Focusonforensics_february2009 (final).indd

Providing valuable insights to corporate decision-makers and their legal counsel February 2009
Navigating uncertainty: a framework for understanding patent values By James D. Woods, PhD, Grant Thornton LLP
of the following sources: (1) using the patented technology to increase sales sales, or both; (2) licensing the patented of its patents. Another defendant in the suit, AT&T Corp., refused to settle and pleaded its case during a two-week trial, strategically restricting competitors from option value derived from the right to use against AT&T for willfully infringing a technology in the future that today has little or no value; or (4) using a variety judge presiding over the case overturned the jury’s verdict. What can we conclude from these various outcomes and rulings? royalties with the aid of the legal system.
They point to the one clear-cut fact about patent values: They are fraught Navigating uncertainty: a framework for understanding patent values (continued) Sources of Patent Value
disposable razors is highly competitive. have similar performance characteristics and sell at low price points. However, Gillette’s MACH 3® razors contain patented technology that improves their performance and allows Gillette to charge a premium price for its Strategic
product; hence, this patent has a high PCR. Alternatively, some products contain patented technology which may be important but which does not add signifi cantly to the profi ts from Practicable alternatives
The horizontal dimension, PA, describes
the number of possible methods —
many to few — of accomplishing the
functionality provided by the patented technology. The PA scale measures the uniqueness of the technology described in the patent. Some patents describe a feature that can be accomplished only through a small number of methods, in which case the patent falls into the “few” side of the scale. Alternatively, Profi t contribution ratio
patents fall on the left or “many” side of a patent signifi cantly differentiates axis; and practicable alternatives (PA), the horizontal axis.
2 Focus on Forensics - February 2009
Navigating uncertainty: a framework for understanding patent values (continued) Use of the patented technology
signifi cantly affecting their competitive (upper right quadrant)
position. Similarly, because these patents add relatively little profi t to a product, large percentage of a product’s profi t which implies that licensing is the most Often, this source of patent value is the simplest to identify and value. If a patent has been widely licensed for a signifi cant License patent rights
(lower right quadrant)
quadrant can be diffi cult because their the invention but contribute a relatively important feature of an automobile tire. with a low PCR and few PA, fall into the often characterized as being only a small automobiles contain hundreds of features existence of white walls, tire profi le, features contribute only a small fraction particular type of turn signal indicator or tinted glass would fall in this quadrant. statistical methods to compare the profi ts patents even if they manufacture products generated by tires which contain the generated by similar tires which do not contain the patented tread design.
3 Focus on Forensics - February 2009
Navigating uncertainty: a framework for understanding patent values (continued) the strategic preservation of rights to develop technologies in the future. The patent may not provide any tactical value or generate any licensing revenue today, but it may still have value because the patent owner anticipates that a market for the patented technology will develop. These patents are extremely hard to value because the cash fl ows associated with these future opportunities are arguably the most diffi cult source of value to quantify.
Other sources (lower left quadrant)
Finally, patents that provide only a
small portion of the product’s profi t
margin and are only one of many ways
Strategic restriction competitors
(upper left quadrant)
Patents that contribute a relatively large percentage of the product’s profi ts but their small contribution to profi ts and would be interested in taking a license. the patented technology, the value of the patent often derives from more strategic portfolio of patents or all of the patents blocking access to certain technologies or patent owners by restricting entry is evidence that large patent portfolios may be cross-licensed in pools to reduce value, it can still be highly valued as a by the patents. The cash fl ows could be signal of future corporate earning power. substantial, but they are embedded in the profi ts from the sale of products covered early patents increase the profi t margins by the cross-licenses. Disentangling these profi ts is complicated by the fact that often no single patent can be identifi ed 4 Focus on Forensics - February 2009
Navigating uncertainty: a framework for understanding patent values (continued) About Grant Thornton
Also, these patents may provide value Conclusion
Grant Thornton LLP is the U.S. member fi rm of through the legal system if patent owners This simple framework does not Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member fi rms are not a worldwide partnership, as each member fi rm is a separate and distinct legal entity.
About this newsletter
Grant Thornton LLP’s multidisciplinary Economic Advisory
Services group effectively and effi ciently solves complex business, regulatory and litigation-related issues. Our customized solutions protect client interests and build Focus on Forensics is published periodically by
Grant Thornton LLP. We hope that you will fi nd this newsletter
patent rights are cash fl ows related to informative and that you look to Grant Thornton’s professionals as reliable and valuable resources for your business solutions. For additional information regarding our services or issues discussed in this newsletter, please contact one of our Economic uncertainties surrounding patent value. • This article is an excerpt from the book From Assets to Profi ts: Competing for IP Larry Redler
National Partner-in-Charge
Value & Return, edited by Bruce Berman, November 2008, John Wiley & Sons, Inc. T 816.412.2426
E [email protected]
Douglas Anderson
Principal, National Forensic Technology Services Practice Leader
T 305.381.7540
E [email protected]
Neil Beaton
Partner, National Valuation Services Practice Leader
T 206.398.2487
E [email protected]
William Olsen
Principal, National Investigative Services Practice Leader
T 703.847.7519
E [email protected]
Bradley Preber
Partner, National Litigation Consulting Services Practice Leader
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E [email protected]
About the author
Jim Schmid
James Woods, PhD, is a principal and the Economic Advisory Services practice leader for the Houston offi ce of Grant Thornton Director, National Construction Advisory Services Practice Leader LLP. Over the past 10 years, Woods has assisted clients with a broad range of issues involving the valuation of various types T 248.233.6910
of intellectual property. He has worked on projects with clients involved in numerous industries, including computer hardware E [email protected]
and software, Internet transfer technologies such as TCP/IP and Voice Over Internet Protocol (VoIP), microelectronics and cellular telephones.
David Wedding
Partner, Southeast Region Advisory Services Practice Leader Woods is an adjunct professor of fi nance for the University of Houston System, where he teaches business fi nance and fi nancial T 704.632.6787
statement analysis to undergraduate and graduate students. He is co-author with Bruce Berman of “Patent Brands,” which E [email protected]
appeared in From Ideas to Assets (John Wiley & Sons, Inc., 2002). Woods holds a PhD in fi nance from Texas A&M University, an MBA from the University of Missouri – St. Louis, and a BSBA from the University of Missouri – Columbia. James Woods, PhD
Principal, National Intellectual Property Services
T 832.476.3658
E [email protected]
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5 Focus on Forensics - February 2009



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