Free LES Webinar on IP Valuation in M&A Deal Making

The Silicon Valley Chapter of LES is hosting a free webinar titled, IP Valuation in Special Situations: Closing the Intangible Value Gap in M&A Deal Making on Tuesday, June 24 at 9:00 am to 10:30 pm Pacific Time.  The notice concerning the webinar states:

“Efrat [Kasznik] will present four unique strategies for integrating IP assets in M&A deal pricing without disrupting deal workflows, while addressing the needs of both sellers and buyers. Topics to be covered include: Current trends in M&A deals How are companies valued in M&A deals? Why is there an intangible valuation gap in M&A deals? Seller and buyer M&A deal pricing considerations Strategies for bridging the intangible valuation gap Personal Insights from an M&A deal where the valuation gap was addressed using IP Make connections to help discover and drive deals. Engage 75+ registered participants —innovators, investors, IP management experts from startups and established SV organizations, and many more.  Online via Zoom” The Registration Link is, here.

Reflecting Forces at Work in an IP Valuation

By Roya Ghafele, info@oxfirst.com, http://www.oxfirst.com

OxFirst Ltd.

Investing wisely in IP

More than ever before, there is a need to invest wisely in technology. No matter which technology one looks at, the adequate management of the underlying IP is crucial so to commercially succeed.

An IP valuation looks at business legal dynamics from a quantitative perspective. In doing so, it allows to put substantive legal aspects in a business context and establish a bridge between law and economics. The IP department by consequence has a chance to stop being perceived as an esoteric cost centre and has the chance to become drivers of business success.

For this to happen a sort of ‘translation exercise’ needs to happen, whereby a patent right can become a patent asset. Even if it does not make the leap to be an asset and it becomes visible that it really is a patent liability, then this still has a massive business proposition. IP which bears no business proposition can be eliminated, which helps save costs.

Elements of an IP Valuation

An IP valuation is structured into three parts. An IP due diligence, a business assessment of the IP and an in-depth analysis of the role of the IP within the larger competitive environment.

The IP valuation consists of an initial due diligence followed by a strategic assessment of the various opportunities provided by the IP to maximize profits. It also helps manage costs, which many companies may find important in the current situation.

Recognizing Forces at Work in an IP Valuation

Using Professor Porter’s framework of ‘forces at work’ is a very helpful step to grasp IP from a business perspective. Translated to the peculiar features of IP law, such forces at work can consist of regulatory challenges, technology challenges, potential new market entrants, as well as competitive dynamics in the market.

Regulatory challenges may for example be Supreme Court decisions, such as the E-Bay vs Merck exchange decision in the United States, which put an end to automatic injunctions. Instead injunctions are issued after the verification of a multi factor test, which Patent Assertion Entities may find difficult to pass.

Technology challenges may pertain to the actual tech solution itself. Is this novel technology even be doable by nature? For example, is it even possible to offer a vaccine for a virus or does a virus not even respond to a vaccine?

Potential new market entrant may be in a position to offer a better market solution. They may be able to offer a faster, cheaper or more effective solution. At times, there may also be novel tech solutions, which make existing ones entirely obsolete.

Competitive dynamics in the market may pertain to issues such as vertical or horizontal integration. Does one single company operate in the same market that it also sells its tech solutions to? If so, can this have an effect on the value of its IP and that of other market participants?

The assessment of these forces at work helps determine a potential net value for the IP at stake. In doing so, it allows to establish a relationship between the IP and the business environment it is situated in. However, such analysis is not just narrative in character. The valuation of the IP allows to quantify such forces at work. This is an amazing value proposition as it helps understand potential returns and sets them in relation to risk.Unsurprisingly, this allows a firm to reorient its strategy and sets the baseline for the entire business strategy, not just the narrow circle of the IP strategy itself. A firm can be in a position to maximize revenues, while at the same time minimize its costs.

IP Valuation for Investment Purposes -- Part 1

Here is the second post by Dr. Roya Ghafele.  It is the first part of a two part series on the importance of IP Valuation.  

IP valuation for Investment Purposes – Part 1

By Roya Ghafele, OxFirst Ltd. www.oxfirst.com

With the European Central Bank’s interest rate decision continuing to be at 0%, investors are forced to put their funds to work in different ways.  Can patents, the underlying rights to an invention, offer such an alternative? 

Any type of investment decision is hinged on an adequate appraisal of risk and return rates of an investment. Ideally, an investment yields high returns, while risk rates are kept as low as possible. The investment in intellectual property forms no exception to that.

The adequate valuation of intellectual property can hence play an important role in the promotion of technology markets. It is through this instrument that investors can make an educated placement of their funds. In spite of the instrumental role that IP valuation could assume, it is often ignored in the financial community. 

The problem does not seem to be that it is not possible to value IP for investment purposes or that IP has any intrinsic features that would prevent its valuation. The problem is a lack of awareness of the many opportunities provided by IP valuation. If investors have IP on their radar screen at all, then they tend to contend themselves with counting patents (apparently, the more, the better seems to be the premise) or to check if the company is involved in any legal proceedings. As to early stage technology companies, investors will at best consult a patent attorney who can undertake a freedom to operate analysis of the underlying patents of a technology. While such an assessment can provide helpful legal insights, it does not allow to understand how IP relates to potential business performance.

IP managers in technology companies on the other hand side do often also not know how to best communicate the value of patents to financial analysts, angel, VC or Private Equity Investors. Current accounting standards that allow to only partially reflect the value of patents do not make things easier.[1]  This leads to market inefficiencies, where valuable technology sits gathering dust, while investors are not able to scope potentially attractive financial opportunities. Already in 2014, the European Commission called for an enhanced usage of IP valuation as a means to better link those in search for funding with those eager to put their money to work.[2] Equally, the UK Intellectual Property Office launched an initiative inviting the City of London to ‘Bank on Intellectual Property.’ [3] Those initiatives have so far shown little results and the best practice for leveraging IP in financial transactions still seems to stem out of Silicon Valley, where some financial institutions have been reported to use IP valuation for investment purposes. [4]  Yet, institutions like these are the worthy exception, rather than the norm. 

So, with a lot to gain from overcoming the little understanding that prevails on IP valuation, the question arises what technology entrepreneurs can do to attract investors to their business.

I turn to this question in the part 2 of this comment, where I will seek to offer some practical tips that may help to better link IP to cash flows.

---

[1]  GHAFELE, R. ‘Accounting for Intellectual Property?’ Oxford Journal on Intellectual Property Law & Practice, Nr. 5/7 2010, at 37

[2] EUROPEAN COMMISSION, Report of the Export Group on Intellectual Property Valuation. http://ec.europa.eu/research/innovation-union/pdf/Expert_Group_Report_on_Intellectual_Property_Valuation_IP_web_2.pdf  (2014) at 7, 22-23, 57, 91,

[3] UKIPO ‘Banking on Intellectual Property? The role of intellectual property and intangible assets in facilitating business finance’ available at: http://www.ipo.gov.uk/ipresearch-bankingip.pdf (2014) at 221

[4] See About Silicon Valley Bank, http://www.svb.com/about-silicon-valley-bank/ (disclosing that Silicon Valley Bank’s clients include 50% “of all venture capital-backed tech and life science companies in the US” and that Silicon Valley Bank was established in 1983).

Welcoming Dr. Roya Ghafele to the IP Finance Blog!

IP Finance is delighted to announced that Dr. Roya Ghafele, the Director of OxFirst, will join our permanent team of bloggers.  I’ve pasted a short bio of Dr. Ghafele below.  Dr. Ghafele is planning to author a series of posts on IP valuation and management.  Please find her first post on IP valuation below.  We are very excited to have her join us!  


Here is her bio:

Dr Ghafele has been the Director of OxFirst, an award winning IP law and economics consultancy, since 2011. In addition, she has held academic positions in International Political Economy and Business with Oxford University since 2008 and was also a tenured Lecturer (Assistant Professor) in IP Law with Edinburgh University. Prior to that she had post-doctoral assignments at Harvard and U.C. Berkeley. From 2002-2007 she worked as an Economist with the U.N.’s World Intellectual Property Organization (WIPO) and the OECD. She started her career with McKinsey in corporate finance.

Her Ph.D. was awarded the Theodor Koerner Research Prize by the President of the Republic of Austria. Dr. Ghafele was trained at Johns Hopkins University, School of Advanced International Studies, the Sorbonne and Vienna University. During the course of her studies she was fully funded by the Austrian Government because her academic merits were continuously of outstanding quality. She is native in German and fluent in English, French and Italian.

Specialties: IP valuation, FRAND Royalty Rate Determination, IP and Competition Economics

Here is her first post: 


IP valuation – Why it Matters

The major challenge does not seem to be that patents or other forms of intellectual property cannot be valued or that IP disposes of any intrinsic features that would prevent its valuation. The challenge is that many IP managers are still rather ignorant when it comes to the valuation of intellectual property.  This can have a series of adverse effects. On the one hand, intellectual property may be inadequately managed. On the other hand, others in the company may in all honesty wonder what the bottom-line contribution of IP is to business. Without an adequate understanding of the value of intellectual property, much IP risks gathering dust and not being put to work in the most effective manner.

This raises the question how intellectual property can be valued. While there are many different methods that allow to value intellectual property, there currently exist three overarching principles that allow to value IP assets. These principles are in no way different from the valuation of any other assets, be they tangible or intangible in nature. These are the income, market and cost approach. Each of these methods offers different insights. Hence, depending on the situation, they can complement each other. The income method, measures value in terms of future revenues that can be generated from the asset. It looks at upcoming revenue streams and seeks to determine the current value of these assets. As the method is hinged on an outlook of what the future may hold, it is crucial to determine the discount rate, which reflects risks and probabilities associated with such potential future income. This method can be quite helpful if one is keen on enhancing the management of a patent portfolio. It gives the manager an insight as to how much the IP could potentially generate. This can help formulate a forward-looking IP strategy. The market method again looks at comparable rates that kind of similar IP could fetch in somewhat similar market transactions. As such the insight gained is what a typical rate could be for the IP. Such a method can give a helpful first insight when one is for example seeking to sell or license IP. It can allow to understand if one’s asking price is somewhat in the range of what others have wanted. That being said, it can be challenging to find such information and the method says nothing about the specific worth the patent has in a specific business context. The cost method again can help determine costs associated with IP creation. This can be useful when seeking to minimize costs in an IP Department.  

Each of these paradigmatic approaches have their strengths and weaknesses. They also vary in terms of the effort needed to find relevant information. But overall, they can help optimize expected results from intellectual property. Important to know is that any IP valuation is an off-book valuation and this makes it harder to systematically make use of data which has undergone the scrutiny of controlling. To the keen IP manager this is however nothing but a small stumbling block that should not prevent her to systematically manage IP for value generation.

New report commissioned by UKIPO on IP valuation market: Observations by the authors

In September 2017, the UK Intellectual Property Office (IPO) published a 148-page independent report, entitled “Hidden Value: A Study of the UK IP Valuation Market” that it had commissioned, and which was authored by Mr. Martin Brassell, Chief Executive, Inngot Limited and Dr. Jackie Maguire, Managing Director, Firm Advantage Limited. Mr. Brassell and Dr. Maguire have kindly provided IP Finance with a number of key observations based on the report. Interested IP Finance readers are invited to consult the report in its entirety (see below).

“Our study has provided an opportunity to investigate some important issues in the area of IP valuation. Why don’t more companies havean awareness of what their intangible assets are worth? What drives them to find out? What methods can they use to understand their asset value, and who helps them? Lastly, what can be done to encourage more firms to take IP value seriously?

We were unsurprised to discover that few, if any, managing directors wake up in a cold sweat at night worrying about how much their IP is worth. As previous research has indicated, many companies do not think of intangibles as being assets at all in the conventional sense. Even if they decide to capitalise the cost of developing or acquiring intangibles, their accounts sometimes appear to suggest that these assets are declining in value as they are being written down, even if their business contribution is in fact growing.

We found that the drivers for IP valuation are very specific and heavily transaction-oriented. We identified 22 distinct reasons for valuing IP, which fell into three categories. The largest number of drivers, accounting for the majority of IP valuation activity, relate to specific needs, such as transfer pricing, post-purchase accounting, preparation for M&A activity, estimating damages in litigation or (occasionally) insolvency. There is some IP valuation activity that is done as a positive response to specific opportunities, such as licensing, collaboration or raising investment. Finally, there is a small but growing number of occasions where there are new applications for IP that require value to be better understood – and this is where a specific opportunity for improved awareness appears to lie.

From the drivers that can be measured, it is unlikely that more than a few thousand IP valuations are currently being conducted annually. The valuation providers fall into two broad categories – large accounting firms and specialist ‘boutiques’ – with a very wide variation in costs, depending upon the complexity, purpose and origin of the valuations. Cost does not emerge as a barrier, as there is a range of services being provided addressing a range of needs. However, valuation providers confirmed a high degree of reliance on introductions or referrals from other professionals, which suggests that people only tend to value their IP when someone they respect tells them it is necessary to do so.

All of this points to an insufficient appreciation of the benefits of being able to measure IP value and thereby manage it better. More educational outreach, better access to information and meaningful testimonials could all help to address this situation over time; but the obvious question that remains is, if the benefits were more compelling, would not more businesses choose to value their IP? Realistically, in the busy world of the SMEs that form the overwhelming majority of UK firms, some pretty compelling incentives will be needed to make business leaders sit up and take notice when they have so many other competing priorities.

From the research that we conducted, it seems that these incentives might come from one of two directions. The first is strategic reporting in its various forms. It has long been apparent that financial statements miss out an important source of value creation in companies (for the reasons noted above); more attention is now being paid to filling these information gaps with insights on how a company is innovating and the assets it is producing as a consequence. Also, the most recent Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) within generally accepted accounting principles (UK GAAP) is beginning to have some impact on accounting awareness of intangibles.

The second direction concerns access to finance, particularly debt, which remains the primary source of business funding. At present the regulations that are designed to ensure capital adequacy do not look kindly on intangible assets, because there is no accepted risk weighting for them. However, there are signs that lenders are beginning to take steps to obtain a better understanding of these assets and their business contribution. Of course, the main concern for a lender when dealing with any asset class is ultimately related to the value that it can recover if the asset needs to be sold to repay a loan. However, if the trend continues to find new ways forward to apply intangible asset value, IP assets could become more concretely associated with money in the minds of SMEs, which would certainly increase the appetite for IP valuation."

For the full results of the research and interviews with over 250 industry players see here.

Call for IP valuation experts

Jackie McGuire, at Coller IP, has informed us that she and Martin Brassell, at Inngot, are undertaking a study of the IP valuation market for the UK Intellectual Property Office, including the structure of the IP valuation market, motivations and barriers to engagement, and best practice in different contexts.

Jackie notes that prior studies for the Intellectual Property Office have established that the majority of UK business investment, and business value, now lies in intangible rather than fixed, tangible assets. Despite this, companies do not always value their IP or take steps to protect the value that it underpins. The study builds on the report from the European Commission Expert Working Group on IP Valuation and Banking on IP. The results will be used to inform UK policy and to develop solutions to promote the wider adoption of IP and intangible asset valuation.

All discussions on this study are using the Chatham House Rule. They will use the information received, and with permission, reference the company’s participation in a published report. While they would welcome the opportunity to use specific case studies, they will not link the personal identity of those interviewed or that of the company with specific comments or findings, without prior approval.

Please contact Martin@inngot.com or Jackie.Maguire@collerip.com by 15th January 2017.

A Relatively New Resource: Guide to Intangible Asset Valuation

Robert Reilly and Bob Schweihs, two managing directors of Willamette Management Associates, have authored a book titled, Guide to Intangible Asset Valuation.  The 700 page book "explores the disciplines of intangible asset valuation, economic damages, and transfer price analysis."  Some of the topics addressed include:

Identifying intangible assets and intellectual property; Structuring the intangible asset valuation, damages, or transfer price assignment; Generally accepted valuation approaches, methods, and procedures; Economic damages due diligence procedures and measurement methods; Allowable intercompany transfer price analysis methods; Intangible asset fair value accounting valuation issues; and Valuation of specific types of intangible assets (e.g., intellectual property, contract-related intangible assets, and goodwill). 

I have not read the book yet, but here is a favorable review by Neil Beaton, Certified Public Accountant.  The book is also reasonably priced at $122.50--a very nice price compared to some of its competitors.  The publication brochure (attached to the referenced review) notes that those "[w]ho would benefit from [the] book" include:

Litigation counsel involved in tort or breach of contract matters; Intellectual property counsel; International tax practitioners; Property tax practitioners; Auditors and accountants; Valuation analysts; Licensing Executives; Multinational corporation executives; Commercial bankers and investment bankers; Merger and acquisition professionals; Bankruptcy professionals; and Judges and arbitrators. 

 I look forward to reading it.

10 challenges to valuing IP: a webinar

"Why it is so difficult to Value IP: Overcoming the 10 Challenges of Valuing Intangible Assets" is a free webinar coming up later this month, organised by Oxfirst (the consultancy driven by our one-time blog colleague Roya Ghafele). The star turn is the experienced Douglas Graham (currently Oxfirst-Iddex Director; formerly CEO and Chairman of Circle Trust, a bank administering $8.5 Billion in assets and a senior partner for Security and Financial Services at KPMG, among other things). The thrust Douglas's talk is this:

Intangible assets represent a major share of today’s businesses. The IP rights associated with those assets are the legal underpinning in that innovation. Yet, despite their fundamental importance, there is a lack of understanding of the economic worth of IP. There is a clear need to increase market actors’ understanding and certainty in IP valuation methods as a way to stimulate IP transactions, to support IP based financing and to give companies the tools to provide information about their IP [one man's opinion? No, it's the view of the IP Valuation Expert Group, European Commission, 2014].

This talk explains what the 10 major challenges of IP valuation are and what can be done to overcome them.

This webinar takes place on 18 July 2014, at precisely 14.30 pm (U.K. Time). To join, just email your name, affiliation and email address to info@oxfirst.com in order to receive an invitation containing login details.

This blogger loves lists and wonders how many challenges to valuing IP the readership of this blog can notch up.  Please email your list of challenges to jjip@btinternet.com and they'll all be listed ahead of the webinar if possible.

The easiest questions to ask aren't always so easy to answer ...

A fairly distinguished and senior member of the European IP fraternity has emailed me to ask a short, simple question:

"Sorry to bother you, but could you please recommend a book about the economic evaluation of IP rights, in particular trade marks and designs?"

My immediate answer was "no". While I have spent many pleasant hours in the company of people who make a living either from valuing IP assets or, I suspect, from writing about it, I hesitate to make any recommendations at all. My particular concerns include but are not limited to the following:

* the absence of generally accepted methodologies that can be consistently applied by members of the valuation so as to reach the same valuation on the same data; 

* the fact that the valuation of an IP asset seems to be so strongly influenced by the reason for seeking it: fixing a purchase price for parties at arm's length or for inter-group transactions, securitisation, boosting a business's asset value, or anything else; 

* the reluctance to take account of the fact that different markets behave in different ways and are bounded by different legal regimes both for intellectual property rights and for accountancy; 

* the risk of double accounting where the IP is part of an ongoing business and of speculation where the IP is not currently used in the course of commerce.

However, putting all prejudices aside, I'm happy to invite readers' recommendations -- preferably with reasons. Do please post them below, if possible, or email me at jjip@btinternet.com with your suggestions (even if you've written it yourself).

Marathon Patent Group – The Hot Bet?

Apparently since around mid-November of last year, Marathon Patent Group (MPG) evolved from American Strategic Minerals and discarded its mineral and real estate assets in favor of an IP management and enforcement services business model.  MPG has been very, very active since then and has received quite a bit of (mostly positive) press (here, here, here and here).  MPG detailed some of its activities in an April 25, 2013 report:

·         Acquired CyberFone Systems and its patent portfolio which has generated 32 settlement and license agreements for a total of $15.5 million in revenue

·         Acquired US Patent 5,331,637 from MOSAID Technologies, one of the world's leading intellectual property management companies

·         Entered into a strategic relationship with IP Navigation (IPNav), the leader in full-service patent monetization

·         Completed the acquisition of Sampo IP LLC acquiring its patent portfolio consisting of three patents and one pending patent application

·         Commenced our first licensing campaign on March 20, 2013 by filing a patent infringement lawsuit in the United States District Court for the Eastern District of Texas against Sony Computer Entertainment America LLC, Siemens Energy, Inc., CB Apex Realtors, d/b/a Coldwell Banker Apex Realtors, Blue Cross and Blue Shield Association, Juniper Networks, Inc., Winn Dixie Stores, Inc., and Dell, Inc.

·         Established a new IP Research and Services Center at the University of Arizona Science & Technology Park in Tucson, Arizona . . . .

Since April 25, 2013, MPG has also, through its subsidiaries, filed patent infringement lawsuits against Ambit Energy Holdings LLC, BMC Software Inc., HomeAway Inc., Hoover's Inc. and Ristken Software in the Eastern District of Texas; Thompson Reuters in the District of Delaware; Sprint Nextel Corporation, Juniper Networks, Cisco Systems, Bloomberg L.P., Hitachi Cable America, D-Link Corporation, Avaya, Hewlett-Packard Company, Enterasys Networks, Extreme Networks, TIBCO Software, BT Group, SAVVIS Inc., Zhone Technologies, Huawei Technologies, Allied Telesis, and Adtran in the District of Delaware;  and E*Trade Financial Corporate Services Inc., Liberty Mutual Group Inc., Aetna Inc., Avon Products Inc., Starbucks Corporation, Yum! Brands Inc., Hewlett-Packard Company, and Alcatel-Lucent USA Inc. in the Eastern District of Texas. Like I mentioned before, MPG is getting a lot of press for its activity. 

Co-blogger Neil Wilkof recently raised the question about the interest of boards in questions concerning IP—and he expressly excluded an entity such as MPG.  An entity such as MPG, of course, is primarily concerned with IP and notably, patent expert Professor Craig Nard recently joined MPG's board of directors.  I think that the importance of IP will lead companies to move toward accessing the services of companies like MPG although presently MPG seems mostly (?) involved in the enforcement of its IP.   I also think more companies will seek to draw in more IP experts on their boards—including some professors.  Does anyone have a sense of whether companies are utilizing the valuation, auditing or related services of companies similar to MPG (although MPG may be a different breed according to Forbes)?  The Forbes article indicates that some companies may be doing just that with MPG. 

IP valuation and the emergence of a tradable asset class

Here's a piece from IP Finance's friend and supporter Jackie Maguire (Coller IP), giving a bit more context to the sudden emergence of officially-sponsored and commissioned studies into IP valuation and the role of IP assets in funding business activity and in stimulating growth. Explains Jackie:  

"Many Governments have now adopted an innovation-led growth strategy and are promoting the importance of IP in underpinning their aspirations for economic growth.  The race to prove the perfect model for growth persists and there appears to be a growing desire to remove all the obstacles for failure in technology transfer.  

Within the Europe Commission, the Innovation Union strategy seeks to create a true innovation system in Europe where scientific excellence, a broad and strong knowledge base and the ability to bring results to the market and innovate are all included.   The Innovation Union includes over 30 action points to ensure that innovative ideas can be turned into products and services that create growth and jobs.

 This drive for success in taking new ideas to market is leading to much Government debate about the role that IP plays, exactly how valuable a company’s IP is -- and also the different approaches used to place a figure on this value.  The mechanisms for unlocking this value, via asset-based lending, litigation or otherwise, are seen to be challenging for those smaller businesses that make up a significant proportion of the growth economy, those very companies that have to convince others that their IP is worthy of finance.

There are now three parallel studies ongoing that are seeking to inform policy surrounding these issues  (did all the officials attend the same summit?...).  One, funded by Scottish Enterprise (noted here), one commissioned by the UKIPO (noted here) and another funded by the European Commission.  Each seeks to understand how IP is valued and could be used to secure the investment often required in the early stages of growth.

Jackie Maguire of Coller IP in the UK together with Danny Ryan and representatives of 10 other countries (including Germany, Sweden, Poland, Italy, Denmark, Belgium, Spain and Portugal ) are involved in the third study and have been appointed as IP valuation experts.

The experts were appointed by the European Commission at the beginning of 2013 to undertake a project during the course of 2013.  The work of this Expert Group will help implement the Innovation Union by looking at the very specific issue of the valuation of IP, the various purposes for which it is required and how new tools and mechanisms might open up the trading of IP assets.

Some policy officials consider that the accurate valuation of IP remains a major obstacle to the emergence as a tradable asset class and that the introduction of more transparency and standardization in IP valuation procedures may render the trading of IP rights significantly more efficient and profitable.  Many of us realise that it is a lot more complicated than that, but we have to start somewhere!

IP valuation mechanisms in the context of litigation, accounting and financial transactions are being currently researched and best practice examples are being compiled to show what can be achieved at a national and European level.  This includes how IP is valued with respect to awarding damages and how financial institutions are lending against IP assets.  The group will report at the end of the year and aims to recommend measures which will be implemented at a European level to unlock IP value.

Jackie hopes that with all of the results of all of these studies and calls for information that useful, coherence and consistent policy will be implemented and that the vision that she and Coller IP have always held, for IP to recognised as a tradable asset, will be achieved".

IP Valuation: a good introduction

Since by no means all of the readers of this weblog also follow the IPKat, I thought it advisable to draw the attention of readers to this piece by Dr Nicola Searle which was posted on the IPKat this afternoon on IP valuation.  Dr Searle's article, replete with links to basic concepts, some leading thinkers and their works, provides a good introduction to the topic for those who are not yet familiar with it.

Valuing IP in Smartphones and LTE

Is this where we'd
still be without
FRAND ...?

In "Valuing IP in Smartphones and LTE", the eighth in the series of guest posts authored by Keith Mallinson (WiseHarbor), Keith observes that extensive IP litigation between various smartphone ecosystem participants —- most notably between Apple and Android licensees Samsung and HTC -— reflects the ever-increasing importance of a business strategy based on first developing or acquiring IP, then licensing and defending it. In this diverse, IP-rich and rapidly changing product sector, disputes erupt over standards-essential patents, software and hardware designs.

In this context, attempt to value IP -- including those rights that stem from essential patent ownership “determinations” -- are subject to great uncertainties, inaccuracies and biases. Keith argues that negotiated licensing agreements can overcome these problems while reflecting significantly different positions among licensors and licensees. For example, Keith calculates that there's virtually no correlation between the results of two different studies purporting to determine essential patent ownership in LTE. Keith concludes that the oft-stated belief that smartphone IP litigation and licensing costs are stifling innovation and foreclosing market entry is a "popular and yet unproven and erroneous refrain". Far from supporting this position, such evidence as there is actually points to the opposite effect: licensing costs are modest; smartphone innovation is extensive and shows no signs of slowing with faster connections, more powerful processing and richer applications, mainly on account of FRAND-based licences.

For ease of reading, Keith's contribution (which is a good deal longer than usual and contains many tables and diagrams) can be accessed here as a PDF document.

Best Practices in Valuing IP: an eye-witness account

IP Finance is pleased to welcome as a guest contributor Jackie Maguire (CEO, Coller IP Management), who writes:

"I attended the recent Summit on Best Practices in Valuing Intellectual Property. Challenged with making IP Valuation Standards sound interesting to a US audience, my good friend Thayne Forbes and I had accepted the kind invitation from Business Valuation Resources to present an international perspective at Morningstar’s Headquarters in Chicago.

Mike Pellegrino (President, Pellegrino & Associates, LLC) provided excellent opening remarks and gave a very reasoned argument for why Google paid far too much for YouTube’s brand, domain name and software platform, and failed the reasonableness test.

Anxious as to how the US audience would take to the new ISO 10668:2010 Brand Valuation Standards, Thayne explained the differences and similarities between the different IP Valuation standards that are being developed or are in preparation.

It has to be said that that the approach to valuing intangible assets in the Accounting Standards such as IFRS and US GAAP are essentially the same, but currently there is only a requirement from these standards to place a value on intangible assets in the company accounts if those assets are the result of an acquisition.

Accountants and the like, therefore, have a different perspective on Valuing IP compared to those of us with technology or brand investment and development in mind.

The new developments from the International Valuation Standards Council are however starting to move the debate forward beyond the accounting profession. It was a shame that the IVSC declined to talk about their proposed Standards at the Summit, especially as they published an exposure draft and collated feedback on 3 September. For those interested though, a rustling of the pages to No 79 will reveal a whole standard for valuing intangible assets, separating IP from goodwill. These apply to any business and are proposed to come into force in 2011. The standards define the principal classes of intangible assets in an interesting way for the IP non-expert: market-related (such as trade marks, domain names and non-compete agreements), customer- or supplier-related, technology-related and artistic-related. The standards then recognize the three principal approaches of Direct Market Comparison, Income and Cost for valuing intangibles. Essentially, as long as the valuation is carried out by a suitably qualified person who takes a reasoned position, making his/her assumptions clear, our view is that while the Standards are not very specific, covering them off will provide a framework for a robust valuation.

While my job was to report on the development of Valuation Standards at the Summit , I couldn’t leave without a comment on the really good presentation of Navigating US legal minefields in IP valuation from Lisa Brownlee and Jimmy Nguyen. The In re Bilski decision of the Supreme Court has secured value in many business method patents, but futher decisions are also having a strong influence on other IP valuations. Microsoft v i4i, Costco v Omega and HydramediaCorp. v. Hydra Media Group Inc. (here) all impact on the valuation of patents and trade marks, but the cases that took my fancy were those on false markings. Stimulated by Pequignot v. Solo Cup Co, where 300 complaints from the US public were made about the 21 billion cup lids that had been stamped with an expired patent number and the public claimed damages of $500 per event of mismarking, the number of cases for false markings are running amock! A list of False Marking cases of quite considerable length is found here.

On Tuesday a petition for writ of mandamus was filed by a false marking defendant who asks the Federal Circuit to consider the following issue:

"Did the district court clearly err when it denied [defendant's] motion to dismiss Relator's false patent marking case for failure to plead supporting factual allegation sufficient to infer an intent to deceive under this Court's precedent in Pequignot v. Solo Cup Co., 608 F.3d 1356 and Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312?"

The Federal Circuit has now ordered the plaintiff to respond to the mandamus petition within 14 days. A pdf copy of the petition can be found here. A copy of the Federal Circuit's order can be found here.

IP valuation: don't underestimate the endowment effect

IP Valuation is not an exact science and the cold rationality of classical economics often fails at giving a value to items of Intellectual Property that satisfies owners and buyers equally. In the specific case of standard-essential technology for instance, it often appears that owners of patents cling on to them with iron claws and will not license it unless the benefits of the transaction largely outweigh the cost of divulging the technology. However according to Prof. Christopher J. Buccafusco (Chicago-Kent College of Law) and Prof. Christopher Jon Sprigman (University of Virginia School of Law) IP law is still largely governed by the rational choice model, which "posits that, when making decisions, people rationally weigh the utility they will derive from different choices and assign monetary values to the options based on the anticipated utility these choices will provide". The two professors decided to call this assumption into question by applying the findings of the behavioural research to the field of IP, as it was clear to them from the beginning that IP owners aren’t more rational than any other individual engaged in a transaction. Their article entitled "Valuing Intellectual Property: An Experiment" (download here) reports on the results of an interesting experiment they carried out in order to determine if IP transactions are subject to the endowment effect, which is the most important contribution of the behavioural research in the field of economics.

“A mountain of survey and experimental data have shown that people attach substantially higher value to goods if they own them then if they are considering purchasing them. People are reluctant to part with their property, and the amount that they are willing to accept (WTA) to sell it generally far exceeds the amount that others are willing to pay (WTP) for it. This WTP/WTA gap has been termed the “endowment effect,” and it has been detected for an astounding variety of forms of property."

As Buccafusco and Sprigman asserted, the endowment effect seriously eroded the “sacrosanctness” of the rational choice model and also had repercussions on many areas of law (such as tort, contract or tort, contract, property, and criminal law).They realized nevertheless that IP law has been relatively immune to this groundbreaking finding of the behavioural research and decided to set things right. Their experiment is all the more interesting so as IP goods are actually created by the owners and are non-rival (their consumption by one person does not prevent their consumption by another). Moreover their experiment – based on a market for poems – is the first one to ask subjects to actually create an object and then value it.

Not so surprising yet quite thought-provoking, the results of Buccafusco and Sprigman's experiment prove that actors engaging in an IP transaction are only "boundedly rational", much like in any other transaction environment. They surely are utility-maximisers, however the preferences on which they based their decisions are very unstable instead of being a constant, as the rational actor model assumes. Their experiment also showed that the difference between WTA and WTP is even higher than expected, even though poems are non-rival goods.

“Our findings suggest that private transactions in creative goods may face significant transaction costs arising from cognitive biases that drive the price that creators and owners of IP are likely to demand for transfers considerably higher than what buyers will, on average, be willing to pay. This does not mean, of course, that transactions in IP will not take place – we see such transactions happening out in the world every day. Our research suggests, however, that IP transactions may occur at a level that is significantly suboptimal and that the baleful effect of cognitive and affective biases is likely to be more serious for transactions in works of relatively low commercial value, or for which no well established custom or pattern helps to inform valuation.”

The result of this experiment could have far-reaching implications in the field of IP transaction and calls for more research on other types of IP goods, notably in the case of patents. It could be argued for instance that due to years of R&D - which are intense and costly all of points of view - the sense of ownership of scientists and researchers toward their inventions is probably exacerbated and higher than in any other field of IP. If this hypothesis were correct, the transaction costs related the licensing of a patent would be much higher than expected and would drive down the overall level of patent transactions significantly.