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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, ranging from 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 & Analytics—e.g., Lex Machina,

DocketNavigator– Patent Analytics

• Online File Histories (Public Pair), Assignment Information, Fee Status, Patent Families

• Robust Patent Databases and Reporting (e.g., Thomson Innovation)

• 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 is appropriate

• 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 and

measurable data– Qualitative: focus on characteristics and

potential 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 the present day– Offensive analysis: What are projected future cash flows from

licensing or enforcement?

– Defensive analysis: What are the savings (royalty payments, litigation costs, design-around costs) due to owning 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 doesn’t 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

Hit Rate

Expected Suits

Loss Rate

Exposure in Loss

Avg. Lit Expenses

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/acquisition agreements) 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 Per Patent/Asset

9/13 Nokia Microsoft Mobile Phone

10-yr Cross-License

1.65B Euro Nokia’s portfolio --

12/12 Kodak RPX/IV Led Consortium

Digital imaging

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

4/12 Microsoft Facebook IM; Email; Browsing

Sale/License

$550 Million 650 patents, plus a license to 275 patents

$594K - $846K(per patent)

4/12 AOL Microsoft IM; Email; Browsing

Sale/License

$1.056 Billion

~800 patents $1.32M(per patent)

8/11 Motorola Mobility

Google MobilePhone

Sale/Acquisition

$12.5 Billion Acquires Motorola Mobility and its ~17000 patents

$735K per patent)

6/11 Nortel Rockstar Consortium (Apple, EMC, Ericsson, Microsoft, RIM and Sony)

Mobile Phone

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

11/10 Novell CPTN Consortium

Networking/Software

Sale $450 Million ~882 patents $510K (per patent)

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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 per patent

$510K per patent

$735K per patent

$750K per patent

$594K to$846K per

patent

$1.32M per patent

$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 the patent under valuation

– “Replacement cost” method: Based on costs that would be spent to obtain an equivalent patent asset with similar use or function

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(3) Cost-Based Method

• Sources of costs: – Direct expenditures, such as costs with materials, labor

and management, e.g., R&D, prosecution costs – Opportunity costs; costs due to delays in market

entrance; 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 to

exclude 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– Qualitative: focus on characteristics and

potential 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 the innovation, 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 History—clean? • Forward Citations

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Valuation/Devaluation Events

Judicial/Legislative Events Possible Effect

Obviousness—KSR -

Algorithm Rule—Aristocrat -

Divided Infringement—Akamai/Limelight (CAFC) +

Venue—TS Tech/Volkswagen -

Willful Infringement—Seagate -

Injunctive Relief—eBay -

Injunctive Relief for NPEs at ITC +

Entire Market Value Rule Damages—Lucent -

IPR/Prost-Grant Review -

Inequitable Conduct Heightened Requirements—Star Scientific/Therasense

+

Legislative Patent Reform +/-

Patentable Subject Matter—CLS Bank/Alice ?

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THANK YOU! ANY QUESTIONS?

John T. Johnsonjjohnson@fr.com

Michael F. Autuoroautuoro@fr.com

Fish & Richardson P.C.601 Lexington Avenue – 52 Floor

New York, NY 10022