Do fewer bankruptcy filings mean less work for valuators?
Despite an 8% increase in new U.S. bankruptcy filings from 2009 to 2010, the pace has slowed from the 30% annual increases since 2006, according to the latest report from the Administrative Office of U.S. Courts. Although this may be good news for the general economy, BVWire asked attorney Daniel Perry (Milbank) what it may imply for business appraisers.
“It’s the big corporate filings that drive valuation work,” Perry says, “and lately we haven’t had the big Lehman Bros. type filings that we saw in 2008.” Instead, the trend he’s seeing involves sales of distressed assets through pre-negotiated or pre-packaged plans effected through Section 363 (“363 sales”) of the Bankruptcy Code. “These are bankruptcies in which the creditor constituencies agree ahead of time as to what to do with the assets, so there is little opportunity for disputes that would require a valuation,” Perry explains. If credit sources dry up again (as they did in 2008) then “we could see a lot more unplanned filings,” he adds. “These tend to breed valuation disputes because inevitably the senior creditors and the junior creditor classes will have a different view of value at the outset of the case.”
As a reminder, Perry notes that the U.S. Courts’ survey covers all bankruptcies, individual as well as corporate.
Expert reliance on entire market value rule wins one, loses one
The law in patent infringement cases is clear: the entire market value rule permits damages based on the value on an entire product containing multiple features, if the patented feature forms the basis for consumer demand. That was the recent holding by the Federal Circuit in Lucent Techs., Inc. v. Gateway, Inc. (2009).
“On the other hand,” says a new ruling by the federal district court (E.D. Tex.), Lucent also held that courts “must be cognizant” of the “fundamental relationship between the entire market value rule and the calculation of a running royalty damages.” Market value may serve as the royalty base, so long as the calculated rate is within an acceptable range. “Even when the patented invention is a small component of a much larger commercial product,” the court emphasized, “awarding a reasonable royalty based on either a sale price or number of units sold can be economically justified.” In that case, the plaintiff’s damages expert provided such justification when he relied on more than a dozen comparable licenses that calculated a royalty rate for the patents-in-suit based on the entire value of the licensed products, the court found, in Mondis Technology, Ltd. v. LG Electronics, Inc. 2011 WL 2417367 (June14, 2011).
On the other hand—after receiving the Lucent case on remand, the federal district court (S.D.Cal.) has just denied the plaintiff’s expert’s reliance on the entire market value rule, finding that the landmark Uniloc v. Microsoft (2011) decision “rejected the argument” that the royalty base could support a rate that was in an “acceptable range” of market value. Instead, if the plaintiff cannot meet the basic test of the entire market value rule then “it must in every case” apportion the defendant’s profits between the patented and unpatented features to calculate damages, the court held, in Lucent Techs., Inc. v. Microsoft Corp., 2011 WL 2728317 (July 13, 2011).
The Business Valuation Update will digest both the Mondis and Lucent decisions in the Sept. and Oct. issues, respectively; the courts’ opinions will be posted soon at BVLaw.
Where can experts get the latest on economic damages—the rules and the attorney relationships?
Consider BVR’s new Online Symposium on Litigation & Economic Damages, a thirteen-part series of webinars that will cover advanced topics in appraisal for litigation and economic damages, such as:
- On September 13th, attorneys Timothy Devlin and William Marsden Jr. (both Fish & Richardson) will present “Working with Financial Experts,” an in-depth discussion of how attorneys and financial experts can maximize their relationships—and client results—in litigation.
- On September 22nd, Part 2 of BVR’s Online Symposium will cover “Patent damages: The Entire Market Value Rule,” with expert Craig Jacobson (Citrin Cooperman & Co.) and attorney Stephen Lieb (Frommer Lawrence & Haug).
Curated by Nancy Fannon (Fannon Valuation Group) and Jonathan Dunitz (Friedman Gaythwaite Wolf & Leavitt), editors of the Comprehensive Guide to Lost Profits Damages for Attorneys and Appraisers, the Symposium will feature contributing authors to the Guide on a number of advanced and emerging issues. Subscribers to the Symposium will receive automatic programming updates as well as access to BVR’s Litigation Desktop Learning Center, an online-multimedia library of all past BVR webinars relating to litigation and economic damages. For more information on programs in the Symposium—including the estimated 26 available CPE and CLE credits—visit the Symposium’s main page.
Lance Hall: It’s a great time to gift private equity
“Because not only do you not have to pay gift tax, but the discount for marketability has shot up, too," Lance Hall (FMV Opinions) told the The Wall Street Journal, in the recent article, “How Volatility Eases Estate Planning.” The IRS generally allows a 30% to 35% discount on transfers of private company stock, the article quotes Hall as saying. “But when the publicly traded markets are more unpredictable than usual,” the article adds, “owners of private stock have successfully argued for larger discounts on the value of their holdings as well. Mr. Hall has used an indicator of market volatility known as the VIX to defend larger discounts on transfers of stock in private companies.”
Lost profits damages for doctors takes surgical care
In disputes concerning lost profits for medical practices, experts should assess the key component—physician compensation—“both in terms of volume and reimbursement rates, based on the unit of service provided and net revenue per type of service,” James Lloyd (PYA Pershing Yoakley & Assoc.) told listeners during BVR’s recent webinar, Lost Profits Damages in Medical Practices. “The growth rates for each could be substantially different,” Lloyd said.
The analysis that goes into this type of a damages claim can be relatively sophisticated, agreed co-presenter Mark Dietrich (CPA.NET), editor of the latest edition of the AHLA/BVR Guide to Healthcare Valuation. Projecting future revenue for physician practices involves looking at many factors, such as:
- Capacity constraints, for example, the number of procedures allowed for a certain piece of equipment
- Revenue per unit of service, typically on a per CPT code basis (but that depends on the practice)
- Revenue per provider (“This can make a big difference depending on the productivity of the individual physicians,” Dietrich said).
- Revenue per payor (“The payor mix can obviously have a significant impact on the revenue and profitability,” he added.)
FLPs subject to tighter scrutiny
“The smaller number of estate tax returns filed for deaths [occurring] in 2011 and 2012 will be subject to a heightened level of government scrutiny as IRS auditors comb through a declining inventory of returns to audit,” says Richard A. Behrendt (Robert W. Baird & Co.) in his article “Transfer of Interest in FLPs” (Trusts & Estates, Aug. 2011, subscription required.)
How does ‘Say’s Law’ implicate business value (and waffles)?
Read James Lurie’s (Capval LLC) “The Economics of Hash Browns.” In his insightful and entertaining review of the new book by James Adams: Waffle Street: The Confession and Rehabilitation of a Financier (Sourced Media Books, 2011), Lurie gives BV analysts some good food for thought about creating value in the current economy. Warning: don't read Lurie’s review if you’re hungry….
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