Friday, 20 August 2010

Valuing Patents and Litigation

Patent valuation has always been an art rather than a science. The value is often more dependent on the eye of the beholder than an "objective" value. And probably rightly so. A company that can exploit a patent is prepared to pay much more for the rights, than one that needs to invest substantially in the means to exploit the idea.

Rob's been intrigued to hear recently about a case in which a substantial deduction was applied to the value of IP rights because they "had not been tested in litigation". This seems to be crazy and almost encouraging litigation. It's probably true that a patent that has survived litigation and had the whole weight of a defendant thrown at it is probably more valuable - it becomes almost impossible to challenge the validity. That might justify a premium. Most such patents, however, tend to be narrower in scope than the original grant. It's almost inevitable that some prior art emerges from unknown sources that will limit the scope of the original patent. So litigated patents tend to offer a smaller degree of protection, but are certainly future proofed against further prior art attacks. Their ultimate value could have changed either way - a reduction in claim scope can also mean a reduction in value.

So what's the conclusion? It looks to me that whoever carried out the valuation has not really considered the implications. When a court case in the US can cost upwards of USD 1 Million it does not seem to be a terribly good idea to apply a general reduction in value because the application had not been through litigation. Any good #alttext#valuation expert should be in a position to at least instruct a prior art search to be done on a patent to see whether it is likely to be substantially litigation proof and that would generally be a much better approach than merely discounting the value because something "might be found". Certainly the search is going to cost an awful lot less than the court case.

Peter Zura's 271 Blog on Patent Litigation Statistics here.
Denis Crouch's chart on litigation reported here.

3 comments:

James Wagner said...

Is there a practical difference between discounting for lack of litigation and providing a premium for having survived litigation?

Also, while a prior art search can be valuable in helping determine the potential invalidity of a patent (especially if it comes back with clearly anticipatory prior art) a search will rarely be as thorough a testing as litigation. Invalidity attacks in litigation tend to be both broader than a prior art search can address (ex. utility, ineq. conduct etc.) and more thorough.

Maureen said...

Is this a published case or published valuation that can be accessed publicly? I would be curious to know the context in which the "discount" for lack of litigation was applied and who rendered the valuation. If this is a new trend, it may be more applicable to particular industries than others.
Maureen Veterano

Minsu Kyeong said...

Value deduction due to lack of litigation causes two issues.

One, like you said, it encourages litigation.

Two, some patents are not litigated because they are "healthy" patents and litigation seems futile. In such cases, lack of litigation should be a ground for adding value.