Measure and increase the value of your patent portfolio

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October 16-31, 2006 continued on page 2 Measure and increase the value of your patent portfolio A patent port5olio is not simply a testimony o5 achievement, a 8proud list 9 o5 your accomplishments; it is also and most importantly a resource to be developed, protected and used 5or the maximum bene5it o5 the company. Patent port5olio valuation is not a one-time exercise. Technology, markets and business opportunities all change rapidly.

Many patent catalogs include sleepers, 9 patents that have little value in today 9s market but which hold enormous promise 5or 5uture exploitation. Valuation should become part o5 the patent development process so that patents that have little or no business value, and will never have any business value, are not pursued, while patents with the most potential are identi\x3ed and tapped at the most opportune moment. Impo,ta(ce o bei(g 0a&ued It had been more than a year in the making.

It was a 8win-win 9 merger 4the likes o5 which an executive sees maybe once or twice in a career. It was a sure thing 4then you threw it away. And you knew you were right.

Your only regret is that you had not seen the true value o5 your patent port5olio ... more. less.

earlier. Astounding as it may appear 4 a senior executive throwing away an apparent 8win-win 9 merger based on a re-evaluation o5 his company 9s patent port5olio 4 the above scenario may soon be all too common. As will the executive 9s regrets that he had not properly assessed the value o5 the port5olio be5ore starting negotiations. Determining the value o5 a patent port5olio is one o5 the trickiest exercises any company can go through, just as it is one o5 the most crucial. Proper valuation o5 the port5olio can mean the di55erence between rags and riches, yet as o5ten as not this exercise is more akin to alchemy than to a set o5 rational, reasoned business decisions, and there seems to be as many alchemies 4 as many methods o5 valuation 4 as there are companies. Co(\x2icti(g de (itio(s o 0a&ue As with so much that involves patents, de\x3nition is at the heart o5 the problem. In this case, there is no commonly accepted de5inition o5 value or method o5 valuation. At the very least, three quite di55erent 4indeed, con\x2icting de\x3nitions o5 patent port5olio value have been used. Each has its merits, but none is entirely adequate in today 9s business environment. These de5initions can be described as the citation de\x3nition, the balance sheet de\x3nition and the cost de\x3nition. Citatio( De (itio( The citation de\x3nition determines the value o5 a patent port5olio based on the number o5 times patents in the port5olio have been cited in other patent applications. While this de5inition has the advantage o5 simplicity, it has 5ew other merits except perhaps that it 5eeds the vanity o5 inventors. Even Olson 9s notorious patent 6,368,227 5or a cMethod o5 swinging on a swing d has been cited. According to the citation de\x3nition o5 patent port5olio value, this 5act would suggest that acquiring the patent would increase the value o5 a company 9s patent port5olio. No one is lining up. Ba&a(ce sheet de (itio( The balance sheet de5inition considers a patent port5olio as an asset, like a building or mineral rights over a given piece o5 land. It usually invokes complex, some might say, arcane, 5ormulas designed to set the asset value o5 each patent in the port5olio, be5ore summing up the total. Not surprisingly, there is no common standard 5or these 5ormulas, just as there seldom is rigorous examination o5 the patents to determine their quality 4that is, their ability to generate revenue, 5or instance; or to de5end against patent aggressors in the market. The balance sheet de\x3nition o5 patent quality is an improvement on the citation de\x3nition approach because it recognizes that a patent port5olio is a tangible asset and attempts to put a price on it. It 5alls short o5 a truly workable de5inition. However, because it 5ails to set a common standard 5or valuating the various elements 4 the patents 4that together make up the asset. In short, how valuable is one patent in the port5olio compared to the others; and how valuable is it compared to patents held by competitors? Nor does this method recognize that 95-97 percent o5 patents are valueless. The key to determining port5olio value is \x3nding the potential 8star 9 patents, and then developing them to match and support strategic business opportunities. Cost de (itio( The cost de5inition o5 patent port5olio value attempts to equate the value o5 a patent port5olio with its cost. Like the balance sheet de\x3nition, the cost de\x3nition approach recognizes that the value o5 a patent port5olio is intimately connected to a company 9s business. Un5ortunately, like the balance sheet de\x3nition, the cost de\x3nition implies many variables and unknowns. For example, does cost mean the R&D cost o5 developing the patents, or o5 the products that use the patents? Simply reducing a patent 9s worth to its cost suggests that a patent port5olio 9s value is static when in 5act all evidence points to the contrary. Above all, a patent port5olio is an asset to be understood, developed and exploited. www.eetasia.com cEstab&ishi(g the 0a&ue o a pate(t po,t o&io is (ot a t,i0ia& exe,cise, but as the e(o,mous sums o mo(ey cu,,e(t&y cha(gi(g ha(ds o, pate(t &ice(si(g attest, a compa(y that does (ot k(ow the 0a&ue o its po,t o&io may e(d up sig(i ca(t&y &osi(g a &ot o mo(ey. d Electronic Engineering Times-Asia P,actica& de (itio( o 0a&ue A practical de\x3nition o5 patent port5olio value is based on the premise that port5olio value is primarily a business matter. That is, the intrinsic qualities o5 individual patents (how well they are written, how revolutionary the invention) are important, but only in so 5ar as they support the company 9s strategic business objectives. This premise implies that, though legal advice is essential, it is not a company 9s legal arm, but the senior business managers who must have the \x3nal word in determining the value o5 a patent port5olio. I5 we accept the premise that the worth o5 a patent port5olio is in its ability to support a company 9s strategic business objectives, then establishing the criteria 5or measuring patent port5olio value becomes relatively straight5orward. The value o5 a patent port5olio value can be measured by its ability to: " Directly generate revenue through 5riendly or adversarial licensing " Protect present and 5uture business " Propagate new business opportunities and partnerships. Dife,e(t st,ategic objecti0es, dife,e(t c,ite,ia Di erent strategic objectives will give di erent weight to each o5 the three criteria 5or measuring port5olio value. The di erent approaches IBM and Apple took towards licensing their computer technology clearly illustrate how di erent criteria 5or port5olio valuation were used to support di55erent strategic business plans. IBM chose to generate revenue (today some $1 billion+ annually) by licensing its desktop computer inventions. Who has not worked on an IBM-compatible desktop? Taking a radically di erent approach, Apple chose to keep its technology to itsel5 and protect and develop its business in a smaller but more exclusive market. Small pharmaceutical research companies and universities provide many examples o5 patents being used to establish mutually pro\x3table partnerships. Focused on research, these companies and institutions have little interest in creating and developing markets. They patent their discoveries, then enter into (usually) 5riendly technology trans5er licensing with large companies that have the means and interest to market products that use these disco- veries. Two co(sta(ts The exact mix o5 revenue generation, business protection, and opportunities and part- nerships will change according to the strategic objectives o5 your company. The 5ollowing two truths, however, do not change: " Patent port5olio valuation is a business responsibility " Valuation must support the company 9s strategic business objectives. Note that the practical de5inition o5 patent port5olio value makes no mention o5 citations, does not use complex 5ormulas to calculate the value o5 a patent against an abstract ideal, and only considers the cost o5 a patent indirectly, in the company 9s bottom line. Simply put, the value o5 a patent port5olio is its value to your business in the marketplace. How to imp,o0e pate(t po,t o&io pe, o,ma(ce With a practical de5inition o5 patent port5olio value, it becomes possible to apply as required the methods available 5or improving the per5ormance o5 the patent port5olio. At the strategic level, improving per5ormance requires: " For many companies, a cultural shi5t at the highest levels to gain buy-in on the value and importance o5 the patent port5olio. " A program 5or technical and legal evaluation o5 patents and patent applications to ensure that the patents are easy both to de5end and to license 5or revenue. " Friendly and assertive licensing to generate revenue. " Monitoring o5 competitors and potential targets to prevent un5riendly incursions against your patents or to protect markets. " Monitoring o5 markets 5or new opportunities. At the level o5 the patent port5olio and the patents them- selves, improving per5ormance requires an array o5 relatively straight5orward but crucial initiatives. These initiatives include a range o5 activities, 5rom the establishment o5 patent per5ormance metrics to searching 5or cRembrandts in the attic. d Pe, o,ma(ce met,ics I5 you can 9t measure it, you can 9t manage it. This adage is as true 5or patent port5olio as it is 5or any other area o5 business. Speci\x3cally, it means that i5 you want to improve the per5ormance o5 your patent port5olio you must establish metrics 5or tracking and measuring your port5olio 9s value to your company. According to the metrics management company PureShare, ca metric is a measurement in context. d The contexts 5or your measurements should be derived 5rom the practical de\x3nition o5 port5olio value: revenue generated, business and markets protected, and o55ering o5 opportunities and partnerships. These contexts should be weighted di erently depending on your company 9s strategic business objectives. For each area, develop global and detailed metrics to track the per5ormance o5 the entire port- 5olio and o5 individual patents. Measurements to consider include: " Number and value o5 in5ringements " Cost o5 de5ense against in5ringements " Number and value o5 technological trans5er licenses " Number and value o5 product revenues protected " Value o5 markets protected " Revenues generated through new opportunities and partnerships " Patent areas requiring improvement " Patent areas 5or 5uture development Pate(t cata&og A complete and well-documented patent catalog is a cornerstone o5 every patent port5olio strategy. A patent catalog is in 5act an inventory o5 your resources 4 probably your most valuable resources. A patent catalog provides a single point o5 re5erence 5or these resources so that you know exactly what you own. Developing and maintaining a well researched, organized and documented patent catalog is not a trivial exercise, especially 5or an organization that owns hundreds, i5 not thousands, o5 patents. It is, nonetheless essential; 5or you cannot reap the bene\x3ts o5 an invention i5 you do not know what it is and understand its potential. Usi(g the pate(t cata&og to ide(ti y po,t o&io st,e(gths a(d de cie(cies The value o5 a patent port5olio depends on the quality o5 its patents, but it is more than just the sum o5 these patents. By addressing the value o5 your patent port5olio as a whole, you can develop programs to exploit strengths and remedy de5iciencies, not o5 individual patents, but o5 the entire port5olio considered as a strategic resource supporting strategic business objectives. When you know how your patent port5olio measures against those o5 your competitors, you can develop your business strategies to ensure that you gain and maintain the lead in areas that are key to your strategic business plans. You will know in which technologies you need to support research to develop new, valuable patents; and in which technologies you should seek to purchase patents or enter into 5riendly licensing agreements. Pate(t +ua&ity A good de5inition o5 patent quality combines both the legal continued on page 3 2 Taken 5rom Electronic Engineering Times-Online I October 16-31, 2006 www.eetasia.com and business requirements 5or quality. In short, the quality o5 a patent can be measured by how well the patent supports your organization 9s strategic business objectives: generation o5 revenue through licensing, product and market and product protection, development o5 new partnerships and opportunities. Ensuring that new patents support as completely as is possible the business objectives o5 your patent port5olio one o5 the most e ective and cost-efcient means o5 assuring 5uture revenue streams. A patent port5olio strategy must include a rigorous quality improvement program 5or new patent submissions. 8Octopus 9 i(0e(tio( p,og,ams Patents are sometimes the 5ruit o5 5ortuitous accident. A5ter months or years o5 hard work a research team stumbles suddenly upon a solution, a new path that leads to dozens o5 inventions 4and their attendant patents and riches. However, a sound business cannot rely on chance to ensure its 5uture. The best patent port5olio is a patent port5olio that is not just growing, but that is undergoing care5ully managed growth through targeted invention programs. An e55ective patent catalog should point to weaknesses in your port5olio, identi5ying areas where you can 5ocus research and patent development to extend the breadth and depth o5 your patent port5olio in order to better support your business objectives. An e ective 8octopus 9 invention program should be in place to patent in these weaker areas, and all areas around that. For example, i5 your business has patented a process 5or laying down metal on a microchip, it may be worth your while to experiment with other, similar processes and metals and to patent these processes as well. While you may pre5er the original process, your patents 5or other processes can both protect you 5rom competition imitating your original process, and provide additional revenues through licensing when \x3nding others in5ringing your 8octopus 9 processes. Hidde( pape, t,easu,es Like all roads less traveled, the path to innovation is neither straight nor obvious. Companies and institutions that have 5ostered innovation 4or that have acquired innovative companies 4o5ten do not know the patents they possess, much less the value o5 these patents. Among these unknown 4and previously untapped 4patents gold mines have been 5ound. Sometimes re5erred to as ca hidden treasure trove d these patents can become signi5icant sources o5 revenue. In some cases, they are so valuable that they warrant a complete change in business strategy, as was the case o5 Vtel, a \x2agging manu5acturer o5 video- con5erencing hardware. A5ter discovering it owned a patent 5or the widely used JPEG algorithm, Vtel recast itsel5 as Forgent and went on to earn, 5rom 2001 to the middle o5 2005, some $100 million through licensing agreements. Co(su&t the expe,ts Finally, be5ore you begin, consult the experts. Consult your company 9s legal, technical and market specialists, and bring in independent expertise in the same areas. Your company experts have the advantage o5 knowing your patents, your technologies and your markets. The external specialists bring experience with patent port5olio valuation tools and methods, as well as technical expertise and knowledge o5 markets, competitors and opportunities beyond your current scope. By providing a 5resh perspective, they will also help you review the crucial role o5 your patent port5olio in your organization, and help prepare you to de5end it when the time comes. To &itigate o, (ot to &itigate? One o5 the most difcult decisions any company 5aces is how 5ar it should go in de5ending its patents. There exist no sure 5ormulas that will tell IP executives and lawyers the amount o5 time and e55ort they should invest be5ore they settle. Ultimately though, patents have no value i5 owners are not willing to litigate in de5ense o5 their patent rights. Only the threat o5 a court decision 5orcing an in5ringer to cease practicing the invention or acquire a license engenders value in a patent. Knowledge, however, is crucial. Knowing and understanding the practical value o5 your patent port5olio will help you make the di55icult calls when they come, because you will know precisely what your patents represent 5or your company 9s bottom line. The companies with the most vigorous en5orcement o5 their port5olios, not coincidentally, have a good understanding o5 the value o5 their port5olio, as well as the corporate will and executive buy-in to generate revenue. Whether you decide to settle or to go to litigation, you should do so with the knowledge that your decision is supported by rigorous analysis, not just o5 the present case, but o5 its implications 5or the entire company. You will know just how much you stand to gain or lose by holding \x3rm or letting go. Selected bibliography Graves, Lucas. cSuing Your Way to Proftability. d Wired Magazine, 13.06. June 2005 (www.wired.com) cIPO Survey: Corporate Patent Quality Perceptions in the U.S. d Intellectual Property Owners Association. Sept. 20, 2005. (www.ipo.org) cMetrics Dashboard Design d. PureShare. (www.pureshare.com) Petty, W. Scott. cSBC Communications 8Frames 9 On-line Sellers By Seeking Royalties For Patent Covering Internet Frames. d King & Spalding. (www.kslaw.com) By Ste0e Adam Vice President Patent Intelligence Chipworks cWhate0e, cou,se you choose, it is a&ways best to i(itiate ,ie(d&y actio(s ,athe, tha( to ,eact to agg,essio(. Howe0e,, &itigatio( is sometimes esse(tia& i( o,de, to estab&ish a(d mai(tai( the 0a&ue o you, pate(ts. Agg,esso,s must k(ow that you wi&& de e(d you, pate(ts 4a(d that you ha0e the k(ow&edge a(d the wi&& to do so. d Patent Strength ABC Tech ou 4 4 Legend: u Strong ¢ Moderate o Weak 4 n/a XYZ Tech ¢ouu QRS Tech uuoo Your Company ouuu Radio Frequency Micro- controllers AnalogPower Taken 5rom Electronic Engineering Times-Online I October 16-31, 2006 3 Steve Adam has a passion 5or seeing what 9s inside technol- ogy and he understands what this knowledge can mean 5or his patent intelligence customers at Chipworks. Steve drives the Patent Intelligence business which pro- vides IP services 5or customers that include the world 9s leading semi- conductor manu5acturers and Ste0e Adam Vice President, Patent Intelligence the law \x3rms that represent them. cOur customers spend mil- lions creating intellectual prop- erty, d Steve says, cand our job is to help them protect those assets. d A sought a5ter public speaker, Steve is also a catalyst 5or driving higher levels o5 awareness about how customers can leverage the value and quality o5 the IP assets. As a sel5-styled cchampion d o5 PI in the company, Steve also has plans 5or the 5uture o5 his group. He wants Chipworks to align with more 5ac- ets o5 the customer 9s IP domain. For example, he wants to intensi5y the Chipworks port5olio devel- opment service and get deeper involved in patent strengthening Electronic Engineering Times-Asia with customers during their pat- ent prosecution phase o5 their business. Within the Patent Intelligence team, Steve has established three engineering groups which are distinct 5rom Chipworks 9 technical intelligence engineering groups, enabling them to concentrate on IP customers and activities. Like Steve, these engineers are care5ul- ly tuned into to patent awareness and have a deep understanding o5 how to support intellectual property. We 9ve broadened our areas o5 expertise, d Steve says, cwe 9ve launched our systems analysis o erings, and we 9re looking 5or the next territory to conquer - and because we 9re Chipworks, it will be at the leading edge. d Above all, Steve looks 5orward to coming in to work every day. He loves the company culture - he speaks o5 Chipworks as a cbig extended 5amily d. Steve is a weekend warrior on the soccer \x3eld and he also \x3nds the time to coach his childrens 9 teams and imbue them with the sense o5 5air play and direction which is a huge part o5 Steve 9s own personal values. Steve earned a Bachelor o5 Arts in Economics 5rom Wil5red Laurier University in Waterloo, On- tario. COrPOrATE HEADqUArTErS AnD SAlES Canada 3685 Richmond Road, Suite 500 Ottawa, On K2H 5 B7 Canada Tel: +1 613.829.0414 Fax: +1 613.829.0515 Website: www.chipworks.com Email: info@chipworks.com InTErnATIOnAl SAlES Chipworks Japan OSAKA 3-8-15 Kitabatake Abeno-ku Osaka-shi Osaka-fu 545-0035, Japan Tel: +81-3-35117750 Website: www.chipworks.co.jp Email: info@chipworks.co.jp Chipworks Kabushiki Kaisha (K.K.) Ichigaya Tokyu Bldg., Suite 1011, 4-2-1 Kudan Kita, Chiyoda-ku Tokyo 102-0073, Japan Tel: +81.3.3511.7750 Fax: +81.3.3511.7751 Website: www.chipworks.co.jp Email: info@chipworks.co.jp Korea Jae Ho, Kim A-1121 DongYang Paragon, 17-2, JeongJa-Dong BunDang-Gu, SeongNam, GyeongKi-Do, 463-842, Korea Telefax: +82.31.782.8204 Mobile: +82.11.313.3204 Email: infokorea@chipworks.com Taiwan Taipei International Business Center Suite 620, 4F, 25, Sec. Tunhua S. Rd., Taipei, Taiwan, R.O.C. Tel: +886.2.2577.4352 Fax: +886.2.2577.4157 Website: www.chipworks.com.tw Email: infotaiwan@chipworks.com InTErnATIOnAl rEPrESEnTATIvE Israel Tal Oren Managing Director -Micon Lt. Netcom Building, 8 Hanagar Street, Industrial Zone Neve Ne 9eman B, Hod-Hasharon 45240, Israel Tel: +972.9.7756867 Fax: +927.9.7442386 Mobile: +927.52.3355497 Website: www.micon.co.il Email: tal@micon.co.il OPErATIOnS Canada 3685 Richmond Road, Suite 500 Ottawa, On K2H 5 B7 Canada Tel: +1 613.829.0414 Fax: +1 613.829.0515 Email: info@chipworks.com Poland ul. Krolowej Marysienki 90, 02-954 Warszawa Poland Tel: +48.22.310.1250 or +48.22.310.1251 Fax: 48.22.310.1252

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