Erik Oliver

Imagine you are presenting to your boss and requesting approval of a $2 million purchase of four patent families. Already savvy about market prices, she is focused on the impact of the purchase to the business. Her question: “So what are these patents worth and what will the impact be of the purchase?” Unless you have done some sort of valuation to quantify the worth of these patents for the business, you may find yourself talking vaguely about synergies or avoided costs. This is because getting a valuation typically takes time and can be expensive. But what if there was a way to quickly model the worth of the patents to us?

Imagine you have found four patent families that address a specific risk to your business, and you are about to ask your boss to approve buying those patents for $2 million. Her questions might include, “What’s the going rate for patents?” Similarly, if you were working with your company’s accounting team and moving four patent families from your corporate parent to a subsidiary, the accounting department might ask, “What is the ‘fair market value’ of these patents for transfer pricing?” A preliminary issue arises: what are you really being asked for? This confusion in part stems from the common use of “price” and “value” nearly interchangeably in day-to-day conversations.

Despite falling average prices, in 2018, the patent market grew fast. We estimate the 2018 market size to be $353 million, up from last year’s estimated $296 million. The 2016 market slump (estimated $165 million market) is, hopefully, a thing of the past. In order to make this estimate, we use the observed sales that occurred in the 2018 market year and used their actual asking prices to determine the market size. As is consistent with the previous two years, if no pricing guidance was provided, the average asking price per asset for the market year of the sale (eg $123,000 for 2018 market year sales), was multiplied by the number of assets to determine the expected asking price. In the 2018 market year, 210 sales were identified, accounting for a total asking price of $527 million. Due to recordation delays, we assume that we have not yet seen 3% of the sales that occurred in the timeframe, so we multiplied this total asking price by 1.03 before applying our standard 35% discount between asking price and expected selling price. Thus, our expected total market size for the 2018 market is $353 million, indicating that the market has increased by 19% since last year and 114% since the 2016 market.

As a buyer, tracking the behaviors of sellers, both in aggregate and individually, allows you to operationalize your buying activities. This is especially true for repeat sellers, who account for 41% of the transactions for patent packages listed in calendar years 2017 and 2018. Knowing who the regular sellers are, often companies with a large portfolio, allows you to contact sellers to create a private deal. Keeping track of a seller’s listings, package sizes, and asking prices can also help you in negotiations because you know their negotiation parameters at the outset. Similarly, if you are a seller, it is important to get out the word that you are selling. Listing packages on your website, through the IAM Market, or working with brokers attracts buyers to you rather than you having to spend the time and effort to find them. For the analysis of current sellers and buyers we looked at all of the packages that sold between January 1, 2017 and May 31, 2018 (assignments were last checked on August 15, 2018) regardless of their listing date. Sales continue to be made mostly by operating companies, which is not surprising as they file the majority of patents. Operating companies were the sellers in 67% of transactions. This is remarkably consistent, at 66% in the previous two papers.

When discussing potential patent purchases with buyers, we continue our push to end the use of the phrase “low quality” to broadly characterize rejected patents. We often hear that there are junk, low quality or weak patents on the patent market. Clearly, there are some patents that we can objectively agree are low quality, just as there are in most portfolios. However, buyers with an efficient buying program should never test the majority of patents for “quality” metrics (e.g. enforceability) because these tests are simply too expensive. Sophisticated buyers create targeted buying programs rather than general ones. When buying, you should have a use case in mind and analyze the value of the patents in that particular context. If you want patents to counter assert against Qualcomm, do not waste time and money evaluating clean energy patents. The “quality” of anything in that technology area is irrelevant. Buyers also tend to conflate quality and value when discussing packages. A package with no value to you for your particular business use should be rejected from your buying program, but again, this is not a comment on the quality. It is easier and cheaper to reject a patent for lack of value that to analyze it for quality. Necessarily, a well-run buying program has visibility into only a small set of the available packages on the market; for the rest of the packages, the program should have no visibility into the quality of the packages because the packages were rejected before any quality metrics were evaluated.