Homework

• Type of Intellectual Property

• Trade Secrets vs Patents

• Real Markets vs Financial Markets

• IP Link to Wealth Creation

• IP Valuation

CHAPTER 6: INTELLECTUAL PROPERTY AS AN ASSET FOR WEALTH CREATION

Initial Foundation

1. Initial Owners Equity

2. Set stock par value

3. Set ownership %

4. Owners’ initial wealth

establishes

Intellectual

Property Creation

5. IP Patent Application

6. Valuation of Int Assets

7. Asses Competition

8. Establish market

appeal.

New Wealth

Creation

9. Financial vs. real

market point spread

10. Market Validation

11. New stock market

price

12. Change in ownership

% and wealth

WEALTH CREATION

Intellectual Property:

• Portfolio strategy

• Litigation process and cost

• How it affects a corporation

STRATEGIC MANAGEMENT OF IP

The IP attorney is an

important a member

of the team as the

accountant or the

research scientist.

Delivering Revenue

Building Markets

Ensuring Design Freedom

Managing Competition

Protecting your product with inventions

Driving

Strategy

IP IS A STRATEGIC ASSET THAT MUST BE MANAGED

Factor Physical Intellectual

Multi-use Use by one firm precludes

simultaneous use by

another

Use by one firm does not

preclude simultaneous use

by another

Depreciation Depreciates Does not wear out but may

become obsolete

Protection Can enforce and protect

ownership

Difficult and expensive to

enforce and protect

ownership

PHYSICAL VS INTELLECTUAL PROPERTY

• Patent requests queue currently around 650,000

• 4 year wait time for a first action

Category Purpose

Patent Protect the idea

Copyright Protect the unique expression of the idea

Trademark Protect the reputation of a product

Trade Secret Protect the sharing of an idea

• Intellectual Property is often viewed as synonymous with patents

• We should be using a broader definition for intellectual creative efforts:

IP CATEGORIES

https://www.youtube.com/watch?v=ax7QHQTbKQE

• Granted for new and useful processes, machines, compositions, manufacturing

• 3 general types:

• Utility: Operation of a machine

• Design: New decorative appearance

• Plant: Category of new plants

• Patents must fulfill the following requirements:

• Must be something new

• Must be useful

• New results

• Allows for replication

PATENTS

https://www.youtube.com/watch?v=V9JPeyWtuyk

• Don’t usually go to Federal court

• Is often a “contract law” question and not a legal question

• Employees might sign employment agreements

• Right to sue if the agreement is breached

• Dominated by “norms”

• Enjoy reciprocal behavior

• Reverse engineering is OK

TRADE SECRETS

• Protects original works like music, dance, books and software

• Its use must be referenced if reused

• Length of protection:

• Life of the author + 50 years

• 100 years from creation for work performed for a fee

• Enforced in a civil court

COPYRIGHTS

• Protect the consumer from confusion about the source of the goods

• Origins with the laws of fraud and deceit

• Protects the producers giving them an incentive to invest in differentiating

their products and brands from the competitors

• Note the protection of the “brand” … may be more important in the

future than patents!

• Can be lost: e.g. aspirin

TRADEMARKS

• Economists see IP as “inexhaustible”

• So the government has the intrinsic responsibility to pay

for things such as defense, public education, research

• Business see them as “scalable. Scalability is cumulative by

building IP on top of IP

• Private property rights tended to take priority over

government subsidy in IP

WHY IS IP SO ATTRACTIVE?

➢ A successful IP portfolio is tightly integrated with the company’s

business plan and product development plans

➢ A strong IP portfolio can help to shut out competition and secure a

strong place for your product in the market

➢ Strong IP portfolio can increase the value of company to investors

➢ Rarely is a single patent or a single type of protection sufficient

➢ The IP portfolio should evolve with the product line

➢ You may invent something new along the way and forget to patent.

IP IS A DYNAMIC STRATEGIC ASSET

To maintain an

approved monopoly in

the market

5. Bargaining power of complementors 6. Bargaining Power

of suppliers

2. Threat of entry by new competitors

3. Threat of Substitute Products

4. Bargaining Power of customers

1. Firm

Rivalry

PATENT PORTFOLIO VALUE FLUCTUATES

➢ Avoid the desire to patent everything in R&D

➢ Focus is the key – seek patent protection on the company’s core

technology and the functions related to that technology

➢ Core technology is key to the company’s business plan / non-

core technology is ancillary to the business plan

➢ Identify:

✓ What aspects of the technology provide the greatest

advantage over the competition?

✓ What advantage will provide the best value over time?.

MAINTAIN A BALANCED PORTFOLIO

ECV R&D

Expense

Expense

to

Commercialize

Trash

(abandon the patent)

Trash

Yes

No

Yes

No

NPV Net

Present

Value

Expected

Commercial

Value

Why did you invest in a technology for which

you will subsequently abandon the patent?

PATENT PORTFOLIO RISK ANALYSIS

> 4 x GDP

2-4 x GDP

< 2 x GDP

Current

Plans

Future

Plans

Not in

Plans

Business

Unit

Growth

Corporate Use

Core

Patents

50%

Non-Core

25%

License

Abandon

Non-Core

25%

KNOW WHAT TO MAINTAIN

1. You have a clever idea

2. Patent it to open a market

3. Collect revenue

IF THE PORTFOLIO IS VALUABLE, PEOPLE CARE

➢ Valuation Process

•Everyone has a favorite

• Seller vs buyer perspective differ widely

• Eventually have to get a third-party

➢ Typically down-select to three for the pro forma

• Explain why specific techniques were picked

➢ What are you willing to spend to protect a

downside of $4.5M in revenue?

IP VALUATION

Factor Physical Intellectual

Categorization Easy Difficult

Context Independent Dependent

Focus Specific Details Specific Concepts

Methodology Objective Subjective

➢ Valuation Process is similar to tangible assets

➢ Some market comparable might be hard to find

➢ Develop fair market approach with upper and lower bounds

IP VALUATION FACTORS

1. Market based: identification of similar intellectual property sold

under similar conditions. Requires the existence of an active

market

2. Cost based: estimate the cost to reproduce or pay to purchase

using historical or reproduction costs

3. Income based: focus on the income producing capacity of the

Intellectual property. Determine the Present Value to be received

over the life of the asset

IRS VALUATION METHODS

➢ Interest Rate: use company’s MARR

➢ Period: determine an estimate of the expected timeframe

➢ Annual benefit: estimate of enhanced revenue

➢ Expense: estimate for development/maintenance of the IP

0 3 4 521

x %

NPV

A=Net Income

VALUATION INCOME

➢ If we change N to 20: PV= $830,076

PV = 97,500 P/A,12%,5 = 97500 3.605 = $351,487

0 3 4 521

x %

NPV

A=Net Income

➢ Project Example:

o Interest= 12%

o N= 5 years

o Annual Benefit: 100,000

o Annual Expense: 2,500

VALUATION INCOME EXAMPLE

PV = −1,000,000 + 1,000,000 P/A,8%,10

= − 1000000 + 1000000 6.710 = $5,170,000

Acme Engineering has developed a new automated process to increase the production of

integrated circuits. They expect the new technology will support annual sales of $2.2M

which is an increase from the current $1M. The initial development was $1M and the

increased annual support is $200k. The current interest rate is 8%. What is the present

worth of this new IP if the expected life should be at least 10 years

VALUATION EXERCISE

Why is litigation so expensive?

Threatened with infringement …

• Obtain a legal opinion on

whether the patent is infringed,

invalid, and/or unenforceable

• File a declaratory judgment suit

that the patent is invalid and/or

not infringed

Lawsuits arise when:

• Discussions for a license fail

• Patent holder wants exclusivity

EVENTUALLY, COMPETITION MEANS INFRINGEMENT

1. IP is often synonymous with “patent”

• But, “trade secrets” can offer protection, too

2. Strategies can be “defensive”

• Keeping others out of your space

• Continuation claims are key (new claims on old patent)

3. Strategies can be “offensive”

• Anticipate and block competitor activity

• Frequently the basis for licensing deals

4. Understand your business risk threshold

• Lawsuit contingency and estimated liability (reserves)

LITIGATION IS INEVITABLE

Patent prosecution

• You are working with an attorney to protect the

inventions of company by creating intellectual property.

• The intention is to prevent others from using your IP

without paying fees.

Patent litigation

• The attorney works with the patent to stop others from

using your patent (an asset).

• Leverages the asset to obtain royalties or to prevent

activity.

LITIGATION: A DEFINITION

A situation reasonably suggests infringement occurring

Complaint: Plaintiff sends a letter:

• Request royalty

• Possibly “cease and desist” (stop and refrain from) letter by

lawyer

If no satisfaction …

• Formally file a complaint

Federal Rules require a patent holder to have a reasonable

belief that the patent is infringed before suit is brought

• About 20 days to respond

TYPICAL LITIGATION CASE

Claim there is no infringement

The patent is invalid

• Obvious to one skilled in the arts

• Anticipation: used by others prior to patent date (prior art)

• Statutory: Was “on sale” a year before the patent was filed

• Enablement: Patent does not describe the invention well enough

• Best mode: The inventor had a “best way” to implement but did

carry out or advise the PTO during prosecution

•Indefinite: Terms for the claims are not definite

The patent is unenforceable

• Patent office was materially misled during the patent prosecution

• “Laches” delay in bringing lawsuit; other legal terms

Antitrust

Unfair competition

Reexamination

SEVERAL DEFENSE MECHANISMS

Pre-litigation

Investigation

Complaint

Answer

Claim Construction

(Markman) Hearing

Discovery

depositions … expert witness

Trial Pre-Trial

Motions Appeal

Appeals Court

Judgment

Trial Court

Judgment

PATENT LITIGATION BASIC PROCESS

Some start at the

state level U.S Supreme Court

U.S Court of Appeals

U.S District Court

State Supreme Court

State Court of Appeals

State Trial Court

• Federal question

• Diversity jurisdiction

• US is a party

• No minimum monetary requirement

Jury Trial Judge panel

• Affirm

• Reverse

• Vacate

• Remand

PATENTS ARE A US FEDERAL ISSUE

WHERE TO LITIGATE?

Suing for infringement puts your IP “in play”

• Patents can be judged invalid, unenforceable or not

infringed

• Antitrust or unfair competition claims can be raised by

defendants or others

• Be confident of a good-faith basis to the suit

Success rates

• Plaintiff loses about 75% against an infringer

Typical costs

• About $3 - $10 million, with, say another $2 million for an appeal

Sure, many are solved for less.

• Takes 2 -3 years

LITIGATION COSTS

Objective Goals

• Market exclusivity through an injunction

• Income …

Compensation for losses

(Lost Profits, Reasonable Royalty)

Punitive Damages

(Increased Damages and/or Attorneys’ Fees)

Subjective Goals

• Promote and Protect Licensing Programs

• Establish a Reputation for Protecting Your IP

LITIGATION GOALS

A case

running over

6 years

LITIGATION DATA BASE

LITIGATION ACTIVITY

1. Long-Term Debt

• A loan through a bank

2. Bonds

• Issued by the firm and sold in the market

3. Deferred Tax Liabilities

• Arise from differences in Tax and Financial Statements

4. Deferred Pension and Benefits

• Can be significant and subject to regulations

5. Lawsuit contingency

• Estimated liability (reserve)

ACCOUNTING FOR LITIGATION UNCERTAINTY

• You and me are going to be partners

• It will cost you $1000

• Let’s Incorporate! • Application fee $175 (Form OH-532)

• Issue 10,000 stock (fee is $500)

LET’S FORM A COMPANY

THE RESULT

You need to deliver on what you promised!

• This is Round 1

• Angel Investor • Stock price negotiated $500/share

• 1500 Shares

• $750,000

• Now what?

NEW INVESTOR

IP is central to investors recovering their investment in high-

technology products.

Know that ….

… you need a portfolio

… the portfolio requirements will change over time

… consider being on the “offense” as your business grows.

… that if you create value, others will “eagerly” follow

… bullet-proof claims are the key to avoiding problems.

SUMMARY

QUESTIONS?