What, for you, are the most important steps of any intangible asset valuation process?
Principally, any intangible asset valuation process should generate credible results. The end consumer of any valuation is the public. In my experience, the marketability and value of intangible assets depend heavily on whether one believes the valuation.
When I first came into valuation, I was appalled by the lack of rigour and the degree of charlatanism that existed (ie, saying “the value is ‘X’ because I have 20 years of experience and I say that it is ‘X’”). Since my first writings in 2005, I have sought to bring a greater degree of rigour and consistency to the valuation process, with the end goal of creating a consistent process for valuing intangible assets for any purpose.
You have served as chair of the IP Valuation Standards Committee for the Licensing Executive Society in the United States and Canada for seven years. What are some differences between the licensing landscapes of these neighbouring jurisdictions?
On average, the magnitude of the economic opportunity in the United States is about 10 times greater than Canada. That is no fault of Canada – it is merely a function of each country’s respective gross domestic product. Consequently, licensing economics can vary dramatically based on the assets. A US$10 million licensing prospect in the United States would be worth about C$1 million in Canada, all else the same. However, licensing costs have general parity between the two jurisdictions, meaning that licensing profits are generally lower in Canada versus the United States.
Canada would be wise to embrace an aggressive policy to incentivise intangible asset investments to correct this imbalance.
Do you think trade secrets are overlooked as a method of IP protection? If so, how can companies remedy this?
Trade secrets get a lot of press as an alternative to patents. Proponents of trade secrets argue that they are superior because they do not require disclosure, while one patents when discovery in the public eye and cost-effective reverse engineering could remove competitive advantage.
I believe that many companies misunderstand the difficulties associated with trade secret management. For example, the law around trade secret damages is much less mature and cases are much harder to prove. Moreover, from an economic perspective, the value of patents dwarfs those of trade secrets on any given day – even handicapping for patent loss, especially since trade secrets often have shorter economic lives tied to reverse-engineering durations.
Trade secrets have their place, but they are not a substitute for patents. Each serves a different, often complementary, purpose.
What common mistakes do companies make when commercialising their IP assets in the United States – and how can they avoid them?
At the most basic level, IP assets are financial assets. Yet many companies hand responsibility for managing these over to attorneys because of the legal roots of IP protection. However, attorneys generally lack both the expertise and skill to serve as effective financial asset managers.
Such misalignment drives gross inefficiencies and many companies do not operate efficiently with respect to how they develop and manage their IP assets. One can often see exceptional waste by IP owners pursuing patents in jurisdictions that are economically irrelevant – either because of regulatory, market or enforcement dynamics. I see similar waste with respect to how companies select inventions to patent, which firms get the prosecution work and later maintenance decisions.
Absent fraud, such operational inefficiencies do exist with other financial asset classes.
How do you manage expectations and maintain close working relationships with clients when the stakes are so high?
I have worked on more than 500 engagements for more than 350 clients on issues that reached into the billions. Yet I tell a lot of clients that they have ugly babies.
All valuation reduces to addition, subtraction, multiplication and division. That fact provides a common and understandable language to communicate valuation results. If someone does not like a value outcome in a small market with evidence of low market value, then the maths will accordingly indicate that outcome. I find that open, sometimes frequent, communications emphasising reliable source data and providing complete visibility into the value development process and associated calculations provides the necessary support to defend a value outcome in a way that is understandable to the client.
The client may still not like the outcome. However, they will usually understand how to mitigate the value outcome or accept it.