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IP rights owners have seen the writing on the wall for some time, attempting to ward off a coming revolution: an organized market for used digitized goods. The fear has been that used digital goods may well be perfect substitutes for new items, offered at significant discounts.
USPTO applications indicate Amazon and Apple have intentions in this space. Under the premise that there will ultimately be such an organized market, the Amazon/Apple model may not be so bad for the protection of IP value, as neither company has an incentive to adversely affect new sales of digital content on their own platforms.
The March issue of Content Licensing gave us a look at the Apple application, demonstrating how IP value will be protected.
Authorized access to a digital content item can be transferred from one user to another. First buyer purchases new digital content item from an online store. First buyer then decides to sell the digital content item to second buyer. The online store is notified (according to procedure) of this arrangement and determines whether one or more criteria are satisfied before the transfer can take place. If the criteria are satisfied, then the online store records the transaction and updates authorization data that allow second buyer access to the digital content while disallowing first buyer such access. The application refers to the buyer with current access as the de facto owner of the digital content item.
Craig Johnson at The New York Law Journal lists three legal reasons why intellectual property may require a separate valuation and at the same time indirectly explains the need for royalty rate research in each setting.
For financial reporting purposes: The values of homegrown intangible assets are not recorded in a company’s financial reports in the normal course of business. If a company is acquired, accountants must allocate purchase price among the acquired company’s assets, requiring a valuation of the intangible assets for recording on the buyer’s balance sheet. Then, the intangible assets also may need to be valued after the acquisition, when a company must test intangible assets for impairment. Many times the value of IP in an acquired company can best be solved for using the relief-from-royalty approach: If the firm had to license a patent to perform the function being performed by an acquired patent, what would it have to pay?
For tax calculation and tax planning purposes: Income-producing intangible assets are sometimes transferred to a separate company, in tax-favorable circumstances, and need to be valued for tax purposes. “For example, a company may separate the income from its centrally developed IP by retaining it at the corporate level and licensing it out to its foreign operating subsidiaries.” Proving the value of those licenses can be tricky. Revenue authorities insist the agreements have to be arm’s length, without involvement of related parties. An extensive database of comparable licenses can be an analyst’s best friend in those cases.
For litigation purposes: Intangible assets are sometimes separately valued for litigation and damages purposes in situations including “infringement, breach of contract, fraud, and expropriation.” Dissolution of a business, through a partner leaving, divorce, or bankruptcy can create a need for intangible property valuation. IP Value Wire once blogged about Tavern on the Green, a famous New York City restaurant that couldn’t survive an earlier economic downturn. Auction sales of tangible assets yielded $3.5 million, and over 1,000 bidders (collectors) participated. However, what was left was the name, which analysts at one time valued at $20 million!
A search of the ktMINE database offered by Business Valuation Resources reveals over 100 IP licenses of marketing intangibles in the restaurant industry.
Dennis Crouch in Patently-O offers an explanation of two recently introduced bills that would affect the market for patents, at least the market as now defined by nonpracticing entities (NPEs).
H.R. 845, the SHIELD Act, would require the patent-holder plaintiff to post a bond to guarantee payment of attorney fees of the defendant should plaintiff not prevail. That bill would affect cases where:
- The party lodging the infringement complaint is not the original inventor or original assignee; and
- The party bringing suit does not use the patent in the production or sales of a product.
The bill would also exempt the U.S. government and universities.
S.1013, the Patent Abuse Reduction Act of 2013, would require plaintiffs in patent infringement suits to reveal the identities of all interested parties when they file suit.
As reported most recently in National Law Review, the average legal cost for defending patent infringement remains about $3 million. As expected, SME defendants tend to settle rather than pay the high attorneys’ fees, even if the lawsuit is frivolous or weak.
In the keynote address given at the American Accounting Association’s Annual Ohio Region Meeting on May 10, Public Company Accounting Oversight Board (PCAOB) member Jay Hanson recognized the changing nature of financial accounting and wondered aloud whether the next generation of auditors is being trained to handle it.
Financial statements used to be all about “tangible assets and historical cost accounting. Today … the balance sheets of an increasing number of companies are dominated by valuation estimates,” and “it is much more difficult for accountants, auditors and investors to understand the transactions and products that must be captured in financial statements.”
Valuation analysts know what it’s like to have auditors looking over their shoulders. Auditors of public companies have the board looking over theirs. “Estimates and measurements” are frequently red-flagged, particularly with respect to impairment of goodwill and accounting for indefinite-lived intangible assets. Hanson points out auditors must assess the “reasonableness of assumptions applied by management in making the necessary measurements or estimates.” “In some cases, auditors did not appropriately consider the weight of both positive and contradictory evidence,” reinforcing the need for valuation analysts to explore alternative valuation methods.
Why searching SIC codes for reasonable royalty rates can throw you off the track
IP Value Wire found another example of SIC misclassification. Advanced Sports Technologies Inc. is classified as SIC 3949, Sporting and Athletic Goods. However, its industry is Medical, and one of its chief IP properties relates to detection and location of coronary and heart disease. This is why BVR instructs ktMINE users to rely on the Industry criterion, not SIC.
Is this how to avoid potential treble damages in an infringement defense?
Rob Pegoraro reported in the Disruptive Competition Project on interviews he had with Washington-area startups, inquiring about their approach to patents. Hidden in the article is a throwaway hearsay paragraph that may reveal a key big-company strategy to patents:
[A]t a prior employer, AOL, he said the lawyers told staffers not to read competitors’ patents, lest they be held responsible for knowing infringement.
Does this work? Avoid the potential treble damages that come with willful infringement through practiced ignorance.
Game of Thrones licensed to Zynga
Zynga has partnered up with game developer Disruptor Beam to publish the developer’s “Game of Thrones Ascent” social game. Zynga will be publishing the game both through Facebook and through its official website to market it to its user base of over 250 million people. The game is an extension of the popular “Game of Thrones” series on HBO and will allow you to create a character to fight for one of the Great Houses.
Google insulated from users’ copyright violations by the Digital Millennium Copyright Act
A U.S. District Judge rejected Viacom’s infringement claims over Google’s allowing the posting of clips from “The Daily Show With Jon Stewart,” “South Park,” and other programs, agreeing with Google that it and YouTube were protected from such copyright infringement claims by the “safe harbor” provisions of the Digital Millennium Copyright Act, a law that limited the liability of online service providers for copyright infringement actions on behalf of their users.
Brandz list of most valuable global brands for 2012 released
The value of the BrandZ Top 100 Most Valuable Global Brands rose 7%, to $2.6 trillion, in 2012, compared to a disturbing flat performance one year ago. Of the 13 categories analyzed, only technology and oil and gas showed negative growth, though technology companies occupy the top three spots in the 100, and four of the top seven.
Consumer categories experienced the strongest value appreciation, year-over-year:
- Apparel: up 21%;
- Retail: up 17%;
- Personal care: up 11%;
- Automobiles: up 7%; and
- Luxury: up 6%.
Apple again leads the parade with a brand value of $185 billion, up slightly from 2012, followed by Google ($113.7 billion), IBM ($112.5 billion), McDonald’s ($90.3 billion) and Coca-Cola ($78.4 billion).
Millward Brown, which produces the annual valuation of the top global brands, touts its valuation methodology as being the most “comprehensive” because it includes a step it calls “brand contribution”: “[B]ecause the brand exists in the mind of the consumer, we have to assess its ability to stand out from the crowd, generate desire and cultivate loyalty.” The company conducts consumer research, including face-to-face interviews, to add this component.
Experts explain personal goodwill
Goodwill is the appraiser's oldest friend, most tenacious foil, and the most loyal companion throughout the valuation process. Apart from knowing how to account for it, the appraiser must also know how to apportion it, for it comes in different forms. In a newly announced self-study offering, expert appraisers James Alerding and Stacy Collins delineate the many considerations in personal goodwill apportionment:
- What is personal goodwill?
- Factors in implementing personal goodwill in cases
- Personal goodwill isn't just for divorce litigation
- Personal goodwill in the context of general valuation principles
- How personal is personal goodwill?
- Entity goodwill
- "Pure" personal goodwill
- Transferable personal goodwill
- How does the standard of value impact personal and entity goodwill?
- What is the impact of a covenant-not-to-compete?
- Personal goodwill in commercial business
- Personal goodwill and a lack of control
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