U.S. District Judge James Holderman in Chicago was asked to determine the royalty damages in Cisco Systems v. Innovatio IP before deciding on patent validity or whether infringement occurred. Presumably this would allow the parties to value the merits of proceeding with the two-year-old case.
On October 3, Judge Holderman set 9.56 cents per chip as the value of the contested standards-essential patents used in wireless computer network technology, as we focus even further on what the courts deem to be reasonable and nondiscriminatory, or RAND, terms.
Innovatio is the other nonpracticing entity everyone likes to point to (IP Ventures being the first) when they describe abuses in the U.S. patent system. Innovatio owns patents in wireless technology, and its monetization strategy has been to threaten litigation against small-business users that benefit from that technology (often settling such cases for $2,500 or so) rather than go after large manufacturers that incorporate that technology into their products. Any commercial entity using a wireless router was vulnerable. Cisco Systems, Netgear, and other manufacturers of wireless equipment have gone to court to protect their clients from these nuisance lawsuits.
According to Businessweek, an Innovatio spokesperson said the company will be making an offer to license its technology at these rates to manufacturers.
In BVR’s Benchmarking Intangibles study, commercial customer relationships made up the largest intangible asset (aside from goodwill) valued in the more than 300 purchase price allocations reviewed.
The value of a customer relationship reflects the present value of future incomes from that relationship, and the value reflected in a purchase price allocation should reconcile to the sum of all of the values of individual customer relationships held by an acquired company. Unfortunately, it would be prohibitively expensive to perform such a proof. The valuation would take into account expected income stream, the sustainability of any competitive advantage, market share and position, and the causal relationship between marketing actions and customer reactions.
The multiperiod excess earnings model (MPEEM) has been the traditional method of choice in the valuation of customer relationships. In the May 2012 issue of Business Valuation Update (BVU), Ed Hamilton and PJ Patel presented the distributor method (DM) as a more suitable alternative for some circumstances. Now a response by Dan Guderjohn and Robert Reis in the October 2013 issue of Business Valuation Update raises concerns about this method.
Conceptual and practical issues: The basic premise of the distributor method is that the returns to a customer relationship asset are analogous to the economic profits earned by a hypothetical intermediary. It attempts to show how the subject company’s economic characteristics would differ if the investment in customer relationships were relegated to an outside entity. Guderjohn and Reis (both with Corporate Advisory Associates) say that, “on further inspection, a number of concerns, both conceptual and practical, become evident.”
For one thing, the distributor method ignores any potential value in the relationships between a company and its distributors, according to the authors. “Contractual agreements and value-added services provided by a distributor can generate customer relationship value at the distributor level,” they say. Also, they point out that distributors are not homogeneous. “While conjuring up a hypothetical distributor might sound easy, it becomes a very difficult task once one begins to consider the myriad forms a distributor can take,” they contend. The article details more of the authors’ concerns.
USPTO’s Board of Patent Appeals and Interferences (BPAI) held invalid various claims in U.S. Patent No. 6,260,097 (Rambus Inc. v. Rea (Fed. Cir. 2013)). Rambus appealed. Alison Baldwin, writing in Patent Docs, alerted IP Value Wire to the court’s instructions regarding three serious due process errors committed by BPAI. Those concerned and responsible for patent value recognize the importance of the Federal Circuit’s oversight.
First, the board deftly shifted the burden of proof that the patent claims were not obvious onto Rambus, concluding in its opinion that “Rambus ha[d] not demonstrated that skilled artisans … would not have been able to arrive at the broadly claimed invention.” That didn’t fly. In re-examination proceedings, “a preponderance of the evidence must show nonpatentability before the PTO may reject the claims of a patent application.” The burden of proof remains with the Patent Office.
Second, the board supplemented the examiner’s findings with its own reasons to come to its own conclusion of nonobviousness. “The Board may not “rel[y] on new facts and rationales not previously raised to the applicant by the examiner.” This is not to say the board cannot bring up more issues. “The Board may elaborate on the examiner’s findings, so long as the appellant had an adequate opportunity to respond to the Board’s findings during the PTO proceeding.”
Finally, the court dismissed the board’s attempt to have it both ways with Rambus on the nonobviousness issue and Rambus’s reliance on evidence of one claim element:
When Rambus presented uncontested evidence of market need and industry praise for the claimed “dual-edge data transfer functionality,” the board held that this evidence was not commensurate with the scope of the claims because the evidence discussed only one embodiment of the claims. The court pointed out a patentee is not required to produce objective evidence of nonobviousness for every potential embodiment of the claim to reach the threshold of “commensurate with the scope of the claims.”
At the same time, the board held that all of the objective evidence of nonobviousness presented by Rambus lacked a nexus because the single claim element of “dual-edge functionality” was disclosed in the prior art and, therefore, was not novel. The court reminded the BPAI that the obviousness inquiry must relate to “the claimed invention as a whole” and that the evidence presented by Rambus was not limited to just the feature disclosed in the prior art.
Governing authorities will be happy to hear that, as planned, more value is being allocated to identifiable intangible assets and less to goodwill, according to a report from Houlihan Lokey on purchase price allocations.
The analysis examined 511 transactions (not involving financial institutions) in which the acquiring company was based in the United States and publicly held. The study used “purchase consideration,” which is the sum of the purchase price paid and liabilities assumed in connection with a business combination.
Changing mix: The percentage of the purchase consideration allocated to intangible assets increased to 32% on average in 2012, up from 26% in 2011. The percentage of purchase consideration allocated to goodwill, on the other hand, dropped to 31% on average in 2012, compared with 38% in 2011.
Categories of intangible asset acquirers most frequently identified were customer-related intangibles (cited in 53% of deals), trademarks and trade names (41%), developed technology (39%), and in-process research and development (9%). Other intangible assets typically included were noncompete agreements, licenses, permits, and other contracts or agreements.
Valuators wishing a glimpse at how others assign remaining useful lives to these intangibles should review Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations, available here from BVR.
Valuation of copyrights is becoming more of a challenge, as new technology continues to change the revenue potential of content. As reported in Content Licensing, lately Twitter has been gaining traction as a way for rights owners to rent their content to brands to incorporate into social media marketing efforts.
In September, the social network signed major deals with CBS and the NFL, notching its two biggest video deals to date. The NFL will embed short, “instant replay” clips from games into tweets, along with five-to-eight-second preroll ads from a sponsor. The sponsors will also send the tweets to their own Twitter followers; Verizon and McDonald’s have already signed on. Revenue will be split between Twitter and the NFL.
The CBS deal will include video clips from 42 of the network’s shows and cover 20 CBS-owned brands, including CBS Interactive online properties such as CNET, TVGuide.com, and its fantasy football site.
In its 13th Annual Royalty Compliance Report, Invotex found 89% of audited licensees underreport and underpay royalties and 56% underreport sales. In 2007, the number was 80%, so things do not appear to be improving.
Three types of errors account for more than 85% of all of the unreported or underreported royalties: “questionable license interpretation,” “royalties from underreported sales,” and “royalties from disallowed deductions.”
Late in 2012, IP Value Wire reported on Carnegie Mellon’s patent infringement victory and huge award ($1.17 billion) over Marvell Technologies and the defendant’s vow to appeal. The first step in that appeal has ended as U.S. District Judge Nora Barry Fischer in Pittsburgh denied Marvell’s request for a new trial and promised a further opinion on Carnegie Mellon’s argument that the jury award should be increased because it found Marvell willfully infringed on the patents in suit.
Carnegie Mellon had sued Marvell Technology Group Ltd., a Bermuda-based chip manufacturing company, in 2009 in the federal court for the Western District of Pennsylvania, alleging the company had infringed patents covering technology counteracting “media noise,” “increasing the accuracy with which hard disk drive circuits read data from high-speed magnetic disks,” according to a statement released from K&L Gates, the law firm for the university.
The case is Carnegie Mellon University v. Marvell Technology Group Ltd available at BVLaw.
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