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N. 30, November - December 2006
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 | IP & RTD: Articles
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Patent Value and Rating
Theo Grünewald
Dr.rer.nat Alexander Wurzer
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This article is the first in a series of four articles that
constitute an introduction to the thematic practice of valuation. During the
course of this series, we will first explain the valuation principles and
identify different occasions in which the valuation of protection rights
becomes necessary. In addition, we will present different valuation methods and
analyse their suitability for patent rating. The last part of the series will
explain the most problematic aspects of patent valuation.
What is the value of a good? In the science of business management,
there have been long and controversial discussions about this question, which
seems quite trivial at first glance.
A common assumption is that the value of a good corresponds to its
price. This would mean, then, that the value of any good could be determined
concisely and would be applicable to anybody. If this were true, then where do
daily statements like: “I got this for a bargain” or “that
is too expensive” come from? If the price and the value coincided, such
statements would be senseless.
The price is just the result of negotiations between two parties:
the buyer and the seller of the good. Both parties have a threshold at which
they can reach an agreement for the transaction. The seller will not agree to a
sales contract below a certain price and the purchaser will not agree to any
price above a certain amount. If the purchaser’s price ceiling is higher
than the lowest selling price, the contract will be concluded. The final price
level depends only upon the negotiating position and skills of the people
involved. When determining threshold prices for a patent, both parties must
consider the value of a certain amount of money and that of the protection
right for sale. If we now assume that both parties act rationally, they will
try to determine the sum that will make the transaction beneficial to them. For
example, the purchaser of a patent can expect a greater benefit from the patent
than from an alternative investment of the same sum of money. The purchaser
will include in this estimate any additional returns or saved costs he expects
from the purchase of the protection right. Figure 1 shows some of these value
components and explains possible mechanisms for value realisation - with no
claim of total comprehensiveness.
Figure 1: value components of patents
Value components
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Possible mechanism for value
realisation
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Safeguarding a fixed-term monopoly
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Only the patent owner is authorised to use the invention
covered by the patent. He can achieve a monopoly pension with it.
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Increase of turnover and profits
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The invention generates a greater benefit for users than
competitive products. A higher retail price is justified.
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Granting licenses
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Licenses can be granted to third parties. By doing so,
additional revenue can be generated. Cross-licensing enables cost-effective
access to further technologies.
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Erecting barriers to market entrance
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Patents make it more difficult for new competitors to enter
the market. The expenditure for the maintenance of the market shares decreases.
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Increasing the technological reputation
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The increased technological reputation can be used for
promotional purposes. It is also a positive signal for (potential) staff,
investors or co-operation partners.
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This makes it clear that the value of a patent does not necessarily
correspond to the costs incurred to acquire the protection right and the
invention deposited therein. Costs reflect only the amount of money that has
thus far been expended in preparing the patent. In ideal circumstances, these
costs are indeed lower than the expected future returns – so the owner
does not suffer a loss – but they don’t influence these returns.
The considerations described above are well known within the context
of company valuation. In this discipline, the favourability of a
company’s purchase or sale is also being rated through comparison with
several alternatives. Company valuation offers a series of instruments to
tackle the problematic nature of valuation. When patents, these instruments
should be used because no difference should be made in the approach, regardless
of whether the rating object is an entire company or merely a smaller division.
In this respect, patent rating is a special form of company rating and
therefore is based on the same premises.
In this context some fundamental findings relevant to patent rating
can be derived from the explanations above:
- The value of a protection right always depends on the individual
possibilities of the rater. This means that the patent value is always
subjective.
- Patent valuation always includes the comparison of different
courses of action.
- The patent value is based on the future economic benefit that
can be expected from the ownership position of the protection right.
- A pure financial goal system is presumed for the valuation.
Nonmonetary motivations, like striving for power, self-realisation or prestige
are not taken into consideration.
In the practice of patent valuation, it is very often the case that
the addressee of the valuation, i.e. the person who wants to know the value of
a patent, and the valuation subject differ from one another. Banks or tax
authorities, for example, could be interested in learning what value a patent
or patent portfolio has to a certain company. Information about the parameter
included in the subjective valuation, such as planned actions, often does not
exist with the rating addressee or is not verifiable. In such a case, the
so-called objectified value is determined. This value is based upon existing,
verifiable company information and doesn't include any potential courses of
action concerning the valuation.
Figure 2: subjective and objective patent value
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