It has become common practice
for companies to sell and license out patents, and even use patents as
collateral, in order to secure loans from financial institutions or attract
capital from investors. As a result, patent valuation has been thrust into the
spotlight, challenging potential buyers of patents and lenders. This article
discusses what buyers of patents should consider, and what lenders should take
into account when providing loans with patents used as collateral.
Considerations for Potential
Buyers
In considering whether or not
to purchase a patent, the potential buyer should consider the patent from both
a legal and a business perspective. From the legal perspective, the buyer
should try to determine the patent’s strength, based on factors such as the
duration of protection, the breadth of potential patent claims and how courts
are currently interpreting these claims, court practices, the patent’s risk of
being challenged in court, and its susceptibility to infringement.
From the business perspective,
the buyer should try to determine the patent’s market potential, potential
competitors, commercialization potential, suitability to the needs of its
business, and alternative technologies, as well as general economic conditions.
Other considerations include
government regulations, as these will govern the use and period of exclusivity
of the patent and may also have an impact on its value. These broad
considerations need to be balanced against one another at the beginning of the
valuation process.
Case Studies
These legal and business
considerations were taken into account by a major Internet technology company
that recently purchased a multinational telecommunications company for USD 5.5
billion. The motivation behind the purchase was the telecom company’s mature
patent portfolio. Although the Internet technology company never released the
exact details of how it arrived at the price, a look into its U.S. Securities
and Exchange Commission (SEC) filings offers some insights.
The company stated that the
acquisition of the patent portfolio complemented its software expertise with
hardware expertise, and the purchase would protect its operating system from
lawsuits. In other words, the technology company saw this patent portfolio as a
way to stay competitive and as a deterrent against patent litigation.
Another example is the recent
purchase of a communications and IT company’s patent portfolio by a mobile
technology company. According to the mobile company’s SEC filings, it agreed to
purchase a portfolio consisting of more than 500 patents and numerous patent
applications covering a wide range of cellular phone infrastructure technology
for USD 22 million.
Certain statements in the SEC
filings indicate that the patents would benefit the mobile company’s expansion
into mobile applications for business-to-business and business-to-consumer
transactions. It also looked at the profitability of the patents if damages
arose from litigation, and what the revenue would be from licensing out the
patents.
Loans with Patents as
Collateral
If a borrower wants to use a
patent as security for a loan, the lender should ascertain that the borrower is
the actual owner of the patent. This is a straightforward task, unless the
patent has been assigned. In jurisdictions where recordation of assignment is
not required, tracing the owner may be difficult.
The lender should only accept
that the borrower is the actual owner of the patent if the borrower can show a
clear chain of title. The lender should also ensure that the borrower has
addressed any liens and encumbrances against the patent.
The lender should then value
the patent by determining what exactly is being offered (the invention, the
patent, or both) and ascertaining the legal characteristics of the patent
rights. The lender should also look at the capability of the borrower to utilize
the patent rights in a commercial context.
In practice, a professional
valuator will be involved at the request of either the lender or the borrower,
and he or she will use a methodology based on a cost approach, an income
approach, or a market approach. The lender should be satisfied not only that
the borrower owns the patent, but that the patent is free of liens and
encumbrances. In addition, the borrower should be responsible for paying for
the valuation.
Every patent purchase is
unique. Buyers have distinct needs and expectations. These should be
well-formulated before beginning to value a patent. Understanding what there is
to gain from purchasing a patent allows a buyer to focus on patents in the
target market, before having to delve into more detailed valuation techniques.
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