11. Measuring the Worth of Patent Portfolios, July 2016

“How can I measure the worth of my patent portfolios?” is a question asked frequently by VPs of intellectual property, patent managers, licensing professionals, and other people responsible for the maintenance and monetization of corporate patent portfolios in the ICT space.  In other words, are there benchmarks against which quality and value may be determined in a patent portfolio?

In fact, there are such benchmarks, and they are based upon a very few facts that are well-known in the patent industry.

(1) Fact 1: Most patents, in fact the vast majority, suffer from one or more major errors.  By “major”, I mean an error that detracts from the intrinsic quality and financial value of the patent.[1]  By “vast majority”, I mean that I believe, based on my review of thousands of patents, that more than 99% of issued patents suffer from at least one such major error.  This does not mean that 99% of patents are totally without value, but it does mean that they are flawed and failed to reach their maximum potential.

(2) Fact 2: For a portfolio, we should discuss quality and value in terms of ranges.  For example, the truly great patents, what people sometimes call “excellent”, or “high-value”, or “fundamental”, or “seminal”, or “breakthrough”, are generally understood to be a very small number of the patents in a portfolio. Industry experience, and my personal experience, suggest that about 1% of the total number of patents in a portfolio generate most of the portfolio’s value, but this should be understood as an average number, with the likely range about 0.5% to 2.0% of all the patents in the portfolio.[2]


[1] In my book LITIGATION-PROOF PATENTS: Avoiding the Most Common Patent Mistakes (2014), I list and discuss in detail what I consider to be the 10 most common mistakes that harm the quality and value of high-tech patents.
[2]  A formal study of the wind-energy industry evidences a range of about 0.8% to 1.9% of various portfolios.  “Clean Tech Trends – Intellectual Property & Transaction”, Ron Epperson and Myron Kassaraba, published in les Nouvelles: Journal of the Licensing Executives Society International, June, 2014, at pp.84-95.  In the Microsoft purchase of AOL’s portfolio for $1.056B, about 1.5% of the patents seemed to generate the most value, and in the $4.5B purchase of the Nortel portfolio, 60 of 6,000 patents were considered to be the “real diamonds”.  See PATENT PORTFOLIOS: Quality, Creation, and Cost(2015), n.53 at pp.83-84.  Neither I nor anyone else knows if 1% is exactly the right amount, but that is the correct order of magnitude.

(3) Fact 3: There is another block of patents in the portfolio that has literally no value at all.  The range is relatively wide, and there is therefore great variation from company to company, but a reasonable estimate is about 30% with a range of 20% – 40% of the portfolio as having no value.  When I say “no value”, I mean that if we took any of the patents in this block, or even all of them, and went to court, we would likely lose all the cases.

Why do these patents lack value?  A full discussion is really a topic for another day, but generally, (i) the main claims may be invalid for a variety of reasons; or (ii) the technology is outdated; or (iii) the patents may be severely flawed with major errors; or (iv) the patents may simply be in the wrong portfolio (where the subject matter of the patents does not fit the company’s business); or (v) due to various problems that are external to the patents themselves.

(4) Fact 4: There is a group remaining, about 60% – 80%, that makes up most of the remainder of the value of the portfolio.  However, it is important to break out this mass.  About 10% (let’s say within the range of 8% – 12%) create most of the remaining value, and the rest, 50% – 70%, create marginal value.

CONCLUSIONS: We could summarize these results in a table.

 

Type of patent % of Patentsin the Portfolio % of thePortfolio’s Value
Highest value   1.0% (Range 0.5%-2.0%) More than 50%
Medium Value 10.0% (Range 8%-12%) 40% or more
Low Value 60.0% (Range 50%-70%) 10% or less
No Value 30.0% (Range 20%-40%) 0%

Corporations should periodically review their portfolios for quality and value, should abandon or sell useless patents in order to save time and money, and should file more heavily in areas where high-value patents may be obtained.  If a corporation does review its own portfolio, it should keep in mind the following:

The most important thing is to maximize the highest value patents.  It is vitally important to identify these patents, and to analyze them for subject matter coverage, geographic coverage, and expiration dates.  If more high-value patents can be obtained, they should be.  If the analysis shows a hole in coverage, the hole must be filled either by filing applications or buying patents.  If the number of excellent patents is less than 0.5% of the total number of patents in the problem, there is likely a severe problem with that portfolio.

 – Every corporation with a significant portfolio will have worthless patents in the portfolio.  That cannot be avoided.  The general goal should be to drive down the number of worthless patents toward 20% of the total number of patents in the portfolio, or possibly even towards 10% if the marginal amount of work is not excessive.  It is simply not realistic to eliminate all of the worthless patents – the time and effort to do so would simply be too great. However, if the number of worthless patents is more than 40% of the total number of patents in the portfolio, there is likely a severe problem with that portfolio.

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