An ex ante theory of patent valuation: transforming patent quality into patent value.

• Author: Perel, Maayan
• Position: IV. An Ex Ante, Social-Normative Perspective of Patent Valuation: Valuing Patents According to Their Quality Traits through VI. Conclusion, with footnotes, p. 196-236

4. AN EX ANTE, SOCIAL-NORMATIVE PERSPECTIVE OF PATENT VALUATION: VALUING PATENTS ACCORDING TO THEIR QUALITY TRAITS

   The first and most striking point of novelty of the proposed theory of patent valuation concerns its social-normative perspective. (348) Indeed, none of the existing methods of patent valuation suggests translating the quality of a patent into monetary value. (349) Rather, they all adopt a positive-economic perspective of valuation, which is based on financial predictions. The proposed idea of quantifying a patent's quality is, thus, revitalizing. Yet, in this regard, two preliminary queries should be initially addressed: (1) what does this proposal exactly mean in "patent quality"? And (2), is there any empirical or other basis that supports creating a linkage between the quality of a given patent and its value? After addressing these queries, the next concern should relate to the practical application of this revitalizing idea of quantifying the quality of a patent. In particular, specific quality indicators should be defined and validated. Accordingly, the following discussion respectively addresses the two preliminary queries mentioned above. Subsequently, it introduces the proposed quality indicators and explains their merit.

   1. What Is Patent Quality?

      Although the term "patent quality" is heard everywhere, especially in conjunction with the near-universal demand "to improve patent quality," a common and precise definition of "patent quality" is still missing. (350) In fact, there are at least three different ways to approach patent quality. (351) One is to evaluate "how well a patent meets the statutory requirements: patentable subject matter, utility, novelty, non-obviousness, and adequate written description and enablement." (352) According to this approach, "the grant of a patent that is not statutorily warranted gives the patent holder market power to raise prices or threaten litigation without providing any true benefit to the public." (353)

      The second way to approach patent quality is to assess the validity and scope of the patent claims from the standpoint of certainty. (354) A high quality patent, according to this approach, would be one whose "specific features ... should be clearly defined, and the claims should be likely to be upheld in subsequent legal proceedings." (355) Granting patents of uncertain validity may impede innovation by causing patentees to under-invest in the field or by discouraging competitors from investing in further research for fear of infringement. (356)

      A third way to approach patent quality is from an economic perspective. (357) A high quality patent, hence, could be "one that covers an invention that would not have been [developed] without the incentive of patent protection." (358) A different variation of this approach would be to evaluate the quality of a patent according to its commercial success. (359) Note, however, that many patents that are not commercially successful could still be of "good quality from the standpoints of the statutory criteria and certainty." (360) Therefore, it is perhaps more accurate to view this approach to patent quality as "a subjective indicator of whether something is a desirable invention, rather than a reflection of the quality of the patent itself." (361)

      This Article advances the first approach to patent quality. (362) Accordingly, it associates patent quality with a patent's compliance with the statutory requirements of patentability. (363) Given this approach to patent quality, understanding the proposed social-normative perspective to patent valuation is a matter of simple logic: affording patent protection is justified if, and only if, the patent granted indeed "promote[s] the progress of science and useful arts." (364) When a patent meets the statutory requirements of patentability it is presumed to satisfy this constitutional mandate. (365) Therefore, we should put our efforts into incentivizing the development of patents that comply with the statutory standards and penalize the development of patents that fail them. (366) How? We must translate patent quality into patent value.

      To achieve this goal, this Article suggests a two-step method of patent valuation. First, determining the quality of a given patent, according to the list of quality indicators proposed henceforth. (367) Then, attaching a corresponding range of applicable values based on the proposed price limitations. (368) Essentially, the proposed quality indicators derive from the statutory requirements of patentability. (369) Accordingly, there should be better chances that a patent designated as having more of these indicators actually meets the statutory requirements of patentability. (370) Therefore, such a patent is more likely to promote the progress of science and useful arts. (371) It should thus merit a high value.

   2. The Bases For Proposing A Social-Normative Perspective

      Turning to the second query, it is interesting to examine three different bases for the proposed theory's social-normative perspective: the constitutional basis, the economic basis, and the empirical basis. Pursuant to the constitutional basis, patents exist "[t]o promote the Progress of Science and useful Arts." (372) Although they unavoidably block subsequent dependent innovation during the limited time of exclusiveness granted to their owners, in the long term, they incentivize innovation and increase public welfare. (373) Thus, valuating patents from a social-normative perspective, according to their ability to benefit the public as whole, is constitutionally warranted. (374)

      Pursuant to the economic basis, patents are justified as means of incentivizing innovation. (375) Indeed, a patent incentivizes innovation by granting its owner the sole right to exclude others from making, selling, using, or licensing the underlying invention. (376) Any other individual who "makes, sells, uses, or licenses the invention or an equivalent thereof--even if that person invented it independently--infringes the patent and can be enjoined from practicing the patent and be made to pay damages." (377) In this sense, patents supply monetary incentives to innovators: innovate, and enjoy a government-sanctioned monopoly over the right to make money from your invention. (378) To reinforce this monetary incentive, especially in regard to high quality innovation, this Article suggests drawing a parallel line between patent value and patent quality; rewarding inventions in accordance with their quality, thereby encouraging the development of socially beneficial inventions. (379)

      Finally, an empirical basis, showing a correlation between different measures of patent quality and measures of patent value, also supports adopting a social-normative perspective of patent valuation. (380) In this regard, a study conducted by Jean O. Lanjouw and Mark Schankerman used a compound of different indicators of "technological importance" (which they referred to as "quality") to predict patent value. (381) Specifically, they analyzed the following indicators of technological importance: (1) the number of patent claims as an indicator of the breadth of the technology claimed; (2) the number of forward citations (the number of citations received by posterior patents) as an indicator of the relevance of the patent for future research; (3) family size (the number of international patents filed for the same priority patent) as an indicator of the patent's international importance and the holder's willingness to incur high application costs; and (4) backward cites (the number of citations made to previous patents) as an indicator of the extent to which the patent makes use of the existing prior art. (382)

      Lanjouw and Schankerman examined the relation between these indicators of technological importance and the private value of patents in different fields of technology, as expressed by litigation and renewal rates. (383) Interestingly, they found a strong positive link between these two. (384) Although they did not examine the precise measures of quality as those suggested by this proposal, their study remains relevant for showing that a meaningful correlation between some measures of patent value and patent quality practically exits, even if not in the same value in the different technological sectors. (385)

   3. The Proposed Quality Indicators

      The following discussion suggests an open list of quality indicators that should be used to determine patent quality; defined in this proposal as, the patent's compliance with the statutory requirements of patentability. (386) Particularly, it presents four groups of quality indicators according to the different statutory requirements of patentability: The first includes quality indicators indicating the patent's subject matter eligibility; (387) the second indicates the patent's utility; (388) while the third reflects the patent's novelty and non obviousness; (389)and the fourth focuses on the patent's clarity and definiteness. (390)

      Recall, that a two-step method of patent valuation is advanced in this Article: first, determining the quality of a given patent; and then, attaching the corresponding price limitations. (391) These steps must be completed upon issuance of a patent, as the proposed method of patent valuation assumes an ex ante perspective. (392) Therefore, to be considered as a quality indicator within the context of this proposal, any suggested indicator first must be found measurable at that preliminary point of time. (393) Accordingly, some indicators of patent quality that had been previously suggested in the economic literature become inapplicable. (394) For instance, the number of forward citations (the number of citations received by posterior patents) (395) could not be used under the proposed theory. While these citations may provide a good indication regarding the relevance of the patent for future research, (396) they cannot be measured upon...