The above three general methods for valuing patents are aimed at putting a financial or dollar value on each. Once doing so the relative value of those patents can then be determined by simple rank ordering of these financial values. Given the complexity of the above analyses it is oftentimes more useful for an organization to determine the relative value of the patents in their own portfolio in their competitors’ portfolios. These alternative valuation methods have as their strength the ease and reproducibility of the measurement. Their weakness is their only moderate correlation to financial value. For strategy purposes however the nonfinancial rankings of patent values oftentimes provides more insight and predictive capability.
In the “Sample Rankings of Analysis Factors” figure, five major elements of patent value are offered. Under these headings, anchored scale ratings of 1 to 10 are also shown. Once the anchored scale value for each of the 5 major factors is determined an overall score can be obtained by adding or, if a company is more sophisticated, a weighted average or sum can be utilized. When comparing patents on relative performance versus relative cost measures, the anchored scale scores are even better visualized by graphing them on a five-point radar or spider diagram.
The “Frequently Used Relative Measures of Patent Value” figure shows a number of other measures derived from patent citations that reflects the strategic and tactical value of individual patents. Depending upon the type of R&D or IP Game of the Corporation and its competitors, each of these does a relatively better or worse job of predicting a patent’s competitive value. It should be noted that overall these metrics have a relatively weak correlation to a patents financial value. However in a particular industry and for a particular company versus its key competitors, these measures often predict accurately the relative value of each patent in a company’s portfolio.
Another method to determined relative patent value is to take any individual patent metric (be it the number of citations, number of inventors, or originality), and when rank ordering these values for patents in a portfolio, apply a statistical test to the results. For those patents that have an attribute whose value is over 3 times the standard deviation plus the average of the group, those “3 Sigma” patents are statistically “special” and worth many multiples of the financial value of the patents that do not meet this criteria.
One patent-based metric does have a reasonably good correlation to the financial value of a patent. This metric is the number of patent citations. This metric likewise is been used as a proxy for patent quality. When exploring the relationship between citations with the probability that a patent will be litigated, it is found that the ratio of forward citations to claims for a patent is positively correlated (in either direction, as a challenger as an infringement suit). It should be noted that the studies in which the correlation coefficients are very high, the technology involved tends to be those associated with the Safety Journey R&D and IP game type. For other R&D and IP game types, i.e. Mass Customization game type, using the number of citations as a quality or value metric is weak. When however a patent has over the Three Sigma limit for citations, it is almost always a very high value asset.
The above model takes into account the major factors affecting the value of intellectual property. A more complete list of elements to consider is shown in the “Attributes That Influence the Value, Damages, or Transfer Price of Intellectual Assets” figure. To the extent possible, analysts qualitatively and quantitatively consider each of these factors. Note that not all of these factors apply to every intangible or intellectual property asset, and that each attribute does not have an equal influence on the asset’s value. However, good analysts typically consider each of these factors, in either a quantitative or qualitative form.
A final general consideration for valuation of patents is the variation in patent value that arises from the number of patents in a portfolio. This variation is a general rule, not specific, and based on licensing transaction data. As shown in the “Patent Value vs. Portfolio Size” figure, the larger the portfolio offered for licensing, the lower the patent value per patent. This is typically explained by saying that the licensee is interested in a “sustained competitive advantage” from a licensing transaction, and is paying for this business outcome, no matter how many patents it takes to achieve it. Thus the business outcome is what creates the valuation relationship. Also larger portfolios also loosely imply that more tangential art is present in the field and this also reduces the business value of the art licensed.