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Copyright Valuation and Damages - Nevium 2013


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Learn the basics of copyright valuation and the analytical approaches to copyright infringement damages

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Copyright Valuation and Damages - Nevium 2013

  1. 1. 1Copyright Valuationand DamagesState Bar of California,Intellectual Property Law SectionMarch 2013Brian Buss, CFADoug Bania, CLP
  2. 2. IntroductionOur View of IPFoundationsof IPValuationKeyConceptsCopyrightExampleA financial and economic perspective on Copyrights2
  3. 3. 3Responsibility ChainComplementary Views on IPA FinancialandEconomicView of IPIP Developmentand OwnershipIP BusinessManagementIP LegalManagement
  4. 4. 4Responsibility ChainValuation BasicsArt &Science . . .but notMagicValue = Present Value of Future BenefitsFair Market Value = price at which un-related parties would transactValuation happens every day, only somevaluations involve a formal analysisIP Valuation requires one more stepcompared to Business Valuation
  5. 5. How Copyrights Can Be Valuable5Description BenefitMonopolyBarrier to entry,exclude othersfrom using• Pricing power• Greater profit marginsPermissionAbility to becompensatedwhen others use• Value of license(PV of royalties+fees – costs)• Value if soldLitigationSeek damages ifothers use• Litigation award(PV of award less costs)• Threat of litigation(force “Monopoly” or “Permission”)PromotionSignals innovation,uniqueness, sourceof origin toconsumers• Additional sales• Reduced marketing• Incremental marginValueDerivedFrom Use
  6. 6. Art, Music &EntertainmentAn LA street artist’s work was used without permission by a well-known band as a component of the concert backdropReasonable fee for use of lyrics by a cover-bandTexts andwritten worksValue of a published Christmas play for the author’s estateFair royalty to the creators of a comic book character when usedas the basis for a motion picture characterSoftware A software developer “used” the user-interface of the market-leader’s design software, knowing that the “look and feel” oftheir new product needed to match the “industry standard”Photographs &ArtShoe company had permission to use an artist’s westernphotography with marketing materials, but used certainphotographs on the shoe box without permissionWebsite,brochuresSon started a new company using Dad’s website, brochure andpromotional materialsDesigns How and when does a fabric pattern yield additional profits fromthe sale of garments by chain-store retailers?Value to prospective lender for a library of copyright-protecteddesigns in the event of bankruptcyRange of Copyright Issues6TheChallenge:Reasonablyquantify theeconomicand financialcontributionof copyrights
  7. 7. Foundations ofIP Valuation
  8. 8. Why8Buying or sellingLicensingBankruptcyBuild, buy or licenseIP portfolio alignmentROI, ROMIOur first question: “Why do you need the Asset valued?”Fair value reportingPurchase price allocationImpairment testingEstate transfers &contributionsTransfer pricingNon-profit to for-profitEminent domainDamagesValuationStrategy / TransactionsComplianceLitigationContext impacts the Analyst’s approach tothe assignment
  9. 9. What9Early on,All partiesagree on whatis being valuedOur 2nd question: “Which assets will be valued?”TrademarksCopyrightsPublicity RightsPatentsCopyrightsTrade SecretsMarketing Assets Technology AssetsDomain NamesCustomer ListsRelationshipsPractices / ProceduresKnow-how / ResearchTest ResultsRelationshipsPractices / ProceduresWhat other assets are related to the copyright(s)?
  10. 10. Valuation Approaches for Brand IPDescription Information RequiredCostApproachAmount a potential buyerwould pay to replace orcreate an asset themself• Historical Cost to develop the IP• Amount spent to promote, maintain and support the IP• Estimate of cost to replace or replicate (R&D expenses,corrective advertising, time and effort)IncomeApproachPresent value of futureeconomic benefitsreceived from ownershipof an asset• Product-level earnings forecast• Apportion profits from products using the IP• Reasonable royalty rates & licensing compensation• For damages: But-for and As-is forecastsMarketApproachValue based onobserved transactionsinvolving comparable orsimilar assets• Comparable transactions research• Peer Group: market share, pricing strategy & results• Similar forms of IP, IP used in similar contextHowSame Approaches as Business Valuation . . .apply as many methodologies as possible10
  11. 11. 11Responsibility ChainTheIntellectualProperty& Products ProfitsPeople ResourcesTangible Assets /Natural ResourcesBusiness and IP ValuationThe Key inIP Valuation:Apportionprofits to theIPIP depends on other assets and resources in order togenerate economic benefits=Capital ResourcesOther IP & IA
  12. 12. Key Concepts forCopyright Valuation
  13. 13. 13Responsibility ChainPresentValue ofExpectedFutureBenefitsValue ofBusiness =IntangibleAssets= =TrademarksPatentsTangibleAssetsIntangibleAssetsTangibleAssetsConcept 1: ApportionmentCopyrightsamongstmany assetsused togenerate“Benefit”Value of Business > Value of copyrights owned by the BusinessCopyrights
  14. 14. IPMarketplaceProductMarketplace14Responsibility ChainLicensorConcept 2: Value for WhomTransactionrequiresbenefit formultiplepartiesFor LicenseeValue = Revenue –Compensation Paid(often a Royalty)LicenseeCustomerFor LicensorValue = Royalty – Cost toDevelop & OwnIP CompensationProduct Revenue
  15. 15. 15Responsibility ChainConcept 2 (cont): Value to WhomBoth partiesexpected tobenefit0 1 2 3 4 5Forecast Licensee Sales 1,000 1,300 1,495 1,645 1,727 1,761Growth Rate 30% 15% 10% 5% 2%Annual Royalty Rate 8.0% 8.0% 8.0% 8.0% 8.0%For IP User (Licensee)Up-front payment (50)Annual Fee (5) (5) (5) (5) (5)Additional Profit Margin 15% 20% 15% 10% 5%Additional Profits - 195 299 247 173 88% of Sales Royalty - (104) (120) (132) (138) (141)Total Benefits (50) 86 174 110 30 (58)Present Value @ 25% (50) 69 112 56 12 (19)Value of IP to Licensee 180For IP Owner (Licensor)Up-front payment 50Promotions Commitment (130) (150) (82) - -Promotions Commitment % 10% 10% 5% 0% 0%Annual Fee 5 5 5 5 5% of Sales Royalty 104 120 132 138 141Total Benefits 50 (21) (25) 54 143 146Present Value @ 20% 50 (18) (17) 31 69 59Value of IP to Licensor 174
  16. 16. Income StatementRevenuesGross Sales 1,000 100%Discounts 5 1%Net Revenue 995 100%Cost of Sales 450 45%Gross Profit 545 55%Operating ExpensesSales & Marketing 100 10%General & Admin 75 8%Research & Development 50 5%Depreciation 35 4%Other 15 2%Total OpEx 275 28%Operating Income 270 27%Other Income / (Expense)Interest, net (55) -6%Non-recurring (45) -5%Sale fo Assets 85 9%Total Other Income (15) -2%Pre-tax Income 285 29%Tax Expense (100) -10%Net Profit 185 19%Not allroyalties arethe sameConcept 3: Royalty RatesBest for LicensorBest for LicenseeFinancialRisktoLicensee$ / Unit made$ / Unit SoldGross Sales ($ invoiced)Gross Sales (Collections)Net SalesGross ProfitsEBITNet ProfitsLevel of Benefit Drives the Royalty16
  17. 17. Concept 3: Royalty RatesLicensor ActivitiesResearch&CreateTest&AdoptPublishMarketDistributeService/SupportResign/AdoptLicensee ActivitiesReasonable Royalty considers:the level of benefit, and the allocation of rolesAllocation of Roles Drive the Royalty17
  18. 18. 18Concept 4: Forecasting Future BenefitsAsset RemainingLife (Years)Cash Flow ($)AssetValue ($)IP: Remaining Life, Cash Flow & Value• IP and the products that use IPhave life spans• Benefits from the IP will grow, peakand then decline as other IP andother products take their place• Companies can expect perpetualgrowth, IP cannotGuiding ConceptsTotal ContributionPatentsIP: Relative contributionTrademarks &Other IntangiblesTimeProduct Life Cycle Products & BusinessesIP RemainingLifeBusiness RevenuesBenefitToday’sProductsProductsIn-developmentFutureProducts
  19. 19. 19• Market outlook• Economic trends• Peer group analysis• Competitive product analysis• Pricing and discounting history• Pricing strategy• Share of product portfolio• Product life cycle stage• Cost to “clean” or “repair”Building Benefit ForecastsRemaining Life, Cash Flow & ValueBut-for v. As-IsTie the forecast to the factsConcept 4 (cont): Forecasting Future Benefits
  20. 20. 20Responsibility ChainConcept 5: Discounting Future BenefitsWACC =WARRRates from15 – 30% aretypicalThe Discounting Formula:• FB = forecast benefits• R = discount rateTwo Key ConceptsWACC = WAAR Principal of Substitution
  21. 21. One lastelement21Responsibility ChainCopyrightValuation&Key ConceptsBringing it all togetherWhy, What & HowApportionmentValue for WhomRoyalty RatesDiscountingForecasting Future Benefits
  22. 22. 22Financial Performance: historical, trends, forecasts, ratiosTimelines: chronologies, histories and event chartsMarket Share: market positions, market mapsSWOT / Porters: identify forces shaping the businessScoring Analyses: confusion scores, comparable claims, brandstrength scoresCompany Language Analysis: what competitive advantage theCompany has claimedSurveys and Intercepts: consumer preference, confusionRoyalty Rates: benchmarks, surveys and comparabletransactionsBest Practices: licensing and transaction practices as describedin texts and guidebooksTools for the NarrativeSupportableanalysisrequires acohesivenarrative . . .and lots oftoolsCombine Concepts & Build the NarrativeThe Qualitative is as important as the Quantitative
  23. 23. Copyright Analysis:An Example
  24. 24. 24Responsibility ChainCopyrightsxProducts/ ServicesProfitsPeople ResourcesTangible Assets /Natural ResourcesCopyright ValuationTwo Steps:DetermineProfitsthenApportionProfits to theCopyrightCopyrights Require Other ResourcesCapital ResourcesValue ofCopyrightSimply . . .ForecastProfitsx Apportionment =DiscountRatex
  25. 25. The Apportionment Challenge25• Company Language Analysis• Website Analytics• Comparable licensing transactions(“CUT”)• Excess profits (“CPM”)• Feature count and comparison• Promotional Use Analysis• Share of product portfolio• Surveys / Scoring / Interviews (thequalitative)• Rules of Thumb?Tools to Apportion Economic BenefitsAlways best to use multiple toolsThe FrameworkHow big is this box?
  26. 26. 26Responsibility ChainCopyright Valuation ExampleThat’s allValue ofCopyrightForecastProfitsx Apportionment =$1,000year 1x =$150year 1PV of Future BenefitApportionment ResultsAnalysis Type Low HighWebsite Analysis 5% 20%Company Language 15% 25%CUT 8% 12%Use% of Profits to IP15%= $603Why Value: Sale of copyright to un-related party
  27. 27. 27Nevium Intellectual Property Solutionswww.nevium.com858 255 4361Managing intellectual property iskey to maximizing value