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Under today’s tighter evidentiary standards for proving reasonable royalty damages, IP experts can expect challenges to any use of the entire market value of the accused product as well as reliance on licenses that are not comparable. The federal district court (Delaware) acknowledges it is tough to come up with a reasonable royalty rate to apply to patent damages calculations, but admonishes an expert witness in AVM Technologies v. Intel that the “difficulty in determining a royalty base … is not a reason to accept an unreliable method.”
Zeroing in (again) on the many-times discredited entire market value rule (EMVR) and then broadening to include an expert’s reliance on portfolio patent licenses when only a single patent is at suit, the court said, “No reasonable juror could consider … broad portfolio license agreements to be comparable in scope.”
The message to analysts in expert witness roles: If it is a single patent at suit, isolate its benefits and technological value and find comparable, single-patent license agreements. Read the complete digest of AVM Technologies LLC. v. Intel Corp., 2013 U.S. Dist. LEXIS 1165 (Jan. 4, 2013) in the March 2013 Business Valuation Update; the district court’s decision will be posted soon at BVLaw.
In a development that is gratifying at least to franchisees in Wisconsin, Illinois, and Indiana, the 7th Circuit Court of Appeals has overturned what had been prevailing law for some 27 years to allow franchisees to use the trademarks they licensed even if the licensor-debtor rejects the license agreement in bankruptcy court.
It remains to be seen whether other courts follow the reasoning in Sunbeam Products Inc. v. Chicago American Manufacturing, LLC., 686 F3rd 372 (7th Cir. 2012) or stay true to the 1985 decision in the 4th Circuit, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. 756 F 2nd 1043 (4th Cir. 1985), which held that the licensee would lose the right to use the trademark.
Analysts take note: If other courts get in line, one risk factor is removed, and valuation of franchisees changes. This development bears watching.
In the wake of the monumental shifts in the music industry sit skeletons and shadows of retail outlets where consumers listened to and purchased records, tapes, and CDs. Last-minute gifts could always be purchased at Sam Goody’s. HMV’s recent demise in the U.K. illustrates that value still may exist in the brands.
HMV is named after the label given to the picture of the cock-eared dog, Nipper, sitting alone and presumably listening to a gramophone, known throughout the English-speaking world as “His Master’s Voice.” BusinessWeek reports that though HMV might have to shutter over 200 of its stores and lay off thousands of workers, there’s still considerable value in its 53 trademarks registered with Britain’s Intellectual Property Office. Nipper appears to be the most valuable of the lot.
In 2011, HMV had its intangible assets valued at $78 million. (It’s possible, but Nipper’s long list of ownership changes makes it unlikely.) IP valuation specialist Mike Pellegrino says that, generally speaking, trademarks represent the most valuable types of IP. Interbrands’ survey of brand values in 2012 bears testimony to this:
- Coca-Cola, $77.8 billion;
- Apple, $76.6 billion;
- IBM, $75.5 billion;
- Google, $69.7 billion;
- Microsoft, $57.9 billion;
- GE, $43.7 billion;
- McDonald’s, $40.1 billion;
- Intel, $39.4 billion;
- Samsung, $32.9 billion; and
- Toyota, $30.3 billion.
In research performed in 2012, The Licensing Letter concluded that the overall average price differential between branded merchandise and nonbranded, such as merchandise in a retail setting, is 32.9%, suggesting overall strong brand value. The study also points out stark differences between product categories.
Entrepreneurs are snatching up discarded brands, sometimes at bargain prices. Polaroid, Eagle Snacks, the Sharper Image, and, just last year, Clearly Canadian are brands seeing a revival under new ownership. River West Brands looks for abandoned (or unused) brands. For example, the Los Angeles Times reports that in 2004, the company bought the rights to Nuprin, a pain reliever no longer being made and sold it to CVS, which used it for a privately labeled pain reliever.
Brand value is a hot topic, critical to valuation, financial, and M&A analysts, and BVR has invited Mike Pellegrino to do a thorough review on March 14. At this webinar, attendees will learn what constitutes a brand, review what legal protections brands carry, run through scenarios of how to value brands, and be given checklists of hard-earned, court-tested dos and don’ts.
In a presentation titled “Intangible Asset Valuation,” Malcolm McLelland, Ph.D., begins with the premise that “there is no reliable way to estimate fair market-derived, risk-adjusted rates of return for non-traded assets and liabilities.” McLelland cogently argues for employing a combination of arbitrage and risk-neutral asset pricing theories to value intangibles:
Using modern asset pricing theory and econometric analysis results in clear, transparent valuations with supportable-and-supported assumptions … critical in transaction advisory services, financial reporting, and auditing.
McLelland looked at inspection reports from the Public Company Accounting Oversight Board (PCAOB) and extracted write-ups from four top-tier auditors. Each used similar language: The auditor “failed to obtain evidence supporting the valuation conclusions.”
The author points out that commonly used valuation methods often rely on unsupported assumptions and professional judgment; in contrast, “modern asset pricing theory” results in valuations of intangibles that are transparent and supportable.
Reports are surfacing (see Sophie Ashley) on the Organisation for Economic Co-operation and Development debates last year on transfer pricing. Two things stick out: The definition of an intangible is still being debated, and so are approaches to valuation.
Arwed Crüger, of WTS, an advisory firm in Germany, testified that he was glad to see a revival of the comparable uncontrolled price (CUP) method in valuation.
David Jarczyk, president of ktMINE, agreed that there appeared to be a general consensus that OECD should consider the CUP method for IP value analysis:
Experts should use independent license agreements to determine the appropriate structure of IP transactions as well as to assist in determining a price for the transactions. The use of these benchmarks answers the critical questions raised by the discussion draft: how would independent parties structure an IP transaction given the tested transaction’s facts and circumstances, and what price would be agreed upon given this structure?
The parallel “discussion” in the U.S. surrounds choices available in Treas. Reg. 1.482.4. Alvarez & Marsal describes what might happen with the transfer of U.S.-based IP to a related party in a foreign jurisdiction. Once the IP is clearly identified and vetted for ownership, an arm’s-length price must be determined. IP assets are typically valued individually, and regulations provide for several methodologies:
- The comparable uncontrolled transaction (CUT) method under Section 1.482-4(c);
- The comparable profits method (CPM) under Section 1.482-5;
- The profit split methods (PSMs) under Section 1.482-6; and
- Unspecified methods under Section 1.482-4(d).
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