intellectual property · 2015-09-18 · than 15 years of experience providing a variety of...
TRANSCRIPT
INTELLECTUAL PROPERTY
BECOME A SUBSCRIBER!
Did you purchase this product from a bookstore?
If you did, it’s important for you to become a subscriber. John Wiley & Sons, Inc.
may publish, on a periodic basis, supplements and new editions to reflect the latest
changes in the subject matter that you need to know in order to stay competitive
in this ever-changing industry. By contacting the Wiley office nearest you, you’ll
receive any current update at no additional charge. In addition, you’ll receive
future updates and revised or related volumes on a 30-day examination review.
If you purchased this product directly from John Wiley & Sons, Inc., we have
already recorded your subscription for this update service.
To become a subscriber, please call 1-877-762-2974 or send your name,
company name (if applicable), address, and the title of the product to:
mailing address: Supplement Department John Wiley & Sons, Inc. One Wiley Drive Somerset, NJ 08875
e-mail: [email protected] fax: 1-732-302-2300
For customers outside the United States, please contact the Wiley office nearest you:
Professional & Reference Division John Wiley & Sons, Ltd.
John Wiley & Sons Canada, Ltd. The Atrium
22 Worcester Road Southern Gate, Chichester
Etobicoke, Ontario M9W 1L1 West Sussex PO 19 8SQ
CANADA ENGLAND
Phone: 416-236-4433 Phone: 44-1243-779777
Phone: 1-800-567-4797 Fax: 44-1243-775878
Fax: 416-236-4447 Email: [email protected]
Email: [email protected]
John Wiley & Sons Australia, Ltd. John Wiley & Sons (Asia) Pte., Ltd.
33 Park Road 2 Clementi Loop #02-01
P.O. Box 1226 SINGAPORE 129809
Milton, Queensland 4064 Phone: 65-64632400
AUSTRALIA Fax: 65-64634604/5/6
Phone: 61-7-3859-9755 Customer Service: 65-64604280
Fax: 61-7-3859-9715 Email: [email protected]
Email: [email protected]
INTELLECTUAL PROPERTY
VALUATION, EXPLOITATION, AND INFRINGEMENT DAMAGES,
2015 CUMULATIVE SUPPLEMENT
RUSSELL L. PARR GORDON V. SMITH
Cover design: Wiley
Copyright © 2015 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning, or otherwise, except as permitted under Section 107 or 108 of
the 1976 United States Copyright Act, without either the prior written permission
of the Publisher, or authorization through payment of the appropriate per-copy
fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA
01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com.
Requests to the Publisher for permission should be addressed to the Permissions
Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201)
748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have
used their best efforts in preparing this book, they make no representations or
warranties with respect to the accuracy or completeness of the contents of this
book and specifically disclaim any implied warranties of merchantability or
fitness for a particular purpose. No warranty may be created or extended by sales
representatives or written sales materials. The advice and strategies contained
herein may not be suitable for your situation. You should consult with a
professional where appropriate. Neither the publisher nor author shall be liable
for any loss of profit or any other commercial damages, including but not
limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support,
please contact our Customer Care Department within the United States at
(800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand.
Some material included with standard print versions of this book may not be
included in e-books or in print-on-demand. If this book refers to media such as a
CD or DVD that is not included in the version you purchased, you may download
this material at http://booksupport.wiley.com. For more information about Wiley
products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
ISBN 978-0-471-68323-0 (cloth); ISBN 9781118928424 (supplement)
ISBN 9781118928431(ePub)
ISBN 9781118928448 (ePDF)
ABOUT THE AUTHORS
Russell L. Parr, CFA, ASA, is president of IPRA, Inc. (Intellectual
Property Research Associates; www.ipresearch.com). He is an expert in
determining the value of intellectual property. Mr. Parr ’ s books about intel
lectual property value and management are published in Japanese, Korean,
Italian, and English. He is dedicated to the development of comprehensive
methods for accurately defining the value of intellectual property.
Highlight assignments conducted by Mr. Parr have included the
valuation of the Dr. Seuss copyrights and the patent portfolio of AT & T.
Mr. Parr also has conducted valuations and royalty rate studies for com
munications technology, pharmaceuticals, semiconductor process and
product technology, automotive battery technology, lasers, agricultural
formulations, biotechnology, computer software, drug delivery sys
tems, medical products technology, incinerator feed systems, camera
technology, flowers, consumer and corporate trademarks, motivational
book copyrights, and cosmetics. His opinions are used to accomplish
licensing transactions, acquisitions, transfer pricing, litigation support,
collateral - based financing, and joint ventures.
Mr. Parr has written 24 articles that have been published in
various professional journals. He has spoken at over 30 conferences
regarding the value of technology, including those sponsored by the
World Intellectual Property Organization in Singapore and in Lima,
Peru. He also has testified about the value of companies and intellec
tual property over 40 times at deposition trial or for arbitration.
Mr. Parr has a master ’ s in business administration from Rutgers
University (1981); a bachelor of science degree in electrical engineering
from Rutgers University (1976); and coursework toward a PhD in the
International Business Management Program at Rutgers University. His
professional designations include Chartered Financial Analyst (CFA) from
the Association for Investment Management and Research and Accredited
Senior Appraiser (ASA) of the American Society of Appraisers.
Among Mr. Parr ’ s writings are five books published by John
Wiley & Sons, Inc. and three books published by IPRA, Inc. His Wiley
v
vi About the Authors
books include Valuation of Intellectual Property and Intangible Assets, third edition; Intellectual Property: Licensing and Joint Venture Profi t Strategies, second edition; Intellectual Property Infringement Damages: A Litigation Support Handbook, second edition; Investing in Intangible Assets; and Corporate Strategies for Maximizing Value. His books pub
lished by IPRA, Inc. include Royalty Rates for Pharmaceuticals and Biotechnology , fifth edition; Royalty Rates for Technology, third edition;
and Royalty Rates for Trademarks and Copyrights, second edition.
Gordon V. Smith is chairman of AUS, Inc. and president of AUS
Consultants. He has advised clients in valuation matters for over
40 years. His assignments have included appraisals of nearly every
type of tangible and intangible property as well as consultations
regarding royalty rates, economic life, and litigation damages for intel
lectual property. Clients have been many of the Fortune 500 and major
international law fi rms as well as research and educational institutions,
regulatory bodies, and the U.S. government.
Mr. Smith, a graduate of Harvard University, has lectured on
valuation subjects throughout the Americas, in Europe, and exten
sively in Asia. He has taught university - level courses at Singapore
Management University and conducted seminars for the IP Academy
(Singapore), the Chinese government, the U.S. Treasury Department,
and numerous private organizations and corporations, and has lectured
in various countries for the World Intellectual Property Organization.
He is a member of the Advisory Committee on Intellectual
Property and Board of Trustees of Pierce Law, whose intellectual prop
erty curriculum is nationally recognized. He is also an adjunct professor
there and a regular guest lecturer. An active member of the International
Trademark Association, Mr. Smith is also a member of the Licensing
Executives Society. His writings include many professional papers and
articles that have appeared in publications here and abroad.
He has authored four books published by John Wiley & Sons, Inc.:
Corporate Valuation: A Business and Professional Guide; Trademark Valuation; Valuation of Intellectual Property and Intangible Assets (coauthor); Intellectual Property: Licensing and Joint Venture Profit Strategies (coauthor); and has contributed to several other Wiley intel
lectual property and tax reference books.
ABOUT THE CONTRIBUTORS
William J. Murphy is a professor of law at the Franklin Pierce Law
Center in Concord, New Hampshire, where he also serves as chair of
the commerce and technology graduate programs. He has extensive
experience in the legal, business, and academic fi elds. Prior to his aca
demic career he worked as an antitrust trial attorney for the Federal
Trade Commission in Washington, DC and as a senior trial consult
ant to the FTC Regional Office in Boston, Massachusetts. Professor
Murphy earned an MBA and a PhD at the Harvard Business School.
His business ventures include serving as a contributing founder of two
companies — one developing educational software and the other provid
ing international chemical and pharmaceutical companies with clinical
trials management and regulatory licensing services. Most recently he
has served on the board of directors for an intellectual property man
agement company. He has taught courses in both the business and legal
fields at Harvard University, University of Massachusetts—Boston, and
Dartmouth College. He was a founding partner in a Concord law fi rm
specializing in technology - based business law and intellectual prop
erty, and is currently Of Counsel to Devine, Millimet, and Branch in
Manchester, New Hampshire. Each summer, Professor Murphy heads
the eLaw Summer Institute in Cork, Ireland, at University College
Cork, where he was a Visiting Fulbright Scholar.
Debora Rose Stewart, CPA, is a managing director with Invotex
Group ’ s Intellectual Property Management & Finance practice and
leads the firm ’ s IP advisory services, including licensing and license
compliance, technology evaluation, asset management, and enforce
ment of IP rights. She has more than 20 years of experience working
with corporations, universities, and their counsel on intellectual prop
erty matters. Ms. Stewart ’ s experience includes intellectual property
compliance, valuations, and licensing consulting as well as reasonable
royalty and lost profit damage calculations in patent, trademark, and
vii
viii About the Contributors
copyright infringement matters. In addition, she developed the pro
prietary Royalty Reporting Process ™ to help clients manage royalty
reporting and revenue and the Audit Indicator ™ , a selection tool to
identify licenses that should be audited. Ms. Stewart has worked with
clients in a wide range of industries, from computer graphics and
biotechnology to consumer goods. She has authored several articles as
well as given presentations and expert testimony on related topics. Ms.
Stewart has been a member of the faculty of the Licensing Executive
Society ’ s Professional Development Series. She is a member of the
American Institute of Certified Public Accountants, Association of
University Technology Managers, International Licensing Industry
Merchandisers ’ Association, Maryland Association of Certifi ed Public
Accountants, and the Licensing Executives Society. Ms. Stewart holds
a BBA in Industrial Management from Kent State University and an
MBA in Finance and Marketing from Case Western Reserve University.
Judy Ann Byrd, CPA, CIRA, is a director with Invotex Group ’ s
Intellectual Property Management & Finance practice. She has more
than 15 years of experience providing a variety of accounting and con
sulting services, including litigation, valuation, and royalty compliance
services related to intellectual property matters. Ms. Byrd ’ s intel
lectual property experience includes litigation - related damage valu
ations as well as royalty audits for IP licensors. Ms. Byrd also has
more than seven years of experience providing tax, accounting, and
auditing services (including royalty audit) to clients in manufacturing,
construction, and property management, among other industries. She
began her career as an accountant and auditor specializing in business
start - ups and small to medium - size business development. Ms. Byrd
has coauthored several articles and frequently speaks on intellectual
property topics. She is a member of the American Institute of Certifi ed
Public Accountants, Association of University Technology Managers,
Maryland Association of Certified Public Accountants, the Intellectual
Property Owners Association, and the Licensing Executives Society.
She has a BA from the University of Pittsburgh and a master ’ s in busi
ness administration from the University of Baltimore. Ms. Byrd is a
CPA in Maryland and Pennsylvania. She is also a Certifi ed Insolvency
and Restructuring Advisor.
About the Contributors ix
Ron Carson, regional sales director at Innovation Asset Group, is
responsible for new accounts, channel development, and solution
sales. Before joining IAG, he was the vice president of strategy and
marketing for an intellectual property monetization firm based in Cary,
North Carolina. Prior to that, he was the director of marketing for HP
Industry Solutions, including Healthcare, Banking, Telecommuni
cations, and e - Commerce.
Richard J. Gering, CLP, is currently a partner at ParenteBeard LLC,
an accounting and consulting firm. An economist by training, over the
last 20 years Dr. Gering has provided economic consulting and expert
witness assistance, including economic and statistical analysis related
to commercial disputes with an emphasis on intellectual property dis
putes such as patent, copyright, trademark, trade secrets, and Lanham
Act matters. Dr. Gering has testified on economic damages in state
and federal courts across the United States as well as in arbitrations.
Dr. Gering is a member of the American Economic Association and
the Licensing Executives Society. For the last 11 years, Dr. Gering has
been an adjunct lecturer at the Villanova University School of Law
where he teaches a class in economic damages.
CONTENTS
Note to the Reader: Chapters or sections not in the main bound volume
(Intellectual Property: Valuation, Exploitation, and Infringement Damages: 978-0-471-68323-0) are indicated by “(New)” after the
an asterisk (*) in the left margin in the contents and throughout the
supplement.
title. Material new to or modifi ed in this supplement is indicated by
PREFACE xvii
PART I VALUATION 1
CHAPTER 1A INTELLECTUAL PROPERTY LANDSCAPE (NEW) 3
1A.1 80% of Corporate Value Is Intellectual Property and Intangible Assets 4
1A.2 Over Seven Million Patents 6 1A.3 Corporations Own the Most Patents 7 1A.4 All Industries Are
Patenting Inventions 8 1A.5 Trademarks 10 1A.6 Trademarks Are Supported with
Huge Ad Spending 11 1A.7 Copyrights 12 1A.8 Trade Secrets 12 1A.9 Business of Licensing 15
CHAPTER 1B U.S. CONGRESS FLIRTS WITH
DISASTER (NEW) 25
1B.1 Patent Litigation Venue 27 1B.2 Patent Infringement Damages 27
xi
xii Contents
1B.3 Injunctions for Only Competitors 29 1B.4 Harming Our Only
Economic Advantage 31
CHAPTER 12A RISK-ADJUSTED CASH FLOWS (NEW) 32
12A.1 Required Rates of Return 33 12A.2 Capital Asset Pricing Model 36 12A.3 Build-Up Method 41 12A.4 Venture Capital Rates of Return 42 12A.5 Probability of Success 45 12A.6 Conclusion 49
CHAPTER 12B DEALING WITH RISK AND UNCERTAINTY IN
INTELLECTUAL PROPERTY VALUATION AND
EXPLOITATION (NEW) 51
12B.1 Risk versus Uncertainty 53 12B.2 Decision Analysis and
Decision Trees 55 12B.3 Decision Tree Components
and Conventions 56 12B.4 Monte Carlo Techniques 63 12B.5 Markov Chains 66 12B.6 Obtaining Information from Indirect
Observation: Shadow Pricing 70 12B.7 Bayesian Analysis 72 12B.8 Option Pricing Models 75 12B.9 Limitations on Rationality in
Decision Making: The Effects of Perception and Biases on Decision Making 78
12B.10 Conclusion 79
Contents xiii
CHAPTER 14A RIGHTS OF PRIVACY, PUBLICITY, AND
CELEBRITY PERSONA (NEW) 81
14A.1 Introduction 81 14A.2 Legal Underpinnings 84 14A.3 Trademark Rights 87 14A.4 Copyright 88 14A.5 Legal Uncertainties
and Solutions 90 14A.6 A Photography Issue 91 14A.7 Conclusion 93
CHAPTER 14B INTELLECTUAL PROPERTY AND INTANGIBLE
ASSET VOLATILITY (NEW) 95
PART II LICENSING 101
CHAPTER 27A ROYALTY RATES AND LICENSE FEES FOR
TECHNOLOGY (NEW) 103
27A.1 Royalty Rates 104 27A.2 Per Unit Royalties 107 27A.3 Royalties Based
on Profi tability 108 27A.4 License Fees 109 27A.5 Medical Device Industry
Royalty Rates 111 27A.6 Medical Device Industry License
Fee Distribution 112 27A.7 Conclusion 114
xiv Contents
CHAPTER 27B LICENSE FEES AND ROYALTY RATE
FREQUENCY FOR TECHNOLOGY (NEW) 115
27B.1 Real Deal Royalty Rates 116 27B.2 Per Unit Royalties 118 27B.3 License Fees 119 27B.4 Conclusion 120
CHAPTER 27C ROYALTY RATES AND LICENSE FEES
FOR PHARMACEUTICALS AND
BIOTECHNOLOGY (NEW) 121
27C.1 The Parties—Licensing between Corporations Dominates 122
27C.2 Royalty Rates 122 27C.3 License Fees 124 27C.4 Key Technologies 125 27C.5 Developmental Stages
of Technology 126 27C.6 Conclusion 128
CHAPTER 33A THE MAGNITUDE AND MEANING OF
ROYALTY MISREPORTING (NEW) 129
33A.1 Introduction 129 33A.2 “Why?” versus “How?” 130 33A.3 Math Errors: 5% Error Rate 133 33A.4 Royalty Rate Errors: 4%
Error Rate 134 33A.5 Transfer Prices: 4% Error Rate 136 33A.6 Unreported Benchmarks and
Milestones: 5% Error Rate 137 33A.7 Unreported Sales: 16%
Error Rate 138
Contents xv
33A.8 Disallowed Deductions: 9% Error Rate 138
33A.9 Unreported Sublicenses: 17% Error Rate 139
33A.10 Questionable License Interpretation: 40% Error Rate 139
33A.11 Conclusion 140
CHAPTER 33B INTELLECTUAL PROPERTY AUDIT AND
MANAGEMENT (NEW) 141
33B.1 Introduction 142 33B.2 Intellectual Property Is Important 142 33B.3 But Intellectual Property Is
Frequently Mismanaged 143 33B.4 Why the Intellectual
Property Dichotomy? 143 33B.5 The First Step: An Intellectual
Property Audit 144 33B.6 From IP Audit to IP Management 146 33B.7 Insuffi cient Approaches 147 33B.8 A New Intellectual Property
Management Paradigm 148 33B.9 Available Tools 148 33B.10 Benefits of Intellectual
Property Management 149 33B.11 When to Do an Intellectual
Property Audit 150 33B.12 How to Do an Intellectual
Property Audit 152 33B.13 Software Solutions to Make the
Job Easier 155 33B.14 Conclusion 158
xvi Contents
CHAPTER 35A
CHAPTER 45
CHAPTER 45A
CHAPTER 45B
APPENDIX G
APPENDIX H
* APPENDIX H-A
APPENDIX I
APPENDIX J
APPENDIX K
INDEX
QUANTIFYING REASONABLE ROYALTIES: THE ENTIRE MARKET VALUE RULE (NEW) 163
NEW MEASURE OF INFRINGEMENT
DAMAGES—FUTURE DAMAGES (NEW) 175
45.1 Royalty Rate for Future Damages 177 45.2 What About Future Lost Profi ts? 188
CONTINUALLY EVOLVING PATENT
DAMAGES (NEW) 189
45A.1 Post-Verdict Royalty Rates 190 45A.2 Optimize Your Patented
Technology or Lose It 195 45A.3 Litigation-Based Licenses 198
THE 25% RULE IS DEAD (NEW) 203
MORE SAMPLE ROYALTY RATE
INFORMATION (NEW) 207
TRADEMARK ROYALTY RATES (NEW) 235
MORE TRADEMARK AND COPYRIGHT
ROYALTY RATES (NEW) 253
PHARMACEUTICAL AND BIOTECHNOLOGY
ROYALTY RATES (NEW) 291
TELECOMMUNICATIONS
ROYALTY RATES (NEW) 315
ELECTRICAL AND ENERGY ROYALTY
RATES (NEW) 351
385
PREFACE
This supplement contains the following:
Chapter 1A, “Intellectual Property Landscape,” reexamines the
ever-changing role of intellectual property (IP) in business, among
institutions, and in the world. The explosive growth of patented tech
nologies, trademarks, copyrights, and trade secrets that we cited in
the original volume continues unabated, but in some new directions.
Non-U.S. countries and corporations are growing their own intellec
tual property at an increasing rate in order to remain competitive in
world markets. Among major corporations, intellectual property now
comprises over 80% of total enterprise value. Interestingly, intellec
tual property value is now distributed over the whole spectrum of
business and is no longer so highly concentrated in a few industries.
This chapter also discusses what is happening in the vital world of
licensing, which now produces over $100 billion annually just within
the United States. There is also an extensive discussion of current
licensing strategies and the underlying reasons for the growth or
licensing activity.
Chapter 1B, “U.S. Congress Flirts with Disaster,” discusses ele
ments of the Patent Reform Act of 2007 and the potential for great
harm to the U.S. economy. With the U.S. economy highly dependent
on intellectual property, changing the patent rules is dangerous. This
chapter outlines some of the pitfalls with which Congress is fl irting.
Chapter 12A, “Risk-Adjusted Cash Flows,” presents an alter
nate method for capturing risk when valuing technology. Traditionally,
when using an income approach for valuation, such as a discounted
cash flow analysis, uncertainty related to cash flows is accounted for
in the discount rate. For an emerging technology where many ques
tions remain, an enormous discount rate of 20%, 30%, or more might
be used. Such a rate is attempting to account for risks beyond infl a
tion and general business risks. In addition, such a rate is attempting
to reflect the added risks associated with possible outright failure of
xvii
xviii Preface
the new technology or possible market rejection of the technology if
it is ultimately commercialized. The alternative approach presented in
this chapter addresses risk in two parts. First, the discount rate used in
the alternate method is one that refl ects inflationary and traditional
business risks associated with the developer of the new technology.
The second element of this method addresses risk specific to the new
technology by establishing a probability factor that is directly applied
to the cash flows. The probability factor reflects an organization’s
experience with development projects and directly reflects the chances
of developing successful technology that the market will accept. The
results of the traditional and alternate methods for risk assessment may
be the same, but accounting for risk with a probability factor can in
some instances provide a more reliable conclusion. The probability
factor forces those conducting the valuation to directly identify devel
opment risks and directly investigate chances for success.
Chapter 12B, “Dealing with Risk and Uncertainty in Intellectual
Property Valuation and Exploitation,” was contributed by William J.
Murphy, professor of law at Pierce Law and an expert on the inter
play of business principles and intellectual property law. This chapter
recognizes that at the core of all valuation methods and exploitation
strategies is the necessity to analyze the future economic benefi ts
associated with intellectual property rights. In turn, that analysis rests
on forecasts. Forecasts of revenues, royalties, commercialization costs,
as well as operating, advertising, and overhead expenses, are just a
few of the line items that demand attention in this process. Professor
Murphy presents a discussion of several forecasting methodologies
currently in use, including decision tree analysis, Monte Carlo tech
niques, and options analysis. He does so in a form that can be readily
understood and remains focused on the use of these tools as they relate
to the process of valuing and exploiting intellectual property.
Chapter 14A, “Rights of Privacy, Publicity, and Celebrity
Persona,” discusses valuation issues associated with celebrity persona.
Immense value is associated with the entertainment industry and cer
tain individuals in that industry. Many movie stars are paid premium
fees to appear in a movie just because their presence in the fi lm is
known to guarantee a minimum of ticket sales. Beyond celebrities,
though, is significant value associated with images and even sounds.
Preface xix
Transitions in this asset category are growing and often are the subject
of litigation. This chapter identifies special issues associated with these
unique assets.
Chapter 14B, “Intellectual Property and Intangible Asset
Volatility,” shows that the value of intellectual property is not immune
to economic downturns.
Chapter 27A, “Royalty Rates and License Fees for Technology,”
shows the frequency of different levels of royalty rates and the per
centage of license deals that include up-front license fees. This chap
ter is based on a research study undertaken to expand and enhance the
database of license agreement financial terms maintained by IPRA,
Inc. Some interesting results of the study included confi rmation that
a royalty of 5% of sales is most common and can be found in almost
all of the industries studied. Also discovered was that up-front license
fees are not common, and when they are part of a deal they are domi
nated by cash-only payments without the payment of stock for the
licensor.
Chapter 27B, “License Fees and Royalty Rate Frequency for
Technology” is an update to Chapter 27A based on new information
published in the fifth edition to Royalty Rates for Technology pub
lished by IPRA, Inc.
Chapter 27C, “Royalty Rates and License Fees for
Pharmaceuticals and Biotechnology,” shows the frequency of dif
ferent levels of royalty rates and information about license fees
for pharmaceutical and biotechnology. This chapter is based on a
research study undertaken to expand and enhance the database of
license agreement financial terms maintained by IPRA, Inc.
Chapter 33A, “The Magnitude and Meaning of Royalty
Misreporting,” by Debora R. Stewart, CPA, and Judy A. Byrd, CPA,
of Invotex Group’s Intellectual Property Management and Finance
practice, highlights a critical element of IP management too often
neglected. After development of intellectual property and signifi cant
time and money in licensing negotiations, the actual collection of
royalties that are due is not thoroughly managed. In their work, Ms.
Stewart and Ms. Byrd have found disturbing errors in reporting and
paying royalties. Sometimes the errors are caused by outright fraud
by a licensor. More often, though, errors occur from miscalculations,
xx Preface
incorrect interpretation of license agreements, inadvertent omission of
products from the royalty base covered in the license agreement, and
several other honest but costly mistakes. In this chapter the most com
mon errors are identified along with lessons that can be implemented
in your next license agreement so all royalties that are due a licensor
are actually collected.
Chapter 33B, “Intellectual Property Audit and Management,”
by Ron Carlson, discusses the importance of knowing about your
intellectual property so it can be integrated into business strategies.
The chapter explains the importance of conducting an IP audit and
the strengths and weaknesses of the different methods that are cur
rently being employed. Software solutions are discussed, including
the enterprise software product offered by his firm, Innovation Asset
Group.1
Chapter 35A, “Quantifying Reasonable Royalties: The Entire
Market Value Rule,” by Richard J. Gering, CLP, discusses new cases
that are increasing the importance of considering the entire market rule
when defining the royalty base and calculating damages based on a
theory of reasonable royalties.
Chapter 45, “New Measure of Infringement Damages—Future
Damages,” discusses some considerations needed to address the ques
tion raised by eBay Inc. v. MercExchange that a permanent injunction
is no longer a guarantee. The alternative may be an award of royalties
to be paid on future sales. This new chapter considers whether the
royalty rate applied to future sales should be different from the rate
applied to past infringement sales.
Chapter 45A, “Continually Evolving Patent Damages,” discusses
recent decisions and their impact on the future of infringement damages.
As judges make decisions and appeals courts affirm or remand, the deter
mination of patent infringement damages is continually refi ned.
New Chapter 45B, “The 25% Rule Is Dead,” discusses how the
25% rule is no longer recognized by the Federal Courts as a method
for determining a reasonable royalty rate for calculating infringement
damages.
1. Full disclosure requires that we acknowledge that Russell L. Parr is on the Advisory Board and an
investor in Innovation Asset Group.
Preface xxi
Appendix G, “More Sample Royalty Rate Information,” pre
sents royalty rate data developed from a recent research study com
pleted to expand and enhance our database. This appendix presents
some interesting results of the study. The information in our database
has been collected from reliable sources from September 1990 through
December 2009 and is published in Royalty Rates for Technology,
fourth edition.
Appendix H, “Trademark Royalty Rates,” presents some of the
new royalty rate data discovered while creating the newest edition to
Royalty Rates for Trademarks and Copyrights, fourth edition.
New Appendix H-A, “More Trademark and Copyright Royalty
Rates,” presents more new royalty rate data discovered while creating
the newest edition to Royalty Rates for Trademarks and Copyrights, fi fth edition.
Appendix I, “Pharmaceutical and Biotechnology Royalty
Rates,” presents some of the new royalty rate data discovered while
creating the newest edition to Royalty Rates for Pharmaceuticals and Biotechnology, seventh edition.
New Appendix J, “Telecommunications Royalty Rates,” focuses
on royalty rates in the industry. The telecommunications companies
are frequently under attack with patent infringement lawsuits. The
constant advancement of services and equipment inevitably steps on
someone’s patented invention.
New Appendix K, “Electrical and Energy Royalty Rates,” fea
tures royalty rates from real licensing deals for the electrical and
energy industry from the IPRA, Inc., database titled Royalty Rates for Technology, fi fth edition.
INTELLECTUAL PROPERTY
PART 1 VALUATION
In this, the first major section of the book, the reader will fi nd the
principles that are the foundation of the sections that follow. In order
to quantify the value of intellectual property and intangible assets, it
is necessary to fully understand their nature and economic character
istics. It is clear that these assets do not create value by themselves.
They must be teamed with other assets in order to be economically
exploited. Therefore, we discuss the relationship between intellectual
property and intangible assets and the business enterprise in which
they reside or in which they will be placed for exploitation.
Valuation is not a crystal ball exercise. Because it is fi rmly based
in return on investment principles, this section presents these underpin
nings before moving on to the specific valuation techniques. With that
grounding, we then proceed to discuss some finer points as they apply
to special business situations, embryonic technology, and international
issues.
1
CHAPTER 1A INTELLECTUAL PROPERTY LANDSCAPE (NEW)
1A.1 80% OF CORPORATE VALUE IS INTELLECTUAL PROPERTY AND INTANGIBLE ASSETS 4
1A.2 OVER SEVEN MILLION PATENTS 6
1A.3 CORPORATIONS OWN THE MOST PATENTS 7
1A.4 ALL INDUSTRIES ARE PATENTING INVENTIONS 8
1A.5 TRADEMARKS 10
1A.6 TRADEMARKS ARE SUPPORTED WITH HUGE AD SPENDING 11
1A.7 COPYRIGHTS 12
1A.8 TRADE SECRETS 12
1A.9 BUSINESS OF LICENSING 15
(a)
(b)
(c)
(d)
(e)
Trends in the Business of
Licensing
Technology Licensing
Trademark and Copyright
Licensing
Reasons Companies
Engage in Licensing
More Analysis of Reasons
Companies Engage in
Licensing
16
16
16
17
20
The main text talks about valuing and licensing specifi c items of intel
lectual property. This chapter takes a broader view. In this chapter you
will see that:
• Intellectual property dominates corporate value.
• The generation of patented technology is accelerating.
• All industries make use of intellectual property.
3
4 Ch 1A Intellectual Property Landscape (New)
• Foreign - based companies own significant amounts of U.S.
intel lectual property.
• Commercialization of intellectual property involves annual
revenues of at least $5 trillion.
• Licensing intellectual property is a core strategy for many
companies and universities.
1A.1 80% OF CORPORATE VALUE IS INTELLECTUAL PROPERTY AND INTANGIBLE ASSETS
In the past 30 years, intellectual property and intangible assets have
become the dominant assets of major corporations. Ocean Tomo is an
integrated intellectual capital merchant bank.1 It conducted an analysis
of the largest companies in the United States and found that patents,
trademarks, copyrights, and other intangible assets have exploded as a
percentage of the S & P 500 ’ s market value from 16.8% in 1975 to
almost 80% in 2005 (see Exhibit 1A.1 ). No longer do markets value
companies based on balance sheet cash and fixed assets. Today, stock
prices reflect the importance and value of all intangible assets, includ
ing patents, trademarks, copyrights, and trade secrets.
This is supported by a recent les Nouvelles article, in which the
value of intellectual property and intangible assets, as a percentage of
corporate market value, is reported as the exact same values shown in
Exhibit 1A.1 .2 The article shows that the dominance of intangibles is not
solely associated with high - technology companies. Exhibit 1A.2 shows the
dominance of these assets for a diverse selection of industries. For many
industries, the dominance of intellectual property is easy to understand.
Healthcare, telecommunications, and consumer discretionary products
would be expected to possess high amounts of technology or trademarks.
Some industries, like utilities, would not be expected to have such intan
gible asset dominance, but it turns out that all industries currently rely on
a significant amount of intellectual property and intangible assets. 3
1. www.oceantomo.com.
2. Keith Cardoza, Justin Basara, Liddy Cooper, and Rick Conroy, “The Power of Intangible Assets:
An Analysis of the S&P 500,” Les Nouvelles—The Journal of the Licensing Executives Society (March
2006): 4.
3. Ibid., p. 5.