What is the value of an IP asset? This is a seemingly straightforward question. It is also a question that IP valuators and lawyers respond to daily. It therefore may be surprising to some that the question is capable of generating at least fifty different answers. This is because there are fifty different IP valuation methods being applied to determine the value of IP assets. Suddenly the routine question becomes incredibly complex.
Miller Thomson Analysis
The problems that can result from variable IP valuations is obvious – the worth of an IP asset may be entirely dependant upon the IP valuation method applied to determine its value. Different IP valuation methods may arrive at widely variant IP values for the same IP asset. Presently, there is no authority to confirm that an IP valuation is reliable and consistent with other similar valuations. This inconsistency and lack of reliability of IP assets value raises several obvious problems in the context of IP transactions. It further has an effect upon global markets, as IP value is a critical category of corporate worth.
Several notable and learned groups have recognized this problem and have tried to establish a single IP valuation standard. Such groups include the US Financial Accounting Standards Boards, the International Financial Accounting Standards Boards, as well as several other expert organizations. All of these initiatives have failed.
There are several elements that complicate the development of a single standard of IP valuation. First, the role of IP valuation is unclear. Is it a financial accounting tool? Accountants would say yes, but lawyers may say no. Second, IP valuation must involve the cooperation of multiple communities (e.g. the IP practitioners and commercial markets players) as well as a myriad of industry sectors. Each harbours individual interests. Third, IP assets come in a variety of types and some do not fit neatly within particular boxes of IP protection (e.g. an invention that only garners patent protection fits within the patent protection box) but spans multiple IP types so as to be capable of deriving several IP protections. Fourth, an inconsistent lexicon is applied to IP assets. This creates confusion about the scope of IP assets. For example, it is not unusual for two parties to talk about the same IP asset using identical terms, but each attributing very different meanings to these terms. These hurdles are but a few of the reasons why a single IP valuation standard has not been achieved, despite great efforts previously directed at such an outcome.
The global recession has refocused a spotlight upon the critical need for consistency in the field of IP valuations. As markets fluctuate wildly, the value of IP assets has been under scrutiny by corporations looking for means to establish their value. Headlines decry the state of IP value decay: “Stock markets wiped $22 trillion off intangible asset values in 2008;” “IP more important than ever in M&A deals, new research claims;” “Intangible values collapse – the old 70% to 80% claim is now officially dead and buried.” The corporate and IP communities agree that some form of standardised IP valuation framework is required for a number of important ends: to achieve consistent IP valuations; to minimize unethical and incompetent valuations; to define requisite valuator knowledge; and to provide a basis for clients and users to form expectations for IP value.
Due to past failures, it is generally acknowledged that another initiative to establish a single standard of IP valuation is not worth pursuing. Instead, recent proposals favour a joint effort of the IP valuation community and other stakeholders (e.g. the business and legal communities, regulatory groups, capital markets, etc.). In particular, Dr. Patrick Sullivan, a pioneer of intellectual asset management strategies, suggests that the IP valuation community should work to improve the quality and consistency of IP valuations and IP valuation reporting. Other stakeholders can then develop and codify their own IP valuation standardization needs based upon the IP valuation community’s activities. Thus, the IP valuation standards will be a framework created and sustained through cooperation of the communities affected by IP valuation, each having individual, but complimentary roles.
IP lawyers and corporate lawyers should be aware of the fact that a formal IP valuation framework may be implemented shortly. In practical terms, this means keeping eyes and ears open to news of a new IP valuation framework. This is critical as the new IP valuation framework may not be introduced with grand fanfare, as there is presently no established organization that will herald the event. Instead, it may be brought into being in increments. By remaining alert, lawyers will be sure to service their clients’ IP valuation needs in a manner that provides the most reliable and consistent pronouncement of IP value possible, in accordance with IP valuation tools as they are made available.