IP P®OSPE©TIVE

A few months ago a post on Joff Wild’s IAM blog sparked a great debate about the valuation of IP, the difference in valuation contexts, and the viability of a practical approach.  Jumping into the discussion late, Michael Martin of Broken Symmetry posted a “final word” comment on Wild’s post and on Broken Symmetry.  A few of his words moved me to revisit the IP valuation discussion on IP Prospective with a few of the standard-setting initiatives that have commenced, old and new. 

One of the more interesting notes from Martin’s post reads as follows:

IP valuations are often done very differently depending on whether the IP is considered a proprietary asset or whether it is intended to be licensed out or sold. As a rough cut, I’d say that in the former case, IP is viewed as equity and in the latter, as an asset.

Jackie Hutter (author of IP Asset Maximizer Blog) and I had discussed the different contexts in which IP is valued, and the difference it makes on the approach.  I had attempted to distinguish the two contexts by calling IP in the transactional context as having trading “value”, while IP in the proprietary and operational context has corporate “worth”.  In this, I tried to classify corporate worth as some intangible value (goodwill, etc.) over a market price, or what a willing  buyer would pay a willing seller.  Mr. Martin’s distinction between equity and an asset, however, is extremely interesting, and something to consider.  He goes on to write the following:

So long as we’re talking about the same thing the two valuations should end up agreeing. The fact that they don’t often agree goes more to how we’re not talking about the same thing than it does to differences in methods of valuation. In both cases, valuations should ultimately rely upon some discounted cash flow analysis.

Here, I might digress a little bit.  I do believe that a large part of the problem is that we are talking about different things and trying to value them the same way.  However, I don’t believe one valuation method will reach the same result for IP in two different contexts.  A patent could mean something completely different to two different comanies, in two different markets, creating two different competitive advantages.  In the brand context, the McDonalds golden arches mark is “worth” much more to McDonalds than its “value” to Microsoft in a fictional sale.  Thus, I don’t believe that a discounted cash flow method works under all circumstances.  Still, the notion of equity vs. asset sheds a light that could lead us somewhere, and I would like to see another intelligent discussion on the issue . . .

Because I am revisiting this (and will, again and again), I’d like to uncover a few of the IP valuation standard-setting initiatives that have taken place over the last decade which purport to move us in the right direction. 

In 2001, the U.S. Financial Accounting Standards Board (FASB) released Statement 142, which recognized accounting standards for “good will and intangible assets” acquired through a merger or acquisition transaction.[1]  The following year the Licensing Executives Society developed an Intellectual Assets Reporting Standards Committee comprised of accounting experts, intellectual asset managers, academicians, lawyers, and industry representatives to discuss the development of a standard method.[2]  Two years later, the IRS joined the movement when it issued a notice regarding charitable contributions of intellectual property in which it asserted that a determination of fair market value of a patent must account for, “among other factors: (1) whether the patented technology has been made obsolete by other technology; (2) any restrictions on the donee’s use of, or ability to transfer, the patented technology (see Rev. Rul. 2003-28, Situation 3); and (3) the length of time remaining before the patent’s expiration.”[3]   Thereafter, following the comments of the American Society of Appraisers at the Patent Donation Roundtable in 2004, the IRS promulgated a stricter standard for appraisals of intellectual property, including a definition of a “qualified appraiser” as one who has “verifiable education and experience in valuing the type of property subject to the appraisal.”[4]

Following the lead of these standard setting entities, a series of recent entrepreneurial endeavors have attempted to create reliable IP valuation systems.  Ocean Tomo, LLC, an intellectual asset merchant bank based out of Chicago, has patented a PatentRatings System which assesses and compares the subject intellectual property with over 7 million U.S.-issued patents using a systematic technology that analyzes certain cumulative characteristics of patents within a pool, including the likelihood of producing economic returns.  On the international platform, in conjunction with the International Organization for Standardization (ISO), the German Institute for Standardization last year released the “General Principles of Proper Patent Valuation”[5], which many professionals agree may be the basis for an international standard for IP valuation. 

We will have to watch Washington, Geneva, etc., and the corporate world to see what will happen next . . .

[1] Financial Accounting Standards Board, Statement 142: Good Will and Intangible Assets (2001).

[2] Press Release, “Accounting Standards in the New Economy: Licensing Executives Address Reporting the Value of Intellectual Property,” Licensing Executives Society (April 24, 2002).

[3] See IRS Notice 2004-7, “Charitable Contributions of Patents and Other Intellectual Property”, found at http://www.irs.gov/pub/irs-drop/n-04-07.pdf (last visited March 10, 2009).

[4] 26 U.S.C. § 170(f)(11).

[5] German Institute for Standardization (DIN), PAS 1070 “General Principles of Proper Patent Valuation” (2007).