OPTIONS METHODS To take into account the variations in the assumption values that go into the income method calculations, more elaborate income-based valuation technologies utilize decision trees, options and Monte Carlo simulations to improve the estimated values.
The DECISION TREE APPROACH is one of several that considers patents as options. Patents can be thought of options in the sense that they give the patent holder the option to preclude others from utilizing the innovation or acquiring the complementary assets in order to extract money from the innovation. A further argument for valuing patents as options is that there is a separation between the underlying asset in the option, and the obligation to use it. As the “Decision Tree Approach” figure illustrates, when a development or commercialization process completes its stage A, the work can either be stopped and the results sold as is (Payout B) or more work can continue on to reach another decision point where again the work can be stopped with the Payout C or continued on even further to reach Payout D. The company has no obligation to continue down the full route to Payout D. Modeling decisions of patent prosecution, global filing, maintenance, licensing, protection of commercial products advantaged positions, or litigation allows one to best estimate the value of the patent along the development and commercialization pathway of the technology it protects. This methodology is best utilized for patents which protect a narrow range of products against a few competitors.
For patent related processes there are a number of statistical values to can be used at the decision points. These are global values for all US patents. They are good starting points, but with more advanced databases these numbers are now available from commercial providers for industry segments and technology areas. That said, the following provides a viewpoint. First, the probability that a patent will be held invalid is 67%. Second, the probability that a patent will be enforceable is 86%. Third, the probability that patents will be infringed is 68%. Fourth, if the patentee asserts his patent in court he has a 68%’s chance of prevailing. For non-practicing entities (NPEs) the probability of winning drops to 29%. The “Decision Tree for Patent Litigation” figure shows an example tree which would use these values.
Another Options approach is the BLACK-SCHOLES APPROACH. It is standard practice in the financial industry use the black Scholes formula to calculate the value of an option. When doing so the Black Scholes model determines the value of the call option. In the financial world it is assumed that the risk-free interest rate is constant and also that the stock price volatility is constant. When applying this to patent valuation the Black-Scholes option pricing model is modified as shown in the “Black-Scholes Method” figure. Note that the issue with this method is that the assumptions the model is based upon may not be true. For example the Variance of Product Value Return and the Risk-free Rate are often not constant throughout the life of a patent. As with other income based valuation models, agreeing on the values to put in the model are subject to expert opinions.