This month, a regular gathering of Kenyan IP enthusiasts
selected IP Valuation as the topic of discussion. The topic reminded this Leo
of recent IPKat posts, here, here,
and here,
the last of which links to its own nugget of spectacular value – a free
104-page book on IP Valuation, here.
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| Do you think my patent portfolio will make me rich? Clara Peeters, 17 c. |
In theory, IP
Valuation seems as straightforward as valuing any other asset. The IP enthusiasts discussed and
explained the Cost Approach, the Market Approach, the Income Approach, and
the Direct Approach. Indeed these are so well know that they feature on the Wikipedia
page for IP Valuation. All very digestible and logical.
When it comes to IP Valuations in practice, however, this Leo is quite the scaredy-kat.
A finance expert recently stated, quite casually, that IP
valuation is no more difficult than valuing any other asset. But can this be the case? Unlike most assets,
an IP right is entirely separable from the product to which it pertains. The
patent is not the device it describes, the trademark is not the logo, and the
copyright is not the drawing. You can use a device, logo, or drawing entirely
apart from any IP right that may cover it, and in any case these IP rights don't
even grant any right to sell or use the product/logo/drawing/etc. Indeed you can even sell a product but not
the IP rights covering that product, and vice versa.
Instead, the IP rights grant the right to stop others from
acting. Accordingly, IP valuation is
really the process of answering the question: “of what value to a potential
buyer is the right to exclude competitors
from doing _______?” The blank represents the right(s) provided by the IPR. This
exclusionary right can have much more (or much less) value than the product
itself.
Dramatic examples of IP valuation show it to be highly
subjective, to the point of being unreliable. A portion of the Kodak patent
portfolio (1700 patents, to be exact) was originally valued at 2.2 Billion to
2.6 Billion USD. After a negative result in a court case, some deal-making,
consortium building, and other hocus pocus curious and interesting events
involving the portfolio, Kodak finally reaped just 94 Million USD, a mere 4% of
the initial valuation. The full story is told here.
This Leo wonders whether there was any consequence for the
firm that was responsible for overvaluing an asset by over 2 Billion USD.
Granted there were intervening events, but if there are no consequences for missing
the mark (by a lot), they why do we bother with IP valuations at all? In the
end, it probably boils down to building a reputation and trust for those doing
the valuations.
An important note (since tax is one of two certainties in
life) is that IP Valuation is important for tax purposes. Tax authorities in
the United States and other developed countries regularly deal with IP assets
in financial reports and tax returns. South Africa, too, appears to allow a deduction
(here and here)
from tax for certain IP assets. The Kenyan tax authority, KRA, has not made any
(obvious) public announcements or guidelines for the treatment of IP assets.
Perhaps this is due in part to the difficulty of valuing such IP. More likely
it is indicative that most Kenyan tax filers do not report IP assets, so there
is little or no need for such guidelines. Surely this is likely to change in
the near future.
