Risk Management

How to Tell Which Patents Are Valuable

A study reveals a simple method that companies with large patent portfolios can use to evaluate the return they're getting on patent maintenance co...
David McCannMarch 29, 2019

Companies spend billions of dollars developing potentially patentable intellectual property, but it can be hard to understand how much value individual patents within a large portfolio are providing.

Patents that stop competitors from copying products can generate great profits or fast growth and thus be quite valuable. But if competitors can find ways to copy patented products without violating the patents, then those patents may be worthless.

In a recent study, MIT researcher Neil Thompson identified an easy measure companies can use to help evaluate the degree of protection that a patent provides.

It’s a simple formula: the fewer words in the first patent claim — the language in the patent application that defines the scope of what’s being claimed as the invention — the greater the protection.

To illustrate the principle, Thompson gives a hypothetical example: “If my patent covers ‘bicycles,’ then it is very broad. If it covers ‘red bicycles,’ it is narrower. If it covers ‘red bicycles with training wheels,’ then it is even narrower. The more words you add, the narrower the patent’s protection.”

He notes that it can be prohibitively time-consuming and expensive to review every patent in a portfolio of thousands to determine which ones are valuable. “Our method of counting words is an easy-to-use tool to measure patent scope that is grounded in both patent law and in the practices of patent attorneys,” he says.

The research found that typical first claims average around 120 words, while almost none exceed 500 words, and 95% run less than 375 words. “A tip for practitioners sifting through hundreds or thousands of patents is to identify the ones with the shortest first claims and spend more time on those,” says Thompson.

Thompson, who conducted the study with Jeffrey Kuhn of the University of North Carolina, explains that valuing large patent portfolios is necessary in preparation for business deals including mergers, acquisitions, and licensing agreements.

It’s also necessary when a company needs to make decisions about which patents to abandon and which to maintain, as maintenance fees for granted patents can be expensive.

“It is very costly to evaluate patents, so it’s not uncommon for a firm to base licensing decisions on only a handful of patents that are deemed most important in a portfolio,” Thompson says. “However, that’s risky, as there may be other valuable patents that are being overlooked. A better method is needed to sort through portfolios and determine which provide the broadest protection.”

The study, titled “How to Measure and Draw Causal Inferences with Patent Scope,” was published in The International Journal of the Economics of Business.

Data on the number of words in the first claim of patents can be found at: http://jeffreymkuhn.com/index.php/data/ under “Patent scope and examiner toughness dataset.”