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Patent valuation is typically done using either a classic accounting practice or a more adaptable approach. The accounting method includes determining the value of a patent based on its estimated market value, cost, and income potential. This is often largely theoretical, and an approach that is considered more practical is patent pricing based on the potential usage of a patent and the likelihood of patent infringement.
All patents have the potential to be worth an enormous amount of money if the product or process that they describe becomes widespread and dominant in the marketplace. As well, as many businesses in the western world switch from models of product and service-oriented profit schemes to ones based on intellectual property, it becomes increasingly important to correctly carry out patent valuation to protect and develop this property. One of the major problems with patent valuation is the fact that a patent in no way indicates how long of a time frame may exist between the development of a successful idea and its implementation in manufacturing and marketing. A good example of this is the invention of the fax machine, which was patented in 1843 with the first successful model being tested by an Italian physicist named Giovanni Caselli in 1865, 22 years later. This was still 11 years before the invention of the telephone itself, as the first fax machine was tested by telegraph, and the fax machine did not become a staple, popular, and essential machine in most office settings until almost a century-and-a-half later.
Those who use accounting principles in patent valuations are aware of their limitations. Using market theory is the most troublesome, as there is no objective sale price or clear competitive market for most patents, and they are often bought and sold to discourage innovation by competitors as often as they are to encourage it internally. Using cost theory for patent valuation is based on the fact that an object's value is determined by the resources that went into producing it. The cost of a patent, however, is a one-time cost, since, once an object or process is patented and that patent purchased by a firm, it cannot be patented again by someone else, which limits reflections of true cost. Income valuation for patents in accounting practices have the most direct relationship with true value, but they are predicated on the idea that, once owned, immediate work will be carried out on developing profits from the use of a patent. As with devices like the fax machine or companies that buy up patents to take competitors out of the marketplace, however, this is also often subject to misinterpretation.
Usage and infringement guidelines involve more abstract values that intellectual property entails, such as licensing fees, legal costs, and renewal rates for patents. This approach to patent valuation attempts to look at it from a more fundamental aspect of intellectual property and distance itself from actual marketing and manufacturing levels for what is being protected. This may be a more accurate way to value patents, as they increasingly define narrower and narrower scopes for technological processes and objects that often overlap in the manufacturing sector. Usage guidelines can be determined by looking at how often a patent is cited in literature and databases through online searches, which is a clear indicator of interest in developing the idea further. The advent of the Internet and public documentation, and analysis of cutting edge research as of 2011, has made large-scale evaluations of industry interest in newly-patented ideas much more practical for patent valuation procedures than was possible only a few decades ago.
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