Valuation methods, both relative and financial, create a continuum of values. When one plots the “Number of Patents Versus the Value of Each Patent” one gets a lognormal distribution as shown in the figure. As mentioned in previous chapters, for most unmanaged portfolios, 1% of the patents generates 90% of the value. 50% of the patents enable and protect the business. 30% of the patents are available for immediate non-conflicting out-licensing revenue opportunities, and 15% of the patents are best donated or abandoned. Using the 3 Sigma test for individual patent attributes is often the best way to very quickly identify the very valuable patents in a portfolio.
Internal value of patents is really determined by the business use of that asset. Depending upon where in the business and technology cycle the patent’s protected property resides, and the business unit’s ability to create revenue from the asset, are the key factors to determining internal value. To determine this internal value patents are placed on a “Use Grid” as shown in the figure. They are placed on grid rows based on which business line they are protecting. Growth businesses are those that are growing double digits. Core businesses typically are growing in single digits. Mature businesses are barely holding their own or declining. For the columns, patents are placed based on the state of the product or process they protect. They might be protecting products that are commercially now offered for sale. Alternatively the products they protect may be contained in written strategic plans but not yet commercial. Even further out, patents may cover potentially strategic directions that are only in the general manager’s eyes, but which have not yet been captured in written business plans. Lastly there is art which is outside the strategic direction of the business unit or corporation. The highest internal value art is in the upper left-hand quadrant. The highest external value art is in the upper right quadrant. The lowest value art is across the bottom of this grid.
When determining the relative value of patents that protect very specific business product lines the use of Value Maps are warranted. As shown in the “Value Map of Patent Portfolios” figure, patents are placed on a grid denoted in this figure by text inserts and small dots. The x-axis placement is determined by the relative cost to create and deliver the product protected by the patent claims. The y-axis placement is determined by the relative performance of the product protected by the patent claims as perceived by customers. When placing patents on this matrix they are done one after the other. Each time a new patent is placed on the map the positions of all other patents are altered to be above or below the new patent so that an equal number of patents exist left or right of the cost average line, as well as an equal number of patents being above or below the relative quality, service, and design line. Art in the upper left is of high value to the Corporation. Art in the lower right is low value and should be donated or abandoned. Art in the upper right and lower left is kept or licensed per a company’s brand image.
When comparing relative value of differing patent portfolios especially among competitors radar or spider diagrams are particularly useful. These visualize the relative portfolio strength based on the multiple individual criteria. There are four key areas to assess when conducting’s such assessments. They are summarized on a star diagram as shown in the “Comparison of Patent Portfolios” figure. In this figure there are 4 quadrants. The first in the upper right shows the patent strength based on the portfolio’s overall size and scope. Values related to the patent portfolios validity and competitive value are shown in the lower right of the figure. The opportunity to license a portfolio based on its size, depth, and breadth is shown in the attributes found in the lower left of the figure. Lastly, the sustainability of the portfolio as evidenced by the attributes is shown in the upper left of the graphic. Using overlays of various competitor’s portfolios, the human eye can quickly determine which portfolio is stronger and of more value and why.
Another method for qualitatively valuing patent portfolios, especially for large portfolios held by entities participating in the “Mass Customization” R&D / IP Game Type field dominated by software and internet firms, is to use artificial intelligence to group patents into clusters of related art. The value of any one company’s art in the field is simply the percentage of patents owned by the company compared to the total number of patents in the same field. Artificial intelligence in this case refers to the use of patent classifiers based on AI that determine which patents do and do not belong in the total patent count considered. Knowing the total value of an advantaged position in the field from business data, the percentage of art owned by a company is applied to this total value. Expressed mathematically, the Mean Royalty Rate for a Specific Company and a Given Product Line is equal to the Mean Royalty Rate typically attributed to that Product Line, times the Number of Patents owned by that Company that read on the Given Product Line, divided by the Total Number of Patents reading on the Given Product Line regardless of owner. Although this is simplistic and doesn’t take into account the quality of the patents under consideration, it has become a common method for business, not legal, personnel to determine the relative value of large patent portfolios. Such methods are not employed in “Safety Journey” R&D / IP Game Types dominated by pharmaceutical companies.