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IP Valuation CLE September 2011
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IP Valuation CLE September 2011

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    IP Valuation CLE September 2011 IP Valuation CLE September 2011 Presentation Transcript

    • IP Valuation
      September, 2011
      1
      CONSOR Intellectual Asset Management
    • Why IP Valuation?
      2
      Beyond specialized IP law practices,
      business, commercial, tax and estate practitioners
      Increasingly involved in identifying, protecting, applying, and defending intangible assets owned by clients.
      Context
      Purpose
      Value to whom?
      How much value?
      How and when does value change?
      Buy, sell or transfer
      Disputed ownership
      Improve performance
      Collateralization
    • What is IP?
      3
      Intellectual Property vs. Intangible Assets
      Bundles of IP and IA Assets
    • Context: Property Types
      4
      Intangible Assets
      Intellectual Properties
      Customer & Vendor Relationships
      Data Bases
      Patents
      Trademarks
      Proprietary Systems
      Internet Assets
      Copyrights
      Trade Secrets
      IA vs. IP: Commercialized Separate from Other Assets
    • IP Property Types
      5
      Bundles of Intangible Assets (IA),
      each contains Intellectual Properties (IP)
      Marketing
      Relationship (Customer / Supplier)
      Marks, brands, names, domains
      Trade-dress, packaging, logos
      Non-competes, key-person
      Customer / Supplier relationships
      Distribution networks
      Order backlog
      Technology
      Contract
      Technologies, know-how, systems, methods
      Patents, software, recipes, content, databases
      License / royalty, lease, franchise
      Permits, use rights, broadcast rights
    • Valuation Methodologies
      6
      Income
      Market
      Cost
      Economic principal of substitution
      Measures expense required to replace
      Neglects future benefit
      Present value of future economic benefit
      Requires projections and a risk assessment
      Requires allocation of benefit specific to the asset
      Value based on price of similar assets
      Requires suitable comparable assets
      Description
      Replication / replacement feasible
      Benchmarking
      DCF
      Relief from Royalty
      Comparable transactions
      Benchmarking
      Application
      Valuation as Art and Science
    • Valuation Tools of the Trade
      7
      The “Science” of Valuation
      Discounted Cash Flow Models
      Comparable Valuation Ratios
      Replacement Cost
      Relief from Royalty
      Allocation / Excess Earnings
      Option Models
      Proprietary Approaches
    • Changing Valuation Terminology
      8
      Level of Value
      Value Definitions
      Fair Market Value
      Fair Value
      Strategic Value
      Liquidation Value
      MVIC
      = Assets + Liabilities
      MVE
      = Equity Ownership
      Minority Interests
      Who’s Setting Standards?
      AICPA, ASA, ISO, NACVA, IRS, Courts, FASB, LESI, and more
      Defining the Assignment to Avoid “Bad Art”
    • Case: Improper Use of a Character
      9
      Background
      Defendants used a character to promote products outside of the permitted terms of agreement with IP owner
      Financial data from the defendants unavailable
      Multiple methodologies applied
      Income approach calculation yields different value than market and cost approaches
    • Case: Improper Use of a Character
      10
      Case Take-away: Context is Key
    • 11
      A more complex case showing
      the importance of Context, and
      the importance of identifying IP
    • Case: Identifying IP
      12
      Client assists municipal agencies issue bonds for public interest projects (a Public Private Partnership)
      Client has achieved substantial profits for several years
      Key competitor is a state-run agency
      State accuses client of gouging the parties it serves
      Has Client developed IP that justifies the excess profits?
    • Case: Identifying IP
      13
    • Case: Identifying IP
      14
      We can see IP exists . . .
      What are the key types of IP Assets?
      IA at the CLIENT
      Proprietary systems (some could be commercialized)
      Proprietary methods
      Relationships / key people (can’t be commercialized)
      History / Longevity / 1st to Market (can’t be commercialized)
      Case Take-away: Both IP and IA Contribute to Value
    • Value Constraints
      15
      Present Value of Expected Future Benefit
      Intangible Assets
      Brand / Trade Names
      Intellectual Properties
      Value of Business
      =
      =
      =
      Intangible Assets
      Tangible Assets
      Tangible Assets
      Could a company’s IP assets exceed the market value of the business?
      Context: Fair Market Value (transaction did occur)
      Context Implication: Value driven by expected future benefits
    • Case: Impact of Context
      16
      Could a company’s IP assets exceed the market value of the business?
      Frequent Context for IP Valuation: Purchase Price Allocation (FAS 141/142)
      Purchase Price Creates Goodwill
      What Portion of the Acquired Goodwill should be allocated to IP?
      What are the components of the IP Allocation?
    • Can Value of IP > MVIC?
      17
      Context Drives the Science
      Value of IP cannot exceed MVIC in a purchase price allocation
      Value of each IP = PV of future benefit each IP provides to Company’s cash flow
      Tools / Science
      Forecast cash flows by product
      Quantify the interaction of IP Assets and their contribution to earnings
      Case Take-away:
      Context is key / Context Can Be Forced on the Value Analyst
    • What if the Context Changes?
      18
      What if we don’t have a completed transaction between
      a wiling buyer and a willing seller?
      Frequent Contexts
      Infringement Damages
      Licensing / Endorsement
      Damage Calculations: require application of traditional valuation methodologies to determine value of economic benefits lost, or not achieved (often when an arm’s length transaction would never have occurred)
      Licensing: requires both parties understand and estimate the present value of future economic commitments (without the benefit of an existing arms-length transaction)
    • What if the Context Changes?
      19
      What if we don’t have a completed transaction between
      a wiling buyer and a willing seller?
      IP Valuation Methodologies
      Comparable Transactions
      Relief from Royalty
      Discount Future Benefit
      Replacement Cost
      All these approaches construct a hypothetical agreement between IP Owner and IP User
      Crafting the Hypothetical Agreement Requires Art and Science
    • Hypothetical Agreements
      20
      No More Rules of Thumb
      Replacing Rules of Thumb
      Uniloc USA v. Microsoft Corp: applicable specifically to IP analysis
      End of the 25% rule = “End of the unsupported conclusion”
      Averages & Surveys as the lemming’s rule of thumb
      If it’s a universal norm, it can’t meet the criteria for comparables
      Licensing agreement = contractual financial agreement
      Commitments can and do take many forms
      Hypothetical agreements must reflect their real-world counterparts
      This Shouldn’t be Shocking
    • Reflecting Real-world Complexity?
      21
      A Typical Relief From Royalty Calculation
      Did Consider . . .
      Forecast benefit (sales, term)
      Industry dynamics (rate)
      Risk assessment
      Assumed . . .
      Constant sales
      Industry average royalty rate
      No changes during term
    • Case: Alternative Royalty Rate Analyses
      22
      Value of trademark and related brand assets to a partner business?
      Method Applied: PV of license-derived economic benefits
      Subject IP did not resemble comparable IP transactions
      Parties had a standing relationship
      Ranges observed in Comparable Transactions
    • Case: Alternative Royalty Rate Analyses
      23
      Royalty Rate Build-up Method: BVEq
      BVEQ= CBV + (IVE1 + IVE2 + …. + IVEN)
      Surveys and Comparable Transactions are not The Only Tools Available
    • Case: Reflecting Reality
      24
      Take-away: “Hypothetical Negotiation” Drives Greater Analytical Burden
    • When Valuation Issues Arise?
      25
    • The Valuation Answer
      26
      Reconcile results from multiple approaches
      Reconcile the calculations to the context
      Context + Time = Value
      There Are No Valuation Answers: Only Good Choices
    • 27
      Handouts
      Law 360 on Rules of Thumb
      Considerations for Hypothetical Negotiations
      20 Licensing Structure Alternatives
      Criteria for Comparable Transactions
    • 28
      Discussion
    • CONSOR’s Services
      29
      www.consor.com
      858 454 9091
      IP Valuation
      IP Litigation Support
      Valuing patents, trademarks, copyrights, trade secrets, celebrity rights, and technology
      Helping businesses understand the value of their IP
      Valuation for transactions, tax purposes, litigation, licensing deals, and more
      Assisting attorneys with damage calculation parameters & case strategy
      Proven success as expert witnesses
      Economic damages in litigation
      Federal, state & international experience
      Arbitration, and mediation
      Licensing Consulting
      IP Transactions
      Assisting clients in maximizing the licensing value of their IP assets
      Develop licensing strategies, execute, negotiate license agreements
      Licensing experts in litigation
      Evaluate financial and economic commitments of a potential transaction
      Maximize the value of bankrupt assets
      Identify valuable IP in bankruptcy
      Market and sale of bankrupt IP assets
      Value and dispose of intellectual property