APPLIED ECONOMICS https://doi.org/10.1080/00036846.2019.1624914 Can patent family size and composition signal patent value? Francois P. Kaborea and Walter G. Parkb aCenter for Research and Action for Peace (CERAP), Abidjan, Ivory Coast; bDepartment of Economics, American University, Washington, DC, USA ABSTRACT KEYWORDS Recent research has proposed a method of patent valuation based on weighting patent family Patent valuation; market size by the market size of the countries in the family. The premise is that inventors tend to seek size; patent families; greater international coverage for their more valuable patents. The paper presents a novel way to citations; renewal test the ability of market size-weighted patent families to predict patent value and compares the JEL CLASSIFICATION method against extant measures of patent valuation based on patent citations and renewal O34; O33; F23; K11 behaviour. We use forecasting techniques to show that the weighted patent family size measure outperforms other methods in terms of predicting patent life and the number of citations. An advantage of the weighted patent family size measure is that it is based on ex-ante information and is easy to construct for purposes of evaluating patent value. We demonstrate this advantage using a large, comprehensive database of international patent families. I. Introduction firms publicly disclose details about their patent transactions or technology transfer agreements. Patent valuation is important to firms’ decision- Furthermore, not all patent rights have a steady making and strategies. For example, it shapes incen- cash flow, since some (if not many) patented inven- tives for investments in innovation. It also plays a key tions are not commercialized or are not ‘worked’ role in licensing negotiations and in determining the (put into practice). Other problems may be that relative bargaining strength of parties (Smith and some patents are invalid (not correctly granted and Parr 2000). Patent litigation is also affectedbyper- will be invalidated upon challenge) or that asym- ceptions of patent value. The more valuable the metric information exists (where the seller knows patent rights are, the more committed patent holders the quality of the underlying invention but the buyer will be to monitor and enforce their rights. Patent does not) so that contract prices may distort the true valuation is also important to policy-makers for valuation of patents.3 assessing the impact of legal provisions or innovation 1 Consequently, from a research standpoint, patent policies on the level and quality of new technologies. valuation is largely based on observing the character- Is the policy regime merely encouraging the filing of istics of a patent or the behaviour of a patent holder patents for low-valued inventions or generating that may reveal information about the underlying transformative wealth-creating activities? The valua- value. For example, previous work by Bessen tion of patents can also provide useful indicators for (2008), Lanjouw, Pakes, and Putnam (1998), Pakes comparing the production of innovations across and Simpson (1989) and Schankerman and Pakes industries and countries. (1986) examined patent renewal behaviour. Given However, the value of patents is not easily the costs of maintaining patent rights, the relatively observed. Patent rights are not frequently or widely most valuable patents will be selected by patent traded like financial instruments, such as equities. holders for renewal. Another approach has been to Large, international exchange institutions for pro- 2 factor in a patent’s forward citations (see Trajtenberg viding markets for patent rights are absent. Few (1990), Harhoff et al. (1999), Jaffe and Trajtenberg CONTACT Walter G. Park [email protected] Department of Economics, American University, Washington, DC, USA 1See Bessen and Meurer (2009). 2However, patent rights are tradable at auctions, held for example by Ocean Tomo, an intellectual property merchant bank. Fisher and Leidinger (2014) and Mauck and Pruitt (2016) study patent values from Ocean Tomo auctions. 3See Murphy, Orcutt, and Remus (2012) for a discussion of the impact of adverse selection on patent values. © 2019 Informa UK Limited, trading as Taylor & Francis Group 2 F. P. KABORE AND W. G. PARK (2002), and Hall, Jaffe, and Trajtenberg (2005)). The take into account the potential market size of more valuable a patent is the more likely it will find the protected areas.6 use in follow-on research or production and there- A key limitation of the citation and renewal meth- fore be more often cited. Barney (2002) finds that ods is that patent values are assessed ex-post. As citations and renewal are related in that patents that pointed out by Hall, Jaffe, and Trajtenberg (2005), receive no forward citation in their first four years are asufficient time is needed after a patent is first less likely to be renewed than those with multiple published to observe citations of it by later patents. citations. On the other hand, patent renewals and Furthermore, patent citations are not distinguished citations may not always yield the same ‘signal’. by how much impact the cited patents have on an A patent may lapse (for lack of market value or invention; for example, patent X may cite prior other) and yet continued to be cited.4 patents A and B, but A may be more important to Another approach to gauging patent value is X’s function than B. Moreover, the reason patent to examine patent family size (see Harhoff, X may cite A and B is to indicate that they are Scherer, and Vopel 2003; Johnstone et al. 2012; alternative products or methods of production, so Lanjouw and Schankerman 2004;Putnam1996). that X is not infringing on them, rather than that Patent family size refers to the number of coun- patent X builds on them. Renewals are also observed tries in which an invention is protected by later in the life of a patent. Another limitation is that a patent; that is, the priority filing and the sub- renewal decisions may be made not on grounds of sequent filings that emanate from it.5 Given the patent value, but on changes in the cost of renewing costs of acquiring patents in multiple jurisdic- or maintaining patents. The limitation of patent tions, rights holders would reserve their more family size as a measure of patent value is that it valuable technologies for international patenting. does not take into account the attractiveness of A variant of this approach is to consider triadic different market destinations. patents, where an invention is protected in the Our contribution here is to join recent work that three major markets, namely the U.S., Japan and weights patent family size by indicators of the mar- the European Patent Office (EPO) (see Dernis, ket potential of the countries comprising the patent Guellec, and van Pottelsberghe De La Potterie family (see van Pottelsberghe De La Potterie and van 2001; Kumazawa and Gomis-Porqueras 2012), Zeebroeck 2008;Frietschetal.2010;Ernstand or transnational patents, which are patent Omland 2011; Neuhausler and Freitsch, 2013; families with at least one EPO or Patent Dechezleprêtre, Ménière, and Mohnen 2017).7 The Cooperation Treaty (PCT) filing. But both the rationale for factoring in the market size is that raw family size and the triadic variable do not rights holders who possess more valuable patents 4Moreover, renewal decisions may largely reflect private value while citations reflect some social value as well, considering the impacts of the patented technology on other inventions. 5There is also an extended patent family definition, as described in Hingley and Park (2003), where ‘a patent family encompasses all the documents related to the patents emanating from an invention, including documents that may cross relate to other inventions as well.’ See also Martinez (2011) for a thorough survey of patent family definitions and methodologies. 6There are other potential indicators of patent value, such as whether a patent has faced an opposition challenge (Harhoff and Reitzig 2004), the number of claims in a patent (Tong and Frame, 1994), auction prices (Nair, Mathew, and Nag 2011; Sneed and Johnson 2009), and filings strategies (van Zeebroeck and van Pottlesburg de la Potterie, 2011). Other approaches to determining patent value are event studies around court decisions or patent announcements (see Henry 2013; Austin 1993). In this paper, we focus primarily on comparing our method of valuation to the most widely used indicators of patent value thus far, namely patent renewals and citations. In this paper, we do control for patent claims which are also ex-ante information. We had examined data on opposition in preliminary work, but do not pursue them further here. While it is likely that patents with much commercial value are the ones that will be challenged, they will also be challenged if they are invalid from a legal perspective. 7van Pottelsberghe De La Potterie and van Zeebroeck (2008) focus on the size and age of a patent family and discuss how the market size (GDP) of destination countries is an important factor in the patent validation strategy of firms but do not construct a GDP-weighted measure of patent families. Ernst and Omland (2011) weight patent counts by market coverage in order to develop a Patent Asset Index for firms. Specifically, a firm’s patent portfolio is evaluated based on the GDP of countries covered and its technological relevance based on citations received. Dechezleprêtre, Ménière, and Mohnen (2017) argue that the timespan between the first application date and last application date within an extended patent family can be an indicator of value, as the lag could reflect the applicant’s strategy to optimize patent scope over time. Freitsch et al. (2010) incorporate export volumes and intensities to patent value indicators. Neuhausler and Freitsch (2013) use six different variables for weighting patent family sizes: the imports, GDP, population, strength of patent protection, global competitiveness, or intensity of local competition of the countries in the family.