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The first sale doctrine provides that, once sold, a copy of a copyrighted work can be resold without the authorization of the copyright owner. Consumers can legally buy books, for example, without fear of copyright infringement. The doctrine applies only when the copyrighted work was “lawfully made under [the Copyright Act].”
The question arose, in order for the doctrine to apply, does the copyrighted work have to have been manufactured in the U.S.? In Kirtsaeng, dba Bluechristine99 v. John Wiley & Sons, Inc., the U.S. Supreme Court has decided that the first sale doctrine applies no matter where the copyrighted works are manufactured. (Read the case headnote.)
Background. Kirtsaeng, a Thai native, moved to the U.S. to pursue advanced education. Because textbooks were produced and priced cheaper in Thailand, he had his friends and family buy texts there and ship them to the U.S. for sale on eBay. As reported in this blog in 2011, Wiley sued him for copyright infringement and won a judgment that the 2nd Circuit later upheld. Kirtsaeng’s defense was that his action fell under the first sale doctrine, so that was the issue before the U.S. Supreme Court.
The court ruled that the first sale doctrine applies to authorized copies of U.S. works manufactured overseas. Under the 6-3 ruling, books by U.S. authors printed overseas for sale in foreign territories—and, by extension, music, videos, video games, and other physical media—can be purchased in those territories and legally resold in the U.S. without the copyright owner’s permission. The immediate effect of the ruling is to open a legal loophole in the Copyright Act’s prohibition on parallel imports. But the implications of the act for rights owners across the media spectrum are potentially much larger. The ability of resellers to purchase copies in foreign territories for sale in the U.S. will make it much riskier for rights owners to charge different prices in different territories based on local market conditions. Without that ability, the long-standing practice of licensing rights on a territory-by-territory basis is now at risk.
What did the decision do to IP value?
Dennis Crouch, in his analysis on PatentlyO, discussed that:
The court did recognize that the decision weakens the value of the given intellectual property right. In that regard, the court basically said “tough luck”—writing that “the Constitution’s language nowhere suggests that its limited exclusive right should include a right to divide markets or a concomitant right to charge different purchasers different prices for the same book, say to increase or to maximize gain.”
When a work of art achieves unexpected success, expect some IP problems. A synthesizer-driven dance track called “Harlem Shake” has gone viral on YouTube, now reportedly with 50,000 copycat videos.
According to the New York Times and as reported in The DROP.fm, reggae artist Hector Delgado and rapper Jayson Musson had their voices sampled on “Harlem Shake,” and neither knew about it.
Delgado’s voice is heard at the beginning of the track, stating the line “con los terroristas.” Musson’s voice is heard saying “do the Harlem shake” about 15 seconds into the tune.
Both artists are currently in negotiations over royalty fees. For well-heeled studios and successful artists, permissions are handled before release of a work. It can be time-consuming and expensive, so small labels with tight budgets and no expectation of success might well skip this part. In the age of YouTube, Facebook, and Twitter, though, you never know.
In Pablo Fernandez’s e-book Valuation and Common Sense, Chapter 25—“Valuation of Brands and Intellectual Capital”—lists seven Interbrand-developed factors that increase the value of a brand:
- Does the brand exhibit market leadership? Market leadership gives the brand competitive influence and the power to set prices, etc.
- Does the brand exhibit stability? Market stability leads to high scores in customer loyalty.
- Is the market in which the brand operates stable or growing?
- Does the brand have global reach? “Brands operating in international markets are considered more valuable than national or regional brands.”
- Does the brand remain current? A brand’s ability to stay relevant for the consumer increases its value.
- Has the brand received continual investment?
- How protected, legally, is the brand?
For those who missed Mike Pellegrino of Pellegrino and Associates and Ira Mayer of The Licensing Letter on March 21 for the BVR webinar titled Valuing Brands, the training pack is available here.
An article in IP Frontline admonishes that the value of an intangible asset should not be assessed in the abstract. It must be valued within the context of its use. Some of these factors include:
- What is the intellectual property; more importantly, how does protecting the IP add value to the business? Value can be found only in how the IP impacts the business.
- What is the remaining useful economic life of the IP? (What have others assigned as useful economic lives of intangibles in purchase price allocations?) See BVR’s Benchmarking report.
- What is the strength of the IP? Is the intellectual property new or a modification of existing intellectual property? Are the patent claims too broadly focused?
- What is the likelihood of technological change that would affect the IP being valued? What are the capital requirements to create or respond to such change?
- Are there any substitutes available and, if so, at what cost?
- How would you assess management skills and experience with respect to the full exploitation of the intellectual property?
- How will the market respond to the product(s) driven by the IP?
- Will there be any regulatory restrictions/difficulties that might affect the exploitation of the IP?
- Are there any strategic factors at play that make the IP more valuable in the hands of an acquirer?
According to flight safety experts, “the expectation in aviation is never to experience a fire aboard an aircraft.” Then why are Boeing engineers reporting that contained fires resulting from battery malfunctions onboard aircraft are almost routine? One reason: The intangible that can kill is reputation.
The fact that Boeing has come up with a fix for its lithium battery problem, albeit one that does not specifically address the problem because the problem could not be identified, needs to be packaged and sold to the flying public.
The Exxon Valdez oil spill in 1989 taught businesses that denial and obstruction were not appropriate strategies to manage reputation hits. Since then, high-profile companies have managed reputation problems through choreographed public posturing, investment in public good, and expensive marketing programs. Since the Valdez disaster, downplaying the seriousness of the problem has not been deemed an acceptable strategy.
Boeing marketing is busy surveying customers’ feelings about the Dreamliner and investing in a paid search that steers inquiring eyes to stories about how it is retrofitting the aircraft. For many, learning that battery failure is routine in Boeing aircraft is not reassuring. Understanding that the fix covers all possible ways the fire could have started and ensures containment if something did happen, making this aircraft the safest the Boeing company ever constructed, would be better messaging.
For more on the importance of reputation as it applies to Boeing, click here.
One of the guiding principles of Content Licensing, a membership periodical published by The Licensing Letter (EPM Communications), is that those executives charged with the task of growing their consumer brands in media need to break away from parochial tendencies and watch trends in all categories. Editor Paul Sweeting states:
All of the media industries were traditionally siloed off from each other. Yet the issue is the same, how do you monetize a given piece of content on the various platforms? If you are mounting content on the same platform as a company in another industry, you are now competing, across siloes, across industries, for the attention of the consumer. It’s one big ocean and everybody is swimming in it. What happens in the music industry has a huge impact on what happens with books.
As if setting out to prove the point, Rovio Entertainment Ltd. announced this week a bold foray from the video game business into the video-entertainment business with its ever-popular Angry Birds franchise. Rovio is creating a new cartoon network—within the Angry Birds app. A year’s worth of cartoons is planned, each about three minutes in length.
There will also be an Angry Birds Toons channel on Comcast, streaming from other vendors as well. Though Disney has little to fear, Rovio is resetting the bar in proving what is possible in raising the value of IP nestled within fictional characters, growing a 99% video game app to an estimated $200 million company in 2012. And now Andrew Stalbow, executive vice president of strategic partnerships for Rovio, calls the latest move to a video-entertainment company a “game-changer.”
In a case that might have some legs, Intertrust Technologies Corp., owned jointly by Sony Corp. and Royal Philips Electronics, has sued Apple for infringing on Marlin, the digital content protection software already licensed to Samsung, Nokia Corp., Fujitsu Ltd., and HTC Corp. In 2004, Microsoft agreed to pay Intertrust over $400 million to settle a similar suit.
The Wall Street Journal reports Intertrust has been in less-than-fruitful negotiations with Apple since 2005 and that Intertrust considers litigation a last recourse. This history may be important if a court finds for Intertrust, as a finding of willful infringement can treble damages.
There are many problems with using the cost approach to value IP. Probably the most significant is that the cost approach fails to reflect the IP’s earnings potential, from which the value of intellectual property is derived.
In effect, the cost approach assumes that the fair value of the asset will be the same as its cost. However, cost does not equate to value. One invention might make it big; another with a similar investment might find little market acceptance. Clearly they do not have the same value.
If the IP has significant income upside in a growing market, the cost method will likely understate its value by quite a bit. If research and development has been inefficient or lengthy, or if the market potential is lacking, the cost method may well overstate the IP value.
In the market approach, the value of an IP asset is determined by the arm’s-length price paid in transactions deemed comparable to the circumstances surrounding the IP being valued. The theory is that a licensee or buyer of IP will not be willing to pay more than the amount others have paid for similar intellectual property.
Wouldn’t it be nice if there were an active public market in which to exchange IP and view exchanges of comparable assets? In such a market, a valuator could also view pricing, terms, and whether the exchange was in an arm’s-length transaction. There have been attempts to create pure auction environments and marketplaces, and those we hear about are reported in IP Value Wire. The pure marketplace for IP does not exist, but there is indeed an excellent source of data that thousands are using to value IP: ktMINE.
ktMINE is an interactive intellectual property database that provides direct access to royalty rates and full text of over 14,000 license agreements, complete with detailed summaries that allow for easy searching. BVR represents ktMINE to the broad valuation community. Valuation analysts seeking royalty rates for an income approach to valuing IP, for relief from royalty, and for the market approach now have an excellent tool at their disposal. Twenty-four-hour passes are available. For more information, to see a user’s guide, or to learn pricing options, contact Randy Cochran at randyc@bvresources.com.
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