Market Method Of Ip Valuation
The market approach has long been a basis of IP valuation, as has its study of closely comparable deals. Individual IP assets, on the other hand, tend to be unique by definition, making it difficult – if not impossible – to discover closely comparable deals in the IP realm. To fully comprehend the underlying economic comparability of IP licensing transactions, one must look beyond the written agreements, which are frequently the result of years of strategic discussion or litigation and can be influenced by other market variables. Furthermore, the economics of IP deals have always been influenced by the connection between the parties.
The iceberg effect in comparable transactions is a simple concept to grasp, but it can be difficult to completely quantify, especially given the increasing regulatory and legislative developments in the IP market. Some valuation elements that cannot be seen on the surface of comparable transactions may considerably impact the underlying value of the deal, similar to the underwater portion of an iceberg.
Recent developments in the global market
Recent global trends, as well as other unforeseen market elements that have a substantial impact on IP prices, are altering how valuation specialists analyses similar transactions when using the market method to IP valuation. In China, Korea, India, and the European Union, for example, regulatory and judicial IP settings are undergoing changes.
Judicial, and legislative regulatory acts will very certainly have an impact on the market for IP assets in ways that cannot be seen on the face of otherwise identical transactions. While some of the adjustments are intended to strengthen patent holders’ rights and weed out bad actors, the overall impact is to keep the once-hot IP market cool.
Market comparables has traditionally been determined using variables connected with a two-party agreement at a certain point in time. However, given the number of new regulatory and legislative changes that are occurring, modifications to the market approach may necessitate the evaluation of variables that will become applicable in the near future.In order for the market technique to create meaningful and full adjusted current values, these components must be measured.
Changes in Market comparables
Simply examining the parties’ identities is increasingly leading to major changes in the underlying worth of the transaction. For instance, with the upsurge of RPX Corporation as a defending patent aggregator (perhaps best defined as a licensor on behalf of its members) or Google as a cash-rich corporation wanting to purchase patent portfolios to keep the others out of the hands of NPEs (or so it claims), what might otherwise be regarded a comparable transaction could be nothing more than a troubled asset sale.RPX spent almost $800 million to acquire 2,900 patents which could have been used against its member companies. RPX charges clients membership or subscription fees (which totaled around $250 million last year) in order to get “coverage” patents that are either owned by RPX or will be acquired in the future. RPX, its member firms, or both: who is the true buyer or licensee?
Global regulations on royalty rate
It is not difficult to find evidence of regulatory bodies’ recent impact on IP pricing and comparable transactions. The Federal Trade Commission of the United States issued subpoenas to licensing entities in 2014. Even though there was no accusation of wrongdoing, the cost of full compliance was high for these businesses.This sort of regulation concentration could have a secondary impact on licensing market prices. In order to evade inspection, licensees may seek to cut the royalty rates asked.
Judicial reforms related to the market
Case law has changed dramatically in recent years, resulting in the disappearance of many comparable transactions for valuation professionals. In particular, prior damages judgements based on the 25% rule of thumb, royalty rates that do not account for apportionment and the “entire market worth” criteria are no longer informative in a lawsuit situation as comparable transactions.The full impact of this new case law is still to be seen, but it will make actual comparable transactions increasingly harder to come by, or at the very least more difficult to alter.
Those seeking for comparable transactions must contend with pending judicial reforms that may affect prior comparable deals. The reform of the EU patent system may result in a general upward adjustment of historical royalty rates derived from similar transactions in the European Union. Patent owners will most likely be able to submit patents in all EU member states and file multijurisdictional litigation. As a result, the cumulative expansion of the ability to enforce across the European Union could provide IP owners in the EU more bargaining power.
Due to the improved chances of obtaining an injunction in Germany, compared to the diminishing chances in the United States, the country has become a more favored venue for IP litigation. A credible threat of a preliminary injunction has always been a potent negotiation tool. Leverage is one of the unexpected aspects that must be taken into account when analyzing a transaction that is otherwise comparable.In China, upcoming judicial reforms could increase the amount of damages a plaintiff can claim in an infringement lawsuit. Rmb1 million (roughly $160,000) is the current level. It remains to be seen whether new restrictions will be imposed as a result of the planned reforms.
Fresh insights on royalty stacking, patent hold-up, and hold-out
The influence of royalty stacking, patent hold-up, and hold-out on royalty rates has been discussed by a rising number of IP professionals. While each factor may have an impact on royalty rates, licensing experts doing similar assessments must examine the empirical evidence – or lack thereof – in actual transactions to evaluate the genuine impact of these ideas on valuation.Patent owners frequently have reasonable complaints that certain infringers are guilty of hold-out while corporations seek to avoid paying high royalties. Hold-out refers to the practice of causing unnecessary delays in licensing talks and the legal procedure while allowing original equipment manufacturers to continue selling infringing devices without having to pay royalties.
Although difficult to prove (since infringers are reluctant to admit it), hold-outs are thought to exist and are increasing. Large firms with a lot of cash on hand can drag out licensing discussions and litigation for years, effectively holding out for lower royalty rates and settlements.
IP licensors (or sellers) point to a lack of specific empirical proof that royalty stacking has hindered enterprises from achieving sufficient profitability in a given market — whereas licensees (or purchasers) have a good number of economists on their side. Hold-up and hold-out are the same thing.Whether or not these criteria are appropriately employed to modify comparable deals, they exist beneath the surface of the deal’s declared conditions and can have a considerable impact on the true value traded.
In typical commercial scenarios outside of litigation, the market approach and its utilization of comparable transactions can be effective in evaluating IP assets. However, finding IP licenses to use as comparables and adjusting for unavoidable discrepancies between the comparables and the target transaction is becoming increasingly challenging, particularly when considering damages in IP litigation. Professionals in valuation, licensees, and licensors must work together to distil particular contract conditions down to true comparability in order to validate valuations and apply them in negotiations and litigation.
Contributed by:– Nidhi Jha, Legal intern at LLL