john johnson - ip valuation.ppt

8/10/2019 John Johnson - IP Valuation.ppt

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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, rangingfrom 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 & Analyticse.g., Lex Machina,

DocketNavigator

Patent Analytics Online File Histories (Public Pair), Assignment Information, Fee

Status, Patent Families

Robust Patent Databases and Reporting (e.g., ThomsonInnovation)

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 isappropriate

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 andmeasurable data

Qualitative: focus on characteristics andpotential 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 thepresent day

Offensive analysis: What are projected future cash flowsfrom licensing or enforcement?

Defensive analysis: What are the savings (royaltypayments, litigation costs, design-around costs) due toowning 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 doesnt 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

HitRate

ExpectedSuits

LossRate

Exposurein Loss

Avg. LitExpenses

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/acquisitionagreements) 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 PerPatent/Asset

9/13 Nokia Microsoft MobilePhone 10-yrCross-License

1.65B Euro Nokias portfolio --

12/12 Kodak RPX/IV LedConsortium

Digitalimaging

Sale $527 Million ~1,110 patents $479K (perpatent)

4/12 Microsoft Facebook IM; Email;Browsing

Sale/License

$550 Million 650 patents, plus a licenseto 275 patents

$594K - $846K(per patent)

4/12 AOL Microsoft IM; Email;Browsing

Sale/License

$1.056Billion

~800 patents $1.32M(per patent)

8/11 MotorolaMobility

Google MobilePhone

Sale/Acquisition

$12.5 Billion Acquires Motorola Mobilityand its ~17000 patents

$735K perpatent)

6/11 Nortel RockstarConsortium(Apple,EMC,

Ericsson,Microsoft,RIM andSony)

MobilePhone

Sale $4.5 Billion ~6,000 patent assets $750K (perasset)

11/10 Novell CPTNConsortium

Networking/Software

Sale $450 Million ~882 patents $510K (perpatent)


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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 perpatent

$510K perpatent

$735K perpatent

$750K perpatent

$594K to

$846K perpatent

$1.32M perpatent

$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 thepatent under valuation

Replacement cost method: Based on costs that would

be spent to obtain an equivalent patent asset withsimilar use or function


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(3) Cost-Based Method

Sources of costs:

Direct expenditures, such as costs with materials, laborand management, e.g., R&D, prosecution costs

Opportunity costs; costs due to delays in marketentrance; 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 toexclude 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

Quali tat ive: focus on character is t ics andpo tential 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 theinnovation, 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 Historyclean? Forward Citations


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Valuation/Devaluation Events

Judicial/Legislative Events Possible Effect

ObviousnessKSR -Algorithm RuleAristocrat -

Divided InfringementAkamai/Limelight(CAFC) +

VenueTS Tech/Volkswagen -

Willful InfringementSeagate -

Injunctive ReliefeBay -

Injunctive Relief for NPEs at ITC +

Entire Market Value Rule DamagesLucent -

IPR/Prost-Grant Review -

Inequitable Conduct Heightened RequirementsStar Scientific/Therasense

+

Legislative Patent Reform +/-

Patentable Subject MatterCLS 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
mailto:[email protected]:[email protected]:[email protected]:[email protected]

john johnson - ip valuation.ppt

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