Intellectual Property: Valuation, Exploitation, and Infringement Damages, 2017 Cumulative Supplement

By Russell L. Parr and Gordon V. Smith

A comprehensive reference for valuation of intangible assets

Intellectual Property, Valuation, Exploitation, and Infringement Damages provides in-depth, up-to-date guidance about the valuation of intangible assets. Covering patents, trademarks, copyrights, trade secrets, and more, this book describes the standards, best practices, and case law relating to valuation, licensing, and infringement damages. Intellectual property strategies are examined from a business economic standpoint, and analytical models are provided to streamline the calculation of valuations, licensing royalty rates, and fair equity splits in joint venture arrangements. Designed to ease the task of attaching monetary value to intangible assets, this invaluable reference includes extensive practical guidance including sample royalty rate information, diffusion sales forecasting models, detailed treatment of investment rate of return, and the valuation of early-stage technology.

Intellectual property is rapidly becoming a major profit center for an increasing number of companies, who may invest billions of dollars in development of an irreplaceable asset. This book provides an authoritative reference for exploiting this property to its fullest extent, and quantifying its actual economic value.

Now that intangible assets are becoming the cornerstones of corporations, applying a logical, analytical approach to valuation has become more important than ever. Intellectual Property, Valuation, Exploitation, and Infringement Damages provides expert guidance for each stage of the asset's life cycle, with recommended procedures and strategies grounded in case law and real-world practice.

• Language: English
• Publisher: Wiley
• Release date: Mar 15, 2017
• ISBN: 9781119341376

Book preview

Table of 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 title. Material new to or modified in this supplement is indicated by an asterisk (*) in the left margin in the contents and throughout the supplement.

Cover

Title Page

Copyright

About the Authors

About the Contributors

Preface

PART 1: VALUATION

Chapter 1A: Intellectual Property Landscape (New)

1A.1 80% of Corporate Value Is Intellectual Property and Intangible Assets

1A.2 Over Seven Million Patents

1A.3 Corporations Own the Most Patents

1A.4 All Industries Are Patenting Inventions

1A.5 Trademarks

1A.6 Trademarks Are Supported with Huge Ad Spending

1A.7 Copyrights

1A.8 Trade Secrets

1A.9 Business of Licensing

Chapter 1B: U.S. Congress Flirts with Disaster (New)

1B.1 Patent Litigation Venue

1B.2 Patent Infringement Damages

1B.3 Injunctions for Only Competitors

1B.4 Harming Our Only Economic Advantage

Chapter 12A: Risk-Adjusted Cash Flows (New)

12A.1 Required Rates of Return

12A.2 Capital Asset Pricing Model

12A.3 Build-Up Method

12A.4 Venture Capital Rates of Return

12A.5 Probability of Success

12A.6 Conclusion

Chapter 12B: Dealing with Risk and Uncertainty in Intellectual Property Valuation and Exploitation (New)

12B.1 Risk versus Uncertainty

12B.2 Decision Analysis and Decision Trees

12B.3 Decision Tree Components and Conventions

12B.4 Monte Carlo Techniques

12B.5 Markov Chains

12B.6 Obtaining Information from Indirect Observation: Shadow Pricing

12B.7 Bayesian Analysis

12B.8 Option Pricing Models

12B.9 Limitations on Rationality in Decision Making: The Effects of Perception and Biases on Decision Making

12B.10 Conclusion

Chapter 14A: Rights of Privacy, Publicity, and Celebrity Persona (New)

14A.1 Introduction

14A.2 Legal Underpinnings

14A.3 Trademark Rights

14A.4 Copyright

14A.5 Legal Uncertainties and Solutions

14A.6 A Photography Issue

14A.7 Conclusion

Chapter 14B: Intellectual Property and Intangible Asset Volatility (New)

Chapter 23A: Determining Royalty Rates (New)

23A.1 Royalty Rate Basics

23A.2 5% of Sales is the Most Common Royalty Rate

23A.3 Forces Driving Royalty Rates

23A.4 Industry Royalty Rates

23A.5 The 25% Rule

23A.6 Industry Norms

23A.7 Return on R&D Costs

23A.8 The 5% of Sales Method

23A.9 The Analytical Approach

23A.10 Comparable License Transactions

23A.11 Naked Patents

23A.12 Patented Versus Unpatented Technology

23A.13 Minimum Royalties

23A.14 Up-Front License Fees

23A.15 Exclusivity

23A.16 Royalty Base

23A.17 Discounted Cash Flow Analysis And Royalty Rates

23A.18 Conclusion

PART 2: LICENSING

Chapter 27A: Royalty Rates and License Fees for Technology (New)

27B.1 Royalty Rates

27B.2 Per Unit Royalties

27B.3 Royalties Based on Profitability

27B.4 License Fees

27A.5 Medical Device Industry Royalty Rates

27A.6 Medical Device Industry License Fee Distribution

27A.7 Conclusion

Chapter 27B: License Fees and Royalty Rate Frequency for Technology (New)

27B.1 Real Deal Royalty Rates

27B.2 Per Unit Royalties

27B.3 License Fees

27B.4 Conclusion

Chapter 27C: Royalty Rates and License Fees for Pharmaceuticals and Biotechnology (New)

27C.1 The Parties—Licensing between Corporations Dominates

27C.2 Royalty Rates

27C.3 License Fees

27C.4 Key Technologies

27C.5 Developmental Stages of Technology

27C.6 Conclusion

Chapter 27D: Licensee Fees and Royalty Rates for Technology Update (New)

27D.1 Per Unit Royalties

27D.2 License Fees

Chapter 33A: The Magnitude and Meaning of Royalty Misreporting (New)

33A.1 Introduction

33A.2 Why? versus How?

33A.3 Math Errors: 5% Error Rate

33A.4 Royalty Rate Errors: 4% Error Rate

33A.5 Transfer Prices: 4% Error Rate

33A.6 Unreported Benchmarks and Milestones: 5% Error Rate

33A.7 Unreported Sales: 16% Error Rate

33A.8 Disallowed Deductions: 9% Error Rate

33A.9 Unreported Sublicenses: 17% Error Rate

33A.10 Questionable License Interpretation: 40% Error Rate

33A.11 Conclusion

Chapter 33B: Intellectual Property Audit and Management (New)

33B.1 Introduction

33B.2 Intellectual Property Is Important

33B.3 But Intellectual Property Is Frequently Mismanaged

33B.4 Why the Intellectual Property Dichotomy?

33B.5 The First Step: An Intellectual Property Audit

33B.6 From IP Audit To IP Management

33B.7 Insufficient Approaches

33B.8 A New Intellectual Property Management Paradigm

33B.9 Available Tools

33B.10 Benefits of Intellectual Property Management

33B.11 When to Do an Intellectual Property Audit

33B.12 How to Do an Intellectual Property Audit

33B.13 Software Solutions to Make the Job Easier

33B.14 Conclusion

Chapter 35A: Quantifying Reasonable Royalties: The Entire Market Value Rule (New)

Chapter 35B: New Guidance About Apportionment (New)

35B.1 Apportionment of the Royalty Base

35B.2 The Infringed Invention

35B.3 Determination of Damages

35B.1 Georgia-Pacific and the Hypothetical Negotiation

Chapter 35C: Lost Profits for New Businesses (New)

35C.1 Why Are Profits Missing

35C.2 Guidance from Business Plans

35C.3 Management Team

35C.4 Operating Capital

35C.5 Comparables

35C.6 Defendant's Profits

35C.7 Before-and-After Analysis Will Not Work

35C.8 Lost Business Value

35C.9 Conclusion

Chapter 45: New Measure of Infringement Damages—Future Damages (New)

45.1 Royalty Rate for Future Damages

45.2 What About Future Lost Profits?

Chapter 45A: Continually Evolving Patent Damages (New)

45A.1 Post-Verdict Royalty Rates

45A.2 Optimize Your Patented Technology or Lose it

45A.3 Litigation-Based Licenses

Chapter 45B: The 25% Rule Is Dead (New)

Appendix G: More Sample Royalty Rate Information (New)

Appendix H: Trademark Royalty Rates (New)

Appendix H-A: More Trademark and Copyright Royalty Rates (New)

Apparel

Celebrity Authors

Internet

Food & Water

Fragrance

Franchises

Furniture

Services

Toys

Universities

Appendix I: Pharmaceutical and Biotechnology Royalty Rates (New)

Appendix J: Telecommunications Royalty Rates (New)

Appendix K: Electrical and Energy Royalty Rates (New)

Index

End User License Agreement

List of Illustrations

Chapter 23A

Figure 23A.1 Royalty Rate Frequency

Figure 23A.2 Distribution of Up-Front Fees

Figure 23A.3 Royalty Rates by Industry

Figure 23A.4 Royalty Rate Distribution for Pharmaceuticals

Figure 23A.5 Royalty Rates for Specific Pharmaceuticals

Figure 23A.6 New Product Revenue Forecast Fabulous Security, Inc. ($millions)

Figure 23A.7 Security Industry Manufacturers Operating Profit Margin

Figure 23A.8 Cash Flow Analysis for Generic and Mature Commodity Corp.

Figure 23A.9 Cash Flow Analysis for Generic and Mature Commodity Corp. with New Technology

Figure 23A.10 Cash Flow Analysis for Generic and Mature Commodity Corp. with New Technology and Royalty Rate

Figure 23A.11 Cash Flow Analysis for Generic and Mature Commodity Corp. with New Technology and Royalty Rate and Up-Front Fee

List of Exhibits

Chapter 1A

Exhibit 1A.1 Tangible Assets versus Intangible Assets

Exhibit 1A.2 Intangible Value as a Percentage of Total Market Value for 2005

Exhibit 1A.3 2004 Patent Owner Distribution

Exhibit 1A.4 Top 20 Corporate Patent Owners

Exhibit 1A.5 Activity of U.S. Patent Technology Classifications

Exhibit 1A.6 Trademark Applications, 2001–2005

Exhibit 1A.7 Trademark Applications for 2005 by State

Exhibit 1A.8 Trademark Applications for 2005 by Country

Exhibit 1A.9 Royalty Income for Selected Manufacturing Industries (thousands of dollars)

Exhibit 1A.10 Key Factors Impacting Royalty Rates when Licensing—In Technology

Chapter 1B

Exhibit 1B.1 Intellectual Property and Other Intangible Assets as a Percentage of the S&P 500's Market Value

Chapter 12A

Exhibit 12A.1 Relief-From-Royalty Method

Exhibit 12A.2 Rates of Return

Exhibit 12A.3 Categories of Investment and Discount Rates

Exhibit 12A.4 Venture Capital Rates of Return

Exhibit 12A.5 Venture Capital Model

Exhibit 12A.6 Success Rates by Therapeutic Class for NCEs

Exhibit 12A.7 Approval Success Rates for Different Clinical Phases

Chapter 12B

Exhibit 12B.1 Standard Graphical Conventions for Decision Trees

Exhibit 12B.2 Mapping Out the Decision Alternatives

Exhibit 12B.3 Adding the Uncertainty or Consequence Node

Exhibit 12B.4 Calculating the Value of Rejecting the Offer and Going to Trial

Exhibit 12B.5 Calculating the Value of the Uncertainty Node—Rolling Back the Tree

Exhibit 12B.6 Performing a Sensitivity Analysis on Our Probability Estimate

Exhibit 12B.7 Sensitivity Analysis—Solving for p

Exhibit 12B.8 Examples Variables

Exhibit 12B.9 Decision Tree with Two Outcomes for Each of the Four Variables

Exhibit 12B.10 Three-Brand Market with Percentage of Switching Customers Shown

Exhibit 12B.11 Brand Loyalty in the Three-Brand Market

Exhibit 12B.12 Markov Chain from the Seafarer's Aphorism

Exhibit 12B.13 Matrix from the Seafarer's Aphorism

Exhibit 12B.14 Using Bayes' Theorem to Update Our Hypothesis

Chapter 14B

Exhibit 14B.1 Intellectual Property and Intangible Assets Values

Exhibit 14B.2 Patent Valuation before Downturn ($ millions)

Exhibit 14B.3 Patent Valuation after Downturn ($ millions)

Chapter 23A

Exhibit 23A.1 Royalty Rates by Industry (2015)

Exhibit 23A.2 Industry Royalty Rates

Chapter 27A

Exhibit 27A.1 Royalty Rate Distribution Across All Industries

Exhibit 27A.2 License Fees Distribution

Exhibit 27A.3 Royalty Rate Distribution for Medical Devices

Exhibit 27A.4 Distribution of Up-Front License Fees for Deals in the Medical Device Industry

Chapter 27B

Exhibit 27B.1 Royalty Rate Frequency

Exhibit 27B.2 Distribution of Up-Front Fees

Chapter 27C

Exhibit 27C.1 Character of Licensors

Exhibit 27C.2 Royalty Rate Frequency Distribution

Exhibit 27C.3 License Fee Distribution

Exhibit 27C.4 Key

Exhibit 27C.5 Financial Terms for Key Technologies

Chapter 27D

Exhibit 27D.1 Royalty Rates

Exhibit 27D.2 Up-Front Fees

Chapter 33A

Exhibit 33A.1 Underreported Royalties as a Percentage of Reported Royalties

Exhibit 33A.2 2006 Findings by Error Type

Exhibit 33A.3 Frequency of Common Underreporting Errors

Appendix I

Exhibit I.1 Royalty Rate Data

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Intellectual Property

VALUATION, EXPLOITATION, AND INFRINGEMENT DAMAGES

2017 CUMULATIVE SUPPLEMENT

Russell L. Parr    Gordon V. Smith

Title Page

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Copyright © 2017 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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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 intellectual 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 communications technology, pharmaceuticals, semiconductor process and product technology, automotive battery technology, lasers, agricultural formulations, biotechnology, computer software, drug delivery systems, 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 intellectual 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 books include Valuation of Intellectual Property and Intangible Assets, third edition; Intellectual Property: Licensing and Joint Venture Profit 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 published 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 intellectual property. Clients have been many of the Fortune 500 and major international law firms 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 extensively 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 property 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 intellectual 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 fields. Prior to his academic career he worked as an antitrust trial attorney for the Federal Trade Commission in Washington, DC and as a senior trial consultant 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 providing 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 management 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 firm specializing in technology-based business law and intellectual property, 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 enforcement of IP rights. She has more than 20 years of experience working with corporations, universities, and their counsel on intellectual property 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 copyright infringement matters. In addition, she developed the proprietary 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 Certified 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 consulting services, including litigation, valuation, and royalty compliance services related to intellectual property matters. Ms. Byrd's intellectual property experience includes litigation-related damage valuations 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 Certified 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 business administration from the University of Baltimore. Ms. Byrd is a CPA in Maryland and Pennsylvania. She is also a Certified Insolvency and Restructuring Advisor.

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, Telecommunications, and e-Commerce.

Richard J. Gering, CLP, is a principle at Asterion Consulting. 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 disputes 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.

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 technologies, 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 intellectual 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, intellectual 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 elements 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 flirting.

Chapter 12A, Risk-Adjusted Cash Flows, presents an alternate 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 questions remain, an enormous discount rate of 20%, 30%, or more might be used. Such a rate is attempting to account for risks beyond inflation and general business risks. In addition, such a rate is attempting to reflect the added risks associated with possible outright failure of 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 reflects 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 development 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 interplay 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 benefits associated with intellectual property rights. In turn, that analysis rests on forecasts. Forecasts of revenues, royalties, and 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 techniques, 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 certain individuals in that industry. Many movie stars are paid premium fees to appear in a movie just because their presence in the film is known to guarantee a minimum of ticket sales. Beyond celebrities, though, is significant value associated with images and even sounds. 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.

NEW Chapter 23A, Determining Royalty Rates, is an updated and expanded chapter about the different methods that are used to determine a royalty rate for licensing. Rules of thumb, surveys, analysis of databases, price differential analysis, and discounted cash flow analysis are all discussed.

Chapter 27A, Royalty Rates and License Fees for Technology, shows the frequency of different levels of royalty rates and the percentage of license deals that include up-front license fees. This chapter 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 confirmation 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 dominated 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 of Royalty Rates for Technology published by IPRA, Inc.

Chapter 27C, Royalty Rates and License Fees for Pharmaceuticals and Biotechnology, shows the frequency of different levels of royalty rates and information about license fees for pharmaceuticals 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 27D, License Fees and Royalty Rates for Technology Update, is an update to Chapter 27B based on new information published in the sixth edition of Royalty Rates for Technology published 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 significant 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, 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 common 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 currently 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, PhD, 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 35B, New Guidance about Apportionment, cites Summit 6 v. Samsung and an apportionment methodology successfully used to calculate a reasonable royalty theory for damages. The method apportions an infringing smartphone's price to a percentage of the phone's price attributed to a camera feature, then apportions the price of the camera feature based on customer usage. Profits attributed to the final price apportionment are allocated and serve as the basis for a per unit royalty.

Chapter 35C, Lost Profits for New Businesses, considers the unique challenges associated with determining lost profits for a new business that has yet to show profits from its operations.

Chapter 45, New Measure of Infringement Damages—Future Damages, discusses some considerations needed to address the ­question 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 determination of patent infringement damages is continually refined.

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.

Appendix G, More Sample Royalty Rate Information, presents royalty rate data developed from a recent research study completed 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 Royalty Rates for Trademarks and Copyrights, fourth edition.

Appendix H-A, More Trademark and Copyright Royalty Rates, presents more new royalty rate data discovered while creating Royalty Rates for Trademarks and Copyrights, fifth edition.

Appendix I, Pharmaceutical and Biotechnology Royalty Rates, presents some of the new royalty rate data discovered while creating Royalty Rates for Pharmaceuticals and Biotechnology, seventh edition.

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.

Appendix K, Electrical and Energy Royalty Rates, features royalty rates from real licensing deals for the electrical and energy industry from the IPRA, Inc. database titled Royalty Rates for Technology, fifth edition.

1.  Full disclosure requires that we acknowledge that Russell L. Parr is on the Advisory Board and an investor in Innovation Asset Group.

PART 1

VALUATION

In this, the first major section of the book, the reader will find 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 characteristics. 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 firmly based in return on investment principles, this section presents these underpinnings 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.

CHAPTER 1A

INTELLECTUAL PROPERTY LANDSCAPE (NEW)

1A.1 80% OF CORPORATE VALUE IS INTELLECTUAL PROPERTY AND INTANGIBLE ASSETS

1A.2 OVER SEVEN MILLION PATENTS

1A.3 CORPORATIONS OWN THE MOST PATENTS

1A.4 ALL INDUSTRIES ARE PATENTING INVENTIONS

1A.5 TRADEMARKS

1A.6 TRADEMARKS ARE SUPPORTED WITH HUGE AD SPENDING

1A.7 COPYRIGHTS

1A.8 TRADE SECRETS

1A.9 BUSINESS OF LICENSING

(a) Trends in the Business of Licensing

(b) Technology Licensing

(c) Trademark and Copyright Licensing

(d) Reasons Companies Engage in Licensing

(e) More Analysis of Reasons Companies Engage in Licensing

The main text talks about valuing and licensing specific items of intellectual 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.

Foreign-based companies own significant amounts of U.S. intellectual 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, including patents, trademarks, copyrights, and trade secrets.

Exhibit 1A.1 Tangible Assets versus Intangible Assets

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 intangible asset dominance, but it turns out that all industries currently rely on a significant amount of intellectual property and intangible assets.³

Exhibit 1A.2 Intangible Value as a Percentage of Total Market Value for 2005

Thirty years ago, the vast majority of a company’s value was its monetary and tangible assets. These are the cash, inventories, accounts receivable, manufacturing facilities, warehouses, transportation systems, and office facilities of a company. Currently, these assets are almost an afterthought, replaced in importance by patented technology, trademarks, copyrights, and other intangible assets.

1A.2 OVER SEVEN MILLION PATENTS

A patent for an invention is the grant of a property right to the inventor, issued by the United States Patent and Trademark Office (USPTO). Generally, the term of a new patent is 20 years from the date on which the application for the patent was filed in the United States or, in special cases, from the date an earlier related application was filed, subject to the payment of maintenance fees. U.S. patent grants are effective only within the United States, U.S. territories, and U.S. possessions. Under certain circumstances, patent term extensions or adjustments may be available. The right conferred by the patent grant is, in the language of the statute and of the grant itself, the right to exclude others from making, using, offering for sale, or selling the invention in the United States or importing the invention into the United States. What is granted is not the right to make, use, offer for sale, sell, or import, but the right to exclude others. Once a patent is issued, the patentee must enforce the patent without aid of the USPTO.

As more products incorporate many diverse technologies, there will continue to be more opportunities to enjoy the economic benefits of licensing. There will also continue to be more need for licensing so that the companies pursuing commercialization of technology will be able to enjoy freedom to operate without the threat of infringement litigation. Consider as an example the ubiquitous cell phone. The diverse proprietary technologies incorporated into it includes inventions associated with:

Liquid crystal displays

Camera technology

Voice recognition software

Communications software

MP3 technology

Keyboard technology

Wireless communications (i.e., Bluetooth™)

Modems

USB ports

Microprocessors

Digital photography

Ergonomic designs

Few companies possess all of the diverse technologies incorporated into today’s products, and licensing technology is becoming fundamental to product creation.

1A.3 CORPORATIONS OWN THE MOST PATENTS

In 1974, the number of utility patents granted was 76,278. By 2004, the number of patents granted more than doubled to 164,293. Corporations were granted the vast majority of patents in 2004. Foreign and domestic corporations received 88% of the total number of patents granted. Interestingly, 44% of patents are owned by U.S. corporations and 44% are owned by foreign companies. Foreign individuals and U.S. individuals received 10% of all patents with the remainder going to the U.S. and foreign governments. The 2004 distribution of patent ownership shown in Exhibit 1A.3 is largely unchanged for the past 10 years.

Exhibit 1A.3 2004 Patent Owner Distribution

Source: United States Patent and Trademark Office.

Most patents are owned by U.S. and Japanese companies. The top 10 foreign owners of U.S. patents are Japan, Germany, United Kingdom, France, Canada, Switzerland, Taiwan, Italy, Sweden, and South Korea.

Exhibit 1A.4 lists the top 20 corporate patent owners. The number of patents they own counts all patents granted to these companies between January 1, 1969, and December 31, 2004.

Exhibit 1A.4 Top 20 Corporate Patent Owners

Source: United States Patent and Trademark Office.

IBM has the most U.S. patents and has held this position for at least a decade. General Electric has also consistently been in second place for what seems like forever.

1A.4 ALL INDUSTRIES ARE PATENTING INVENTIONS

Between January 1977 and December 2004, over 3.1 million patents were granted. Currently, the total number of patents granted for all time is nearing 7 million. The USPTO classifies patents by technology category. Exhibit 1A.5 shows the technology classifications for which patenting is most active.

Exhibit 1A.5 Activity of U.S. Patent Technology Classifications

Source: United States Patent and Trademark Office.

Drug inventions clearly dominate. This is not surprising. Huge investments in the hundreds of millions of dollars are required to invent and perfect medical therapies. Decades are needed to test drug therapies and gain governmental approvals from the Food and Drug Administration. If a new drug is eventually successful, annual sales can reach many billions of dollars and incremental profit margins can be over 75% of sales. With so much at stake, patent protection is critically important.

Further review of the most active technology classifications clearly reflects the state of our experience with commercial and consumer products. As an example, computer and digital products are part of every aspect of our lives. Not surprisingly, semiconductors and active solid-state devices are technology classifications in the top five of the most active list.

Exhibit 1A.5 counts all patent documents including utility, design, plant, and reissue patents as well as statutory invention registrations and defensive publications.

1A.5 TRADEMARKS

A trademark is a word, name, symbol, or device that is used in trade with goods to indicate the source of the goods and to distinguish them from the goods of others. A servicemark is the same as a trademark except that it identifies and distinguishes the