Amy Achter, when she was Kimberly-Clark’s director of corporate intellectual asset management, once said: “While intangible assets (including patents) comprise an increasingly high percentage of corporate value, only 30 percent (at best) of patents actually provide profitable returns.” Apparently, many agree with Achter, who has since left the maker of personal care items and now serves as senior director of partner development at health and wellness company Nature’s Bounty.
“I fully agree with Achter’s comments. The really valid intangible assets (especially including patents) should have been created for increasing a company’s competitive power, such as licensing for profitable returns, enforcement against unauthorized use or self-defense for any accusation,” says Ruey-Sen Tsai, a partner at Lee and Li in Taipei. “Besides, such intangible assets (especially including patents) should be valid enough not to be easily cancelled – many patents have been cancelled or cannot really be enforced against infringement due to defects.”
It is broadly accurate that only 25 to 30 percent of patents actually provide a profitable return, says Karen Taylor, general manager, Asia Pacific, for Anaqua in Hong Kong. “Patents have to be novel, so companies don’t always know what is going to happen with that when they file. It makes sense that they will file more patents than they ultimately use. The component of the portfolio that is profitable and useful is the strategic portfolio.”
“The broader portfolio, 75 percent, is not actively working for the company and perhaps has no strategic value. It may never be profitable, but it may also simply not be ready to come of age,” Taylor adds. “While it is not realistic to have 100 percent of patents provide profitable returns, the important thing is to know which ones are in your 25 to 30 percent and which ones in your broader portfolio could still be valuable, such as future tech that you have not yet found a commercial application for.”
According to our contacts, IP valuation is not very popular in the eastern hemisphere.
Many companies do not truly measure profitability by patent, Taylor says. “Without a single system that pulls together patent information from multiple sources (e.g. the financial system, the contract management system, etc), it is very difficult to manage a portfolio and tell which patents are profitable and which are not. However, some companies are paying closer attention to IP valuation. In particular, for companies with global operations, customers and competitors, valuation is important to them in deciding whether to acquire IP from other companies or whether to sell/license some of their own IP.”
In Asia, many companies are still quite conservative with regards to IP valuation, Taylor adds. “It is mainly measured by more ‘internal’ metrics, for example the amount of revenue generated through licensing or use for products. However, large, global companies, in technology or manufacturing for example, are turning to IP valuation to help craft their global filing strategies and to identify opportunities to sell or acquire IP. Large Japanese companies have recently sold sizable lots of patents to US companies. In other countries, South Korea and China for example, large companies are net buyers of foreign IP. Whether buying or selling, robust IP valuation is critical for these companies to stay globally competitive.”
The kinds of companies that do valuation are IP management consultation companies, and IP valuation is considered one of the most important management strategic issues, says Ruey-Sen Tsai, a partner at Lee and Li in Taipei. “While it is getting popular in Taiwan, there are still not that many companies doing it. One key issue is that there are no official laws or regulations governing the guidelines for IP valuation. Accordingly, the results of all IP valuation are just for reference or may be cited or accepted by certain institutions in specific cases.”
Similar to Taiwan, all kinds of IP valuation (e.g. trademarks, patents, copyright) are simply not popular in Sri Lanka, says J.M. Swaminathan, senior partner at Julius & Creasy in Colombo.
Nevertheless, the present Sri Lanka and International Accounting and Audit standards provide for the valuation of trademarks and other IPRs in the event of a merger or acquisition. “The acquiring company would have to recognize these rights and include them in the balance sheet,” Swaminathan says. “The standards require the values to be clearly and separately accounted for and cannot only be included under the general heading goodwill. The standards require that after valuing these rights the residual value may be classified as goodwill.”
Brand valuations have been done in respect of listed financial institutions to support and justify the proposed business valuations to the acquirer, Swaminathan adds. “Recently a valuation was done for a retail FMCG brand for the purpose of transferring the brand asset from a listed entity to another company within that conglomerate.”
To begin with, what is the checklist for a good valuation strategy?
“Well… IP derives its value from a wide range of significant parameters such as market share, entry barriers, legal protection, the IP’s profitability, industrial and economic factors, growth projections, remaining economic life, and new technologies. All of these factors may be listed as the checklist for a good valuation strategy,” says Tsai.
After taking care of the strategy, it is time to determine which method to use.
While there are a handful of approaches to valuation, the three in Figure 1 are globally accepted due to the significant insights each provides, says Manisha Singh, a partner at LexOrbis in New Delhi.
The cost method for IP valuation should be considered if the value of an IP asset is not greater than the cost to obtain or reproduce the asset, says Arpita Dutta, a legal consultant at Louis International Patent Office in Taipei. “While taking this strategy, the company must consider whether the IP holder has no opportunity to generate income in the near future due to obsolescence of such IP assets or any other valid reasons. This obsolescence could be in any form such as functional or technical problems.”
This cost method is not so appropriate for the IP valuation, however, it is perfectly applicable for accounting, such as bookkeeping, tax reporting purposes and even for litigation’s damage calculation, Dutta adds. “Basically, this method should apply if there is no reference of market revenue data for value calculation. Based on this principle, we can sometimes even calculate the IP valuation at an early stage of development of an IP to estimate a target price prior to negotiations for purchasing/ licensing.”
For the market approach, it should be considered if an existing similar IP asset is ruling in the market, and the price of the existing IP is already known to the public, Dutta says. “While using this method for value calculation both parties have to consider whether the subject IP is comparable, compatible and replaceable with the existing IP, and whether there is an active market with willing buyers for the subject IP.”
“The market method is more like market perceptions,” Dutta adds. “Therefore, this method should be used when the company possesses substantially tangible market information, not only the negotiating price of existing IP but also the detailed terms and conditions and modes of transaction, for more exact valuations.”
The income approach is probably the most used because it helps calculate the expected revenue in the near future. “In other words, we can say that it is a forecast of income received through the lifespan of an IP,” Dutta says. “The income method is applicable if the company has sufficient information and data related to the revenue/income attributed to the use of an IP. The timeframe also plays an important role, so the company must have a clear idea as to how long they may enjoy the revenue/income, and the lifespan of such an IP. Other notable factors to consider while using this method is the projection of the revenue growth scale, the risk analysis and risk adjustment.”
“In brief, we can say a company must understand how to measure the income coming from the asset,” Dutta adds. “Once the company is in possession of all necessary data (revenue & lifespan of the IP) and information (risks and demands of the IP), then the income approach would be a perfect choice.”
The most important duty in managing a company’s resources is to evaluate the company assets effectively, Dutta says. “Therefore, the value calculation must be considered in all aspects thoroughly. When an appropriate approach is applied based on accurate data then you can have better knowledge of your IP value before negotiation. Some companies may use two or more approaches simultaneously to have more accurate valuation since the IP can have multiple values without being recognized.”
Other methods derived from those three major methods include:
1) Excess operating profits: These are profits generated by a trademark proprietor and carried over and above the profits of similar businesses which lack the trademark, Swaminathan says. “This is a somewhat difficult method because similar businesses would have their own trademarks as well;”
2) Premium pricing: This is the value of the fact that consumers will pay more for the trademark proprietor’s branded product than for the unbranded or differently-branded products of the competitor;
3) Cost savings: How much does the trademark owner expect to save through owning the trademark;
4) Royalty savings: How much does the trademark owner expect to save by using his own trademark rather than paying royalties to a third party; and
5) Replacement cost: If the trademark owner were to lose the trademark how much would he have to pay for the mark with sufficient market power.
“Deciding on which approach to use often depends on the purpose for valuation, quantity and quality of relevant data available and even personal inclinations of the analyst executing the valuation,” Singh says. “As such, a one-size-fits-all approach is not applicable – one must carefully weigh the benefits and limitations of each on a case-by-case basis.”
In Taiwan, patents may be granted or protected once they are approved under the Patent Act. “Nonetheless, once the patent application is published by the Taiwan Intellectual Property Office, even if the patent has not been granted, the patent applicant may send a warning letter to the potential infringer who is using the patent. Once the potential infringement has not been ceased and the patent is granted later, the patentee may claim all of the damages for the infringement since the date of sending such a warning letter,” Tsai says. “Such an actual economic benefit should be listed under IP valuation.”
If you have been on a road trip, you will know that it is never a plain sailing – so is life and other things such as IP valuation.
Value is inherently subjective, and that is the biggest challenge to IP valuation, Taylor says. “Value depends on which aspect of the patent you are valuing. Is it protection of a differentiating feature in one of your products? Depending on the product, the financial impact of the patent could be in the millions if these differentiators are key sales drivers. Other types of value come from the defensive stance a patent gives your company. Does it provide enforcement protection against competitors? Or does the value stem from licensing revenue you are currently earning? Are there additional licensing opportunities that have not been fully explored?”
A patent’s value is always in flux depending on many factors. At the end of the day, a patent is worth what somebody else is willing to pay for it, and these multiple factors mean “valuation” in the context of “price” is difficult to nail down, Taylor adds. “Therefore, creating a process to evaluate across multiple factors including use in your own products, licensing revenue generated, utility against competitors, identifying potential infringers, and developing evidence of use is critical to successful and meaningful valuation.”
While IP valuation has evolved over the years, it continues to rely heavily on data available to the analyst. “Analysts may be limited by incomplete information available with IP owners, rapidly evolving technology domains and even changing consumer appetite among other factors,” Singh says. “Even in today’s globallyconnected innovation ecosystem and the deluge of data available to us, its quantity and quality can be unreliable. While, the quality and quantity of data continues to be the greater maker/ breaker of a valuation, various factors may derail the process.”
Singh adds that many types of IP are difficult to value. In terms of competition (or lack thereof), novel IP may suffer from a lack of comparable references, while disruptive technologies often cannot be predicted and their impact can derail entire industries. Profitability assumes the continued relevance and success of the IP – which can be blindsided by gross market changes. In terms of regional dynamics, countries like China and India can be a nightmare, with each region presenting a different set of challenges. And when it comes to consumer appetites, no commercializable IP can succeed without understanding the demand for it.
Last but not least, there are no official laws and regulations governing the guidelines for valuation, Tsai says. “Accordingly, each individual valuation may reach totally different results, even though all of the valuated factors might be the same.”
Co-innovation is premised on the idea of collaboration. It is a concept when two or more partners that purposively manage mutual knowledge flows across their organizational boundaries through joint invention and commercialization activities.
“Generally speaking, with collective intelligence, there would be convergence of ideas, collaborative arrangement and cocreation of experiences. In turn, new ventures may spark from the convergence of ideas and the co-creation of internal and external stakeholders to the firm,” says Amira Budiyano, a senior associate at Gateway Law Corporation in Singapore.
Similar to what has happened in the R&D situation, coinnovation is now permeating into marketing and commercial functions.
“The customer/user experience is different today and consumers are designing, planning for, and supervising the experience itself. This also suggests that where the consumer’s input would be useful and ownership of the expression of the idea would not be a controversial affair, it would be good for clients to consider working with stakeholders,” says Budiyano.
It is acknowledged that when co-innovation and value cocreation leads to joint product development, and where individual contributions to value co-creation become more difficult to determine, ownership of IP becomes quite challenging, Budiyano adds. “When customers are central to the value creation process, at the very least, companies should acknowledge their consumers and incentivize them for their contributions, especially for those ideas that represent real economic benefits for the companies. It would be good to also bear in mind that by rewarding the customers (through free trials, prizes or free samples for instance), the value coinnovation and co-creation processes are kept alive, and for future engagement to remain possible.”
While core-innovation is critical for driving organic growth of a business, no company can provide everything its customers need, Tsai says. “Co-innovation can then come into play as it usually aims to produce a successful joint solution. However, it requires close collaboration among the participants to make sure the customer needs are sufficiently addressed. Coinnovation may focus on integration of solutions from different parties and proof of concept of new applications built on top of existing solutions.”
In recent years, research and development of new technologies and products have become more advanced, complicated, large-scale and diversified, and market needs have become more uncertain and been changing rapidly, says Kei Iida, a partner at Nakamura & Partners in Tokyo. “Under such circumstances, many business enterprises in advanced countries, such as Europe and the US, have come to adopt inbound open innovation approach as strategy for frontrunner/ market-leading type R&D, and strategy for creating and obtaining inventions or other intellectual properties, in combination with traditional closed innovation approach.”
“The purpose of adopting inbound open innovation is to reduce time, costs and labour required for the R&D by establishing a mutually complementary relationship with any adequate enterprises, while managing risks associated therewith, and to enjoy and commercialize the results of the R&D definitely, quickly and continuously, in the following manners: outsourcing R&D, joint R&D, technology alliance, licensing-in, M&A, procurement of parts from external sources, investments in venture enterprises, etc,” says Iida.
Based on inbound open innovation approach, Procter & Gamble, for example, launched its “Connect + Develop” prpgram to achieve 50 percent of P&G’s innovations through alliance with external enterprises or organizations in the early 2000s, and successfully increased its net profit greatly, while maintaining R&D costs.
In addition, many business enterprises in advanced countries have come to adopt outbound open innovation approach as strategy for front-runner type of business, and strategy for utilizing their own inventions or other intellectual properties.
“The purpose of adopting outbound open innovation is, through alliance and collaboration with any adequate enterprises or organizations, to develop and expand the market of their own technologies and/or products definitely, quickly and continuously, and also to gain a competitive advantage over any other competing or alternative technologies, or any competing enterprises, in the following manners: release of patents for free, opening of patents by means of international standardization or licensing out under the FRAND terms, business alliance, spinoffs, carve-outs, etc,” says Iida.
For example, in the case of the Blu-ray Disc, the specification was standardized to the minimum extent necessary for its international diffusion, and in order to expand the market thereof, a forum representing not only Blu-ray Disc makers but also content holders was established. The forum forms a patent pool necessary to implement standardization of relevant patent based on the forum standard, and grants a license to the forum member(s) at a low rate and on a non-discriminatory basis. Further, the forum owns trademark rights with respect to the “Blu-ray Disc” logo, thereby eliminating counterfeit products.
In many cases, inbound open innovation can be adopted in combination with outbound open innovation, Iida says. “Tesla Motors, for example, developed and commercialized highperformance and high-price electric vehicles (EV) with its outstanding product planning capabilities by sourcing key parts, such as rechargeable batteries, externally through market transactions, and entered into the EV industry, and in addition, Tesla grants free licenses on its EV-related patents to other enterprises. By these approaches, the company is growing rapidly.”
IP Owners = Value Knowers
In order to offer more effective valuations, it is inevitable to employ and rely heavily on efficient cross communication between legal associates and technical professionals.
“In traditional law firms, it is not uncommon that an eligible lawyer who received proper education in a certain technical field is hard to find. As such, outsourcing work is inevitable which adversely increases billing hours and thus the total costs for valuations,” says Fu Chu Chen, a patent attorney at Louis International Patent Office. “In this regard, if an IP service provider or a law firm has the advantage of offering valuations from its internal professionals with both legal and technical expertise, it would significantly reduce misunderstanding and thus minimize repetitive rectification actions in the valuation process.”
With external aid or not, only the internal IP teams or the companies themselves can assign true values to their IPRs.
Placing “value” on patents should be done by an internal team and should be a major part of any IP management group’s activity. A patent is only valuable if:
1) It protects a feature of a product or one on your roadmap,
2) It can be used defensively, or
3) It can be directly monetized via licensing, cross licensing, or sales.
Patents meeting one or more of these criteria are considered strategic, Taylor says. “Working with IP service providers or law firms can provide additional support or insight in the process, but ultimately, only you, your IP management team and your business stakeholders can truly assign value to your portfolio. In particular, identifying and retaining those patents which might not have immediate application, but could become immensely valuable in future depends on your specific industry and technical insight.”
In one example, a large telecom player had a set of four patents covering a certain aspect of mobile phone technology. The patents were filed in 2001, and nobody used the technology until late 2012. Today, the features enabled by these patents are in virtually every modern smart phone and a company would be hard pressed to make a sale without these features. It took 11 years for the products in the market to catch up to the invention, Taylor says. “The lesson from the story is that when you file, you don’t know where technology may head, so you don’t know the precise value of the patents today. Markets change and the patents that support those changes go up and down in value as the markets evolve.”
“However, once you are looking to sell a patent, the people who are best able to help you value are experts who practice patent brokering and sales for a living – this may be a group within a law firm, or a consulting firm specializing in patent sales,” Taylor adds. “Nothing influences the price of a patent more than the spot market, and the biggest buyers of patents tend to be either young companies whose growth outstrips their ability to create organic patents to support their revenue or established companies looking to get into new markets or bolster existing ones. The demand curve shifts all the time and personal relationships have to be maintained with key buyers.”
Tips to Survive
Without doing any valuation, companies could face significant financial losses and, unfortunately, the undo function is not available in real life. Therefore, companies must have vision and be fully prepared before and during the course of valuation in order to avoid the typical pitfalls.
“There is a very high risk that without adequate systems and analytics in place, portfolio managers and IP management teams can easily miss hugely valuable patents. Especially patents which are not currently profitable, but could have significant future value, can slip into the ‘sell or abandon’ bucket,” says Taylor.
“We have seen a few lucky catches in our time, where leverage of technology to thoroughly review the ‘sell/abandon’ list identified a few jewels that were on the chopping block,” Taylor says. “One in particular turned out to be the fundamental patent in a major technology with the potential to drive millions of dollars in licensing revenue for the company. To this day, the patent is still in force, and the patent owner never sold it.”
“I think the lesson learned from this experience is that without robust systems in place to flag these types of patents in their strategic bucket, patent owners risk giving away their ‘crown jewels,’” adds Taylor.