PATENT VALUATION: FROM FIRST PRINCIPLES TO PRAGAMTIC CONSIDERATIONS

1. PATENT VALUATION: FROM FIRST
PRINCIPLES TO PRAGAMTIC
CONSIDERATIONS
Jay P. Kesan, Ph.D., J.D.
Professor, University of Illinois at Urbana-Champaign
& U.S. Patent Attorney

2. Patent Valuation is Contextual – To Whom?
• Manufacturer and What role in that particular market?
• Licensor/Licensee
• Venture Capitalist/Private Investor
• Trustee or Entity in Bankruptcy
• Plaintiff or Defendant in Patent Litigation

3. Patent Valuation is Contextual – What
Purpose?
• The business model for extracting value from the
patent/innovation
• Right to exclude competition
• Licensing value
• Marketing/signaling value
• Role in the value chain
• Product value chain
• Role in the life cycle of the product or generation—economic
life of the patent

4. Patent Valuation is Contextual – Field of
Technology
• Computers
• Hardware (semiconductors, integrated circuits, computing devices,
and systems)
• Software (e-commerce/web, operating systems, applications,
SaaS, machine learning/artificial intelligence)
• Communications/Wireless (role of Standard Essential
Patents, SEPs)
• Mechanical/Manufacturing

5. Patent Valuation is Contextual – Field of
Technology (cont’d)
• Medical (healthcare, devices, equipment, services)
• Pharmaceuticals
• Biotechnology/Life Science
• Human
• Animal
• Plant

6. Factors Which Affect Patent Value
• Intrinsic Quality
• Significance of invention (apportionment and relation to other
technologies)
• Stage of development
• Level of risk (technical, market, and legal risks)
• Market
• Market size
• Perceived market acceptance
• Likely growth rate of market
• Competition
• Strengths and weaknesses of competition
• Barriers to entry

7. Factors Which Affect Patent Value (cont’d)
• Finances
• Costs associated with additional R&D
• Specialized resources required
• Expected net cash flow
• Legal Issues
• Strength of protection – scope of protection; validity concerns;
ease of design arounds; enforceability issues; prior litigation
• Part of a technology standard, essential or optional
• Regulatory approval needed; certification needed
• Other contractual commitments (licenses, sub-license rights, grant
back rights)

8. Broader Sources of Patent Value
• Rights to practice technology (conducted freedom to operate study,
obtained relevant licenses)
• Commercial data – drawings, operating experience, technical
assistance
• Improvements to patented technology
• Rights to sub-license
• Previous investments in technology – R&D, other IP
• Testing, certification, etc…
• Regulatory approval

9. Approaches to Patent Valuation
• Use of Industry Standards
• Existing licenses (how comparable are they?)
• Established industry royalties
• Discounted Cash Flow Analysis
• Requires understanding of the economic impact of the technology
• Identifies important variables to the valuation
• Facilitates the negotiation
• Allows the structure and terms of agreement to reflect both
parties’ assumption of risk

10. Pros and Cons of Industry Standards
• Advantages
• Provides general idea of market values and applicable methods
• Simple, easy to understand, has broad appeal
• Provides confidence that one is “in the ballpark,” “what is the
norm here?”
• Disadvantages
• Most available information tends to be dated
• No connection to the IP rights that have been actually granted
• “Basis” is unknown (x% of what?)

11. Pros and Cons of Industry Standards (cont’d)
• Disadvantages (cont’d)
• No connection to the business value of the opportunity
• No connection to the strength of the patent position (e.g.,
infringement, validity or enforceability)
• Data on up-front payments is generally not available
• Agreements often contain other provisions which affect value and
yet no transparency into those provisions

12. PATENT VALUATION: FROM FIRST
PRINCIPLES TO PRAGAMTIC
CONSIDERATIONS
Jay P. Kesan, Ph.D., J.D.
Professor, University of Illinois at Urbana-Champaign
& U.S. Patent Attorney