Intellectual Property Issues for Consideration When Having a New Idea

Intellectual Property Issues for Consideration PLUS Valuation Methods

Demetris C. HadjisofocliExecutive Director, Entrepreneurship Frontier Network, Ltd.Managing Director, Innovade, Ltd.

IP Precautions

Perform patent search before beginning research

Keep careful lab notebooks and write down every possible notation and action from the very beginning

Avoid known/legal issues that will prohibit the registration of a patent

Protect against patent invalidity

IP Valuation Methods

Basic Valuation Methods Cost method

Market method

Income method

Selected IP Valuation Methods 25% rule

Industry standard royalty rates

Real-Options method

Competitive Advantage Valuation

Perform Patent Search Before Beginning Research

Perform Patent Search Before Doing Research

Patent owner’s rights

Exclusive right to make, use, sell and import

Unauthorized use of patent subject matter in research=patent infringement

No general experimental use exemption to patent infringement as in most other countries

Limited experimental use exemption for drugs and medical devices subject to FDA approval

Perform Patent Search Before Doing Research

Beyond avoiding infringement, patent searches can also be helpful

To learn from work of others

To improve on successful approaches

To avoid unsuccessful approaches

To engineer around potential problems

Keep Careful Lab Notebooks


Lab notebooks necessary to determine

Who has priority to an invention

Who is named as an inventor


Who has priority to an invention US patent law; priority goes to first to invent All other countries; priority goes to first to file

Who is the first to invent First person to conceive of an invention and then

diligently proceed to reduce the invention to practice

First person who conceives of an invention (A) will prevail over the first person to reduce the invention to practice (B) if the first person who conceives of the invention (A) is diligent from a date prior to the other person’s (B’s) conception of the invention until his/her (A’s) reduction to practice


Priority Example

A conceives of invention on 1/1/2000

A reduces invention to practice on 1/1/2004

B conceives of invention on 1/1/2001

B reduces invention to practice on 1/1/2003

A will prevail over B, if A is diligent in reducing the invention to practice from a date prior to 1/1/2001 until 1/1/2004


Definitions Conception

Formation of a definite idea for the complete and operative invention

Reduction to practice Actual reduction to practice

Building a working prototype of the invention Constructive reduction to practice

Filing a patent application sufficient to enable one skilled in the art to make and use invention

Diligence Reasonable and continues effort directed toward

actual and/or constructive reduction to practice Fact sensitive determination in each case


Lab notebook are critical to establish Date of conception Date of reduction to practice Diligence during required period of time

Lab notebooks should document all information relevant to the invention (ideas, experiments, instruments, procedures, formulas, calculations, etc.)

Every page should be signed and dated by the inventor

Every page should be witnessed and dated by two non-inventors who understand the work

All entries should be in ink; errors should be crossed out with a single line to remain readable

Electronic lab notebooks (date/time stamp) can be used


Who is an inventor An “inventor” is the person who conceives

of an idea that is included in the patent claims A sole inventor must conceive of all the ideas

included in the patent claims A joint inventor must conceive of at least one

idea included in at least one patent claim A person who reduces an invention to

practice is not an inventor unless during the reduction to practice he/she conceives of an idea that is included in the patent claims

Failure to properly name inventors in a patent application can render the patent invalid


Lab notebooks are critical to determine who is an inventor and who should be named as an inventor in the patent application

Named inventors can be changed after patent application is filed; unless there was a knowing and wrongful omission or inclusion of inventors in the first instance

Avoid known/legal issues that will prohibit the registration of a patent

Avoid Statutory Bar To Patent Issuance

Patent cannot be obtained in the U.S. if Inventory known or used in U.S., or patented

or described in printed publication in U.S. or foreign country, prior to the date of invention claimed by applicant

Invention patented or described in printed publication in U.S. or foreign country, or in public use or on sale in U.S., more than one year prior to patent application date

There is no statutory grace period in foreign countries Strict novelty; any publication, public use or sale

prior to patent application date will bar foreign patent issuance


Acts of patent application or third party can bar patent issuance

Acts that can bar patent issuance Public use

Can be very negligible and still bar patent issuance Limited exception for “experimental use”

Experimentation must be technical, not marketing Experimentation must be evidenced by written records

On sale Offer of sale to single person can bar patent issuance Offer of sale can occur prior to reduction to practice License of technology is not an offer of sale


Acts that can bar patent issuance (cont.) Printed publication

Any document available to public regardless of location or form is a “printed publication” Doctoral theses are available to public at time they

are properly catalogued in library A document is not available ion public

At time of thesis review and defense At time of submission for peer-review publication If recipient is under duty of confidentiality

Public presentation Papers, slides, posters = printed publication Unless audience is under a duty of confidentiality


To constitute a statutory bar, the printed publication must enable one skilled in the art to practice the invention

Reporting what an invention can do, but not how the invention does what it does, is generally not an enabling disclosure

Protect Against Patent Invalidity


A patent can be invalidated for inequitable conduct during the patent application process

Two elements of inequitable conduct Patent applicant must misrepresent or fail to

disclose material information to PTO The misrepresentation or failure to disclose must

be intentional Most common misrepresentations

Critical dates; Inventors Most common failures to disclose

Prior art; offer of sale; printed publication Patent Act requires patent application to sign

an oath that applicant believes he/she is the first inventor of the claimed invention


The Patent Act requires the patent application to contain a written description of the invention “in such full, clear, concise and exact terms” as to enable any person skilled in the art to make and use the invention

Every element of invention claims must be enabled in the patent application specification

Failure to provide an enabling disclosure will renter claim(s) invalid

Basic Valuation Methods


Cost Method

Value of an asset is the cost to replace the asset with an identical or equivalent asset

Can count for physical depreciation and functional obsolescence

BUT…. Cost does not equal value

Nuclear powered aircraft

Small percentage of patents have any value


Market method (real estate appraisals)

Value of an asset is price paid for comparable assets

Conditions necessary for market method

Public exchange market

Sufficient number of recent exchanges

Standardized exchange terms

Price of exchanges available to public

None of these conditions exist for IP assets


Income Method Value of an asset is the net present value

(NPV) of the future income expected to be received from the asset Discounted cash flow (DCF) Dollar today worth less than dollar tomorrow

Income method useful for IP assets associated with a revenue stream (Licensed patents)

Income method is not useful for IP assets prior to licensing or commercial use



25% Rule Licensor should receive 25% of licensee’s

gross profit from the licensed technology 25% rule is not a valuation method, but a

rule-of-thumb for splitting IP value between a licensor and licensee

25% rule does not account for quality of technology, its state of development, additional investment and future risk

25% rule is not useful where the licensed technology is a component part of a product or process


Industry Standard Royalty Rates The value of an IP asset is determined by the

royalty rates paid for similar assets in past transactions

Some companies provide royalty rate information for different industries for a fee

Two main problems Industry definitions are generally very broad

Health care; computing Industry royalty rate ranges are generally very large

1% to 25% Also problems similar to 25% Rule

Standard royalty rates do not account for quality of technology, state of development, additional investment, future risk


Real Options Method Value of IP asset is the value of future

options regarding further development of the IP asset Options are a series of “go” or “no go” decisions Each stage of development provides additional

information about technology The decision to proceed with development does

not depend upon the risk adjusted final NPV The decision to proceed with the next stage of

development depends upon whether the risk adjusted incremental gain in NPV, if the next stage of development is successful, is sufficient to justify the cost of undertaking the next stage of development


Competitive Advantage Valuation (CAV) The value of an IP asset is determined from the IP asset’s

competitive advantage with respect to an average substitute IP asset

Seven basic steps Calculate NPV of total profits in technology’s intended market over time Disaggregate NPV into portion of profits attributable to technical

intellectual property assets Define price/performance parameters that determine success in the

intended market Calculate competitive advantage by comparing IP asset to an average

substitute IP asset on price/performance parameters Extrapolate from IP asset’s competitive advantage to predicted market

share in intended market Calculate value of IP asset from value of technical intellectual property

profits in intended market and predicted market share in intended market

Adjust IP asset value for technical, market and intellectual property risks


CAV (cont.) Benefits

Links principal value drivers in intuitive way Easy to use and understand Can be used in multiple valuation contexts Scalable for simple and complex valuations Neutral as between licensors and licensees

Limitations Default formulas and values are generalized for all

industries Technical, market and intellectual property risk

adjustments can greatly alter valuation results

ThanksQUESTIONS

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Intellectual Property Issues for Consideration When Having a New Idea