What's a patent worth?

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Indiana Lawyer Focus

The question of “What is my patent worth?” is never an easy one to answer, according to intellectual property attorneys and others who specialize in helping patent holders determine what they should expect for a patent – whether that’s determining the value of filing a patent, what a patent is worth when doing a business transaction, or the patent’s value when it is the focus of a lawsuit.

Starting with the filing process, an attorney who always explains the different factors of patent valuations to clients is Vic Indiano, of Indiano & Vaughn in Indianapolis. He said he will let clients and potential clients know how expensive it will be just to file a patent and try to be as honest as possible.

Vic Indiano Indiano

“Every conversation I have with clients starts with a lie,” he said. “When a client says, ‘Vic, I want to file for a patent,’ they’re really saying, ‘Vic, I want to make money.’”

He compared the way inventors think of their inventions as the way parents care for their children, which makes it difficult for inventors to take a step back and realize the real value beyond what the inventor thinks his invention is worth.

While not all attorneys will tell clients exactly how expensive a patent can be, Indiano said he’ll give his clients an estimate of $10,000 to $20,000 just to file the patent. That doesn’t include the cost of a prototype, marketing and advertising, research and development, and any other business costs. So sometimes in the beginning, the client will decide the cost of the patent might be better spent on something else.

“A patent is a capital investment you make to make money,” he said.

In other words, if a patent makes money, that’s good; if it loses money, that’s bad, especially for his clients who are individuals or small businesses.

He also tells clients to consider other costs, the potential profit margin, how many people will want to buy the product, and competing products that already exist.

In one case, he had a client who was making a product that was for large-scale grocery-pallet producers. That client decided not to get a patent because he knew his market was only about a dozen potential customers, and if he could get enough of them to buy the product and therefore saturate the market, a patent wasn’t worth the expense.

Another client who invented a particular kind of cardboard box wanted a patent because he planned to sell the box to large box stores like Wal-Mart and K-Mart. He knew that if he showed the idea to those stores and if they liked it, they would find someone else to manufacture the same box or something remarkably similar.

That wouldn’t happen or be as likely to happen if he had a patent.

“Or at least he wouldn’t get beat up too bad by larger manufacturers,” Indiano said, adding in the end, the client got the patent and made some money.

A value of a patent also can’t be easily calculated if it’s part of a transaction.

“In a lot of cases, patents are the foundations for a deal,” said Mike Pellegrino, president of Pellegrino and Associates in Indianapolis. “They are often given little consideration in the deal itself, yet it can be remarkable how valuable a seemingly small thing can be.”

One patent that was physically small but extremely valuable was the 11-page, 4,400-word patent for Lipitor. He described it as the most profitable kind of patent ever created.

While not a lawyer, Pellegrino is an engineer whose company specializes in patent valuations. He recently organized a CLE for ICLEF regarding patent valuations.

He said he sometimes sees some “horrible deals” by the time they get to him, whether it’s an under- or over-valued patent, depending on which side he’s looking at.

While it’s not always too late to fix a deal gone bad, he said a few minutes on the phone with an expert can save a lot of time and money in the long run, especially for attorneys whose time is valuable to them and their clients.

Dustin Dubois Dubois

Dustin Dubois, a partner at Ice Miller, also considers the value of patents in transactions and for companies looking for investors.

“For example, fairly large successful software company A had a lot of product development dollars they were spending at the beginning. While IP was a focus, it wasn’t a critical focus at first. As time passed, the company wanted to take a more aggressive approach to its IP because 1, more dollars were available, and 2, it’s expected by the investment community.”

He said patents also have different values to the companies that have them.

“Some companies are looking to build their portfolios to exclude the competition from doing what they do,” he said. “Some have the belief they’ll never use their patent as something to sue someone on, but they will use it as a defense if they are ever sued.”

He added different industries approach this in different ways.

Another issue companies and investors look at is the likelihood they’ll be sued over a patent.

However, decisions of the Federal Circuit are also showing signs that the judges are taking a more scrutinizing look at evidence and testimony when determining royalties, according to Trevor Carter of Baker & Daniels.

Trevor Carter Carter

He discussed recent Federal Circuit decisions as part of the same CLE Pellegrino organized. He added that Congress is also working on patent reform legislation. Efforts by both branches could mean significant changes for how much patents are worth, but there is still no defined way to definitively calculate the value of a patent.

Among the cases that have had significant outcomes for IP valuations, Carter said, as the April 2009 case Cornell University v. Hewlett-Packard Co. In that case, the Federal Circuit reduced a $186 million verdict to $53 million. He also mentioned two other cases: a September 2009 case, Lucent Techs. Inc. v. Gateway Inc., where the Federal Circuit vacated a $357 million damages award; and a February 2010 case, where the Federal Circuit vacated a damages award in Inc. v. Lansa Inc.

Because there’s no cut and dry way to value a patent, those who specialize in the area strongly suggest attorneys without expertise in either IP or the type of technology their client is dealing with should hire an expert as soon as they realize they might need more help.

“You don’t know what you don’t know,” Pellegrino said.•


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