,
`with its own rights to exclude others, may block the desired use. When there
`are a lot of separately owned blocking patents covering a particular prod-
`uct, a patent thicket is said to exist.
`A patent search should be conducted to help determine whether any
`blocking patents exist. Accurately identifying blocking patents allows the
`valuator to make two key determinations. First, the valuator can determine
`if there is an alternative economic path for the blocked patent. The rights
`holder may be able to work around the potentially blocking patents. Sec-
`ond, the valuator can determine the viability of obtaining a license to the
`blocking patent. In either case, dealing with the blocking patent will involve
`
`
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`Preparing for the Valuation
`
`103
`
`costs that should be subtracted from the stream of future economic benefits
`
`that are projected from the blocked patent.
`
`Synergistic Patent nights
`
`The mirror image of blocking patents is a synergistic portfolio of patent
`rights. A group of related patent rights may be worth more in the aggregate
`when held in a sing