Guest blog by Manoj P Dandekar, Ph.D., ASA, FRICS
Dr. Manoj P. Dandekar is the Managing Director of Enterprise Economic Evaluation. He has over 30 years of experience in the identification, valuation and remaining life analysis of intangible assets and intellectual property as well as the appraisal of business enterprises and partial business interests. (Details at: www.3isgroup.com)
What is a Patent?
A patent is a set of exclusive rights granted by a sovereign state or intergovernmental organization to an inventor or assignee for a limited period of time in exchange for detailed public disclosure of an invention. A patent excludes others from making, utilizing, or promoting the merchandise in question over its life – generally between 14 and 20 years. As soon as a patent has been granted to an inventor, he or she has the right and authority to ban others from making or promoting the invention within the country in which the patent was granted.
It should be noted that a patent is not a right to a monopoly as innovations can be designed around a patent by producing another technology that yields similar results. A patent that becomes a commercially successful product may not necessarily be profitable to its owners.
Patents are granted only after a long registration process. Patent rights help enterprises keep unique competitiveness in the market, under protection of law, avoiding the copying and plagiarism of other competitors.
Certain things like artistic, dramatic, literary and musical works receive copyright protection instead of patents.
Typical types of patents:
• Utility patent – For an invention that has some type of usefulness or utility. The term is 20 years from date of patent application filing; in certain instances, a one-time extension of 5 years may be granted.
• Design patent – “New, original, or ornamental design for an article of manufacture.” Term is 15 years from date of the patent grant.
• Plant patent – “Distinct and new variety of plant.” Term is 20 years from date of patent application filing.
• Software patent – For original computer software. Nowadays, a software patent is being described as a collection of processes or as a machine that would earlier cause it to fall under a utility or design patent.
What is Patent Valuation?
Patent valuation quantifies in monetary terms the future commercial utility that can be extracted from the use of the patent. The patent may be used in one’s own products or licensed to a third party to generate income.
What is Patent Evaluation?
Patent evaluation is the qualitative analysis identifying the strengths and weaknesses of the patent. It creates a value guide through the rating and scoring of different factors related to the patent.
Patent evaluation is useful for internal patent management. It can be used for comparing, categorizing, and ranking patents within a portfolio or vis-à-vis competitors’ patents. A qualitative evaluation helps in assessing the risks and opportunities of patents.
Overall, patent evaluation, while not exactly critical, adds color in the valuation of a patent.
When is Patent Valuation Required?
Certain situations require patent valuation:
1. M&A operations, spin-offs, demergers, joint ventures
2. Bankruptcy and reorganization
3. Sale or license
4. Patent infringement, conflicts and disputes
5. Collateral for bank loans
6. Accounting, financial reporting
7. Regulatory compliance
8. Taxation (transfer pricing, ad valorem, gift, etc.)
Reasons for a patent valuation analysis include:
• To estimate a defined value for a specific ownership interest.
• To measure an appropriate royalty rate or license fee associated with the third-party licensing agreement.
• To calculate the arm’s-length price for the intercompany transfer of the patent (technology) between controlled foreign entities of a multinational taxpayer corporation.
• To quantify the expected remaining useful life of the ownership or operating (or associated rate of change in the value).
• To determine the amount of lost profits or other economic damages suffered due to infringement.
• To estimate a relative exchange ratio for two bundles of intellectual property.
• To opine on the fairness (or solvency, adequate consideration, excess benefits, etc.) of a patent (or patent portfolio) sale or license.