Archive | 2008, April | (2) posts

“It depends!”

A week ago I got a telephone call from a potential client asking me to generally suggest the royalty rate or price for an intangible asset. My immediate attorney answer in this case (which, by the way, would be the same in any other similar case…), was not the one wished for, namely: “It depends.” And it does.

The price/royalty and the value of an intangible asset are interlinked. Usually, the value of an intangible asset is calculated by reference to a royalty under a license (which can be an actual or hypothetical license). A license is simply an agreement, whereby the proprietor (the licensor) grants the rights to use an asset to a licensee. The royalty rate is then the price or rent for this use, reflecting e.g. the rights and obligations of the parties (licensor/licensee), the risks assumed by each of the parties, the real or potential value of the rights and obligations transferred to the licensee.

However, the business context of the valuation and the royalty rate is not always understood. In considering acquiring or licensing an intangible asset, a company would weigh up certain options. Broadly speaking, the various technology acquisition strategies may be:

  • internal exploitation, i.e. create a similar asset itself. (what would it cost to create, recreate and/or design around the asset?)
  • acquiring the asset (what is the price of a similar asset?) 
  • licensing-in the asset (what is the royalty to licence in the same asset or a similar asset?)
  • do not acquire or license the asset at all (what profits would be given up if the company did not acquire or license the asset?)

Each of the above-listed approaches can, and should be, used either to determine the value of the intangible asset or to determine the royalty rate. As with any IPR valuation, the quality of the resulting outcome of the valuation depends on the level of exactitude and insight in the underlying analysis. By now, you might note that valuation of intangible assets is not a very easy task! A proper valuation not only requires knowledge about specific valuation methodologies, it also requires a deep understanding of the asset to be valued, and of the market, and not the least the context in which the valuation is to be performed, etc.

To make things even more complicated, note that while the statement “The price/royalty and the value of an intangible asset are interlinked” above is correct at a general level, this link also depends on a number of parameters, for example, whether one discusses the value for the owner of the intangible asset or the potential acquirer of the asset. For example, an intangible asset may be, in principle, worthless and a cost driver for an owner but constitute a real business opportunity for an acquirer. How should the price/royalty be determined in such a case ? Again, the answer is probably: “It depends”.

The Black & Scholes model for evaluating options has gained wide spread use in the valuation of patents. This model is a mathematical model of the market for an equity, in which the equity’s price is a stochastic process. The value of the equity, i.e. the patent, increases the more volatile the environment is, for example, the value of a patent within a technical field experiencing a fast development will probably increase. This model gives an approximate value, which is as inexact as the approximations made in the model, but at least it gives an objective value. The option market functions due to the fact that there exist a commonly accepted model for valuating the equity. The approximations used on the input side will though vary – otherwise no market would exist. In light of this, the market for valuation of IPR would probably benefit from accepting a model for the valuation process.

So, if you are still pondering about the price of an intangible asset my immediate answer would still remain the same: It depends. This answer would remain so at least until we meet and define the framework for the IPR valuation together…

Christian Arkelius, Patent Attorney

Money, money, money …

Recently, the European Patent Office (EPO) introduced steep increases in patent claims fees. From April 1 2008, an excess claim fee is due for each patent claim in excess of 15 and the fee will be as much as 200 EURO (!) per claim. In addition, there are further drastic new claims fee increases to take effect from April 1 next year.

So, if you plan to enter the European market, it might be a good idea to learn at least some of the techniques at your disposal for limiting the number of claims …

Right from the beginning when a patent application is drafted, there are a number of claim drafting techniques that can be used in order to reduce the number of claims. In the U.S. for example, patent applications often show a large number of claims having single dependency. In contrast, the EPO accepts multiple dependencies.

If the invention is claimed in more than one independent claim, e.g. apparatus and method claims, in Europe it may in fact often be enough to have only one sequence of dependent claims to which the second independent claim refers. Multiple dependencies can also be an effective measure in limiting the number of claims if certain combination of features are to be defined with as few dependent claims as possible.

In some cases, applicants may indeed also consider using optional features following expressions such as “preferably”, “for example”, “such as”, etc. in the claims (as long as these expressions do not introduce ambiguities, of course…). Although the EPO may object to such optional features in later prosecution, the EPO does not fundamentally object to the use of optional features in each and every case and, hence, applicants may consider using this approach in the first filed set of claims. This may help the applicant to find room for as many embodiments as possible within the fifteen claims. Furthermore, EPO allows claims including alternatives using the expression “or”. So, instead of claiming several embodiments in several dependent claims, the alternatives can instead be claimed altogether in one single dependent claim.

If used properly, the above techniques may help applicants to limit the number of claims. This sounds pretty good, doesn’t it? You might note that there are few disadvantages though – even if these techniques are properly used. However, if the techniques are not used properly,  well then that is a different story…”

I therefore recommend contact with a European patent attorney at an early stage in the process who can advise you regarding a proper claim drafting. Our patent attorneys are ready to give you advice in this regard!

Christian Arkelius, Patent Attorney