Presentation on theme: "AIPLA 1 Firm Logo American Intellectual Property Law Association IP Valuation John T. Johnson & Michael F. Autuoro Fish & Richardson P.C. IP Practice in."— Presentation transcript:
AIPLA 1 Firm Logo 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 Institute Phoenix, AZ January 28-29, 2014
AIPLA 2 Firm Logo 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
AIPLA 3 Firm Logo 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!
AIPLA 4 Firm Logo Increased Need? Greater need for IP Valuation today than in the past?
AIPLA 5 Firm Logo Increased US Patents/Litigation More Opportunities?
AIPLA 7 Firm Logo 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
AIPLA 8 Firm Logo 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?
AIPLA 9 Firm Logo 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
AIPLA 10 Firm Logo 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
AIPLA 11 Firm Logo 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
AIPLA 12 Firm Logo (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?
AIPLA 13 Firm Logo (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 )
AIPLA 14 Firm Logo (1) Reported Royalty Rates by Industry 2012 KPMG report: Profitability and royalty rates across industries: Some preliminary evidence
AIPLA 15 Firm Logo (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) Risk Patents Hit Rate Expected Suits Loss Rate Exposure in Loss Avg. Lit Expenses Total 5x80%=4x((30%x$10M)+$1M)=$16M
AIPLA 16 Firm Logo (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?
AIPLA 17 Firm Logo (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.
AIPLA 18 Firm Logo (2) Recent Market Transaction Data DateSellerBuyerTechnologyTypeDeal PriceNo of IP AssetsPer Patent/Asset 9/13NokiaMicrosoftMobile Phone 10-yr Cross- License 1.65B EuroNokia’s portfolio-- 12/12KodakRPX/IV Led Consortium Digital imaging Sale$527 Million~1,110 patents$479K (per patent) 4/12MicrosoftFacebookIM; ; Browsing Sale/ License $550 Million650 patents, plus a license to 275 patents $594K - $846K (per patent) 4/12AOLMicrosoftIM; ; Browsing Sale/ License $1.056 Billion ~800 patents$1.32M (per patent) 8/11Motorola Mobility GoogleMobile Phone Sale/ Acquisition $12.5 BillionAcquires Motorola Mobility and its ~17000 patents $735K per patent) 6/11NortelRockstar Consortium (Apple, EMC, Ericsson, Microsoft, RIM and Sony) Mobile Phone Sale$4.5 Billion~6,000 patent assets$750K (per asset) 11/10NovellCPTN Consortium Networking/ Software Sale$450 Million~882 patents$510K (per patent)
AIPLA 19 Firm Logo 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?
AIPLA 20 Firm Logo (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
AIPLA 21 Firm Logo (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
AIPLA 22 Firm Logo (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
AIPLA 23 Firm Logo 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
AIPLA 24 Firm Logo 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
AIPLA 25 Firm Logo 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
AIPLA 26 Firm Logo Valuation/Devaluation Events Judicial/Legislative EventsPossible 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?
AIPLA 27 Firm Logo THANK YOU! ANY QUESTIONS? John T. Johnson Michael F. Autuoro Fish & Richardson P.C. 601 Lexington Avenue – 52 Floor New York, NY 10022