What is a patent worth?

In November 2000, lawyers representing NTP, Inc. invited Research in Motion, Ltd. (RIM) to take a license to NTP's portfolio of patents related to wireless e-mail.

RIM refused to take a license.

In November 2001, after failing to secure an amicable agreement, NTP filed suit in U.S. District Court against RIM accusing the Canadian provider of wireless e-mail service of infringing eight of its U.S. patents.

RIM refused to settle.

In November 2002, a jury found in favor of NTP and ordered RIM to pay $51,6m in damages for willful infringement plus a running royalty of 5.75% on future sales. The District Court also awarded NTP a permanent injunction against RIM.

RIM refused to settle and filed an appeal. The injunction was stayed during appeal. 

In January 2003, RIM announced that the USPTO had started re-examination of all five of NTP's patents remaining in the litigation.

In 2004, the Appeals Court issed its ruling, partially affirming and partially overturning the District Court. RIM appealed to the U.S. Supreme Court and then announced that it had reached a settlement with NTP: $450m for a fully-paid up license,

in final and full settlement of all claims to date against RIM, as well as for a perpetual, fully-paid up license going forward.  The amount relates primarily to settlement of past damages, and includes the judgment and money escrowed to date totalling $137 million (the $152 million previously accrued included approximately $15 million in other litigation related fees).  It is expected that a substantial portion of the $313 million, which is the balance of the settlement amount, will be expensed in the fourth quarter, ended February 26, 2005.*

RIM failed to complete the agreement.

In October, 2005, the U.S. Supreme Court refused to hear RIM's appeal.

In March 2006, RIM announced that it come to an agreement with NTP: $612,5 million in full and final settlement of all claims against RIM, as well as for a perpetual, fully-paid up license going forward.

What is a patent worth? In March 2006, NTP's patents were worth at least $612,5m. Undoubtedly, had RIM's management concluded an agreement with NTP when first approached, the value of NTP's patents would have been substantially lower. As the Washington Times observed, "high-profile, high-priced eleventh-hour settlements reveal little about the often overlooked and remarkably low royalty deals that could have been reached earlier."†

The fact of the matter is that it is very difficult to assign a value to an individual patent or portfolio of patents, but there are many instances where some sort of valuation is needed.

Instances when patent valuation is needed

1. Before initial filing - The decision to file an application for patent is a commitment to a significant cash investment. If a obtaining a patent does not create value, it only creates costs. Although at this early stage, the uncertainties of future value are very high, some attempt must be made to justify the expense of obtaining the patent.

2. Before grant - A lot can happen during prosecution: claims might be cancelled or amended, a lot of prior art may limit the scope of the patent, a lack of prior art might indicate an even broader scpe of protection is available than orginally thought. The potential value of a patent can change substantially during prosecution. Before paying the issue fee, it can make sense to confirm the patent's value.

3. Before foreign filing - Obtaining patent coverage in more than one country substantially increases the costs of patenting. Whilst an invention may be very valuable, it not be worthwhile to obtain patent protection for the invention in more than a few key countries. 

4. Post grant - After a patent is granted, there are numerous instances where valuation might be needed:

a) before paying maintenence fees.
b) when deciding on, or establishing a licensing program.
c) for accounting purposes
d) in establishing mergers and acquisitions
e) in divestitures
f) in litigation
g) when seeking venture capital

Methods of valuing patents

There are basically four methods that are used to determine the value of a patent:

i) costs - useful, and sometimes necessary, for accounting and tax purposes, but useless otherwise. 
b) market based methods - using comparable royalty rates and industry averages is a method commonly used in litigation.
c) income - accounting for future value using discounted cash flows (DCF) and net present value (NPV). There are several ways to do this.
d) options pricing theory - man variants based on Black-Scholes options pricing model have been proposed over the past decade.

Each of these methods has advantages and shortcomings.

Avvika AB can help you wade through the confusion of patent valuation and provide you with the insight you need to make strategic business decisions.

Contact Avvika AB for a personal consultation to see how we can get your patent portfolio working for you.    

Footnotes:

* RIM Press Release, Research In Motion And NTP Agree To Resolve Litigation, March 16, 2005

† At a hearing on Feb. 25, 2003, three months after the jury's verdict, [Judge] Spencer expressed surprise that the case was still before him "because, frankly, I never thought the case would make it to trial," he said. The judge proffered a theory: "It seems to me that some of the folk took it personally, and that's how it got this far."