Part 3 of Interview with David Wanetick: The importance of valuing intellectual property in pricing M&A transactions
In this final installment, Jeff Schmidt had the opportunity to interview David Wanetick on the importance of valuing intellectual property in pricing M&A transactions. Valuing patents is an especially complex subject so we have broken our interview into several posts.
Worldwide value verse cost
David
It is expensive to file patents outside of the United States as well. There is, you know some methods you can use that are more expedient. There's something called the Patent Cooperation Treaty PCPs. So you can file a patent, and for instance, that will give you the opportunity, to file patents in a lot of European countries. So, you can get the patent, get that issued, and then you have a year to make a decision in which European countries you want to file. So, you can buy some time, you can get some efficiencies. If you go through a patent cooperation treaty, process you know, part of it's gonna be dictated by the budget you have. Part of it's gonna be dictated by the market. You know, is my product relevant in every country in the world, probably not.
There's probably a lot of countries where it's not relevant. In some parts of the world, the patents are not at all upheld. I don't see the logic of getting a patent in, in most of the African countries, for instance, or some of the smaller South American countries, you know, it just doesn't make sense to pay money to get a piece of paper that won't be enforced. If there is infringement, you also have to look at where is, where is it likely that a competitor is gonna compete with me? So if you're producing automobiles, you know, it's probably not likely that automobile company will arise in Lithuania or Lichtenstein or Peru you know, a very small market. So it's just, it's just not likely that somebody's gonna produce something that competes with me, in certain markets. Therefore, I will preserve my budget and not invest in, in patents in those countries.
Applying for patents
Jeff
Does the fact that you've applied for a patent, say, in the EU but it hasn't been issued yet, it's in process. Does that give you any kind of protection at all?
David
I don't know all the rules in the EU, but the way it is in the United States is you can license or sell anything. You can sell even a provisional patent application. So, a provisional patent application can just be a placeholder. So, if you have an idea today and you don't think anybody else has had this idea or published any similar patent, you can know, theoretically just write some notes on a piece of paper and send that into the patent office. And that will be a provisional patent application. You have one year to file a non-pro provisional patent application, and then that's the one that's reviewed. So, you can even sell that initial provisional, which, you know, maybe nobody will pay for it, but you could sell it. You could sell or license a non-pro provisional patent application, published application.
So, if several years ago I was going through the patent review process, and 18 months into it, I got my patent application published. If somebody started infringing, then I could seek damages from the time the patent was published, even though it wasn't issued, it was just published, but it wasn't, wasn't granted. I could receive damages from the data publication if the application actually issues, and if the claims are substantially identical from the published application to the issued patent. And if the infringer was put on notice that, or they knew about my application, then I could start receiving damages from the beginning of the time that the patent application was published. And that's important because it's more money for more the time that infringement was taking place. And it could also bear interest damages on top of the, reasonable loyalty damages and interest damages could, could be significant as interest rates are rising pre-judgment interest is set by the judge. It can be arbitrary. The judge can get very aggressive with the compounding scheme and the interest rate. So that's, that could add some more money to my damages.
Case study
We have a, a client that we're working with currently that has patents in the US and patents applied for in the EU. They're in the packaging industry and have an innovative and patentable concept or product to improve the sustainability, reduce the costs of, shipping in corrugated packaging. They were concerned at the outset about approaching prospective buyers in Europe as opposed to the United States because they had applied but had not yet received
United State vs EU patent examiners
David
It's more of a profession to be an examiner in Europe, in the United States, many of the examiners use their tenure as a, as a patent examiner, as a stepping stone to get a job at a big law firm. The tenure, they serve in the US is shorter in, in Europe, it can be a whole career. So, you have people that are more versed in doing prior art searches. So prior art searches mean the examiner's job is to make sure nobody else had the idea before, so that they have to do a lot of searching to make sure that you're the first one with the invention.
There's a lot of firms out there that can be hired to do very sophisticated searches, therefore may be less likely that the European examiners are going to find any damaging prior art, and therefore, the probability of the getting their European patents can be, can be very high. So it may just be a matter of time, before they get their patent applications issued. In some cases, it could be an advantage that there's a bit of a delay if they start to see that the market is shifting or that the hot new, um, element on a device is a little bit different. Now, they could still change the claims a little bit. They could tailor the claims a little bit to the hot area.
Valuing patents
Jeff
A hundred years ago if a client has a portfolio of patents that they want to sell, how do you approach the valuation of those patents? What is the, the calculus that is used, what research has done? What, what is the calculus used to put a value on those patents?
David
It's not something that you can be answered in just a, a couple minutes. I teach a course that's two and a half days, and even that's not enough. We can send genericized reports to some clients and prospective clients if they, but basically you have to you usually have some analysis on the industry, so we get some context where, what is this patent supposed to do in the industry, where, are the growth drivers for the industry? What are the obstacles to growth for the industry? How are regulations or demographics gonna affect that industry? Why is my invention within the industry going to be needed? Is it going to cause more demand?
Is it gonna reduce cost? Is it going to help companies get in regulatory compliance? You know, what is the reason that people are gonna need my patented inventions? There's a lot of great inventions that don't really have any application. There's a lot of different ways of applying the market method, for example. So of course, if you are aware of other patent sales that are similar, any licensing agreements that are similar, that's great. You can look at things like liquidated damage provisions in nondisclosure agreements, you know so the amount of money for the liquidated damages, um, is supposed to reflect the value at risk. There are all the patent specific things going on that we talked about and that I mentioned earlier. Um, but then, you know, there's always a risk that the patent will be invalidated, uh, just because your patent has been issued, even if it's gone through a rigorous examination process, even if it was a five year or six- or seven-year process, it's, it's not a guarantee that the patent will not be invalidated.
Jeff
Well, David, this has been a, a very broad and insightful interview. You've obviously had a tremendous amount of expertise in this arena, and is increasingly important as, as the world's economy becomes more and more oriented to intellectual property. And so, we thank you today for sharing some of your insights and experience with us, and, uh, uh, hope to have a chance to work with you and our clients in the future.
David
Well, thank you very much for your interest in my patent work, and, uh, I look forward to working with you as well. Thank you for the opportunity to interview with you.
