In a knowledge-based economy, investors are keen to track the companies with the most valuable intellectual assets. A handful of young companies, including Ocean Tomo, LLC, 1790 Analytics LLC, and The Patent Board, say that the answer is patent analytics, a method of evaluating patent quality and portfolio trends. Each company is promoting its own financial product to woo investors with the promise of a new, objective tool for analyzing a company's intangible assets. But intellectual property attorneys are skeptical.
In November, Chicago-based Ocean Tomo launched its Ocean Tomo 300 Patent Index, a list of the top 300 public companies as ranked by the quality of their patent portfolios, on the American Stock Exchange. One month later, financial services company Claymore Securities, Inc., launched an exchange-traded fund based on Ocean Tomo's index, the first of its kind, which at press time had more than $15 million in assets.
In January, The Wall Street Journal began to publish a weekly "Patent Scorecard" for different industries. The Journal's Scorecard is based on information from the WSJ Market Data Group and The Patent Board, a Chicago-based patent consulting company that is now developing a mutual fund with Chicago Alternative Investment Partners LLC.
Meanwhile, New Jersey-based 1790 Analytics has featured its patent-based company rankings in high-tech trade magazine IEEE Spectrum for the past two years. It has offered a hedge fund since late 2004. Like other financial products based on patent rankings, the fund tracks companies with patented technology and invests in those undervalued by the stock market.
Each company has its own method for evaluating a company's patent portfolio. Ocean Tomo's patent scores are based on factors such as the number of citations a patent receives and whether maintenance fees are being paid every four years. The Patent Board uses more than 50 indicators, such as "science strength," which measures the degree to which a patent portfolio is linked to core science based on citations to scientific research journals. 1790 managing director Chip D'Angelo says that rather than analyzing individual patents, his company looks for technology trends in multiple patents over time: "We're more technology assessment through the lens of patent analysis."
Paul, Hastings, Janofsky & Walker IP litigation partner Michael Bednarek, who works with several financial services clients, is skeptical. "My take on this, especially the Ocean Tomo 300 Index, is that it's a gimmick at this point," he says. "That and what The Patent Board [is] doing is trying to wrap in the aura of objectivity something that's got to be subjective, or inaccurate. Patent value isn't something you can measure the full value of objectively." Bednarek points to factors that cannot be determined objectively in advance, such as new patent legislation or legal precedent.
"The KSR decision alone could dramatically affect patent value across the board," Bednarek says, citing the pending U.S. Supreme Court decision on patent obviousness in KSR International Co. v. Teleflex, Inc., which could raise the threshold of patentability and bring thousands of granted patents into question.
The question of patent value is still an open one for many lawyers. A 2005 study by University of Pennsylvania Law School professors Gideon Parchomovsky and R. Polk Wagner found that individual patents are, on average, worth nothing. Parchomovsky and Wagner theorize that "the real value of patents lies not in their individual significance, but instead in their aggregation into a patent portfolio--a strategic collection of distinct-but-related individual patents that, when combined, confer an array of important advantages upon the portfolio holder."
Bednarek says that patent analytics companies are starting with the dubious assumption that all patents have some value. But when patents are judged individually, their value is typically all or nothing. "The vast majority of patents have zero value," he says, "and then a small number have a lot of value."
Patent analytics companies claim to provide a way of quantifying the intangible value of a patent portfolio. "Intangibles aren't on the balance sheet," says Scott Ebner, head of new product development, ETF Marketplace, at the American Stock Exchange. "You can't go into a company's 10-Q or 10-K and find an equivalent to a price/earnings ratio for IP," says Ebner, who helped set up the Ocean Tomo index. "So the thing that was interesting to me [about patent analytics] was that [it] focused on an area of information that's hard to assess."
The Wall Street Journal's Patent Scorecard hasn't made much of a splash among financial analysts yet. The January 23 Scorecard ranked Deere & Company number one on its chart for heavy industrial equipment. Asked about it three days later, Morningstar equity analyst John Kearney, who follows Deere, said he hadn't seen the listing: "To tell you the truth, it's not even on my radar."
"In the sense that [a patent portfolio] drives longer term performance and speaks to the company's innovation and the fruits of their R&D efforts, that's something we take note of," Kearney adds. "But the patent analytics is all new to me."
