In recent years, with the strong promotion of patent operation and the rise of diverse operating models in China, the value of patents has received increasing attention. However, how to view the value of patents has always been a problem for all participants. It is puzzling that this phenomenon has become commonplace, and even holding the same patent certificate has resulted in a dual nature of value.
On the one hand, many companies operate well without patents; Enterprises holding a large number of patents have not seen significant business benefits and competitive advantages, and even patent maintenance has become a burden; Abandoning the patent did not result in substantial losses, and even better performance indicators; The transfer of a large number of abandoned patents at the cost of application has not been accepted. What is even more unacceptable is that having a large number of patents on hand cannot avoid infringement; Products without patents still sell well, and various phenomena have greatly shaken the value of patents.
On the other hand, the amount of compensation for patent infringement damages has repeatedly hit new highs; High priced patent transactions and equity investments are common; In many large-scale mergers and acquisitions, patents have become the core subject matter; Leading companies in the field of technology are actively increasing their investment in patents. In terms of concept, there is even a popular saying that without patents, there is no independent intellectual property, no innovation, and no research and development. As a monopoly protected by law, patents make the exercise of litigation rights as a means of commercial competition a legitimate act of infringement. In infringement litigation, regardless of the background, the unequal game between the plaintiff and defendant leads to the best outcome for the defendant, which can only prove non infringement after going through many trials and tribulations. This has also made many companies sigh that they cannot operate freely without patents, have no security guarantees, and face many technological policy opportunities with great admiration.
The two are intertwined, and enterprises are trapped in a maze of trouble without patents and uselessness with patents. However, a large number of patent transaction prices are showing a phenomenon of soaring and touching the ground, and the chaos is gradually captivating the eyes. It is difficult for onlookers to understand the logic behind it, and judging the value of patents seems to be a divine operation without any rules or methods to follow. Even insiders are prone to falling into the misconception of cutting and confusing the truth.
The author has been in the industry for 20 years and has mainly invested in patent operation practice in the past decade. They have been deeply involved in various business sectors such as patent value evaluation and analysis, litigation, licensing, trading, and investment and financing. Based on the experience and lessons learned from handling many cases in practice, this article elaborates on the mechanism and conceptual analysis of how to understand the value of patents for reference.
To understand the value of a patent, one must first understand its essence and attributes. The essence of a patent is an exclusive right, which, due to its potential operational benefits, derives an asset attribute from its right attribute. However, there is a dependency relationship between the two, with the right attribute being primary and secondary, and the asset attribute being secondary to the right attribute. The asset attribute is parasitic on the right attribute.
The characteristics of rights are blurred boundaries, scalability, and extensibility, which are variable and difficult to quantify. The realization of their value depends on the operation, transformation, and application of the subject, which can generate indirect or even implicit benefits, dependence on the subject, and insufficient liquidity. And asset attributes are more reflected in explicit computable returns, especially when it comes to transactions, where liquidity is a part of asset attributes and prices. In various typical models of patent operation, litigation and licensing are used to exercise rights attributes, while transactions, valuation and equity investment, and pledge financing are used to demonstrate asset attributes. Patents, on the other hand, are generalized to more surface level derivative label attributes for high-tech certification, tax reduction and exemption, qualification recognition, etc.
The attribute of rights is reflected in application, the attribute of assets is more reflected in transactions, and the attribute of tags is reflected in recognition. The essence of the three is from reality to virtuality, and the manifestation is from the inside to the outside.
Next, let’s talk about the essence of patent value. Fundamentally, patents are tools for commercial entities to compete in the market. The value of a tool depends on its needs and application scenarios, and is closely related to the problem it solves. Its value is determined by what role it plays in what scenario. A stool, usually a seat, can be used as a ladder by people who want to climb over walls, as decoration in model rooms, as a material for starting fires in harsh wilderness, and even as a weapon by people fighting. Tongguan patents, in different enterprises, periods, environments, and for different business purposes, naturally have different meanings and actual values. Whether patents are used as important tools for market competition, defensive fortifications to avoid the loss of technological exclusivity, or certificates obtained to enhance reputation or obtain qualifications, determines what kind of value they can play. Therefore, core patents that are essential for one enterprise may be worthless for another enterprise, even among peers in the same category of goods.
In the case of unchanged subject, different enterprises have different dominant components of patent attributes and different levels of value expression due to differences in driving modes. Trade oriented and service-oriented enterprises’ competitiveness is largely reflected in their service capabilities, with little dependence on technology. In terms of products, the presence and quantity of patents have a lower impact on their competitiveness, and they hold more patents, assets, and label attributes; For technology driven enterprises in production and research and development, the technology is focused on the product, and the cost of development is accumulated in it. If the technology is not protected by patents, it is equivalent to sharing a part of the investment and output results of technology development for free with competitors in the same industry. Competitors participate in the competition by acquiring technology at almost no cost, resulting in the exchange of advantages in the market. The importance of patents is obvious, and their role as an attack on first mover advantage is dominated by the attribute of rights.
In the case of changes in the subject, such as in transactions, equity investments, and pledge financing, ownership and control rights may be fully or partially transferred, and patents may undergo value reconstruction and division due to detachment from the original subject or alignment with the new subject. Their role is reflected in the actual commercial benefits associated with the transaction. Patents, as a medium, fulcrum, or lever, may shift their value beyond the entity.
Therefore, patent value is multidimensional and cannot be simply linearly summed up due to its multidimensionality. Attempting to construct a multivariate matrix model to calculate the entire value is meaningless, there is no suitable model, and the variables are difficult to exhaustively list, let alone meet practical needs.
Since patents are tools, and most of the tools we see can relatively accurately determine their value, why can’t patents? Due to the multifaceted nature and diverse application scenarios of patents. Although a stool has many uses as listed above, its conventional use is relatively certain, while patents exhibit multiple levels of attributes simultaneously and undergo use transfer with changes in the external environment, resulting in a mismatch between the evaluation perspective and actual use. Meanwhile, each patent is theoretically a unique non industrial product, and its weak liquidity and adhesion to the subject make it almost impossible to determine fair value.
Can the value of patents be accurately evaluated in specific scenarios? The answer is that it cannot be accurately evaluated. The value of patents is reflected in the problems they solve, and patents are only one of the elements that solve problems, and the contribution shares of each element’s value are difficult to accurately determine. On specific needs, the value realization of patents is influenced by more important external variables such as stakeholders, legal environment, industry characteristics, technological trends, and operational strategies, which can be covered by non patents themselves. Taking infringement litigation as an example, a high-quality patent cannot achieve its exercise efficiency goals without professional manpower, necessary capital cost investment, and compatible business strategy linkage support. Its value is naturally difficult to reflect, as other elements are indispensable. Therefore, it can be seen that the value cannot be attributed to the patent; On the other hand, the amount of compensation or license fee income obtained from a patent infringement lawsuit does not represent the full realized value of the patent, it is only a manifestation of the stimulation under a combination of elements. Furthermore, the value of a patent is not constant and varies from person to person, from time to time, and from different environments. The aforementioned mention of external factors as variables implies this. For achieving business goals, there is no need to be trapped in the quagmire of patent value. As long as the cost input is acceptable and cost-effective compared to the benefits, it is cost-effective. It is not only impossible but also unnecessary to pre evaluate and calculate its value. The value of patents is realized in operation, and correct application is more important than precise and unverifiable evaluation.
After discussing value, let’s talk about price. How should we price it? At present, the common methods for asset valuation include cost method, market method, income method, etc. However, the prices of patents evaluated by various methods vary greatly. For the same subject matter, different methods have different prices, and the pre evaluated prices often cannot be realized in the actual market. The use of the income approach often ignores the most important external factors and prerequisites, and separates patents for isolated pricing, which is impossible to price and can only be achieved by nested theoretical models. Therefore, in practice, there has been a common pattern of inconsistency, reverse operation, first reaching intentions and then evaluating, and then executing transactions. This has made patent evaluation and pricing essentially a formality, just an operation in conjunction with the procedure. The significance of asset evaluation institutions is only to provide a formal proof that provides a textual reference for transactions.
So how is the price formed? An important understanding needs to be clarified here: prices are not determined by evaluation, but by market transactions. Without transactions, there is no price. During the transaction, both parties can provide seemingly reasonable prices and explanations based on their own goals, but the conflicting interests lead to each speaker blowing its own horn. What determines the price? Fundamentally, the true price depends on market supply and demand. From the perspective of the demand side, value is reflected in the problem being solved, and price is the cost of solving the problem; From the supplier’s perspective, value is reflected in the loss of tools and opportunities, while price is compensation for the loss. Both parties have their own acceptable ranges, and when the ranges overlap, a transaction can be made. In the entire trading market environment, patents are similar to other assets, and their prices depend on the scarcity of the subject matter, which can determine the number of competitors. More precisely, it is a comparison of supply and demand. When there is more supply, the price naturally decreases, suitable for fewer subjects, but of course, high prices are difficult to obtain.
Talking about the relationship between value and price again, this is clearly a two-tier concept, somewhat similar to the duality of rights and assets. The value of a patent is more directed towards the attribute of rights, while the price is more directed towards the attribute of assets. Tag attributes are a generalized extension of rights and asset attributes. We often believe that value determines price, and price is a reflection of value. Based on the analysis of value, price can be controlled. However, from the above analysis of value and the mechanism of price formation, it should be clear that the relationship between price and value is not significant. Transaction price is not a reflection of value, and price cannot determine price. On the one hand, the activation mechanisms of the two are different and do not form a mapping relationship with each other. On the other hand, value depends on human definitions and needs, and many transactions do not point to the value of the patent itself. The dual line operation mechanism of value and price results in the inability of surface prices to reflect their underlying value. Even if value has an anchor point, it may not be settled due to poor information transmission or distortion, or cognitive distortion may occur due to market variability, thus unable to transmit to prices. In transactions, the same patent can have significant price differences due to factors such as the trading subject, trading time, trading mode, and trader. Therefore, there is no objective and constant value, let alone a fair and constant price. When we see a sky high transaction, there is no need to exclaim that patents are priceless, and there is no need to lament that patents are worthless for priceless transfers. The transaction naturally has its inherent logic. Although both parties may not have accurately estimated the patent value, they must feel that the transaction price is reasonable and acceptable.
Is it meaningful to understand the mechanisms and logic behind the various values and prices mentioned above? Does it help to better solve problems? of course. Due to different business purposes and ever-changing scenarios, understanding the reasons behind them can lead to change without being limited by established laws. Tailored solutions can be tailored to actual business needs, which is also the core of transparency required by patent operators and the value of professional experience.
Taking patent transactions as an example, from the perspective of the demand side, the upper limit of patent value that cannot be reached is the corresponding benefit of solving business problems, including potential achievable loss avoidance or risk resolution. Under a clear framework of purpose, the benefits to be realized and expected input costs can be determined, and then the highest contribution ratio of each contributing factor (ignoring secondary factors) can be decomposed to give the highest contribution ratio of the patent. This can be a subjective range, and then roughly determine the upper limit price of patent acquisition. However, this should not be the price of patent transactions, but should be explored downwards as much as possible through market means during operation. This process is not touching the value of patents, but reducing transaction costs, because the recognized upper limit of patent value has been set, and the input costs are higher. The lower the better. From the perspective of the supplier, the loss of abandoning the patent should be determined first, that is, the expected benefits that can be generated by not selling it. Based on this, market means such as packaging and filling should be used to increase its observable benefits on the books, so as to maximize the expected reasonable selling price. In theory, when a transaction is made at the intersection where supply and demand are expected to extend in opposite directions, it is the appropriate price for the transaction between two determined entities. If either party does less work or uses the wrong method, the interests will tilt towards the other party. Of course, many situations are not as simple as this. For example, in commercial mergers and acquisitions, patent transactions are often part of the overall asset transaction. At this time, the overall transaction game dominates, and it is common for the values of the various targets in the asset package to be swapped and shifted horizontally. In another scenario, such as the low-end trading market, tag attributes often dominate, and the intrinsic value of patents is not the core of transactions. Prices have a market average reference line, and both parties do not need to perform complex operations and can directly transact at the desired price of both parties. Transactions are sometimes the result of game theory, and sometimes the outcome of cooperation, depending on the true needs of each party and the degree of divergence between the goals of both parties.
Regarding the value, price, and evaluation of patents, many people have a vague understanding, but they are unable to clarify the principles and develop clear and effective implementation plans in practice. Knowing what is in the table allows for flexibility. I hope that by elaborating on the essence and underlying logic of patent value and price, it will be easier for everyone to see various bizarre phenomena.
In practice, the scenarios vary greatly, and the approaches to solving problems also change with time, place, and person. It is difficult to exhaust them all in one sentence. As the value of patents is more about operation rather than static inherent and evaluated, how to operate is crucial and largely depends on people. It is necessary to combine practical experience and thoroughly understand the reality of business scenarios, starting from the high-dimensional and broad perspective of patents themselves, grasping the core elements, ignoring secondary variables, and adapting to local conditions, in order to solve problems well.
