Enabling Tools and Practices - IP Valuation

As real estate title may cover a square inch of Arctic tundra or a square mile of Manhattan, intellectual property protection may be broad or narrow, cover various kinds of products or processes, and have widely varying value.

- Thomas Field, Franklin Pierce Law Center Professor of Law49

Not all IPs are born equal; some are much more valuable than others. A domineering patent, a highly distinctive trademark with growing brand equity, and a strong rather than a thin copyright are all terms used to distinguish between the value of various IPs. There are two facets to the value of IP - legal and commercial. Legally, the value of IP lies in its scope of coverage, and the strength of the right (i.e., whether it will be afforded strong protection by the courts). Commer­cially, the value of IP depends on how customers will react to it. In particular, it depends on whether customers will embrace a new technology (patents), relate to a brand and be loyal to it, and receive the copyrighted work with enthusiasm. The fact that the value of IP depends on com­mercial and legal considerations makes valuation of IP a very complex exercise. This is particu­larly true at the early development stages of the life of IP wherein customer reaction and hence commercial value cannot be accurately ascertained.

There are a number of methods for the valuation of IP based on accounting methods, includ­ing cost, income and market based. While cost methods look at historical values relating to the IP development costs (past-oriented), income methods estimate the expected royalty streams that an IP may generate in the future and discount the cash flow to the present. Market-based methods rely on data on IP royalties in various industries and make a valuation based on what IP will gen­erate in an arm's-length transaction.50 Valuation of IP is used widely in cases of mergers and acquisitions, litigation for estimation of losses and awards, major licensing transactions, patent donations, and whenever an IP is used as a collateral security. However, the fact that valuation of any single IP may cost between $25 and $50,000 makes its use for IP portfolio management pur­poses prohibitive, particularly where the organization owns tens of thousands of IPs (see also about invest money).

It is crucial that an organization develop a methodology that includes qualitative and quantita­tive methods to roughly estimate the value of IP, for IPM to be engrained in business management. A study by the Danish Patent and Trademark Office (DPTO)51 found that the lack of valuation tools that an organization may use in relation to IPM is one of the main problems ham­pering management of IP as business assets. The DPTO discovered that though most Danish companies develop IP strategies, they fail to link it to business strategy, mainly because they lack systematic tools and methods to assess the value of their IP portfolios. To promote economic development by unlocking the value of IP portfolios, the DPTO developed the IPScore™ tool for businesses to systematically assess the value of their IP. The IPScore uses mainly qualitative measures and criteria to assess the significance of individual IPs. The IPScore measures represent a guide to the minimum criteria that an organization should apply to value an IP for IPM pur­poses. They include:

•   Technical status of the IP (relates to patents and software)

•   Market-related utilization potential

•   The company's mission and resources relating to the utilization of the right

CONCLUSION

The goal of IPM is to cultivate the organization's ability to use IC both for competitive position­ing and revenue generation, by unleashing the power of IP. The optimal benefit of IPM is capi­talizing on what may otherwise remain a dormant IP portfolio, and hence maximize the organization's competitive performance and profit-making ability. For that to happen, IPM should be transformed from being a function of the legal department to becoming a part of the business management function of the whole organization. This involves effecting a number of changes on the strategic and operational levels, including undertaking an IP audit of the primary form of IP, creating IP portfolios, adopting the appropriate competitive and commercialization IP strategies to mine the portfolios, and effecting necessary structural and cultural changes. This is further enabled by the development of systematic tools for the valuation and assessment of IP value. Chapter 13 outlines the implementation of the IPM stage step by step.

But before we proceed to that, it is important to see how the CICM approach exists in real business life, by exploring the comprehensive ICM systems of two pioneers - Skandia and Dow Chemical.