Describing Patents as Real Options

I. INTRODUCTION II. CURRENT LITERATURE ON PATENTS AS REAL OPTIONS A. Real Options Defined B. Economics Scholarship on Patents as Real Options C. Law Scholarship on Patents as Real Options III. AN INITIAL STEP-DETAILED DESCRIPTION OF PATENTS AS REAL OPTIONS A. A Patent's "Option Price" B. A Patent's "Exercise Price" C. A Patent's "Expiration Date" D. Value of Asset Underlying the Patent E. Additional Complexity -A Patent as a Series of Embedded Options IV. BENEFITS TO DESCRIBING PATENTS AS REAL OPTIONS A. Defines New 'Macro Patent Elements" 1. Patent Troll Problem in Option Terms a. Too Low an Option Price b. Too Low an Exercise Price 2. KSR and a Heightened Nonobviousness Standard in Option Terms B. Describes Patents Like Industry Views Technological Development C. Presents a New Theory of Patents V. CONCLUSION I. INTRODUCTION A fairly robust economics literature exists which analogizes patents to real options. Real options create the right, but not the obligation, to purchase the underlying asset at a defined exercise price. (1) A patent is like a real option, economists say, because it allows its owner to choose between exclusively commercializing the patented invention sometime during the patent term or foregoing commercialization altogether. (2) Economists have taken this analogy and used real options analysis to place specific values on patents. A few economics articles have gone a step further, identifying some policy implications from the real options description of patents. (3) The legal literature is a bit behind in using this analogy. A few scholars have engaged in the same valuation exercise as economists. Russell Denton and Paul Heald, for example, previously set forth a state of the art discussion of how to value patents using options analysis. (4) Shaun Martin, Frank Partnoy, and Michael Abramowicz have taken the second step, arriving at definite policy conclusions based on a real options view of patents. (5) This Article continues the use of real options in patent law by taking a step back. The Article proceeds in three parts. Part II describes the concept of real options and catalogs the existing economics and law literature discussing patents as real options. The Article then lays a foundation for previous and future discussions by describing in detail how patents are like real options. Specifically, Part III identifies the particular patent doctrines that make up the common components of a real option--the option price, the exercise price, the expiration date, and the value of the underlying asset. This descriptive analysis is a necessary first step in developing a robust theory of patents as real options--a theory that can have specific patent doctrine implications. Part III also describes how patents can be defined as a series of embedded options. From here, Part IV discusses some implications of using real options theory in patent law, and provides a preliminary taste of the benefits of using real options theory in patent law. Real options analysis allows both patent problems and patent solutions to be examined in terms of "macro patent elements"--elements defined by the operational components of a real option. Real options theory also facilitates viewing patents the same way industry views research and development projects--as real options. Finally, there is promise in the underlying enterprise--using the concept of real options to articulate a new theory of the patent system. II. CURRENT LITERATURE ON PATENTS AS REAL OPTIONS A. Real Options Defined "A real option is the right, but not the obligation, to take an action (e.g., deferring, expanding, contracting, or abandoning) at a predetermined cost called the exercise price, for a predetermined period of time--the life of the option." (6) It is called an option because it gives the holder just that--an option to do something, but not a requirement to act. …