Economics and Patents - Patent Valuation

Patent Valuation

Patents are not intrinsically valuable. Rather, a patent claiming an invention with market demand would likely have economic value because the patent holder can exclude others from making, importing, using, and offering for sale, or selling that invention throughout the jurisdiction (the U.S.A. for example ) and sell the product at a monopoly price. Without alternative suppliers for the patented good or technology, the price the patentee is able to charge would likely be greater than the competitive price (the price in a competitive equilibrium). This portion of incremental profit would only be attributable to the patent and would therefore be the value of the patent.

Patent value, like value of other property, may fluctuate over time, as markets change. What was once a pioneering invention may be soon outsold by an unpatented (and non-infringing) competitor catering to fringe adopters with products having features even more desirable than the invention. Contrarily, a strong patent grip could stagnate a narrow market as innovation is no longer justified, eventually resulting in reduced demand (for outmoded and over-priced products), and thus reduced patent value, as the market moves away.

A particularly difficult question of value arises where inventors/owners use their patents to extract other advantages without actually marketing the invention (e.g., cross-licensing of related patents to avoid litigation, or suppressing a technology that could compete with the owner's other products). How can one determine the value of a patented product (and the underlying patent) that has not actually been produced, let alone sold in any quantity? Furthermore, many products incorporate numerous patented inventions (owned or licensed), and may carry exclusive trademarks, making it difficult to attribute a specific value to an individual patent. Would the same invention be as valuable if owned and marketed under a weak brand?

In 2005, the European Commission published a comprehensive study of the value of patents for patent owners as well as for the European economy. The title of the survey was “Study on Evaluation the Knowledge Economy – What are Patents Actually Worth?” Ref. The study was in part based on a survey of 20,000 patent owners who filed EPO patents between 1993 and 1997. The survey was performed in 2003. 9000 patent owners responded. The patent owners were asked how much effort was required to produce their inventions and how much monetary value their patents had been worth. The median effort to create the patentable invention was 1 person-year, with 10% of the patent owners requiring 2 or more person-years. The median value of the patents produced was €300,000, with 10% of patent owners reporting values of €10 million Euros or more.

In certain cases, patents may be valued using the techniques developed for financial options, as applied via a real options framework. Since the patent provides the firm with the right to develop the product, it will do so only if the present value of the expected cash flows from expected sales exceed the cost of development, and the patent rights thus correspond to a call option and may be valued correspondingly. See Option pricing approaches under Business valuation for further discussion.