Commentary: The risky business of valuing IP

COMMENTARY | According to widely circulated news reports, the jurors in Apple v. Samsung ignored the testifying experts and calculated damages on their own. Who can blame them? Apple's expert came up with upwards of $2.5 billion as fair compensation for the infringement. Samsung was seeking $500 million in a countersuit. A $3 billion spread makes it hard to trust either analysis.

Valuing intellectual property is risky business, especially when the stakes are high. Investors, regulators, and tax authorities all want to know what a company's technology is worth. If the company doesn't give a straight answer, it risks costly inquiries and investor skepticism.

Unfortunately, a straight answer is hard to come by. Companies have to value IP for all sorts of reasons. And they have to follow different rules, depending on the purpose of the valuation. What if Apple licenses one of its patents to a foreign subsidiary? What if Samsung buys a company with a patent portfolio equivalent to Apple's? Each of those analyses will likely propose a different value for the technology. And chances are slim that either of those values will bear any resemblance to the numbers exchanged last week.

The rules of the road in IP valuation change according to who's driving. If tax authorities are behind the wheel, only a portion of a company's patents may have any value at all. In M&A, financial regulations tend to steer many companies towards high IP valuations. And, while courts typically rely on lost profits and/or reasonable royalty estimates to approximate patent value, juries may well veer off that road and go four-wheeling instead. Small wonder that valuations of the same IP could differ substantially, depending on the analysis. By billions, say.

Tech companies may be thrill-seekers with respect to innovation, but they're pretty conservative when it comes to stuff like financial reporting, tax returns and investor confidence. These audiences don't appreciate miscalculations or uncertainty. Consequently, IP valuation projects must be carefully managed, whatever their purpose. And, even if a company coordinates its multiple IP analyses and carefully controls dissemination of results, it still runs the risk of defending them against a jury's opinion.

If the blockbuster jury award in Apple v. Samsung survives appeal, it could be a game-changer. Technology companies may think twice about risking patent infringement suits. And a decision to steer clear of the courts may require a new approach to innovation. Specifically:

• "I'll show you mine if?" Tech companies may find it more prudent to cross-license technology to entwine their interests and avoid costly litigation.
• "If you can't beat 'em, buy 'em." Less successful innovators may snap up their more creative competitors to access the technology they need. While acquisitions are expensive, they avoid high profile lawsuits and brand-damaging jury verdicts.
• "Since I can't steal your tech, I'll steal your talent." The talent flow between companies may accelerate as competitors lure each other's best and brightest. Companies may find this strategy a relatively cost-effective way to jump-start innovation and cultivate a robust IP portfolio. Even if employers fight back, the stakes shouldn't be as high as they are in patent suits.

Each of the strategies suggested above represents a more conservative approach to IP portfolio enhancement and would result in more cross-licensing, increased M&A activity, and elevated technology salaries. R&D departments may coordinate more closely with finance groups in this environment as companies greet internally generated innovation with more caution.

Intellectual property portfolios represent the crown jewels of successful technology firms. Protecting them is a matter of corporate survival. Unfortunately, assessing their value is a matter of perspective. Litigation introduces yet another perspective, one that may or may not rely on accepted valuation methodologies.

The Apple v. Samsung case may encourage tech firms to take courts out of the valuation equation altogether, by finding new - litigation-resistant - ways to access intellectual property.

Correction, 5:30 p.m. EST: This piece was corrected to fix the difference between what Apple and Samsung both sought in damages.

Kara Boatman is Senior Vice President and Tom Hopkins is CEO of Fortisure Consulting LP in San Francisco, CA.

Source: http://news.yahoo.com/risky-business-valuing-ip-175200183.html

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