zondag 29 mei 2011

about patent valuation

Some effort has been done in evaluating the price of patents. The company Ocean Tomo is quite far in providing (allegedly) rather accurate prise evaluations of single patents and patent portfolios. According to J. Malackowski, founder of Ocean Tomo, basically three ways of evaluation appear to be practised [1]:

1) cost base approach
2) market value approach
3) Income approach

Well, let's have a more profound look on these three approaches in the light of the data available:  

Cost base approach

From a study done by Gasnier, an evaluation of the out of pocket expenditure, including both patent attorney fees and official fees, for obtaining patent protection in the United States, Japan and three major European states (DE, FR and EN) is estimated to be on average per patent family [2]:

From these data, a 10 year old patent family would on average be worth 80 k€, whereas a 3 year old patent family would on average be worth 10k€.

Market value approach

From data gathered from published results of auctions held by Ocean Tomo, a average selling price can be deduced [3].

From the data between 2006 and 2011, an average sales price of 106 k€ can be calculated, with extremes (in the average sales price) varying between 25k€ and 300k€. This price is based on the sales of about 980 patent families, wherein the day to day Dollar/Euro rate of exchange has been applied. The four auction average (green line) shows a slightly declining tendency. It is remarked that the data of last ICAP/Ocean Tomo auction of March 30/31, 2011 were not taken into account, since at this auction, for the first time ever, covenants not to sue were offered, of which at least one was sold for a stunning 35 million $ (35E6$). These covenants however are blurring the sales price figures of patents as such. Furthermore, after the takeover of ICAP of the IP auctions of Ocean Tomo, auction results are less and less published, which will render it more difficult in the future to obtain valuable data on market based patent price indications.

Remarkably, an auction held by IP Auctions GmbH (for obvious reasons, now out of business) in Munich in May 2007, resulted in an average sales price of patents sold of less than 6 k€, based on 83 offered families [4]. This means that patents sold in Europe are on average selling for a factor 18 less than the average price in the US. When compared with the average cost base evaluated price, selling patents in Europe is not quite a profitable business.  

Income based approach

In a study performed on assignment by the European Union, based upon about 10 000 questionairs, handed out to inventors and patent holders, representing about the same number of patent families another picture emerges [5]:

Leading to an average value of approximately 3 million Euro [3E6€], a remarkable 30 times more that the average sales price in the US market and, even more stunning, a 500 (!) times more than the average auction sales price in Europe.

Conclusion and discussion

In a cost based approach, inevitably, older patents are valuated more expensively, since more costs have arisen. In this model, the older the patent, the more expensive it is going to be, whereas less and less time remains for exploiting it. In itself, the cost base approach can thus be seen as quite a questionable model.

In an income based approach, the value of patents appear quite overestimated by patent holders themselves. This price evaluation model carries along some inevitable crystal ball, hope for income effects, rendering a price evaluation of EP patents on average a factor 500 higher than the prices actually paid for on auction in Europe. 

It is my firm believe that the difference in average sales prices of patents between auctions held in Europe and auctions held  in the US of a factor 18 is due to the complex and inefficient European patent system, when compared with the straight forward single market, single economy US patent system. 

One can arguably say, that due to the relative complex and burdensome patent enforcement in Europe and relative expensive European patent system, patent applicants first have to pay 10-20 times more money, to obtain a patent worth 18 times less than a US patent [6]. A unification of the European patent litigation system will thus be likely to both decrease the costs and increase the value, rendering patenting trading business in Europe a stunning factor 250 more profitable. The patent trading (by some denounced patent trolling) in Europe will instantaneously emerge, as soon as the patent system is finally unified.   

The slow European political systems -it is now 36 years after the first community patent convention (CPC) has been drafted [7]- and above all the unification blocking of patent wise unimportant countries such as Italy and Spain are costing (predominantly European) enterprises considerable amounts of money. Even if a new CPC will finally be agreed upon, it will last some more years to be finally ratified and to enter into force.  

From the above given data, the best evaluation of a patent appears to be the market value approach. By trying to find similar patents and to search for their sales prices, an appropriate value may be evaluated.

For evident reasons, however, the prices of patents, sold at auctions are less and less easy to be found on the web. The companies providing price evaluations, more and more keeps commercial auction data undisclosed, such that others, including patent holders can no longer make a fairly accurate marked price evaluation themselves and more firmly depend on them.

So the best evaluation method available is likely to disappear, which, I believe, is on the long term neither in the interest of the companies organising the auctions and providing valuations nor in the interest of the other stakeholders.

It is my prediction that in this market, like in every fully grown market, in the future open bidding and price forming systems will appear, leading to a transparent system, where patent valuation can be a relative straight forward exercise, based upon a market approach model. The unification of the European system will contribute to such transparant system and will strongly accelerate its process of development.   

Till that time, patent evaluation remains inevitably a partially crystal ball and gut feeling business.

[1] S. Graj, "The IP quake Behind how You Bet Your Asset", Interview J. Malackowski (15-05-2011), http://www.ggny.com/blog_gg/?p=732 

[2] A. Gasnier, "The Patenting Paradox" (2008), p. 88-89.

[3] Ocean Tomo and ICAP information on auctions (2006-2011), (most auction results are no longer available).

[4] J. Ostler, "IP Auctions GmbH first sale of patents at live auction in Munich" (2007),  http://www.drs-digital.com/dataroomservices-news-events-2-10/archive/2007-en/ip-auctions-sales-patents.html 

[5] A. Gambardella e.a., "The Value of European Patents" (2005),    http://www.ulrichkaiser.com/patval/Final_Report_PATVAL.pdf

[6] A Single Market for Intellectual Property Rights, Boosting creativity and innovation to provide economic growth, high quality jobs and first class products and services in Europe (25-05-2011),  http://ec.europa.eu/internal_market/copyright/docs/ipr_strategy/COM_2011_287_en.pdf

[7] M.Hoffmann, "The EU ‘Community Patent’ – a new, better patent protection regime?", News Link, (spring 2004), http://www.worldlink-law.com/pdf/newslink_spring04.pdf

zondag 15 mei 2011

Patent traders

It is fascinating to see how the ratio of intangible assets versus tangible assets has virtually flipped the last 35 years [1]:

Although the graph represents listed US S&P 500 companies, the very same effect occurs throughout the world, with in developing economies at an even far more rapid pace. It means that within these companies, intellectual property, e.g. know how, patents, breeders rights, software, copy rights, models and designs is nowadays far more valuable than land, buildings and machines.
In relation to the surge of importance of intellectual property, amazingly, the patent and patent revenue distribution appears extremely imbalanced and revenue is predominantly concentrated with large industries [2]:

This might indicate that patents of small entities, individuals and research institutions are of an appalling commercial quality. Expressed in revenue value, they perform about a factor 150 less than those of large corporations. Though their patents maybe less valuable, 150 times less valuable appears highly unlikely.
More likely, the patents of small entities, individuals and research institutions hardly find their way to a profitable exploitation when compared with large corporations. Common sense would indicate, when the left and right pie charts were more similar, a fairer distribution of plain reward for inventive effort would have been provided for.
This very reward for inventive effort is the true pith and marrow of our national, international and global patent systems. The basic thought of our patent systems is a reward for the effort of the inventor, in exchange for the full disclosure of the technological progress made by him. Yet, this system proves to function suboptimal. 
Apparently large corporations are more successful in converting intellectual property into money, whereas small entities, individuals and research institutions own more intellectual property. Thus, a huge potential for trade of intellectual property has emerged.  
This potential has not been left unnoticed and relative new companies are now stepping in this potentially very profitable trade. However, especially the larger producing entities are predominantly negative about this evolution, which is very accurately described by J.F. McDonough III [3]. The above presented charts clearly support his view that patent trade potential is progressing and that traders, often denounced trolls, may function as essential market intermediaries, for the benefit of enhancement of the efficiency in the patent exchange economy. Thus, in an evolving market, when traders start to open up the market, the trade in patents will grow and flourish in the decades to come. This development will finally balance the left and right pie charts, inevitable leading to a fairer rewarding of inventors.   
Most contradictory to what is now seen as trolls, being the evil abusers of our patent systems, these companies actually act in favour of the very philosophy of these patent systems. The fact that governments are considering amending patent law to prevent this evolution from happening would be directly against the ideas behind the patent system and might in the end even threathen the progress of technology. On the contrary, governments should encourage trade in patents, for the benefit of more and better rewarded innovation, development and progress.   
Consequently, patent traders are the much welcomed and needed pioneers in breaking the barriers for a more fair distribution of invention reward and definitively deserve more respect than the troll pejoratives.

1: Ocean Tomo: http://www.oceantomo.com/media/newsreleases/Intangible-Asset-Market-Value-Study
2: Acacia Research Corporation: http://www.acaciaresearchgroup.com/2011ACTGIRPRESENTATION.pdf
3: James F. McDonough III, 'The Myth of the Patent Troll: an Alternative View of the Function of Patent Dealers in an Idea Economy', Emory Law Journal, 56 (2007), p.189-228.