There are three quantitative methods and one qualitative method used to determine patent value. The choice of method is based on the specific circumstances and details of the patent to be valued and the reason(s) for determining a value. The reasons usually involve sale, licensing, or litigation involving the patent. However, this article is not about the reasons, it is about how to figure out what a patent is worth. Carson Patents recommends hiring a patent attorney when valuing a patent.
How to Determine the Value of a Patent
To determine the value of a patent, we start with the patent itself and then collect the details needed to place a monetary value on it. Figuring out patent value starts with its claims. The claims of a patent are what the protection is based upon. Patent claims will describe the apparatus or device that is protected and/or the method (steps) used to do something.
What Information is Needed to Determine Patent Value?
The place to start is the patent itself. Patents are all about their claims, so the claims will matter a lot in determining what a patent is worth. The the core value of a patent is in the language of the claims and how well the specification supports how to make and use the invention. The claims and language of a patent is so important that frequently when computing the value of a patent, a validity study or freedom to operate study is conducted to verify the patent.
The better the claims, the better the patent, and thus the more valuable the patent. However, a lot more goes into figuring out a monetary value or range of values for a patent. In addition to the actual language in the patent, valuing a patent will focus on the circumstances and details of the patent being evaluated. The following is a list of the important information needed to determine patent value. The list includes the following specific circumstances and details:
- the utility protected by the patent;
- the age of the patent;
- the country of protection;
- the relationship to other issued or pending patents;
- the industry the patent is in;
- the state of the art for the industry that the patent is in;
- the present state of manufacturing;
- the product(s) or parts of products protected by the patent;
- the complexity of developing and implementing the technology of the patent;
- the details of any litigation history;
- whether there are any licenses issued; and
- the business plan and company reports.
Additional information may be needed to calculate patent value depending on the method chosen to value the patent. Read more about patent valuation at the World Intellectual Property Office (WIPO). Read more about how to write a patent application.
What about Determining the Worth of a Patent Portfolio?
A patent portfolio is a collection of patents all owned by a single entity (person or business). To determine the value of a patent portfolio, each patent in the portfolio is valued and added to the total.
Patent Value Assessment Methods
Patent value can be assessed quantitatively or qualitatively. Quantitative patent valuation is based on financial or monetary characteristics and seeks to put a number (or range) on the price of the patent. There are three quantitative methods: 1) the cost method, 2) the income method, and 3) the market-based method. Qualitative patent valuation includes non-monetary based valuation of technical and legal analysis factors and seeks to put a rating or a ranking on the patent compared to other patents. There is only one qualitative method: the rating method.
Cost Method – Quantitative
There is a method of determining patent value called the “cost method” approach. This is where the value of a patent is determined by figuring out what it would cost to replace or reproduce the technology of the patent less depreciation. The cost method is comprised of either or both the Replacement Cost Method and the Reproduction Cost Method.
- Replacement Cost Method: Determining the value of a patent with the replacement cost method includes all of the costs necessary to develop an equivalent replacement for the utility or technology of the patent. The replacement cost method may include depreciation for time.
- Reproduction Cost Method: Determining the value of a patent with a reproduction cost method includes all of the costs necessary to develop the technology of the patent. This can be based on what costs were incurred or what it would cost to replicate an equivalent replacement for the utility or technology of the patent. The reproduction cost method may include depreciation for time.
The cost method seeks to put a price on a patent based on what it costs to create the utility and technology of the patent. The cost method of valuing a patent is most frequently used to verify the possibility of a sale or to determine a negotiation range. The weakness of the cost method is that it is not based on use of the patent like in the income or market methods.
Income Method – Quantitative
There is a method of determining patent value called the “income method” approach. This is where the value of a patent is determined by figuring out how much income it generates or how much income it is expected to generate.
The income method seeks to put a price on the patent based on the cash income that the patent is producing or what can be produced by the patent in the future. The value of a patent is determined by adding up the present value of the income generated each year over the remaining life of the patent term. In other words, the discounted cash flow. The discounted cash flow methods used for valuing a patent include the Direct Cash Flow Prognosis Method, the Relief-from-Royalty Method, the Incremental Cash Flow Method, and the Multi-Period Excess Earnings Method. Divesture and/or disposal costs may also be useful to include.
Market Method – Quantitative
There is a method of determining patent value called the “market method” approach. This is where the value of a patent is determined by figuring out what it should cost when compared to other recently sold patents. This is a comparison of the patent being valued to other patents. The age and area of industry will generally be very impactful when valuing a patent with this method. Generally, only similar patents recently sold are use in this method.
The market method seeks to put a price on the patent based on its relative value in the marketplace. The market method of valuing a patent is generally only valid if there is sufficient comparable sales available and the market is active. Analogies and comparisons to other arts is frequently necessary for patent valuations due to the uniqueness or advancement of the patent. The market approach methods include the Relief from Royalty Method, the Comparable Uncontrolled Transactions Method, and the Comparable Profit Margin Method.
Rating Method – Qualitative
There is a method of determining patent value called the “rating method” approach. This is where the value of a patent is determined by a non-monetary assessment method including technological and legal factors.
The rating method is used to determine patent value based on how important a patent is relative to other patents, typically without assigning a price onto it. Determinations are based on the size of the patent family, the validity of the patent, the number and quality of claims, and a combination of technology and legal factors.
- Technology Factors: The technology factors include the art or industry area of the patent, the state of the art in the industry, where the technology of the patent is relative to the state of the art, and where the state of the art is in its lifecycle.
- Legal Factors: The legal factors include the validity of the patent, the area of manufacture protected by the patent, the patent age, patent family relationships, litigation history, license history, business plan and company reports, and patent search volume.
The rating method seeks to put a rating or ranking on a patent based on the technological innovation of the patent compared to its state of the art. Generally ratings of patents are based a set of criteria and/or questions. There are many different patent rating and ranking systems. But, because each rating system is based on its own set of criteria and/or questions, you cannot really compare a rating or ranking from one system to another.