SMHLLAW

by Martin Medeiros

The value of intellectual property (copyright, trademark, trade secret and patent) is subject to debate, but one dimension of the debate is beyond discussion.  Intellectual property is increasing in value.  Based on the percentage of the market value of a company, intellectual property is the highest valued asset of the publicly traded companies.  In fact, the market value of the S&P 500 is 80% intangible now, compared with only 20% in the 1970s.  Indeed, David McFeeters-Krone of Intellectual Assets, a technology transfer specialist (http://www.intelassets.com/) puts that number closer to 90%.  So what is IP worth for private companies that don’t have a market to determine value?

Start-ups may have nothing but intellectual property, or maybe a nascent idea and the passion to develop the idea into an enforceable right.  Remember, ideas are generally not enforceable or valuable rights.  Consider the following formulae to help us understand what may be able to create an enforceable right:

Idea + expressive original content = copyright

Idea + useful + nonobviousness + novelty = patent

Idea + secret + economic value + competitive advantage = trade secret

Idea + source identifier +goodwill =trademark.

Even if you are a tangible asset-rich company, such as a real estate holding and management company, intellectual property can be a big part of your value through branding and business processes.   Services businesses are totally reliant on intellectual property, but at first impression, one would think they only have hours to sell.  So can an hourly service company have a robust intellectual property portfolio?  Yes, in fact, service firms have many highly valued pieces of intellectual property.  These may include mailing lists (that may be a trade secret), business processes (that may be patentable), publications (that may be copyrightable) and logos (that may be trademarks).  A janitorial service owner may have quality control measures appreciated by customers allowing her to increase market share. Even those who provide products and services and give away their products (such as creative commons or open source companies) have valuable intellectual property.  The Linux software provider Red Hat, which is a publicly traded service company, lists trademark as their principal asset in their annual report.

If you are buying or selling a business and you want to obtain a high valuation, increase your intellectual property holdings and focus on documenting their value.  For example, if you publish something, register the copyright (go to www.copyright.gov to get a general understanding of the process) and keep tabs on the revenue the original and derivative works generated for your firm. 

An economist or accountant is the best place to start getting a feel for how much intellectual property is worth to your company.  However, valuation methods vary widely: potential market for commercial units (whether a widget, a movie or a royalty stream from licensing revenues); annual revenue attributed to that unit times some valuation formula, etc.   Some believe an asset is worth nothing unless validated in the marketplace.  "A patent is worth nothing unless someone buys the product it contains," is a practical approach, but neglects the fact that the principal right in a patent is the “right to exclude others.”  It is a limited monopoly.  But even at that, is the sale attributable to the patent, the trademark, or something else?

     Intellectual property litigators take the view that intellectual property is worth nothing until a judgment is awarded to enforce the right.  There are two main types of damages available, economic and statutory.  Additional damages may be available for truly bad intellectual property infringement.  Statutory damages are not available generally, unless the intellectual property is recognized by an authority through registration.  In fact, of the small fraction of the 8000 or so cases in the United States that are filed, the average monetary awards are in the six figure range, with patents tending to be in the seven figure range on average, according to data from the U.S. Department of Justice. From 1994 to 2002 the number of cases in which plaintiffs sought civil remedies related to patent, trademark, and copyright infringement increased 20% to 8,254.  This trend may be attributable to changes in the laws in the late 70’s and early 80’s (although some speculate this pendulum is swinging the other way base on the supreme court decision KSR v. Teleflex and other decisions), and the increased sophistication of the marketplace, but whatever the cause, intellectual property is increasingly valuable and a continuing challenge for those must glean a value, increase that value and retain it.

Sources: http://www.ojp.usdoj.gov/bjs/pub/pdf/ipt02.pdf ; www.uspto.gov; www.copyright.gov; http://www.ojp.usdoj.gov/bjs/pub/pdf/ipt02.pdf