India: Reaping the benefits of useful life of the patents

Last Updated: 30 August 2018
Article by DPS Parmar

It is really a myth that you can reap benefit of your patents for your life and thereafter. We must understand that in the fast changing the useful life of patent is not very long. Economically speaking patent asset's useful life is defined as the time period over which the asset is expected to contribute directly or indirectly to patentee future cash inflows. Mind you this useful life time is always restricted by the statuary limitations and technological factors. In this context it becomes imperative to determine the patents remaining useful life (RUL). This methodical determination of RUL invokes the interplay of wide range of factors such as statutory term; competition; market demand for IP related product and Technological factors. Other factors include litigations and Governmental regulations.

Obsolescence of technology

Few inventions are absolute in terms of the use and value for example, zip fastener, Velcro, gem-clips, Globe stopper (banta) bottle, pencil and so on , as they are still in use even when they have completed over a century when they were invented. Contrary to this, the rapid advances in the technology have made some inventions such are manual typewriters, record Players, Juke boxes, VHS, VCRs etc. as obsolete and only of historic value. Some of the inventions such as VCRS become obsolete even during their patents' statutory lives. Advances in technology may lead to its obsolescence even before its statutory patent term expires. Therefore, the patentee must find the useful life time of his invention before it is too late.

Importance of determination of RUL

Since the value of the patent is related to the income it is capable of generating, determination of RUL plays significant role for correct evaluation of the patent value. Three major approaches to valuation of patent invariably include determination of RUL. The cost based patent value determination method employs RUL to estimate the technology obsolescence. The income based approach employs RUL to find the period over which income is projected. In the market based patent valuation approach RUL is found useful where evaluation involves study of comparables and making adjustments to bring them in line with the subject patent technology.

Calculating Patents RUL

The useful life of a patent may rests on much more than its statutory term of protection. This requires a comprehensive study and analysis of variety of factors that determine how long a patentee can expect the patented technology to generate profitable income. Assessing the useful life of patents requires independent assessment of each determinant. In certain situations the interrelated determinant analysis plays a significant role in RUL determination. The most useful determinant is one which indicates the shortest remaining useful life. First determinant of patent life is its legal life or statutory time available under the patent law after the date of grant of Patent. Second determinant of useful life of patented technology is its contractual life. This includes contracts with clients, lease agreements and franchises. Third significant factor is its viable economic life to generate a profitable cash flow. Forth important factor is patented technology's functional and technical obsolescence. Functional obsolescence sets in as major determinant of RUL when the patented technology is no longer in position to perform the function for which it was intended. In early years of development rubber Goodyear suffered setbacks when his earliest "invented rubber" mail bags, raincoat and jackets were rejected by public due to it defects as they melted and become sticky in hot weather. But Goodyear's vulcanisation process still remained a milestone in the rubber industry. The technology advancement is another major factor which makes the old patents obsolete. Technical obsolescence is a type functional obsolescence which is caused by rapid advances in the technology. For example 2G, 3G, 4G and so on .The mobile phones have virtually replaced the landline phones. Lastly, analytical studies of the history of the turnover could be very useful in determining the useful life in terms of the customer relationship. The changes in the functionality and technical advancement in relation to patents have a direct impact on its economic value.

Determining the Useful Life of an Intangible Asset

The accounting for a recognized intangible asset such as patent is based on its useful life to the reporting entity such as patentee or assignee. The Patents set with limited life span has a finite useful life. In financial and accounting terms the "useful life" of patent asset to patentee is the period over which the asset is expected to contribute directly or indirectly to the future cash flows to the patentee. The estimate of the useful life of a patent asset to patentee/assignee is based on an analysis of all pertinent factors, such as:

  1. Expected Use by patentee: The expected use of the patent by the patentee is determined by the capacity of the patentee to take risk and financial resources at his disposal. 
  2. Depleting raw materials: Where the Patents requires the use of raw material(s) the expected useful life of that asset or a group of assets to which the useful life of the patent asset may relate (such as raw material of the depleting assets) is also material in determining its remaining useful life.
  3. Legal limitations  : The determination of RUL of a patent is also subjected to any legal, regulatory, or contractual provisions that may limit its useful life. The legislative action that results in an uncertain or changing regulatory environment, may impact the RUL of a patent.
  4. Functional and technical obsolescence : The functional obsolescence normally extinguish the life of a product .Thus the patent product should be properly evaluated to avoid market failures. On the other hand technical obsolescence may curtail the RUL of a patent. The effects of obsolescence, demand, competition, and other economic factors such as the stability of the industry, known technological advances, and unexpected changes in distribution channels may impact the RUL indirectly.
  5. Product life cycle history: Comparing the life cycles of similar patents or other similar products can be handy to determine RUL. This is based on the premise that certain categories of technology tends to follow similar life patterns, from incubation, introduction, adoption and its growth to maturity. Where no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of patent to the patentee, the useful life of the patent shall be considered to be indefinite. The term indefinite here does not mean infinite.

Documents essential for gathering data for RUL determination

As seen from the above discussion we may require several types of documents and data related thereto to perform an objective RUL analysis. Some of these essential documents are listed below :-

  • Patent registrations : including renewal certificates
  • Lists of commercial contracts :  such as use and development contracts and licensing agreements
  • Court orders [if any] : Orders  related to past or future damages
  • Financial and accounting statements : Last few years and projected, in relation to revenues and expenses, such as the cost of goods sold.
  • Production and sales data :  including the number of products in circulation, rejections if any , list of contracts of reference usage.
  • Technological data : Reference material  related to earlier and competing technologies found in patent applications, marketing materials and industry journals.

Applying RUL for valuation of patent

A comprehensive analysis of all the factors discussed above is essential to arrive at an accurate and dependable RUL. Measuring the RUL plays significant role in determining the fair value of the patents assets in financial reporting. Useful life is the key consideration for measuring fair value of the patent assets using all the three approaches discussed above. In the income bases approach fair value is assessed taking into consideration that the period of time covered by the prospective financial information (PFI) is equal to the length of the patents useful life. In the market approach comparable patent's useful life is one of the major considerations in determining whether the patent in question is in fact comparable. The cost based approach takes into consideration the length of useful life when measuring the obsolescence of the patented technology.

Conclusion

One must know that types of documents and data specified above may meet the requirement of RUL assessment in general but specific circumstances and special patents may need additional sources of data pertinent to the determination of RUL of a patent in question.  No doubt a comprehensive analysis is needed to reach an accurate and dependable RUL. The purposeful assessment of RUL is useful for arriving at meaningful assessment of valuation of a patent. One must be cautious to know that a patent asset's useful life rests on much more than its statutory term of protection. The expert assessment of RUL is an effective tool to maximise the gains from the patented technology.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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