In an article to be published in the next AIPLA Quarterly Journal, Brad Pursel and Michael Annis provide a brief history then a detailed overview of the requirements related to FAS 141 (acknowledging the ASC Topics, namely Topic 805, but choosing to maintain the customary 141 reference), provide useful statistics related to the number of FAS 141-related fair value measurements, discuss the valuation and audit process as it relates to FAS 141, and challenge attornies to make use of FAS 141-related IP valuations in subsequent litigation.
Their contribution is a good one in indentifying the possible evidentiary value of FAS 141 valuation reports in IP infringement litigation, and IP counsel should have a fundamental understanding of when and how an FAS 141 valuation takes place.
In an acquisition, for FAS 141 purposes, there are two criteria that can trigger the required recognition of acquired intangible property as being separate from goodwill:
1) If the intangible asset exists from contractual or other legal rights, and/or
2) If the intangible asset is separable from the acquired entity, meaning can it be sold, or licensed, or exchanged, regardless of whether or not there is any intent to do so, even if that separability can only exist with a related contract, asset, or liability. You will see this with knowhow or trade secrets that are separable, but only if with related technology (or vice versa).
Unfortunately, FAS 141 does not provide substantive guidance regarding the valuation of acquired intangible assets, including IP, though it does recognize the inherent difficulty, acknowledging “the fair value estimates for some intangible assets that meet one of the recognition criteria might lack the precision of the fair value measurements for other assets.”
The goal, then, is to identify, analyze and value the intangible assets, of course including IP, as of the date of the acquisition.
Here, therefore, is an important linkage between the FAS 141 valuation and IP litigation. The purpose of patent protection is to provide the patentee proper economic return in the acquisition of the patent. As such, a jury should consider the valuation of the infringed asset at the time of its acquisition. And any existing FAS 141 valuations may well have done that.
For example, FAS 141 valuations may be particularly useful to a defendant if the plaintiff previously allocated only nominal value to the infringed IP. Of course, careful or full valuation, or even over valuation, of the asset in an FAS 141 report may do the converse. (As management is ultimately responsible for financial reporting, here is still another reason to make sure the FAS 141 valuation is done correctly.)
Likewise, purchase price can be a significant factor, and the authors use as an example Integra Lifesciences I, Ltd., v. Merck KGaA wherein a royalty-rate-based damage award was reduced by over a 50% because the original jury award was out of line with the purchase price of the assets.
Since FAS 141 valuations can add significantly to fact finding in a litigation, the authors discuss their discoverability, asserting that though the courts have not specifically referenced FAS 141 reports, it is clear a company’s financial records are subject to discovery.
Whether valuing a patent under FAS 141 or calculating a reasonable royalty for a patent infringement claim, the primary inputs are the same: royalty base and royalty rate. (Here is a good source.) The authors predict FAS 141 valuations will be admissible in patent infringement litigations, if only in support or argument against an estimated reasonable royalty rate or the base to which it is applied.