Protected Assets: Valuing Patents

• Author: James L. Horvath & Steven Hacker
• Pages: 643-666

643

Chapter 23

Protected Assets: Valuing Patents

james l. horvath & steven hacker

Practice Tip

In some companies, th e most valuable asset is an ide a.

Innovation is a key driver of economic growth, but only if it is accessible to

the imagination of t he public. Unlike a t rade secret,1 in order to encourage

public disclosure, while maintaining some rights for the inventor, details

of a patented innovation can be examined by anyone. A patent prohibits

anyone but the inventor from making, usin g, selling, or importing the in-

novation, at least for a limited period (twenty years from the f‌il ing date in

Canada and the United States). The legal, technological, and economic or

commercial characteristics of patents are unique attributes that valuators

must ref‌lect in t heir valuation analysis. Following a brief discussion of the

legal and economic background of patents, this paper examines t he factors

inf‌luencing value in patents (va lue drivers), the methods of valuing pat-

ents,2 and a step-by-step g uide to the valuation of patents.

1 In Canada, there i s no statutory def‌inition of t he term “trade secret.” The Glossa ry in

the Canadian I ntellectual Proper ty Off‌ice’s A Guide to Patent s (October 2006), online:

http://strategis.gc.ca/sc_ mrksv/cipo/patents/pat_gd_mai n-e.html, def‌ines a tr ade secret as

“information about a produ ct or process kept secret from competitors .” Examples of such

information could i nclude a method, formula, pat tern, process, or information abo ut, or

contained in, a produc t or mechanism.

2 The valuation of technology is di scussed in more detail in ot her chapters of this book.

644 james l. horvath & steven hacker

A. BACKGROUND: PATENTS

A patent is a legal right granted by a government to an inventor to exclude

others from making, using, selling, or importing the invention for a limited

time. In exchange for this r ight, detailed public disclosure of the invention

must be made when the patent is granted. In Canada, the patent application

is available to the public eighteen months after f‌iling. The Canadian Patents

Database, which is accessible and searchable online at the Canadian Intel-

lectual Property Off‌ice (CIPO) section of the federal government’s Industry

Canada website,3 currently includes over 1.5 million patent documents.

Once granted, the patent owner can prof‌it from the patent by selling or

licensing it, or using it in the negotiation of f‌inancin g. Patents obtained in

Canada do not extend to foreign countries, and foreign patents do not pro-

tect inventions in Canada.

In Ca nad a, pa te nts ar e g ra nte d b y T he Pat en t O ff‌i ce, wh ic h is pa r t of CI PO,

which in t urn is an agency of Industry C anada. CIPO is responsible for pat-

ents and other intellectual property rights including trade-marks, copyrights,

industrial designs, and integrated circuit topographies. CIPO’s counterpart in

the United Sates is the United States Patent and Trademark Off‌ice (USPTO).

The USPTO mai ntains an online patent database.4 Patents in foreign coun-

tr ies c an be appl ied fo r wit hin Can ada t hrou gh t he Pat ent C oope ratio n Treat y,

administered by the World Intellectual Property Organization.

In order to be patentable, an invention must be new (but can be a new

combination of old th ings), useful (for the purpose for which it was de-

signed, advantageous), and show inventive ingenuity (not be obvious to

others in the industr y). CIPO has tabulated that 90 percent of patents are

for improvements to existing patented applications.

Canadian patents are granted to the f‌irst inventor who f‌iles an applica-

tion for the innovation, regardless of who was f‌irst to conceive of the inven-

tion. This is in contrast to the law in the United States, where patents are

awarded to the f‌irst person or persons to have invented the invention. Strict

rules and procedures govern the patent application and granting process.

The USPTO, which operates on an annual budget of close to US$2 billion,

received over 440,000 patent applications in 2006, and completed over

332,000 patent applications.

Patents are generated by individuals and companies of all sizes. In recent

year s, for e xample, small biotec h f‌irms , and u niversi ties ha ve dri ven a sig nif‌i-

cant amount of pharm aceutical i nnovation. Smaller than their multi national

rivals, smaller companies and academic institutions provide researchers with

3 Online: www.cipo. gc.ca.

4 Online: ww w.uspto.gov.