1. CONSOR Intellectual Asset Management
IP Valuation
September, 2011
CONSOR Intellectual Asset Management

2. Why IP Valuation? Beyond specialized IP law practices,
business, commercial, tax and estate practitioners
Increasingly involved in identifying, protecting, applying, and defending intangible assets owned by clients.
Context
Purpose
Value to whom?
How much value?
How and when does value change?
Buy, sell or transfer
Disputed ownership
Improve performance
Collateralization

3. What is IP? Intellectual Property vs. Intangible Assets
Bundles of IP and IA Assets

4. Context: Property Types
Intangible Assets
Intellectual Properties
Customer & Vendor Relationships
Patents
Trademarks
Data Bases
Copyrights
Trade Secrets
Internet Assets
Proprietary Systems
IA vs. IP: Commercialized Separate from Other Assets

5. IP Property Types Bundles of Intangible Assets (IA),
each contains Intellectual Properties (IP)
Marketing
Relationship (Customer / Supplier)
Marks, brands, names, domains
Trade-dress, packaging, logos
Non-competes, key-person
Customer / Supplier relationships
Distribution networks
Order backlog
Technology
Contract
Technologies, know-how, systems, methods
Patents, software, recipes, content, databases
License / royalty, lease, franchise
Permits, use rights, broadcast rights

6. Valuation Methodologies
Cost
Income
Market
Description
Economic principal of substitution
Measures expense required to replace
Neglects future benefit
Present value of future economic benefit
Requires projections and a risk assessment
Requires allocation of benefit specific to the asset
Value based on price of similar assets
Requires suitable comparable assets
Application
Replication / replacement feasible
Benchmarking
DCF
Relief from Royalty
Comparable transactions
Benchmarking
Valuation as Art and Science

7. Valuation Tools of the Trade
The “Science” of Valuation
Discounted Cash Flow Models
Comparable Valuation Ratios
Replacement Cost
Relief from Royalty
Allocation / Excess Earnings
Option Models
Proprietary Approaches

8. Changing Valuation Terminology
Level of Value
Value Definitions
Fair Market Value
Fair Value
Strategic Value
Liquidation Value
MVIC
= Assets + Liabilities
MVE
= Equity Ownership
Minority Interests
Who’s Setting Standards?
AICPA, ASA, ISO, NACVA, IRS, Courts, FASB, LESI, and more
Defining the Assignment to Avoid “Bad Art”

9. Case: Improper Use of a Character
Background
Defendants used a character to promote products outside of the permitted terms of agreement with IP owner
Financial data from the defendants unavailable
Multiple methodologies applied
Income approach calculation yields different value than market and cost approaches

10. Case: Improper Use of a Character
Case Take-away: Context is Key

11. A more complex case showing the importance of Context, and
the importance of identifying IP

12. Case: Identifying IP
Client assists municipal agencies issue bonds for public interest projects (a Public Private Partnership)
Client has achieved substantial profits for several years
Key competitor is a state-run agency
State accuses client of gouging the parties it serves
Has Client developed IP that justifies the excess profits?

13. Case: Identifying IP

14. Case Take-away: Both IP and IA Contribute to Value
Case: Identifying IP
We can see IP exists . . .
What are the key types of IP Assets?
IA at the CLIENT
Proprietary systems (some could be commercialized)
Proprietary methods
Relationships / key people (can’t be commercialized)
History / Longevity / 1st to Market (can’t be commercialized)
Case Take-away: Both IP and IA Contribute to Value

15. Value Constraints
Present Value of Expected Future Benefit
Intangible Assets
Brand / Trade Names
Intellectual Properties
Value of Business = = =
Intangible Assets
Tangible Assets
Tangible Assets
Could a company’s IP assets exceed the market value of the business?
Context: Fair Market Value (transaction did occur)
Context Implication: Value driven by expected future benefits

16. Case: Impact of Context
Could a company’s IP assets exceed the market value of the business?
Frequent Context for IP Valuation: Purchase Price Allocation (FAS 141/142)
Purchase Price Creates Goodwill
What Portion of the Acquired Goodwill should be allocated to IP?
What are the components of the IP Allocation?

17. Can Value of IP > MVIC?
Context Drives the Science
Value of IP cannot exceed MVIC in a purchase price allocation
Value of each IP = PV of future benefit each IP provides to Company’s cash flow
Tools / Science
Forecast cash flows by product
Quantify the interaction of IP Assets and their contribution to earnings
Case Take-away:
Context is key / Context Can Be Forced on the Value Analyst

18. What if the Context Changes?
What if we don’t have a completed transaction between
a wiling buyer and a willing seller?
Frequent Contexts
Infringement Damages
Licensing / Endorsement
Damage Calculations: require application of traditional valuation methodologies to determine value of economic benefits lost, or not achieved (often when an arm’s length transaction would never have occurred)
Licensing: requires both parties understand and estimate the present value of future economic commitments (without the benefit of an existing arms-length transaction)

19. What if the Context Changes?
What if we don’t have a completed transaction between
a wiling buyer and a willing seller?
IP Valuation Methodologies
Comparable Transactions
Relief from Royalty
Discount Future Benefit
Replacement Cost
All these approaches construct a hypothetical agreement between IP Owner and IP User
Crafting the Hypothetical Agreement Requires Art and Science

20. Hypothetical Agreements
No More Rules of Thumb
Replacing Rules of Thumb
Uniloc USA v. Microsoft Corp: applicable specifically to IP analysis
End of the 25% rule = “End of the unsupported conclusion”
Averages & Surveys as the lemming’s rule of thumb
If it’s a universal norm, it can’t meet the criteria for comparables
Licensing agreement = contractual financial agreement
Commitments can and do take many forms
Hypothetical agreements must reflect their real- world counterparts
This Shouldn’t be Shocking

21. Reflecting Real-world Complexity?
A Typical Relief From Royalty Calculation
Did Consider . . .
Forecast benefit (sales, term)
Industry dynamics (rate)
Risk assessment
Assumed . . .
Constant sales
Industry average royalty rate
No changes during term

22. Case: Alternative Royalty Rate Analyses
Value of trademark and related brand assets to a partner business?
Method Applied: PV of license-derived economic benefits
Subject IP did not resemble comparable IP transactions
Parties had a standing relationship
Ranges observed in Comparable Transactions

23. Case: Alternative Royalty Rate Analyses
Royalty Rate Build-up Method: BVEq
BVEQ= CBV + (IVE1 + IVE2 + …. + IVEN)
Surveys and Comparable Transactions are not The Only Tools Available

24. Case: Reflecting Reality
Take-away: “Hypothetical Negotiation” Drives Greater Analytical Burden

25. When Valuation Issues Arise?
Question
Answers
Why is valuation needed?
Transaction, Infringement, Financial Reporting, Tax/Transfer, etc.
What level of value?
MVIC, MVE, Minority Interest
Who will use the value result?
Accountants, IRS, Potential partners or investors, Management, other
What information is available?
Audited financials, business plans, industry studies, etc.
What types of assets exist?
Tangibles, know-how, brands, patents, designs, relationships, etc.

26. The Valuation Answer Context + Time = Value
Reconcile results from multiple approaches
Reconcile the calculations to the context
Context + Time = Value
There Are No Valuation Answers: Only Good Choices

27. Handouts Law 360 on Rules of Thumb
Considerations for Hypothetical Negotiations
20 Licensing Structure Alternatives
Criteria for Comparable Transactions

28. Discussion

29. CONSOR’s Services www.consor.com 858 454 9091 IP Valuation
IP Litigation Support
Valuing patents, trademarks, copyrights, trade secrets, celebrity rights, and technology
Helping businesses understand the value of their IP
Valuation for transactions, tax purposes, litigation, licensing deals, and more
Assisting attorneys with damage calculation parameters & case strategy
Proven success as expert witnesses
Economic damages in litigation
Federal, state & international experience
Arbitration, and mediation
Licensing Consulting
IP Transactions
Assisting clients in maximizing the licensing value of their IP assets
Develop licensing strategies, execute, negotiate license agreements
Licensing experts in litigation
Evaluate financial and economic commitments of a potential transaction
Maximize the value of bankrupt assets
Identify valuable IP in bankruptcy
Market and sale of bankrupt IP assets
Value and dispose of intellectual property