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A patent attorney's practice, whether as in-house or outside counsel, often involves a variety of responsibilities. For example, patent attorneys often find themselves counsel­

ing clients involved in coiporate transactions such as patent sale or purchase, licensing, contribution of patents to joint ventures, mergers and acquisitions, and use of patents as collateral to raise debt or equity capital. Similarly, patent attorneys may advise clients on strategic patent-related issues including corporate restructuring, development of research and development (R&D) investment strategies, and patenting decisions, among others.

A common thread affecting all of these transactions and strategic issues is the topic of patent value. As such, it is extremely important that patent attorneys have at least a basic understanding of patent valuations and a patent attorney's role in performing and interpreting valuations.

Consistent with this view, this article is meant to acquaint attorneys with some basic patent valuation topics by: (1) pro­viding an overview of the approaches used to value patents and nonpatented inventions, (2) defining the legal issues that should ideally be addressed when helping to perform such a valuation, and (3) identifying the key elements of a valuation report.

Market Approach The market approach estimates the value of a patent asset by comparing the subject asset to other similar assets that have been traded in the marketplace between unrelated parties. The degree of reliance on this approach depends, in large part, on an assess­ment of whether the transactions of potentially comparable assets to those being valued are sufficiently similar to provide an indication of the value of the assets being appraised. Factors to consider include the nature of the assets transferred, the industry and products involved, the agreement terms, the circumstances of the parties to the agreement, the date of the transaction, and other elements that may affect the agreed-upon compensation. Patents by their very nature are novel and unique; consequently, market transactions occurring under closely comparable circum­stances rarely exist. Moreover, even if reasonably comparable assets can be identified, the details surrounding the specific transactions may not be publicly available. As a result, identi­fying comparable patents at a similar stage of development, in similar markets, in similar products, traded by similarly situated parties may be challenging, if not impossible.

This approach, if utilized, requires adjustments to the value(s) found in the comparable transaction to fit the cir­cumstances of the assets being valued based on differences between the assets and their deal structures, such as: stage of development, other intellectual property (IF) assets included in the transaction, timing, market applications, bargaining positions of the parties, and many other potential factors.

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Valuation Approaches The three most common valuation approaches are: (1) the income approach, (2) the market approach, and (3) the cost approach. The implementation of any single approach pro­vides the valuation analyst with an "indication of value," which then contributes to a final value determination. In many instances, an important early step in implementing any of these approaches includes the mapping of patent claims to relevant products and/or services. Understanding how and in what ways the invention potentially impacts the value of goods and services is fundamental to patent valuation.

Cost Approach The cost approach estimates the value of patents by relying on historical development cost and/or the cun ent cost of replac­ing the subject asset by purchasing or developing an asset that provides similar utility. The concept behind this method is that potential buyers would not pay any more for an asset than it would cost them to create an asset of comparable usefulness. The cost approach takes into account direct expenditures such as R&D costs, prototype costs, engineering labor, and indi­rect costs, such as legal and consulting fees. This approach may be particularly helpful for valuing early-stage technologies for which the commercial use is not yet fully understood or patented inventions with available, acceptable, noninfringing alternatives.

When performing the patent valuation, the weight given to each of the approaches varies with the facts and circumstances of each valuation effort and the availability of appropriate data; however, the attempted application of multiple approaches is generally preferred over the reliance on a single approach. No matter the approach, the parameters defining the property right, and the methods of acquiring it, are governed by specific legal provisions. Therefore, an understanding of how these legal pro­visions contribute to the present value of an IP asset, as well as to the future value of an IP asset yet to be acquired, is critical to maximizing the business's utilization of that asset.

Income Approach The income approach values assets based on the present value of the future income streams expected from the patent under consideration. This approach considers the amount and tim­ing of the expected cash flows that can be attributed to the subject asset and the risk of realization of those cash flows. The risk associated with the realization of the stream of future cash flows may be captured through the use of an appropri­ate discount rate or adjustments to the inputs used to project the cash flows, or a combination of these factors. The income approach is the most commonly relied-upon patent valuation approach. Projected cash flows based on a detailed buildup of revenues, costs, and profits—along with sound assumptions regarding legal and technical viability, customer acceptance, ramp-up, growth rates, and estimated useful life—often form a reliable basis for employing the income approach.

Bruce W. Burton is a managing director and Scott Weingust is a director in the dispute advisory and forensic services group at Stout Risius Ross, a global financial advisory services firm.They are also co-leaders of the firm's intellectual property valuation service. Alton L. Hare is a patent attorney in the chemical, pharmaceutical, and biotechnology practice groups of Sughrue Mion, PLLC, where he maintains an active patent litigation and prosecution practice.

Legal Components of Patent Value Three important legal components of an invention's value are: (1) the issued claims covering it, (2) the patentee's inter­action with the United States Patent and Trademark Office (USPTO), and (3) changes in the law of patents. A patent

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attorney involved with a patent valuation will typically assist with all of these issues.

value-enhancing opportunities that may have been consum­mated if the patent were granted in a timelier manner. In order to maximize patent value, it is best to consult with patent counsel as early as possible in the patent procurement process, which is often much earlier than the filing date of the patent application.

For instance, with a few caveats, a patent expires within 20 years of filing.7 If there is a plan to license the patent for a run­ning royalty but a lack of legal protections, the licensee may only be willing to pay a lower royalty rate to license the inven­tion compared to if the patent had been issued and the right to exclude was more certain. Similarly, if there is a plan to sell a technology, and the technological field is such that the patented invention may lose relevance quickly, every day without an allowance involves a risk that a potential buyer will not be inter­ested or will significantly discount the price that it is willing to pay. In this respect, the patentee can maximize its chances of avoiding these pitfalls, and best leverage its intellectual property, through collaboration between its patent counsel, business strate­gists, and product development and marketing teams.

Furthermore, the patentee's representations and other interactions with the USPTO can have a profound effect on the scope of the claims once the patent has issued, the validity of the patent, and the enforceability of the patent.8 Extended prosecution involving numerous amendments can result in narrower claim scope than might have been obtained. This is because claims resulting from an amendment to the appli­cation may be legally assigned more restrictive scope than identical claims that were issued without amendment.1' In this respect, consultation with patent counsel results in more accurate patent value determinations by avoiding mistaken determinations of claim scope and patent enforceability.

Claims Covering the Invention The value of an issued patent will depend on the legal scope of the claims. Here, we do not endeavor a comprehensive review of the legal definition and scope of patent claims. Instead we will describe some key aspects, and how they are directly connected to an invention's value.

A particular patent's unique characteristics are set forth in its claims, which define the legal boundaries of the owner's property right.1 This property right consists of the products and services that the patentee may lawfully exclude oth­ers from making, using, selling, and importing in the United States.2 Even before this property right is formally recognized by the United States, it has value as of the date those claims are published, if the other party has notice of them.1 Once the interested party has determined which goods and/or services are encompassed by the property right, a patent landscape of those products and services should be generated to deter­mine whether the interested party can be excluded from any of them, and what would be the cost to avoid exclusion. Once this is done, experts in that party's business can determine which goods and/or services could or should be sold in the market, and at what profit. This creates a connection between market variables and the patent property right as defined by the claims.

The claims' language itself is not always sufficient to deter­mine their scope. On the contrary, highly dynamic and complex technological areas often utilize words of art with no easily ascertainable meaning. The meaning of the same word changes as the art advances, and some researchers may use the word in an entirely different way because it is more appropriate to the particular context in which the inventor developed the invention, or simply by personal choice.4 The appropriate timeframe for considering the meaning of certain claim terms is "as of the date of the invention," which is the date that the inventor first "con­ceived the invention," as that has phrase has been defined in U.S. patent law.5 In other words, the meaning of claims, and thus their scope, is a legal conclusion supported by the relevant factual context.6 Therefore, consultation with patent counsel is essential to obtaining the most accurate prediction of patent value.

Changes in the Law Although Congress establishes the statutory law of patents pursuant to its authority to promote the "progress of science and useful arts,"10 how that law applies in particular circum­stances can be an open question until a court issues a decision on the matter. The U.S. Supreme Court dramatically changed the law of patents in several patent cases over the last few years. The Supreme Court has restricted the scope of inven­tions that are eligible for a patent11 and increased the degree of clarity required for claims.12 More patents are likely to be invalidated in court after these decisions than before them.

Consequently, reflecting the additional risk of invalidity, it is clear that some patents declined in value. On the other hand, it is likely that some patents increased in value. This is because pat­ents grant only an exclusionary right, not a right to practice. This permits the scenario where patentee A cannot commercialize products or services covered by the claims of its patent because patentee B has a patent with claims that encompass some ele­ment of the claims of patentee A's patent, and vice versa. But if one of the patents is now invalid, the holder of the valid patent can practice free of the other patentee's prior exclusivity. Pat­ents that block each other in this or other ways are referred to as "blocking patents."" But in order to take advantage of changes in the law, the patentee has to know which patents are now likely to be invalid (and potentially worthless), and which patents have probably become even more valuable due to the invalidation of

USPTO Another difficulty in ascertaining patent value occurs before a patent covering the invention is granted. Before the patent is granted, the inventor may have already created something valu­able, but until that property is the subject of an issued patent, there is no enforceable property right. Obtaining an issued patent typically takes two to four years after filing the patent application at the USPTO. The USPTO is the only entity authorized to issue a (nonplant) patent, and operates according to a voluminous set of rules, regulations, and standards set out in the Manual of Patent Examining Procedure (MPEP), title 37 of the Code of Federal Regulations, and of course title 35 of the United States Code. Unfamiliarity with the process often results in delays, and those delays result in business uncertainty to the extent the business cannot rely on the legal protections in formulating and executing its strategy and, furthermore, can result in missed

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blocking patents, preferably before the patentee's competitors. As is often the case when the rules change, there are some who come out ahead and some who do not.

attributable to the patent being valued. Each of these can be con­sidered a different valuation methodology. Although there are only three basic approaches, there are dozens of methodologies. An understanding of the methodologies employed is necessary to understand how the patent value was determined. Key Elements of a Patent Valuation Report

While it is a strong best practice for counsel and its client to carefully read the entire patent valuation report, counsel can also assist its client to hone in on those sections of the report likely to be most important. Areas of a patent valuation report typically meriting special focus are: (I) purpose/context, (2) standard of value, (3) assumptions, (4) approaches and methodologies, and (5) valuation conclusion.

Valuation Conclusion The "bottom line" of the valuation is represented by the con­clusion of the valuation. The result may be presented as a point estimate or a value range. In order to fully understand the valua­tion conclusion and its credibility, it is necessary to understand the purpose/context of the valuation, the standard of value employed, the assumptions, and the approaches and methodologies.

Purpose/Context Understanding the purpose/context for the valuation will allow the reader to understand the assignment of the valuator, the pur­pose of the valuation, and its intended audience. As indicated above, there are many different purposes for valuing patents. The purpose of the valuation is an important component to any patent valuation, as it may have a significant effect on the approaches and methodologies relied upon and the results of the valuation. Because the conclusion of value for a patent asset may differ depending on the purpose of the valuation, the value determina­tion of an asset for one purpose generally should not be relied upon for other purposes. For example, the valuation of a patent asset for purposes of financial reporting may very well conclude a different value than if the same asset were valued for the pur­pose of selling the asset to a particular buyer.

Conclusion Attorneys play a key role in assisting their clients to both per­form and review patent valuations. This article offers a primer on how patent valuations are performed, the specific issues that can be addressed by attorneys to help execute a patent valuation, and the key elements of valuation reports that attor­neys should be familiar with. While we have only skimmed the surface of the topic of patent valuation, we hope that this article has provided some basic practical information for improving attorneys' ability to counsel their clients. •

Endnotes 1. See, e.g., Vas-Cath Inc. v. Mahurkar, 935 F.2d 1555, 1565

(Fed. Cir. 1991) ('"The invention' is defined by the claims."). 2. 35 U.S.C. §271. 3. Id. § 154(d). 4. In re Paulsen, 30 F.3d 1475, 1480 (Fed. Cir. 1994) ("[A]n

Standard ofValue The word "value" means different things to different individ­uals and can vary depending on the facts and circumstances of each particular valuation effort. Consequently, every valu­ation should have a specifically identified standard of value. The standard of value is the type of value being utilized for a valuation and is typically selected to match the purpose of the valuation. Some often cited standards of value include fair market value, investment value, and fair value. The standard of value addresses the questions "value to whom?" and "under what circumstances?" The use of different standards of value can result in different determined values for the same asset.

•• inventor [may] define the specific terms used to describe his or her invention . . . [and] must set out his uncommon definition in some manner within the patent disclosure.")

5. Burroughs Wellcome Co. v. Barr Labs. Inc., 40 F.3d 1223, 1227-28 (Fed. Cir. 1994).

6. Teva Pharm. USA, Inc. v. Sandoz, Inc., 135 S. Ct. 831 (2015). 7. 35 U.S.C. § 154(a)(2).

8. See Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276 (Fed. Cir. 2011) (en banc) (recognizing that inequitable con­

duct before the USPTO, including failure to submit material prior art, may bar enforceability of the patent); 37 C.F.R. § 1.56 (duty to disclose information material to patentability).

9. Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535

Assumptions Although it is a simplification, it is still fair to say that val­uations are often built on facts, projections, and certain assumptions. The assumptions will be very important to the valuation result as they fill in gaps between facts and pro­jections and explain how the facts and projections were interpreted and used to create the valuation conclusion. Assumptions often are very fundamental to the analysis and are key to understanding the outcomes.

U.S. 722 (2002). 10. U.S. CONST, art. I, § 8, cl. 8.

11. See Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107 (2013) (finding extracted and isolated polynucleo­tides unpatentable); Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289 (2012) (holding methods of applying newly discovered laws of nature unpatentable if the tools for applying the law are already generally well known).

12. Nautilus, Inc. v. Biosig Instruments, Inc., 134 S. Ct. 2120 (2014) (holding patent claim language must be ascertainable with "reasonable certainty," rejecting the older requirement that claims only have to avoid being "insolubly ambiguous").

13. Sheila F. Anthony, Antitrust and Intellectual Property Law: From Adversaries to Partners, 28 AIPLA Q.J. 1 (2000).

Approaches and Methodologies Patent valuation approaches (income, market, and cost) are briefly explained above. Methodologies represent specialized methods within, or hybrids of, two or even all three valuation approaches. For example, within the income approach, there may be several ways to develop projections of the future incremental cash flows

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