How much is your patent worth?

A patent for invention is the intellectual property title that all innovative companies aspire to, regardless of their business sector.

Patenting grants an exclusive exploitation right on the use of the inventive invention.

It is precisely the exclusive right granted to the owner by registration that provides a competitive advantage that is far from negligible. The commercial appeal generated by the particular advantage over competitors makes this exclusive right an object of economic-financial valuation.

The economic evaluation of the patent‘s value has many similarities with the valuation procedure for trademarks, which we have already discussed in a previous paper.

Some differences, however, arise from the heterogeneous nature of the two intellectual property titles. One example is their different durations. As a matter of fact, it should be noted that a patent for an invention has a limited duration (i.e. 20 years). On the contrary, the trademark has an initial ten-year validity, potentially perpetual thanks to the possibility of renewal every 10 years.

A further difference is the importance of the R&D (Research&Development) expenses incurred for the development of the invention, which are generally much lower for the design of the trademark.

In this article:

1. When to evaluate a patent?
2. Preliminary analysis and legal/administrative consistency
3. How to evaluate a patent?
4. Patent evaluation and legal assistance

1. When to evaluate a patent?

During the period of validity of a patent, there may be several moments when it is useful (and sometimes mandatory) to calculate the economic value of the patent title. These moments are numerous and most often coincide with the circulation of the intangible asset between different parties.

The economic evaluation of the patent is required at:

• transfer/assignment of the title;
• licensing, in particular with regard to the calculation of royalty rates;
• contribution to the capital of a company. In the latter hypothesis, the valuation of the patent will be an obligation (the law, pursuant to Article 2343 of the Italian Civil Code, prescribes a sworn expert’s report as a guarantee of the actual consistency of the share capital);
• liquidation of corporate assets (e.g. following the bankruptcy of a company to satisfy creditors);
• extraordinary transactions (e.g. acquisition, transfer of business or branch, merger, demerger);
• tax benefits (e.g. patent box);
• quantification of damages suffered as a result of a patent infringement action.

In most cases, the economic evaluation of the patent is carried out in concert with other valuation operations. It is performed jointly with the overall estimate of a company’s value. The patent is obviously one of the company’s intangible assets.

As mentioned above, the valuation of the patent may be required to access tax benefits (such as the patent box). In the latter case, there will be no change to the patent. The tax relief is focused on the ability to generate an income directly from the patent right, in order to maximise the benefit of research and reward business investment in R&D.

2. Preliminary analysis and legal/administrative consistency

To be valid, the patent must have certain characteristics: novelty, inventional activity, industriality, lawfulness (for more details, Patenting an invention: how to do it?).

Obtaining the title does not absolutely determine the existence of the requirements of the law and, consequently, its validity. The investigation performed by the competent offices is more formal than substantial. Hence, the verification of the validity requirements carried out by the Patent and Trademark Offices is limited in substance.

As a result, even a formally granted patent may be subject to an invalidity action brought by a third party for alleged lack of the above-mentioned requirements.

Since the patent title, even when granted by the competent offices, remains contestable, before proceeding with the economic valuation of a patent, it is always advisable to verify from a technical-legal point of view that the object of the valuation is not a null title.

Invalidity of the patent would lead to a “zeroing” of its economic value, since the patent title could no longer guarantee the corresponding exclusive right to its owner. As already illustrated, it is the monopoly on the invention (i.e. exclusivity) that is the real object of assessment.

Verification of the purely legal aspects is therefore a prerequisite for the correct economic calculation of the patent’s value.

3. How to evaluate a patent?

There is no a universally recognised and correct valuation method. The choice as to which valuation method to adopt must be weighed – on a case-by-case basis – taking into account the type of patent, the purpose for which the valuation is sought and the market niche to which it refers.

Economic valuation is the operation by which the value is determined in monetary terms (Euros, Dollars or any other currency).

The main methods referred to can be grouped into three different types:

1. Historical cost methods – Applying these methods, one wants to establish how much it cost to obtain the patent being valued. All costs, fees and investments incurred both prior to the application and after the grant of the title (maintenance) must be considered. The first costs include R&D (Research&Development) expenses, charges related to the filing of the application (e.g. legal advice, registration fees required by the competent authorities), costs of designing and implementing the invention. An appropriate monetary value must also be placed on the time taken to bring the project to life.
2. Profitability-based methods – These are probably the most widely used methods. They aim to quantify the patent’s ability to generate profit. Profitability-based methods make it possible to calculate the value of the patented technology on the basis of expected future profits from the favourable economic exploitation of the innovation itself. One of the determining factors is the remaining period of legal protection before the patent falls into the so-called public domain.
3. Market-based methods – This last group of methods consists of indirectly determining the value of the patent resulting from prices agreed upon in recent transactions involving similar inventions. The implementation difficulty with these methods is essentially the lack of a sufficient number of cases to be analysed and their effective comparability.

4. Patent evaluation and legal assistance

Patent valuation is essentially an economic-legal valuation. Normally, one turns to law firms that routinely collaborate with accountants and market experts.

The Canella Camaiora Law Firm deals with the analysis and reconstruction of a company’s portfolio of intangible assets.

As anticipated, the identification of the scope of protection and the assessment of the legal standing of the patent are prodromal activities to the economic valuation. We then provide the consulting service concerning the economic-financial valuation profile in cooperation with experienced professionals in the valuation of intangible assets.

In addition, our extensive experience in the area of intellectual property allows us to advise on all other activities that surround patent valuation. Many clients ask us for assistance in drafting assignment, licence and franchise agreements or for assistance in negotiations with current and potential business partners.

Our assistance is also often requested for guidance in corporate transactions involving industrial property rights and in taking advantage of possible tax benefits.

For more information on our intellectual property services, please contact us.