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AIPLA1
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American Intellectual Property Law Association
IP Valuation
John T. Johnson & Michael F. Autuoro
Fish & Richardson P.C.IP Practice in Japan Committee
2014 AIPLA Mid-Winter InstitutePhoenix, AZ
January 28-29, 2014
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Agenda
• Intro to IP Valuation– What is it?– Why the Increased Need?– Circumstances Requiring Valuation
• Intro to Valuation Methods– Quantitative Valuation Techniques– Qualitative Valuation Techniques
• IP Valuation/Devaluation Events
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What is IP Valuation?
• An estimation of the worth of an IP asset or a set of IP assets
• Many valuation techniques, ranging from the simple to the extremely complex– Patents exist even on patent valuation!
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Increased Need?
Greater need for IP Valuation today than in the past?
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Increased US Patents/Litigation More Opportunities?
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More NPEs/Aggregators More Opportunities?
Source: PatentFreedom © 2013. Data captured as of August 6, 2013
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Greater Availability of Information about IP
• Various information sources make valuation easier?– Litigation Searching & Analytics—e.g., Lex Machina,
DocketNavigator– Patent Analytics
• Online File Histories (Public Pair), Assignment Information, Fee Status, Patent Families
• Robust Patent Databases and Reporting (e.g., Thomson Innovation)
• International Patent Databases (e.g., EPO)
– Internet search engines
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Know Why You Need to Valuate
• The objectives of the valuation will impact the strategy as well as the type of valuation that is appropriate
• What is the purpose of the valuation?
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Example Valuation Contexts
• Negotiations to sell/license IP rights• Merger, acquisition, joint venture or bankruptcy• To support decision-making in patent disputes• Fund raising/loans/venture capital • Developing internal IP risk mitigation strategy• For accounting purposes
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Patent Valuation Methods
• Generally, two categories of valuation: quantitative and qualitative– Quantitative: focus on numerical and
measurable data– Qualitative: focus on characteristics and
potential uses of the IP
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Quantitative Approach
• Examples of quantitative methodologies:– (1) Income-based method– (2) Market-based method– (3) Cost-based method– (4) Option-based method
• Overlap of methods
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(1) Income-Based Method
• Value of IP asset = the sum of expected income flows it will generate over time, discounted to the present day– Offensive analysis: What are projected future cash flows from
licensing or enforcement?
– Defensive analysis: What are the savings (royalty payments, litigation costs, design-around costs) due to owning the asset?
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(1) Median Damages Awarded for Patent Cases
2013 PWC Patent Study (available athttp://www.pwc.com/en_US/us/forensic-services/publications/assets/2013-patent-litigation-study.pdf )
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(1) Reported Royalty Rates by Industry
2012 KPMG report: Profitability and royalty rates across industries: Some preliminary evidence
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(1) Income-Based Method Simple Example
• Company C is offered 100 patents for license, prior to Owner offering for sale to third parties– Due diligence on the patents suggests that there is risk of
infringement as to 5 patents
– If Company doesn’t acquire/license patents, what are the chances it will be sued? (e.g., 80% chance of suit on a risky patent)
– Probability of loss? (e.g., 30%)– Targeted activity and est. exposure in case of loss (e.g., $10M)
– Average Litigation costs? (e.g., $1M, win or lose)
RiskPatents
Hit Rate
Expected Suits
Loss Rate
Exposure in Loss
Avg. Lit Expenses
Total
5 x 80% = 4 x ((30% x $10M) + $1M) = $16M
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(2) Market-Based Method
• IP value is estimated based on similar market transactions (e.g. similar license/acquisition agreements) of comparable patent rights
• Was it a similar transaction?– When did it occur?– What technology area?– What was purpose of deal?, e.g., was acquisition for offensive or defensive purpose?– Who were the parties to the deal?
• Were rights comparable?– Was agreement a license, cross-license or acquisition?– Perpetual term?– Existing encumbrances?
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(2) Market Information Sources
• The Internet• Press Releases • Company annual reports• Royalty rate publications• Court decisions
• Unlike real estate transactions, the terms of most IP transactions are kept confidential.
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(2) Recent Market Transaction Data
Date Seller Buyer Technology Type Deal Price No of IP Assets Per Patent/Asset
9/13 Nokia Microsoft Mobile Phone
10-yr Cross-License
1.65B Euro Nokia’s portfolio --
12/12 Kodak RPX/IV Led Consortium
Digital imaging
Sale $527 Million ~1,110 patents $479K (per patent)
4/12 Microsoft Facebook IM; Email; Browsing
Sale/License
$550 Million 650 patents, plus a license to 275 patents
$594K - $846K(per patent)
4/12 AOL Microsoft IM; Email; Browsing
Sale/License
$1.056 Billion
~800 patents $1.32M(per patent)
8/11 Motorola Mobility
Google MobilePhone
Sale/Acquisition
$12.5 Billion Acquires Motorola Mobility and its ~17000 patents
$735K per patent)
6/11 Nortel Rockstar Consortium (Apple, EMC, Ericsson, Microsoft, RIM and Sony)
Mobile Phone
Sale $4.5 Billion ~6,000 patent assets $750K (per asset)
11/10 Novell CPTN Consortium
Networking/Software
Sale $450 Million ~882 patents $510K (per patent)
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Low High
(2) Market Valuation Range Example
Kodak(12/2012)
Novell/CPTN
(11/2010)
Google/Motorola(8/2011)
Nortel(6/2011)
Facebook/Microsoft(4/2012)
Microsoft/AOL
(4/2012)
$479K per patent
$510K per patent
$735K per patent
$750K per patent
$594K to$846K per
patent
$1.32M per patent
$479K $1.32M
Which is most similar to the deal at hand?
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(3) Cost-Based Method
• IP valuation based on the costs that were expended in the development of the IP
• Two approaches:– “Reproduction cost” method: Based on costs associated
with the purchase or development of a replica of the patent under valuation
– “Replacement cost” method: Based on costs that would be spent to obtain an equivalent patent asset with similar use or function
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(3) Cost-Based Method
• Sources of costs: – Direct expenditures, such as costs with materials, labor
and management, e.g., R&D, prosecution costs – Opportunity costs; costs due to delays in market
entrance; lost investment opportunities
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(4) Option-Based Method
• IP valuation based on stock-option pricing models – More complex– Patent rights viewed as analogous to a “call option”– Both give a right to exploit an asset in the future, and to
exclude others from using it
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Patent Valuation Methods
• Generally, two categories of valuation: quantitative and qualitative– Quantitative: focus on numerical and
measurable data– Qualitative: focus on characteristics and
potential uses of the IP
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Qualitative Approach
• Valuation performed through the analysis of aspects that can impact the value of an IP asset, e.g., legal aspects, technology level of the innovation, market details, company organization
• Not based on purely financial analytical data
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Qualitative Considerations
• Incremental improvement?• Relevant market?• Who developed the IP?• How close to expiration?• Are continuations pending?• Subject to broadening reissue?• Nature of the claims? Method? System?• File History—clean? • Forward Citations
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Valuation/Devaluation Events
Judicial/Legislative Events Possible Effect
Obviousness—KSR -
Algorithm Rule—Aristocrat -
Divided Infringement—Akamai/Limelight (CAFC) +
Venue—TS Tech/Volkswagen -
Willful Infringement—Seagate -
Injunctive Relief—eBay -
Injunctive Relief for NPEs at ITC +
Entire Market Value Rule Damages—Lucent -
IPR/Prost-Grant Review -
Inequitable Conduct Heightened Requirements—Star Scientific/Therasense
+
Legislative Patent Reform +/-
Patentable Subject Matter—CLS Bank/Alice ?
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THANK YOU! ANY QUESTIONS?
John T. [email protected]
Michael F. [email protected]
Fish & Richardson P.C.601 Lexington Avenue – 52 Floor
New York, NY 10022