Valuing Patents for Licensing: A Practical Survey of the Literature

21 Pages Posted: 29 Jul 2009  

Anne Layne-Farrar

Charles River Associates; Northwestern University

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Date Written: March 3, 2006

Abstract

A number of methods exist for valuing a patent in order to license it to an external party. Several of these methods are well accepted in academic circles, others are merely tolerated as expedient. None of the existing methods, however, appears poised to easily accommodate software patent valuation in the face of open source software. Open source software distributors do not earn revenues directly from licensing source code. Even forprofit open source enterprises, such as Red Hat, provide software as part of a service bundle, not as an individually priced product. The problem of linking a patent to a stream of revenue generated by a bundle of goods holds for many service-oriented businesses, with open source as an extreme case. The increasing prevalence of service-based business models suggests that new thinking about how to put a price on patented innovations may be required. In addition to the basic problem of placing a dollar value on an innovation, new thinking on the incentives at play in license negotiations may also be necessary. In other words, do any unique principal-agent problems between patent holder and licensee surface as a result of the open source business model‘ Do any other licensing structure issues need to be worked through in order for existing theory to fit an open source environment. Before any of this 'new thinking' can begin (or is even warranted), though, an assessment of the current state of art is in order. This paper reviews the academic literature on valuing patent licenses.

Keywords: Licencing, patent valuation, open source software, literature survey, innovation

JEL Classification: K11, O33

Suggested Citation

Layne-Farrar, Anne and Lerner, Josh, Valuing Patents for Licensing: A Practical Survey of the Literature (March 3, 2006). Available at SSRN: https://ssrn.com/abstract=1440292 or http://dx.doi.org/10.2139/ssrn.1440292

Anne Layne-Farrar (Contact Author)

Charles River Associates ( email )

1 South Wacker Drive
Suite 3400
Chicago, IL 60606
United States
312-377-9238 (Phone)

HOME PAGE: http://www.crai.com

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Josh Lerner

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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