Correlating Patent Values with Prior Citations
What is forward patent citation? Why is it relevant? In this article, the author answers the above questions and details how these may be relevant to a damages expert in a patent infringement matter. These experts may need to ascertain the value attributable to the patented technology at issue. While comparable license agreements may serve useful in providing a market-based approach to arriving at a value, the damages expert must also seek to apportion out the comparable patents related to the patented technology within the comparable license agreements from that of the intellectual property that is not attributable to the patented technology. Analysis of patent’s forward citations may provide one with a means to apportion out the value of the patented technology.
The role of a damages expert in a patent infringement matter may include the need to ascertain the value attributable to the patented technology at issue. While comparable license agreements may serve useful in providing a market-based approach to arriving at a value, the damages expert must also seek to apportion out the comparable patents related to the patented technology within the comparable license agreements from that of the intellectual property that is not attributable to the patented technology. Analysis of patent’s forward citations may provide one with a means to apportion out the value of the patented technology. It is both grounded in the economic literature and has recently been accepted by the courts.
Valuation analysts engaged in litigation consulting on patent infringement matters as damages experts regularly utilize the market approach to ascertain the value of a patent-in-suit. The patent-in-suit, however, is often not licensed to a third-party outside of litigation, indicating a need for economically and technologically comparable patents. Licenses for comparable technologies with the appropriate economic risk characteristics may serve as a basis for ascertaining the value of the patent- (or patents) in-suit. Rarely, however, are these comparable license agreements limited to the comparable patented technology one seeks to examine. Indeed, comparable license agreements typically involve an exchange of various assets, which may include trade secrets; know-how; shared engineering resources; trademarks; as well as a variety of other patents that are technologically and economically distinct from that of the patent-in-suit. The patent damages expert is required to apportion out the value not attributable to the patent-in-suit. Failure to do so would result in overvaluing the inferred value of the patented technology by attributing the value of these non-patented technologies and assets to that of the patent-in-suit.
Forward patent citation analysis provides a means of apportioning out the relative value of patented technologies from comparable license agreements. Forward citation analysis can be described as a method to discern relative patent value that examines the number of times a patent is cited by a later patent. This approach is gaining increasing recognition and is widely used in the commercial practice of valuing intellectual property. Empirical work at leading academic institutions has established that an objective indicator of the value of a patent is the number of times it has been cited by later patents. A growing body of economic literature demonstrates that there is a correlation between the intrinsic value of a patent and the number of such citations. For example, Harhoff, et al., (2002) fits an econometric model that relates patent value to forward citations and finds a positive relationship. More valuable patents, that is, patents for which there is relatively high demand for the technology described in those patents, tend to be cited more often than less valuable patents. The intuition of this finding is straightforward. Patents for inventions that appear to be very valuable are likely to encourage research and patenting in very similar areas. The economic incentive is to try and claim ideas that are very close to the original patent. A patent application must cite all ideas that are precedents to the idea being patented. Consequently, research focused on an area related to the original, valuable patent is more likely to result in a citation to the original patent.
The absolute number of citations, however, is not by itself a good indicator of relative value. Patents in different technological fields tend to be cited at different rates, and patents that are older tend to have more citations than patents issued more recently. Therefore, to estimate the value of a patent relative to the remaining patents within a comparable license agreement, a valuation analyst may look to find other patents comparable to the patents listed on the basis of similarity of technology and age (the “Comparison Group”). The analyst may then compare the number of times these comparable patents are cited to the number of times the corresponding patents of interest are being cited to get an indication of their value.
To identify patents that are comparable to each patent at issue, one may utilize the fact that patents are classified by the USPTO into technology categories using the International Patent Classification (IPC) system. Under this system, a patent examiner assigns each patent to a category of technology labeled with increasing specificity from one to ten digits. Using the character subclass labels currently assigned to each patent of interest, for instance, one can identify other comparable U.S. granted patents on the basis of the fact that they, (a) share at least one current IPC subclass with the patent of interest, and (b) are published no more than six months before or after the publication date of the patent of interest.
To describe more explicitly how such data might be used, suppose a company is interested in assessing the value of the U.S. Patent Number 5,185,561A (the ‘561 patent), which was issued by the United States Patent Office in February of 1993 and placed in G06F, “Electric Digital Data Processing,” under the IPC convention. Suppose the ‘561 patent is but one of 20 patents included in a comparable license agreement. To isolate or apportion out the value of the ‘561 patent relative to the other 19 patents, an analyst could identify all, say, 2,990 patents issued within three months of the issue date in that G06F IPC class and count all the forward citations received by each of those patents. If the ‘561 patent received more forward citations than 99 percent of all the other technologically similar patents of the same age, that would be an indicator it may be a patent of considerable value. On the other hand, the opposite inference would be made if it received fewer forward citations than 75 percent of the comparison group.
Next, one may compare the number of times each patent is cited by later patents—or “forward citations”—with the median number of forward citations received by its comparable group of patents. One can then normalize the number of forward citations to the median of the comparison group. Such an analysis would allow a valuation analyst to apportion the relative value of each patent within a comparable license agreement of the ‘561 patent to that of the other 19 patents in the comparable license agreement.
In short, forward citation analysis, an extension of the market approach in valuation, provides analysts a possible tool for extracting or apportioning out the relative value of patents in comparable license agreements.
This article first appeared in QuickRead