Providing valuable insights to corporate decision-makers and their legal counsel February 2009
Navigating uncertainty: a framework for understanding patent values
By James D. Woods, PhD, Grant Thornton LLP
of the following sources: (1) using the patented technology to increase sales
sales, or both; (2) licensing the patented
of its patents. Another defendant in the
suit, AT&T Corp., refused to settle and
pleaded its case during a two-week trial,
strategically restricting competitors from
option value derived from the right to use
against AT&T for willfully infringing
a technology in the future that today has
little or no value; or (4) using a variety
judge presiding over the case overturned
the jury’s verdict. What can we conclude
from these various outcomes and rulings?
royalties with the aid of the legal system.
They point to the one clear-cut fact about patent values: They are fraught
Navigating uncertainty: a framework for understanding patent values (continued)
Sources of Patent Value
disposable razors is highly competitive.
have similar performance characteristics
and sell at low price points. However, Gillette’s MACH 3® razors contain patented technology that improves their performance and allows Gillette to charge a premium price for its
Strategic
product; hence, this patent has a high PCR. Alternatively, some products contain patented technology which may be important but which does not add signifi cantly to the profi ts from
Practicable alternatives The horizontal dimension, PA, describes the number of possible methods — many to few — of accomplishing the
functionality provided by the patented technology. The PA scale measures the uniqueness of the technology described in the patent. Some patents describe a feature that can be accomplished only through a small number of methods,
in which case the patent falls into the “few” side of the scale. Alternatively,
Profi t contribution ratio
patents fall on the left or “many” side
of a patent signifi cantly differentiates
axis; and practicable alternatives (PA), the horizontal axis. 2 Focus on Forensics - February 2009
Navigating uncertainty: a framework for understanding patent values (continued)
Use of the patented technology
signifi cantly affecting their competitive
(upper right quadrant)
position. Similarly, because these patents
add relatively little profi t to a product,
large percentage of a product’s profi t
which implies that licensing is the most
Often, this source of patent value is the
simplest to identify and value. If a patent
has been widely licensed for a signifi cant
License patent rights (lower right quadrant)
quadrant can be diffi cult because their
the invention but contribute a relatively
important feature of an automobile tire.
with a low PCR and few PA, fall into the
often characterized as being only a small
automobiles contain hundreds of features
existence of white walls, tire profi le,
features contribute only a small fraction
particular type of turn signal indicator or
tinted glass would fall in this quadrant.
statistical methods to compare the profi ts
patents even if they manufacture products generated by tires which contain the
generated by similar tires which do not contain the patented tread design. 3 Focus on Forensics - February 2009
Navigating uncertainty: a framework for understanding patent values (continued)
the strategic preservation of rights to develop technologies in the future. The patent may not provide any tactical value or generate any licensing revenue today, but it may still have value because the patent owner anticipates that a market for the patented technology will develop. These patents are extremely hard to value because the cash fl ows associated with these future opportunities are arguably the most diffi cult source of value to quantify. Other sources (lower left quadrant) Finally, patents that provide only a small portion of the product’s profi t margin and are only one of many ways Strategic restriction competitors (upper left quadrant)
Patents that contribute a relatively large
percentage of the product’s profi ts but
their small contribution to profi ts and
would be interested in taking a license.
the patented technology, the value of the
patent often derives from more strategic
portfolio of patents or all of the patents
blocking access to certain technologies or patent owners by restricting entry
is evidence that large patent portfolios
may be cross-licensed in pools to reduce
value, it can still be highly valued as a
by the patents. The cash fl ows could be
signal of future corporate earning power.
substantial, but they are embedded in the
profi ts from the sale of products covered
early patents increase the profi t margins
by the cross-licenses. Disentangling these
profi ts is complicated by the fact that
often no single patent can be identifi ed
4 Focus on Forensics - February 2009
Navigating uncertainty: a framework for understanding patent values (continued)
About Grant Thornton
Also, these patents may provide value Conclusion
Grant Thornton LLP is the U.S. member fi rm of
through the legal system if patent owners This simple framework does not
Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International
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Focus on Forensics is published periodically by Grant Thornton LLP. We hope that you will fi nd this newsletter
patent rights are cash fl ows related to
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For additional information regarding our services or issues discussed in this newsletter, please contact one of our Economic
uncertainties surrounding patent value. •
This article is an excerpt from the book From Assets to Profi ts: Competing for IP
Larry Redler National Partner-in-Charge
Value & Return, edited by Bruce Berman, November 2008, John Wiley & Sons, Inc.T 816.412.2426 E Lawrence.Redler@gt.com Douglas Anderson Principal, National Forensic Technology Services Practice Leader T 305.381.7540 E Douglas.Anderson@gt.com Neil Beaton Partner, National Valuation Services Practice Leader T 206.398.2487 E Neil.Beaton@gt.com William Olsen Principal, National Investigative Services Practice Leader T 703.847.7519 E William.Olsen@gt.com Bradley Preber Partner, National Litigation Consulting Services Practice Leader T 602.474.3440 E Brad.Preber@gt.com About the author Jim Schmid
James Woods, PhD, is a principal and the Economic Advisory Services practice leader for the Houston offi ce of Grant Thornton
Director, National Construction Advisory Services Practice Leader
LLP. Over the past 10 years, Woods has assisted clients with a broad range of issues involving the valuation of various types
T 248.233.6910
of intellectual property. He has worked on projects with clients involved in numerous industries, including computer hardware
E Jim.Schmid@gt.com
and software, Internet transfer technologies such as TCP/IP and Voice Over Internet Protocol (VoIP), microelectronics and cellular telephones. David Wedding
Partner, Southeast Region Advisory Services Practice Leader
Woods is an adjunct professor of fi nance for the University of Houston System, where he teaches business fi nance and fi nancial
T 704.632.6787
statement analysis to undergraduate and graduate students. He is co-author with Bruce Berman of “Patent Brands,” which
E Dave.Wedding@gt.com
appeared in From Ideas to Assets (John Wiley & Sons, Inc., 2002). Woods holds a PhD in fi nance from Texas A&M University, an MBA from the University of Missouri – St. Louis, and a BSBA from the University of Missouri – Columbia.
James Woods, PhD Principal, National Intellectual Property Services T 832.476.3658 E Jim.Woods@gt.com
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EUNHEE EMILY KO 1630 Chicago Ave Apt.707 Evanston, IL 60201 EunKo2013@u.northwestern.edu 814-321-5088 Web Site: eunheeko.com ~ QUANTITATIVE MARKETING PROFESSIONAL ~ Dedicated professional with a commitment to driving profitability through skillful quantitative modeling and in-depth analysis of market, competitor, industry and economic insights. Excellent background include
59-year-old woman presenting to the Emergency Department after a motor vehicle collision. She was a restrained driver in a Fiat which collided into a tree at a high rate of speed. Air bags were deployed. She was pinned in the vehicle and there was a prolonged extrication of an hour and 45 minutes due to entrapment of her right foot. She was noted to have an open left femur fracture and a fair amo
Providing valuable insights to corporate decision-makers and their legal counsel February 2009
Navigating uncertainty: a framework for understanding patent values (continued)
Use of the patented technology 
Navigating uncertainty: a framework for understanding patent values (continued)
the strategic preservation of rights to develop technologies in the future. The patent may not provide any tactical value or generate any licensing revenue today, but it may still have value because the patent owner anticipates that a market for the patented technology will develop. These patents are extremely hard to value because the cash fl ows associated with these future opportunities are arguably the most diffi cult source of value to quantify.
Navigating uncertainty: a framework for understanding patent values (continued)
About Grant Thornton