Patenting and Intellectual Property

Patents are considered an important outcome of innovation as well as a means for protection of innovation efforts. Still, patenting is a multi-faceted undertaking affecting many stakeholders with different interests. Despite these difficulties patenting behaviour of corporates with its various indicators has been widely adopted as a non-monetary approach to quantification of innovation. It is considered as particularly well suited for measuring industrial product and production process innovation.[1] One of the major advantage compared to R&D expenses is that patents reflect not only company innovation potential[2] but also its transformation into applicable intellectual property. Patents grant the assignee the exclusive right to commercially exploit an invention and thereby a temporary monopole for using a novel technology.[3] However, companies’ patenting strategies are often rather ambiguous. Companies could for example aim at exclusive access to a certain technology or try to prevent the usage of some unique technological solution by competitors, thereby effectively blocking alternative ways of market access.[4]
However, despite increasing importance of intangible assets, it has been stated that the valuation of patents or more broadly intellectual property is still more speculative rather than relevant for investment or decision making.[5] The main problem is, that the distribution of patent values is highly skewed as are the technological advances comprised in the inventions patented, both in technological and economic impact.[6] In fact, experts estimated that between 85 and 95% of patent applications are not used at all by the assigning companies.[7] However, during acquisition of companies patents are valuated on a more thorough technological basis often leading to large premiums paid on the current company valuation, which discloses the estimated value of the intellectual property for the acquiring company.[8]
This investigation focusses on patents or more precisely utility patents under the US, EU, and WO authority and therefore only outlines the general features of patenting processes for these authorities. The first externally visible step of patenting activity is the filing of a patent application or optionally, in the US, a provisional patent application.[9] The patent application is normally published with a delay of 18 months after the priority date (first date of filing of a patent application). Based on patent applicants request the patent office performs a thorough investigation of the novelty. After this review and possibly adaption or abandonment of certain claims, the patent application is either rejected or a patent is granted. After grant of a patent, fee-based patent extension is possible up to twenty years from the filing date of the earliest application. A general overview of the patenting process for utility patents is given in the following figure.

General overview of patenting process
Patenting process overview
Sources: Representation based on Chitale et al. and WIPO.[10]

Since the whole process from patent application to patent grant is usually rather time consuming, a detailed analysis of patenting behaviour is only possible ex post with a delay of several years. Despite these difficulties, numerous attempts have been made to valuate patents without investigating the patent claims and the patent scope in detail.[11] Still, firms have very different patenting strategies[12] and varying research and development efficiencies.[13] Due to different widths and importance of patent scope, patent valuation requires more than just counting patent applications and patents granted.[14]
For example, patents from all major patent authorities are classified according to the International Patent Classification (IPC) system, a hierarchical system of language independent symbols differentiating between technological areas concerning the respective invention. The IPC divides technology into eight sections with approximately 70,000 subdivisions. Each subdivision has a symbol consisting of Arabic numerals and letters of the Latin alphabet.
The fundamental eight sections are:

A
Human necessities
B
Performing operations; transporting
C
Chemistry; metallurgy
D
Textiles; paper
E
Fixed constructions
F
Mechanical engineering; lighting; heating; weapons; blasting
G
Physics
H
Electricity

Together with the subdivision into classes, subclasses, main groups and subgroups, IPC valid symbols for complete classification are 14-character strings comprising IPC information encoded as e.g., C01F0011220000:

Systematics of international patent classification
IPC systematics

Furthermore, some of sections are divided into (non-hierarchical) subsections, e.g., subsections of chemistry section C are:

C01-C14
Chemistry
C21-C30
Metallurgy
C40
Combinatorial technology
C99
Subject matter not otherwise provided for in this section

In addition, subgroups can include an additional level hierarchy within; however, this level is not mirrored in the numeral structure.

Economic Impact of Patents and Patent Valuation

The value of patents originates from their temporary protection of an exclusive right to commercially exploit a certain technology or technological solution. For individual patents or smaller patent portfolios mostly three groups of quantitative approaches can be employed:[15]

  • Cost-based approach
  • Market-based or transactional approach
  • Income-based approach

Sometimes an additional binomial or option-based approach or method is considered.[16] Each approach comprises various implementations or methodologies, the choice of which depend on purpose of the valuation as well as data availability.[17] Still, while these methods deliver absolute values for the respective patent or patent portfolio they require knowledge of the expenses related to a patent, a patent’s relations to certain products, or the market prices of similar patents. Hence, these methods are rather laborious and therefore limited to smaller number of patents. For large patent portfolios statistical valuation methods can be used which mostly provide relative rather than absolute patent values. Furthermore, these methods are based on bibliographic patent data rather than technological content and individual claims and rely heavily on forward citations as well as patent classification.[18]

The most basic indicator for patent portfolio strength or relative portfolio value is simply the number of patents, an indicator used an early study by Pakes.[19] The study provided an insight into the associations between the number successful patent applications of’ industrial firms, their R&D expenditures, and the stock market value of the respective firms. However, while this model could explain differences in stock market value between firms, the explanatory power for variations over time for a particular firm were found to be rather low. Later Albert et al. investigated the relation between patent citations and patent value by using a survey asking experts to classify patents according to their importance and found a clear correlation of this importance to frequency of forward citations of the respective patents.[20] Forward citations were even found to correlate to patent value.[21] A similar approach for valuation of European patents based on forward citations combined with a survey to assess the financial value of individual patents revealed a significant influence of patent quality indicated by citation frequency on estimated patent value.[22] Other researchers used a combination of patent citations and 3-digit IPC classes to construct the two indicators “Generality” and “Originality” describing the basicness of an invention disclosed in a patent.[23] Using these indicators an extensive database was built containing all patents filed in the US from 1963 to 1999 and all citations made to these patents between 1975 and 1999.[24] The patent citations as surrogate for patent quality displayed a significant positive impact on corporate market value.[25] A somewhat reverse approach was chosen by Kogan et al. who derived the economic value of patents from stock returns estimated as attributable to issuance of the respective patents and found a strongly positive relation to future forward citation frequency, thereby in fact using stock price as indicator for quality for patents issued by a company.[26] Mauck and Pruitt investigated stock returns based on corporates’ patent strength using a common stock market patent index known as the Ocean Tomo 300 Patent Index and found that corporations with strong patent portfolio (highest patent maintenance value to book value ratio) outperform the general market in stock market returns.[27] Looking at patenting and corporate profitability Ernst et al. reported a positive correlation between patent protection and information management and corporate profit margin; however, they did not find a significant correlation between active patents and profitability.[28]

In summary, the general findings are, that there is a statistically significant relation between certain patenting related activities and corporate profitability, but number of patent applications filed, as announced in many annual reports, seems not to be an appropriate indicator. Unfortunately, most of the patent valuation indicators apart from patent counts or citations are proprietary with no disclosure of their exact calculation. Furthermore, it cannot even be ensured that the calculation of the respective indicators remains the same over time. In addition to that, even simple patent counts are not without problems. For example, the likelihood of granting patents depends on the examiner’s characteristics.[29] In addition to that, the time allocated for patent review was identified as determining factor for patent review quality by the examiner, indicating the limits to objectivity of patent data.[30]

Footnotes

  1. Acs, Z. J., Anselin, L., & Varga, A. (2002). Patents and innovation counts as measures of regional production of new knowledge. Research Policy, 31, 1069–1085. https://doi.org/10.1016/S0048-7333(01)00184-6.
    Arundel, A., & Kabla, I. (1998). What percentage of innovations are patented? Empirical estimates for European firms. Research Policy, 27, 127–141. https://doi.org/10.1016/S0048-7333(98)00033-X.
  2. Špaček, M. (2021). Company innovation potential and how to measure it. International Journal of Learning and Change, 13, 544–572. https://doi.org/10.1504/IJLC.2021.116692.
  3. Bogdan, B., & Villiger, R. (2010). Valuation in life sciences: a practical guide (3 ed.). Springer, p. 236.
  4. Neuhäusler, P. (2012). The use of patents and informal appropriation mechanisms—Differences between sectors and among companies. Technovation, 32, 681–693. https://doi.org/10.1016/j.technovation.2012.07.004.
  5. Russell, M. (2016). The valuation of pharmaceutical intangibles. Journal of Intellectual Capital, 17, 484–506. https://doi.org/10.1108/JIC-10-2015-0090.
  6. Falk, N., & Train, K. (2017). Patent Valuation with Forecasts of Forward Citations. Journal of Business Valuation and Economic Loss Analysis, 12, 101–121. https://doi.org/10.1515/jbvela-2016-0002.
    Griliches, Z. (1990). Patent Statistics as Economic Indicators: A Survey. Journal of Economic Literature, 28, 1661–1707. http://www.jstor.org/stable/2727442.
    Pakes, A., & Griliches, Z. (1984). Patents and R&D at the Firm Level: A First Look. In Z. Griliches (Ed.), R&D, Patents, and Productivity (pp. 55–72). National Bureau of Economic Research. https://EconPapers.repec.org/RePEc:nbr:nberch:10044.
    Pakes, A. (1986). Patents as Options: Some Estimates of the Value of Holding European Patent Stocks. Econometrica, 54, 755–784. http://www.jstor.org/stable/1912835.
    Scherer, F. M. (1965). Firm Size, Market Structure, Opportunity, and the Output of Patented Inventions. The American Economic Review, 55, 1097–1125. http://www.jstor.org/stable/1809230.
  7. Bartenbach, K., & Volz, F.-E. (2013). Arbeitnehmererfindungsgesetz – Kommentar (5 ed.). Carl Heymanns Verlag, p. 932.
    Fisher, D. (2014). The Real Patent Crisis Is Stifling Innovation. Forbes, 18 June. https://www.forbes.com/sites/danielfisher/2014/06/18/13633/#4e3e90806f1c.
    Mittelstaedt, A. (2015). Intellectual Property Management: Geistiges Eigentum als Führungsinstrument und Erfolgsfaktor in der Wissensökonomie. Springer-Verlag. p. 96.
  8. Lohr, S. (2011). Google Goes Hardware Shopping. New York Times, August 21, SR 9.
  9. Landers, A. L. (2018). Understanding Patent Law (3 ed.). Carolina Academic Press, LLC.
  10. Chitale, S., Lawler, C., & Macfarlane, S. (2020). Understanding the basics of patenting. Nature Biotechnology, 38, 263–270. https://doi.org/10.1038/s41587-020-0447-x.
    WIPO (2020). PCT FAQs: Protecting your Inventions Abroad: Frequently Asked Questions About the Patent Cooperation Treaty (PCT). WIPO World Intellectual Property Organisation. https://www.wipo.int/pct/en/faqs/faqs.html.
  11. Abbas, A., Zhang, L., & Khan, S. U. (2014). A literature review on the state-of-the-art in patent analysis. World Patent Information, 37, 3–13. https://doi.org/10.1016/j.wpi.2013.12.006.
    Ernst, H., & Omland, N. (2011). The Patent Asset Index – A new approach to benchmark patent portfolios. World Patent Information, 33, 34–41. https://doi.org/10.1016/j.wpi.2010.08.008.
    Ernst, H. (2003). Patent information for strategic technology management. World Patent Information, 25, 233–242. https://doi.org/10.1016/S0172-2190(03)00077-2.
    Mauck, N., & Pruitt, S. W. (2016). The valuation of patents using third-party data: the Ocean Tomo 300 Patent Index. Applied Economics, 48, 3995–3998. https://doi.org/10.1080/00036846.2016.1150947.
  12. Peeters, C., & van Pottelsberghe de la Potterie, B. (2006). Innovation strategy and the patenting behavior of firms. Journal of Evolutionary Economics, 16, 109–135. https://doi.org/10.1007/s00191-005-0010-4.
  13. Thomas, V. J., Sharma, S., & Jain, S. K. (2011). Using patents and publications to assess R&D efficiency in the states of the USA. World Patent Information, 33, 4–10. https://doi.org/10.1016/j.wpi.2010.01.005.
  14. Ernst, H., & Omland, N. (2011). The Patent Asset Index – A new approach to benchmark patent portfolios. World Patent Information, 33, 34–41. https://doi.org/10.1016/j.wpi.2010.08.008.
    Ernst, H. (2003). Patent information for strategic technology management. World Patent Information, 25, 233–242. https://doi.org/10.1016/S0172-2190(03)00077-2.
  15. https://www.wipo.int/sme/en/ip-valuation.html
  16. Flignor, P., & Orozco, D. (2006). Intangible Asset & Intellectual Property Valuation: A Multidisciplinary Perspective, ipthought.com. World Intellectual Property Organization (WIPO), Geneva. https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_valuation.pdf.
  17. Lagrost, C., Martin, D., Dubois, C. and Quazzotti, S. (2010). Intellectual property valuation: how to approach the selection of an appropriate valuation method. Journal of Intellectual Capital, 11 (4), 481-503. https://doi.org/10.1108/14691931011085641.
  18. Falk, N., & Train, K. (2017). Patent Valuation with Forecasts of Forward Citations. Journal of Business Valuation and Economic Loss Analysis, 12, 101–121. https://doi.org/10.1515/jbvela-2016-0002.
  19. Pakes, A. (1985). On Patents, R&D, and the Stock Market Rate of Return. Journal of Political Economy, 93(2), 390–409. https://doi.org/10.1086/261305.
  20. Albert, M. B., Avery, D., Narin, F., & McAllister, P. (1991). Direct Validation of Citation Counts as Indictators of Industrially Important Patents. Research Policy, 20(3), 251–259. https://doi.org/10.1016/0048-7333(91)90055-U.
  21. Using ex post data after patent expiry patent and defined patent value categories in millions of USD, see Harhoff, D., Narin, F., Scherer, F. M., & Vopel, K. (1999). Citation Frequency and the Value of Patented Inventions. The Review of Economics and Statistics, 81(3), 511–515. https://doi.org/10.1162/003465399558265.
  22. Gambardella, A., Harhoff, D., & Verspagen, B. (2008). The value of European patents. European Management Review, 5(2), 69–84. https://doi.org/10.1057/emr.2008.10.
  23. Trajtenberg, M., Henderson, R., & Jaffe, A. (1997). University Versus Corporate Patents: A Window On The Basicness Of Invention. Economics of Innovation and New Technology, 5(1), 19–50. https://doi.org/10.1080/10438599700000006.
  24. Hall, B. H., Jaffe, A. B., & Trajtenberg, M. (2001). The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools (No. 8498; Working Paper Series). National Bureau of Economic Research. https://www.nber.org/papers/w8498.
  25. Hall, B. H., Jaffe, A., & Trajtenberg, M. (2005). Market Value and Patent Citations. The RAND Journal of Economics, 36(1), 16–38. https://www.jstor.org/stable/1593752.
  26. Kogan, L., Papanikolaou, D., Seru, A., & Stoffman, N. (2012). Technological Innovation, Resource Allocation, and Growth (No. 17769; Working Paper Series). National Bureau of Economic Research. https://www.nber.org/papers/w17769.
  27. Mauck, N., & Pruitt, S. W. (2016). The valuation of patents using third-party data: the Ocean Tomo 300 Patent Index. Applied Economics, 48(42), 3995–3998. https://doi.org/10.1080/00036846.2016.1150947.
  28. Ernst, H., Conley, J., & Omland, N. (2016). How to create commercial value from patents: the role of patent management. R&D Management, 46, 677–690. https://doi.org/10.1111/radm.12210.
  29. Cockburn, I. M., Kortum, S., & Stern, S. (2002). Are All Patent Examiners Equal? The Impact of Examiner Characteristics (No. 8980; Working Paper Series). National Bureau of Economic Research. https://www.nber.org/papers/w8980.
    Lemley, M. A., & Sampat, B. (2012). Examiner Characteristics and Patent Office Outcomes. The Review of Economics and Statistics, 94(3), 817–827. https://doi.org/10.1162/REST_a_00194.
  30. Frakes, M. D., & Wasserman, M. F. (2017). Is the Time Allocated to Review Patent Applications Inducing Examiners to Grant Invalid Patents? Evidence from Microlevel Application Data. The Review of Economics and Statistics, 99(3), 550–563. https://doi.org/10.1162/REST_a_00605.