How do we actually structure an open, free-market patent exchange?
(1) How would patent assets be placed on the exchange? (2) How would they be classified? (3) How many shares would be attributed to a given patent within a technology class? (4) How would we initially value them? (5) What market forces would affect value of the patent shares? (6) If I own a technology share (used interchangeably with patent share), what exactly do I own and what can I do with it? (7) What would drive trading on the patent shares? (8) What would incentivize collaboration amongst market players?
In this post, I’ll be discussing (4) & (5)–share valuation.
How would we initially value a share within a technology class? What market forces would affect that value?
Let the free market dictate each exchange’s valuation techniques to determine a suggested price listing for shares of its listed technology classes, and let the market judge that exchange’s reliableness.
But each exchange must conform to minimum valuation standards.
What are those valuation standards? How do you determine the value of a share?
In its most basic terms, the value of a technology share is what a buyer is willing to pay for it.
Thinking of it from the buyer’s perspective, what valuation metrics would a buyer use to measure share value for a technology class?
Before purchasing a share of a technology class, below are questions a knowledgeable buyer would ask and answer, keeping in mind that the shares are backed by patent assets.
1. Are there products or services in the market that embody the patented ideas?
This is the threshold question to valuing any patented idea. If there is an actual product or service that exists and incorporates a patented idea, then the patented idea’s value has realized at least some of its potential.
If there is no commercial adoption at a given point-in-time, then the patented idea’s value is potential value.
2. If there is no product or service in the market, how do you value a patent asset’s potential value?
Some guideline questions: (a) Is there a perceived chance of success of commercial adoption of the patented idea? (b) Is there a market player in the planning and preparation stages of launching a product or service adopting the patented technology? (d) Are there research-and-development (R&D) efforts devoted to commercializing the patented idea? (e) If so, how much and what percentage is it of the company’s overall R&D budget? (f) Does the product or service appear to be a central one to the company?
Trading on a patented idea’s potential value enables the free market to determine the value of an idea–this doesn’t yet exist today.
3. If there is commercial adoption:
(a) What is the overall revenue of those products and services? (b) What apportionment of overall revenue does the patented idea contribute? E.g., is it just a feature-of-a-feature or is it a core feature that drives sales? (c) What are the profit margins for the product- or service-in-question, and what would an appropriate royalty rate be for continued infringing use?
4. What is the nature of the patent activity for the patents in the technology class?
(a) How many patents does the technology class include? (b) How many patent applications? (c) Is the absolute number of patents and applications trending upwards or downwards? Are patent filings increasing or decreasing? Are there more patents being filed then there are patents expiring? Are the patent maintenance fees being paid?
5. Do market players acknowledge using the technology covered by a technology class?
Do they have a license to the technology class? Are they paying royalties into the technology class? What are royalty amounts? What are the respective apportionment and royalty rates? What are the sales and revenues of those products and services?
6. If there is no licensing revenue, is there a possibility that a market player is practicing and that it should pay a royalty?
This is where we take into account the dynamics of the risks and rewards of an infringement allegation in the litigation context, and account for them into each exchange’s proprietary litigation algorithm–an algorithm to encapsulate the dice rolls of jury verdicts and judicial rulings, accounting for each side’s respective legal burdens of proof.
The output of such an algorithm would be an indexed number for the technology class that measures the chances of success that a court would rule in its favor on an infringement claim against a particular product or service.
Each case is highly fact specific and highly volatile, and these algorithms will be tested and refined over time, particularly as patents rated by the algorithm are tested in actual litigation at various points.
Why encapsulate potential litigation-outcomes into algorithms? Using an algorithm converts limited judicial time and resources into a software output that enables market speculation and trading.
And if the patent is actually litigated, the algorithm weights would vary as litigation milestones are reached, potentially creating volatile side-markets.
And lastly, if a technology class is experiencing trading due to infringement speculation based on activity of a particular market player, then this would flag an opportunity for cross-licensing discussions.
Regarding why parties would be incentivizied to engage in cross-licensing activity on the exchange, we’ll be discussing this in a subsequent post in this series.