How Much is My Patent Worth: Everything You Need to Know
If you need help with a patent claim, you can post your legal need on UpCounsel’s marketplace. 7 min read
How Much is my Patent Worth?
Many different factors go into determining patent worth, such as the nature of the underlying invention, the length of time the patent lasts, the way it is used in product positioning and business financing, and the ability to open up new revenue streams from licensing and royalties. Taken together, these factors will drive the value of a patent as an asset on your business balance sheet and help you assign a price to your patent should you ever decide to sell.
What Are Intangible Assets?
“Intangible assets” is a term used to refer collectively to the intellectual property of a business. Intellectual property (IP) includes a company’s brands, its proprietary business information (“trade secrets”), its patents, trademarks, copyrights, research and development strategies, licensing agreements, and so on. Other important intangible assets include a company’s approach to talent management (human capital) as well as databases, customer lists, product specifications, and manufacturing guidelines.
All intangible assets have value. Quantifying that value is challenging but is important to realizing a fair price when a business is bought or sold. Almost all small businesses tend to undervalue their intangible assets.
What We Learn About Intangible Asset Value from the Big Companies
Small businesses can learn a lot about patent worth by looking at their larger counterparts and back issues of the business news. For example, in 2013, Kodak sold its 1,100 digital photography related patents for over $525 million to buyers that included Apple, Microsoft, and Google. Around the same time, Google bought Motorola Mobility and its 17,000 patents for a whopping $12.5 billion, mostly to protect rights to the Android operating system.
One feature virtually all successful large businesses have in common is their focus on innovation and their high awareness of the role their intangible assets play in the financial future of the business. In today’s increasingly digital economy, experts estimate that roughly 70-80% of the average company’s value is in the form of intangible assets such as patents, copyrights, trademarks and proprietary business “know-how.” Successful companies today know the ways in which patents and trademarks can give them a competitive edge and help them enhance their market position. They manage their IP portfolios carefully, control access to their inventions as much as possible and when others are permitted to use their inventions, they drive revenue from it through licenses, royalties, and business partnerships.
Determining What a Patent Is Worth
In an ideal world, the patent process serves as “currency” for inventors, encouraging invention and the buying and selling of ideas. The challenge is that the buyers and sellers of ideas routinely disagree on their value, given the abstract nature of the asset and the inherent lack of comparable transactions. Figuring out how much exactly a patent is worth boils down to a handful of steps that are simple on their face and challenging to execute:
- Determine the quality of the invention on which the patent is based—this is sometimes also thought of as determining the “importance” of the patent;
- Evaluate whether the patent itself is well constructed;
- Look at the market environment and marketing value of the patent;
- Assess the patent term;
- Assess the “prior art” scenario;
- Evaluate the ways in which money can be extracted from the patent.
Importance of the Patent
To determine the importance of a patent, you need to look at what the patent protects. Is the invention ground breaking, like the internal combustion engine, or is it an incremental improvement, like a new kind of squeaker for dog toys? For obvious reasons, breakthrough patents which protect brand-new technology or provide solutions to long standing problems are the most valuable. A breakthrough patent often gives the inventor a complete monopoly over the new industry his or her invention creates, for the duration of the patent, and can be worth billions of dollars.
If a patent is not for a breakthrough invention, it is regarded as an “incremental” patent, which starts from an existing patented product or process and enhances, improves or extends it in some way.
The degree to which a patent is incremental, and the importance of the underlying patented product or process, will determine the patent’s value.
One good way to look at this is to ask, “What would a competitor pay to be allowed to use this product or process?” or “What am I willing to spend to keep this out of the hands of my competitors?”
How Well Is the Patent Constructed?
This is a matter of legal craftsmanship. Constructing a patent so that it meets the requirements of the patent examiners at the US Patent and Trademark Office (US PTO) and so that it protects the invention as completely as possible is complex and requires considerable legal skill and expertise, which is why most business managers leave this to the attorneys. A poorly drafted patent is worth less because it may not fully protect the underlying invention and may be at high risk of patent infringement or abuse by patent trolls.
An assessment of the market into which the patented item is sold, and the market positioning of the product or process is critical to determining the value of the patent. How large is the market in which the patented product or process plays? How saturated is the market? What sort of sales can be expected, and for how long? Just as important, you should determine how well has the patented product or process been marketed and how well positioned is it in the marketplace? Aggressively promoting the patented idea, and your ownership of it, can be just as important to the value of the patent as the actual invention. Patent marketing companies exist to assist inventors with this and using one can make a critical difference in patent value.
Patents have a maximum life of 20 years. Obviously, a patent near the beginning of its life cycle, offering more years of protection, will have more value than a patent which is close to its expiration date. However, it is not a simple matter of tallying up the years left before the patent expires. Other factors will accelerate the devaluation of a patent before its 20th anniversary. For example, in some industries, competitors will have figured out acceptable alternatives and brought them to market long before a patent reaches 20 years old. In rapidly evolving industries, a technology may even become obsolete before its patent expires. Factoring term into the value of a patent is a matter of looking at how long the patent is valid for and then determining whether the patented product or process will remain marketable for that entire time and if not, for how long.
A good indicator of patent value is how often the patent is cited in other patents. Patent applicants have to reference other patents, called “prior art” in their applications and describe how their invention is similar to or different from those earlier ones. Frequent citations of your patent as prior art are considered to be a good indicator that the patent has value. On the other hand, a proliferation of patents citing each other as prior art may indicate a saturated market with lots of customer options driving the value down.
The number of revenue streams from licensing and royalties that a patent has is a critical factor in determining the patent’s value. Experts estimate that roughly 70-80% of the average company’s value is in the form of intangible assets. Smart companies not only protect those assets through patents, but they also drive revenue from those seeking to use the patented item, turning competitors into partners and revenue sources, and reducing the chance that they will develop their own alternative invention. In some cases, licensing revenue from granting access to your patented product or process can outpace revenues from direct sales.
Factoring Legislation and Court Activity Into Patent Value
Another important factor in determining the value of a patent is whether legislative and court activity in the patent law area could affect the validity of the patent and shorten its life.
Under the America Invents Act, there are processes through which a party can request that US PTO review the validity of another party’s patent. These “inter-partes review” (IPR) and “covered business method review” (CBR) processes have become common since they are faster and cheaper way than a lawsuit to challenge a patent and they have a high “kill rate” on patent claims with less legal fees. Considering whether a patent could be vulnerable to an IBR/CBR process is relevant to its value. Some experts refer to these challenges as “death squads” for patent claimants, but their frequency does appear to have fallen slightly in recent years.
In addition, patent valuators need to keep an eye on court cases. For example, the landmark Alice Corp. vs. CLS Bank case from 2014 called thousands of patents in the software industry into question with its holding that patents cannot claim abstract concepts without adding anything inventive. Also, in recent years there has been an on-again, off again debate about the possibility of patent reform, and what that could mean for the value of existing patents. Watching federal court litigation in the patent area is important for anyone considering filing for a patent or buying or selling one.
Offering Your Patent: How Much Can You Expect?
If you have a patent, chances are you spent a lot of time and money obtaining it. While there is no “average price” for obtaining a patent, industry experts say a fairly common spending range for patent applicants is between $500 and $10,000—and that’s just for getting the patent, setting aside what you spent on achieving the invention in the first place. Clearly, with this much invested and with the value of your patent in the marketplace, you want to assign the right price to it when you offer it for sale and realize as much as possible from the transaction.
The specific price will depend on all of the factors discussed above in this article, as well as market conditions at the time of sale and the competitive landscape. However, one thing is certain. Buying and selling patents is a complex, high stakes process where expertise can make all the difference to the outcome.
If you need help with a patent claim, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe and Twilio.