THE VALUE OF IP

So, you have aspirations to license a patent? But where do you start? And how do you value something as intangible as intellectual property? Watermark's Peter Hallett and Richard Baddeley explain.

Where do you begin with a new client?

• RB: If a new client has asked about licensing their technology, the first thing I want to know is whether they have a business plan. Right from the beginning they need to have an understanding of the commercial value of what they are licensing.
• PH: Yes, and as the client's advisers we need to understand our client's business and where the client wants to take its business. We can then put together a strategy for protecting the client's IP in the markets of greatest potential value. If our client wants to license in technology, we will start by assessing the strength and breadth of the IP around that technology.
• RB: The technologist might be blinded by the technology and possibly discount its commercial value. If they do not have a business plan, I'll say, 'Let's do some market research'. We can assist with identifying possible partners or sometimes provide an introduction. An assessment of the commercial value of the IP, which might sometimes be a challenge, is the best place to start.

Do most of your clients build companies around their IP or license the technology?

• PH: Some companies are well equipped to exploit their IP, others might lack the resources or skills to maximise the potential of their IP. They are ideal candidates for licensing out their technology to generate value. And from a licensee's perspective, licensing in technology can be far more cost effective than internal development.
• RB: OEMs (original equipment manufacturers) often arrive with very clear ideas about the purpose of their patents. They will ask us to draft protection around certain commercial considerations. An increasing number of companies will have the expectation that we will also provide value as 'business advisors', in addition to technical advisors.

What sort of information will you require?

• PH: We'll need to know what sort of applications the IP has and what role the IP owner wants to play - will they be hands-on and involved in manufacture and distribution, or do they simply want to receive a royalty stream? Then we can help to identify potential licensees.
• RB: Typically, clients operating in an industry already have an idea of who would benefit from the technology. If they are already investing in their technology through the purchase of patent protection, they are very likely to have a reasonable idea of its value and who or what industries would benefit.

How do you value licensable technology?

• PH: The two main factors to be taken into account when determining value are what premium the IP will bring and the strength of the IP. The 'premium' refers to the cost saving the IP will bring, or the extra revenue it will generate. In short, how it will generate financial value and influence 'the bottom line' of a potential licensee. The strength of the IP refers to its scope and validity.
• RB: The 'scope' of the IP is the extent to which you can stop others using it. It's your enforcement potential. For example, can the IP be enforced across multiple industries? The 'validity' of the IP refers to how different your IP is from what's gone before - how confident you are that another can't contest your rights. The combination of strong IP and high premium value measured in the market's terms will give you a valuable asset.
• PH: Finally, the developmental stage will also influence the value. The closer your IP is to market, the higher value it will attract.

Is it worthwhile putting yourself in the position of the buyer?

• PH: Yes, most definitely. The buyer will be looking for ways to discount the price. How they value the IP will depend on whether they are looking to exploit the IP in its entirety, or simply looking for freedom to operate, or to stay ahead.
• RB: They may also be seeking exclusivity, which will force the licensor to re-visit their overall strategy for licensing the IP. To explain, exclusivity may earn a higher price for the licensor but it is worth considering whether that price will exceed the value of a number of non-exclusive licences commanding a lower nominal royalty. Different types of clients reach different conclusions on this point.
• PH: Right from the beginning, it's best to get both patent and licensing advice. That way, a sound strategy can be developed from the outset.

Peter Hallett is a Director for Watermark Intellectual Property Lawyers and specialises in licensing IP. Richard Baddeley is a Principal and Patent Attorney specialising in Chemical Engineering projects. For patent or licensing advice, please contact either Peter or Richard on (03) 9819 1664.