The IP Valuation Spectrum

This is the first in a series of blogs about IP valuation. We wanted to address this topic because we’ve found it to be one of the most misunderstood topics in the management of intellectual assets. During our 15 years of working as IP consultants, we saw the migration of IP valuation from being a tool for estimating IP damages into more “main stream” applications. In order to understand the process we need to lay out the framework for thinking about IP valuation. Although the first question I always get after presenting myself as an IP valuation expert is: “how do you value patents”? I believe that it is actually the wrong question to ask, or at least, it should not be the first question. There are two fundamental questions that should be asked and answered first, in order to put the valuation into the right framework:

1. Why do you need to value the IP in question?
2. When do you need a valuation expert?

The answer to the first question requires a bit of a history…

With its roots in the IP litigation of the 1980’s and 1990’s, the valuation of IP (primarily patents) was initially limited to damages calculations in legal cases involving claims, such as patent infringement. With the introduction of tax planning involving IP, such as transfer pricing and patent donations, the need for IP valuation increased and the valuation of intangibles became critical in non-litigation circumstances. In tax reporting, companies now had to include the fair market value (FMV) of IP involved in transactions, such as the inter company transfer of IP or the donation of a patent to a university. New accounting rules related to business combinations, introduced in the mid- 2000’s, expanded the need for IP valuation even more, as companies were now required to report the Fair Value (FV) of intangibles that were purchased as part of a target in an M&A deal.

In addition to the above circumstances – tax, accounting, and litigation –, which we refer to as “Compliance” situations, there are other situations where an IP valuation could be beneficial for transactions, commercialization decisions, licensing, or general corporate planning. During the same timeframe, which saw the proliferation of tax and accounting rules mandating the valuation of IP, IP management teams were beginning to gain momentum in US corporations. Large companies with large patent portfolios were becoming increasingly sophisticated in managing their IP portfolios and had the need for IP valuations. The types of transactions they needed a valuation for included: spin-offs, in kind contributions, licensing, patents sales, and other commercialization activities. Since there are no governing regulations (such as IRS, SEC or other agencies) controlling the process, we refer to these IP valuation circumstances as “Non-Compliance”.

With regards to the second question – when do companies need to hire an IP valuation expert – the answer is two fold: when there is a very high degree of scrutiny, and when the opinion needs to be “bullet-proof” with the highest level of accuracy. Most Compliance circumstances fall under this category, and so the recommendation or requirement under these circumstances would be to hire a third party, independent IP valuation expert. The non-compliance situations are more of a “gray” area… the higher the degree of scrutiny of the level of accuracy required, the more likely the valuation cannot be done in house and an expert needs to be brought in.

The chart below displays the IP Valuation Spectrum, the compliance vs. non compliance situations and our recommendation on when as expert may be needed. The Compliance situations are highlighted in a box, with the rest being the Non-Compliance situations:





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