20 Steps for Pricing a Patent: To Value an Invention You Have to Understand It
Cromley, J. Timothy, Journal of Accountancy
Inventors help solve vexing problems, both sophisticated and simple, and as a result sometimes enjoy considerable celebrity and rewards. Our society's economic success, too, is based on innovation. To encourage public disclosure of inventions, the U.S. Patent and Trademark Office (USPTO) issues an inventor a patent, which excludes others from making, using, selling or importing that invention into U.S. territories for a limited period of time. The three kinds of U.S. patents cover living plants, ornamental designs and useful inventions (the latter are called "utility" patents). Familiar products once protected by U.S. utility patents include Alexander Graham Bell's "improvement in telegraphy" (the telephone), the Wright brothers' "flying machine" and Thomas Edison's "incandescent lamp" (the light bulb). This article provides valuators such as CPA/ ABVs with a set of basic procedures for valuing U.S. utility patents.
Patents are intellectual property (IP) that may need to be appraised for accounting, tax, litigation and transactional purposes in situations that include divorce or bankruptcy actions, estate settlements, sales of businesses and company mergers (which might require valuing portfolios of inventions). The ability to appraise patents can be important for GAAP financial reporting purposes under FASB nos. 141 and 142, especially for auditors and valuators in high-tech industries in which there are lots of business combinations. An understanding of how to appraise patents also may be useful in expert witness engagements (see "Damages Aren't Always Patently Obvious," page 36).
RESEARCH AND COMPARE
Some patents are very valuable, while many are not. Because patents often are quite complex, appraising one usually is a highly detailed and expensive process that requires the input of lawyers and advisers with specific technical knowledge and experience. The makeup of valuation teams will vary by engagement, but it is axiomatic that before an appraiser can value something, he or she has to understand what it is. Here are 20 steps to help valuators such as CPA/ABVs do that:
1. Check whether the patent is in force. Before the CPA/ABV starts a detailed evaluation, he or she should see whether one is warranted. The first question to ask is whether the patent's maintenance fees are up to date. If not, the patent may be worthless. Maintenance fees are due at the U.S. Patent and Trademark Office at 3 1/2, 7 1/2 and 1 1/2 years from issuance. Some payment delays can be rectified, but if the maintenance fees haven't been paid by the "cure" date, the patent might be worth nothing due to "abandonment."
2. Identify the context. The premise of any valuation engagement can affect its conclusion. For example, a patent royalty amount that seems reasonable in an arm's-length negotiation may not be indicative of what later might be assessed for infringement of the invention if a plaintiff successfully sues for damages.
3. Gather information. For particularly valuable patents, CPA/ABVs should request the following:
* A copy of the application file on the patent, including all USPTO correspondence.
* A list of any foreign patent applications relating to the invention (and related sales).
* Copies of any relevant business plan, marketing study, financial statements and independent appraisal.
* Descriptions of any litigation, past or present.
* Copies of any contract, licensing agreement or offer to license pertaining to the patent.
* Available economic data on the industry in which the invention is used.
* Copies of promotions and advertising materials used during the past year relating to the invention or the product in which it is incorporated.
* Cost information relating to the existing or proposed patented product including cost accounting records and/or engineering feasibility studies.
4. Assemble a valuation team. …