Patent infringement damages are often hotly contested in litigations, as it involves a complex blend of legal and economic analyses and is often steered by the Georgia-Pacific factors.¹ A basic understanding of a patent’s value, however, is important for any transaction or litigation.
In this case study, we determined the fair market value of a patent directed to a multi-camera apparatus that may be used in a technology transaction or, if needed, in a patent litigation.
We were approached by a private company developing multi-camera apparatuses, including those for wearables or for integration into existing devices, to determine the value of their patent portfolio.
The patent portfolio consisted of 11 issued and 5 pending U.S. patents and patent applications with priority dates as early as 2009. The patent portfolio was also associated with an operating company specializing in developing wearable camera devices.
Our services were recruited to develop a preliminary “damages” model for the patent portfolio directed to multi-camera systems and apparatuses that may be used for photo effects, image enhancement, eye tracking, facial recognition, and other effects and abilities. The preliminary damages model was requested to be directed against three specific major smartphone manufacturers.
Pursuant to 35 U.S.C. § 284,² when there is a finding of infringement, the patent owner is entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty[.]” Accordingly, we developed a damages model that determines the value of a patent portfolio using an Income Approach known as the Relief-From-Royalty Payment Method. This approach measures a property’s value by quantifying the amount of income that could be generated from licensing the intangible asset and applying royalty rates from Comparable Uncontrolled Transactions (“CUTs” or “comparables”) to determine projected royalty payments.
Given statutory time limitations on damages as defined by 35 U.S.C. § 286,³ we determined the relevant time period to be between 2016 and 2030. We then calculated a Total Available Market (“TAM”) for smartphones within the United States in the relevant time period. Information for TAM was available through 2020, after which we applied a projected growth rate between 2020 and 2021 and a Compound Annual Growth Rate (“CAGR”) to project the TAM through 2025. Since we found no information on smartphone growth in the U.S. beyond 2025, we made no additional predictions and assumed that the smartphone market will remain steady through 2030. This assumption provides for the most conservative valuation. We attributed the TAM to individual smartphone manufacturers across the years based on reported market share.
We next determined the royalty rate. We identified 158 market comparables within the applicable field of use, i.e., multi-camera systems and apparatuses for imaging technology. Taking into account various factors, we determined the royalty rate from the comparables to be in the xx%-yy% range. Given that the comparables were not directly from smartphone applications, we found this range of royalty rates may not be appropriate for the smartphone market given the numerous features and parts within a smartphone. We therefore developed several additional approaches in determining a reasonable range of royalty rates. Three of these approaches are described below to showcase that when direct comparables are not available, some out-of-the-box thinking can help tremendously in estimating a justifiable value:
- Camera-related smartphone applications sold in respective online stores typically have image enhancement features using smartphone technologies. With an analysis of the earnings on these applications, we were able to calculate one royalty rate range.
- Smartphone manufacturers typically boast of various features with every new generation of smartphone. An analysis of the major features for each smartphone determined a proportion of the phone that can be considered a multi-camera imaging apparatus. Assuming that the previously identified royalty rate of xx%-yy% represented the entire capability of a device, we were able to estimate the portion of the royalty rate that needs to be associated with the invention of interest. This produced another independently estimated royalty rate range.
- Starting from what a typical point-and-shoot digital camera currently sells in the open market, and given the xx%-yy% royalty rate for such devices (based on comparable data we had found), we determined the royalty per unit that they would generate. Working backwards, we determined the royalty rate for a smartphone to generate the same royalty per unit.
All of the independent approaches used, including the ones mentioned above, produced royalty ranges close to each other. This confirmed that we are arriving at the correct solution. Based on the above analyses, we determined the appropriate royalty rate to be about 10 times lower than the initial range of xx%-yy%.
Finally, we applied the royalty rate above and calculated Net Present Value (“NPV”) of the expected royalty from 2016 through 2030 for each of the major smartphone manufacturers. An overall value for the patent portfolio was also determined based on TAM.
Based on our multi-pronged approach to value estimation, and given on our reputation for unbiased and conservative valuations, the client was able to easily convince third parties that the estimated damages/value are reliable and could be used for their due diligence purposes.
1 The Georgia Pacific factors include 15 factors that are considered in determining a reasonable royalty, including, e.g., the rates paid comparable to the patent in suit, the nature and scope of the license, the nature of the patented invention, etc. For a full list of the Georgia Pacific factors, please see: http://www.ipglossary.com/glossary/georgia-pacific-factors/
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