Valuing potential patent applications is difficult, but necessary

That patents have value is not a concept in dispute, but actually valuing a patent or - worse - a pending patent application or - worse yet - a potential patent application can be an intimidating proposition. The valuation problem is most difficult when the answer matters the most: when a decision has to be made to file (or not) a patent application covering an invention.

Examining the value of a potential patent application matters because at least roughly ascertaining how a potential patent application will provide value to a company enables a more valuable application to be prepared. Patents can provide value in many ways, and not all of those ways of providing value require the same approach. A patent application intended to serve as part of cross licensing arrangements should be different than a patent application intended to entirely block competitors from a field; a patent application intended to relegate competitors to a lower quality product technology should be different than a patent application intended to ward off infringement claims; a patent application intended to secure production efficiencies should be different than a patent application intended to provide a marketing advantage. A single patent application may certainly be able to serve more than a single function, but uncertainty about what a patent application is intended to do - in other words, not knowing how a patent application will provide value to its owner - will almost certainly result in the wrong type of patent application being filed.

Actually developing a precise valuation of a patent, a patent application, or a potential patent application may be challenging, but that does not mean that valuation considerations should be ignored. Fortunately, how to determine what a patent is worth is the theme of Patent Valuation - Improving Decision Making through Analysis, by William J. Murphy, John L. Orcutt, and Paul C. Remus (John Wiley & Sons, Inc., 2012). Perhaps the truest words of the entire book is the observation that “lawyers have been slow to incorporate valuation analysis into their decision making, which makes legal decisions one of the richest areas for improvement.” Patent Valuation, pages 47-48.

Patent Valuation covers a lot of conceptual ground, but it makes at least two important points about patent valuation. First, there actually are systematic approaches to patent valuation that can be implemented by non-experts. Second, even when uncertainty about the future prevents a precise estimate of the value of a patent, the process of valuation itself and the rough sense of value that results provides important guidance in managing a company’s patent strategy.

Understandably, Patent Valuation focuses more on valuing issued patents than pending patent applications or potential patent applications (a brief discussion can be found on pages 48-50). The valuation principles described for issued patents are applicable to both pending and potential applications, however. Those principles should be brought to bear in the initial application filing decision. The decision to file a patent application (or not) is essentially a one time event, and once an application has not been filed intervening events often prevent a patent covering an invention from ever being obtained, especially in the first-to-file system of the America Invents Act. Perhaps even more significantly, though, considering the nature of the value of a potential patent application at the outset permits the application to be drafted to maximize that value; after the application has been filed, new material to change the direction of the application often cannot be added.

Even with a good book to rely upon, valuing a patent application that has not yet been filed is an imprecise process. Ignoring the valuation process, however, only undermines the ultimate value of any patent application that is filed. Valuing potential patent applications may indeed be difficult - but it is necessary.