Understanding IP obsolescence

Mike Pellegrino in BVR’s Guide to Intellectual Property Valuation explains how analysts and financial advisors should view IP value obsolescence. Physical deterioration generally has no tangible impacts on IP value because IP is generally intangible; however, functional, technological, and economic obsolescence affect the value of intellectual property more directly.

• Functional obsolescence occurs when the IP user must incur excess operational costs to use the IP as compared to current alternatives, which may be state of the art. For example, manufacturing Company A uses a patent under license from Company B and pays Company B a royalty of 5% of gross revenues for use of the patent. However, Company A determines that new technology would allow it to sell equivalent functionality in the market with new technology that it has developed for lower cost. Thus, Company A is experiencing functional obsolescence using the patent under license from Company B because there is newer technology that can provide the same utility for lower cost.

• Technological obsolescence occurs when technological forces render the intellectual property worthless. For example, patents for a next-generation computer floppy disk drive may be very effective and have the fastest seek time and greatest data recovery rate ever known to man. Yet the technology is largely worthless because better technological options are already on the market, such as high-capacity flash memory, which provides more utility in a much more efficient and superior manner.

• Economic obsolescence occurs when the use of the intellectual property in its highest and best form cannot provide an adequate return on investment (ROI). This can occur easily because intellectual property is generally unique and may have little utility outside of a particular function. This limits the value of the IP economically, especially compared to newer IP.

A court upholding patent validity does not prevent an opposing ruling from USPTO

Michael Nelson for Venable LLP reports that, at least in some circumstances, the USPTO can find a patent invalid even after a court has upheld its validity.

Baxter International Inc. owns a patent related to hemodialysis machines. In 2003, Fresenius Medical Care Holdings filed for declaratory judgment of noninfringement and invalidity. In 2005, Fresenius also requested reexamination of the patent in suit. In 2007, the district court agreed with Baxter and granted judgment of validity and infringement (affirmed on appeal in 2009). Between 2006 and 2010, the USPTO reexamined the patent. The Board of Appeals at the USPTO, even after consideration of the Federal Circuit decision, found the claims obvious, invalidating the patent (the Federal Circuit upheld the Board of Appeals in In re Baxter). See full article for more information.

IVSC releases new booklet on valuation of intangibles

The International Valuation Standards Council (IVSC) has just published The Valuation of Intangible Assets, guidance on identifying different types of intangible assets and the recognized methods for their valuation, ISBN 978-0-9569313-2-0. For more information, see the IVSC website.

Protecting trade secrets is an expensive and arduous task

The headline reads that Altavion Inc. won a $5 million judgment against Konica Minolta Systems Laboratories Inc. for trade secrets misappropriation. Score one for the little guy, right?

Altavion Inc. had developed proprietary technologies that detect document changes, with important uses in detection of check fraud and altered health records, for example.

Altavion attempted to reach a licensing agreement with Konica Minolta in 2004. After receiving assurances in an executed NDA, there were about 40 meetings in 2004 alone to discuss the technology. (It is difficult to imagine good-faith negotiations that would take 40 meetings.)

In 2006, Altavion noticed Konica Minolta patent applications that included the referenced Altavion technology. The company sued for trade secret misappropriation in San Mateo County Superior Court and won a $5 million judgment finalized just last month, June 2012, eight years after the 40 meetings and six years after filing suit.

Altavion asked for over $2 billion in damages. The company won $1 million in damages, $513,400 in prejudgment interest, almost $3.3 million in attorneys’ fees, $79,778 in expert fees, and $93,813 in costs. Net of expenses, Altavion received just $1.513 million, and Konica Minolta plans to appeal.

Protecting trade secrets is an expensive and painful task. It’s important for valuation analysts and trade secrets owners to understand the expense and time involved and to plan a protection scenario: What is left of the trade secrets after prolonged license negotiations or litigation?

Judge Posner offers prescription for ‘fixing’ the U.S. patent system

Judge Richard Posner, of the 7th Circuit Court of Appeals, the most cited legal scholar of the 20th century, according to an article in Daily Finance, has followed up his dismissal of the Apple and Motorola Mobility infringement lawsuits with a prescription for fixing the U.S. that many feel is, at best, wasteful.

In an opinion article published in The Atlantic, Posner postulates that too many worthless patents are clogging the system, interfering with the efficient processing of patents of more societal value (e.g., pharma). Chief among Posner’s targets for criticism are patents in the technology world: By the time a patent is approved, the technology has been superseded in the marketplace. He offered specific alternatives for change:

• Patent legal lives should match the realities of their respective industries;
• Compulsory licensing of patented inventions should be instituted;
• Replace jury trials for infringement cases with specialist panels under the auspices of USPTO;
• Remove nonpracticing entities from the equation by requiring litigants to make or sell something based on patents in suit; and
• Train federal judges who will hear patent cases.