Role of IP Attorney in Continuous IP Valuation

By: David Banko, Attorney at Law

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David A. Banko

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Outline of Presentation

≫ The value of intellectual property

≫ Reasons to value intellectual property

≫ Role of IP attorney

≫ Reasons for continual or ongoing audits

≫ Discussing patents specifically

≫ How defects in a patent affect its value

“If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.” — John Stuart, Chairman of Quaker (ca. 1900)

IP and IA

The Economist’s Patent Valuation Analysis• In an Aug, 17, 2011 article titled “Doing the Math,” The

Economist presented the following analysis:• In December of 2010, Novell sold off its portfolio of 882

patents for $450 Million. A simple division calculation leads us to a value of $510,204.08 per patent;

• Google‘s $12.5 billion acquisition of Motorola Mobility is widely regarded as being about Motorola's patents, which Google needs to defend itself from a spate of recent lawsuits;

• Forgetting that Motorola also makes mobile phones, let’s say the entire value of the acquisition was in their 24,500 patents and applications. At a $12.5 billion price tag, that equates to…$510,204.08 per patent!

• Therefore, in the Motorola acquisition, Google bought a patent portfolio and got a mobile phone business thrown in for free.

More from The Economist on Patent Valuation

• The same Economist article continues with the following analysis:• If Google's acquisition of Motorola was indeed priced solely

on a cost-per-patent basis, as looks likely, it would set a benchmark for valuing an intellectual property portfolio.

• In July 2011, six IT firms including Microsoft, RIM and Apple paid $4.5 billion for 6,000 patents owned by Nortel, a bankrupt Canadian manufacturer of telecommunications gear.

• Using the same simple math, the group paid a clean $750,000 per patent. If Google's latest acquisition was pricey, that one was downright exorbitant.

One More Comparison: Nortel vs. MMI

• Finally, the IAM Magazine published a blog titled “Why Google is much better off with the Motorola patents than the Nortel ones,” which includes the following analysis:• The following tables show the essential patent counts for

both Nortel Networks Ltd and Motorola Mobility Inc. • This comparison is of interest because it is quite rational

for defensive purposes to assign the value of a portfolio to the standard essential patents within it.

Motorola Mobility Inc Total declared essential US patents in portfolio: 1,369 Portfolio cost ($mm): 12,500 Cost per essential US patent : $9.1M

Nortel Networks Ltd Total declared essential US patents in portfolio: 107 Portfolio cost ($mm): 4,500 Cost per essential US patent: $42.1M

“This is a lucrative time for intellectual property.

Earlier this year, Kodak, the bankrupt company that invented the digital camera, sold its portfolio of 1,100 digital photography-related patents to a dozen licensees, including Apple, Microsoft, and Google for $525 million ($477,272.72 per patent).

Last spring, Google bought Motorola Mobility, with its 24,500 patents, for $12.5 billion, to protect its Android mobile operating systems from rivals($510,204.08 per patent).

Also last year, Microsoft acquired 800 patents from AOL for more than $1 billion, ($1.25 million per patent) only to turn around and sell 70% of them to Facebook for $550 million in cash ($982,142.86 per patent).”

Forbes, “How To Tell What Patents Are Worth” (2013).

IP and IA ≫ Intangible assets are economic resources, often created in the normal

course of business, that lack physical presence, but have value due to the rights, benefits, and privileges they convey to their owner:

› Brand names

› Customer lists

› Non-compete agreements

≫ Intellectual properties comprise a subset of intangible assets that are created consciously through the intellectual effort of specifically identifiable individuals, and are registered and legally protected by federal and state statute:

› Patents

› Copyrights

› Trademarks

› Trade secrets

› Know-how

At least 9 reasons for valuing IP:

1. Exploitation- A basis for negotiations involving sale, licensing, or exchange of IP.

2. Taxation - Transfer of IP from parent to subsidiary company; Donation of IP as a tax-free gift to some institution; Estate planning

3. Raising Funds and Securing Financing- IP may serve as a collateral with banks; IP value helps startups raise venture capital

4. Profit Sharing - When there are multiple IP owners- As in a R&D consortium that involves multiple companies contributing - to determine the allocation of net income; Joint ventures and strategic partnerships

5. Assessing damage claims in a dispute, infringement or breach of contractual rights.

6. Financial Reporting

7. Transfer Pricing- What price is right, for transfer of patents, licensing a trademark, within the firm?

8. In any restructuring or liquidation procedure - As in mergers, spin-offs or bankruptcy.

9. IP Drives Market Value of Stock - Not only for smaller startups without significant real assets, but increasingly for larger companies such as IBM

One more reason

“Nevertheless, the role of intellectual property rights ( IPRs) and intangible assets in business is insufficiently understood.  Accounting standards are generally not helpful in representing the worth of IPRs in company accounts and IPRs are often under-valued, under-managed or under-exploited.  Despite the importance and complexity of IPRs, there is generally little coordination between the different professionals dealing with an organization’s IPR.”

Kelvin King, The Value of Intellectual Property, Intangible Assets and Goodwill (2011).

Valuing IP is a team effort

Client

Accountants

IP Attorney

• Usually in the best position to evaluate the marketplace;

• Averse to spending upfront costs for indefinite gains

• Identifies, protects, and maintains IP

• Claim interpretation

• Evaluate new case law’s impact on portfolio

• Determines the value of IP;• Advises on the CBA of depth of

audit

• Identification, organization, and review of a client’s intellectual property assets and potential liabilities• Ownership• Recordation of transfers• Perfection of security interests• Compliance with statutory formalities• Infringement of third party rights (FtO)• Client’s rights being infringed

• Could be • General Purpose IP Audit• Event Driven Audit• Narrow Focus Audit

Role of the IP Attorney

• Other than quantifying the value

• Identify, organize, and review existing IP portfolio• Resolve current issues in IP management practices (IP

case law changes rapidly)• Establish procedures to ensure protection of assets in the

future • Better guarding of trade secrets• Docketing system for payment of fees and renewal

filings• Assignments of IP in employment and consulting

agreements• Especially Problematic for Copyright

• Better marking of products

• Add value to the company• What IP assets are underutilized• What are the potential value creators

Why perform an IP Audit?

• Mayo v. Prometheus, 132 S. Ct. 1289 (2012) (biotech.) - invalidated patents for diagnostic tests that measured the amount of metabolites in the blood.

• Association for Molecular Pathology v. Myriad Genetics, 569 U.S. 12-398 (2013) (biotech.) – invalidated patents for genes.

• Alice Corp. Pty. Ltd. v. CLS Bank Intern., 134 S. Ct. 2347 (2014)(software) – invalidated patents for computer systems that embody economic processes.

How fast does case law change?

Benefits of IP Audit

“A patent is like real estate. When you own a piece of real estate you might put a fence around it to keep people from trespassing on your property. The fence is the metaphorical claims in your patent. Well-constructed claims are worth a lot more than flimsy ones.” - Joseph G. Hadzima

• Prevent asset losses• Make effective economical use of IP assets• Address gaps in licensing and agreement procedures • Minimize risk of third party infringements• Determine position in relation to competitors

Other issues unearthed in IP Audit

• Defects in title to IP• Assignments of ownership from consultants• Employee inventions within the scope of work• License rights from third parties to make derivative works• Third party joint ownership• Defects in patents (copyrights or trademarks as well)• Requests for reexamination or reissue of a patent• Amendments to applications• Certificates of correction

Types of Patents

Utility Patents

* Non-provisional

* Provisional

* Continuation / Continuation-in-part

Design Patents - (Google v. Samsung – initially $2 billion, but now $639.4)

Plant Patents

Discounts on Value: Guidelines for Assessing Patents

1. Status of the patent

2. Ownership and contractual issues

3. Patentability / Invalidity

4. Freedom-to-Operate

5. Scope of the claims

6. Circumvention and breadth of the coverage

7. Detectability and Enforceability

Malte Köllner, Due Diligence Or Discount Monetary Effect Of Legal Aspects In Patent Valuation (2009)

• Questions?