I NTELLECTUAL P ROPERTY V ALUATION , E XPLOITATION , AND I NFRINGEMENT D AMAGES G ORDON V. S MITH R USSELL L. P ARR JOHN WILEY & SONS, INC. I NTELLECTUAL P ROPERTY I NTELLECTUAL P ROPERTY V ALUATION , E XPLOITATION , AND I NFRINGEMENT D AMAGES G ORDON V. S MITH R USSELL L. P ARR JOHN WILEY & SONS, INC. This book is printed on acid-free paper. Copyright © 2005 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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For Nancy Bunker Smith, my wife and partner of nearly five decades, and for the wonderful family we enjoy so much, Craig and Susan, Tracy and Lee, Sam, Carlye, Molly, and Jamie. BECOME A SUBSCRIBER! Did you purchase this product from a bookstore? If you did, it’s important for you to become a subscriber. John Wiley & Sons, Inc. may publish, on a periodic basis, supplements and new editions to reflect the latest changes in the subject matter that you need to know in order to stay competitive in this ever-changing industry. By contacting the Wiley office nearest you, you’ll receive any current update at no additional charge. In addition, you’ll receive future updates and revised or related volumes on a 30-day examination review. If you purchased this product directly from John Wiley & Sons, Inc., we have already recorded your subscription for this update service. 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Box 1226 Milton, Queensland 4064 AUSTRALIA Phone: 61-7-3859-9755 Fax: 61-7-3859-9715 Email: brisbane@johnwiley.com.au John Wiley & Sons (Asia) Pte., Ltd. 2 Clementi Loop #02-01 SINGAPORE 129809 Phone: 65-64632400 Fax: 65-64634604/5/6 Customer Service: 65-64604280 Email: enquiry@wiley.com.sg Update Service vii ABOUT THE AUTHORS Gordon V. Smith is chairman of AUS, Inc. and president of AUS Consultants. He has advised clients in valuation matters for over 40 years. His assignments have included appraisals of nearly every type of tangible and intangible property as well as consultations relative to royalty rates, economic life, and litigation damages for intellectual property. Clients have been many of the Fortune 500 and major international law firms, as well as research and educational institu- tions, regulatory bodies, and the U.S. government. Mr. Smith, a graduate of Harvard University, has lectured on valuation subjects throughout the Americas, in Europe, and extensively in Asia. He has taught university-level courses at Sin- gapore Management University and conducted seminars for the IP Academy (Singapore), the Chinese government, the U.S. Treasury Department, numerous private organizations and corpo- rations, and has lectured in various countries for the World Intellectual Property Organization. He is a member of the Advisory Committee on Intellectual Property and Board of Trustees of Pierce Law, whose intellectual property curriculum is nationally recognized. He is also an adjunct professor there and a regular guest lecturer. An active member of the International Trademark Association, Mr. Smith is also a member of the Licensing Executives Society. His writings include many professional papers and articles that have appeared in publications here and abroad. He has authored four books, published by John Wiley & Sons, Inc., titled: Corporate Valua- tion: A Business and Professional Guide; Trademark Valuation; Valuation of Intellectual Prop- erty and Intangible Assets (coauthor); Intellectual Property: Licensing and Joint Venture Profit Strategies (coauthor), and has contributed to several other Wiley intellectual property and tax reference books. Russell L. Parr, CFA, ASA, is president of IPRA, Inc.—Intellectual Property Research Asso- ciates (www.ipresearch.com). He is an expert in determining the value of intellectual property. Mr. Parr’s books about intellectual property value and management are published in Japanese, Korean, Italian, and English. He is dedicated to the development of comprehensive methods for accurately defining the value of intellectual property. Highlight assignments conducted by Mr. Parr have included the valuation of the Dr. Seuss copyrights and the patent portfolio of AT&T. Mr. Parr also has conducted valuations and roy- alty rate studies for communications technology, pharmaceuticals, semiconductor process and product technology, automotive battery technology, lasers, agricultural formulations, biotech- nology, computer software, drug delivery systems, medical products technology, incinerator feed systems, camera technology, flowers, consumer and corporate trademarks, motivational book copyrights, and cosmetics. His opinions are used to accomplish licensing transactions, acquisitions, transfer pricing, litigation support, collateral-based financing, and joint ventures. Mr. Parr has written 24 articles that have been published in various professional journals. He has spoken at over 30 conferences regarding the value of technology, including those sponsored by the World Intellectual Property Organization in Singapore and Lima, Peru. He also has testi- fied about the value of companies and intellectual property over 40 times at deposition, trial, or for arbitration. Mr. Parr has a master’s in business administration from Rutgers University (1981); a bache- lor of science in electrical engineering, from Rutgers University (1976); coursework toward Ph.D. in the International Business Management Program at Rutgers University. His profes- sional designations include Chartered Financial Analyst (CFA) from the Association for Invest- ment Management and Research and Accredited Senior Appraiser (ASA) of the American Society of Appraisers. viii About the Authors Among Mr. Parr’s writings are five books published by John Wiley & Sons and three books published by IPRA, Inc. His Wiley books include: Valuation of Intellectual Property & Intangible Assets, third edi- tion: Intellectual Property: Joint Venture and Profit Strategies, second edition; Intellectual Property Infringement Damages: A Litigation Support Handbook, second edition; Investing in Intangible Assets; and Corporate Strategies for Maximizing Value. His books published by IPRA, Inc. include: Royalty Rates for Pharmaceuticals and Biotech- nology, fifth edition; Royalty Rates for Technology, third edition; and Royalty Rates for Trade- marks and Copyrights, second edition. [...]... Intellectual Property Need for Intellectual Property Valuations Intellectual Property Exploitation Legal Attitudes Enhance Value When Intellectual Properties Collide 3 3 5 6 8 10 11 13 2.1 2.2 3 Defining Intangible Assets and Intellectual Property 13 21 Intangible Assets Intellectual Property 36 3.1 3.2 3.3 3.4 3.5 4 Defining Intangible Assets and Intellectual Property Trademarks 36 37 43 46 61 Trademarks... holdings or tangible property but on intellectual property resources Management of these properties will distinguish the winners from the losers in the decades ahead Intellectual property has attained an extremely important status within the fabric of our society and livelihood Enterprises, and even whole industries, are built on an intellectual property foundation We depend on intellectual property in our... 18.3 18.4 18.5 18.6 18.7 18.8 18.9 18.10 18.11 18.12 18.13 18.14 18.15 19 Economic Contributions of Intellectual Property 19.1 19.2 19.3 19.4 19.5 19.6 19.7 20 Intellectual Property Contributes Powerfully to Earnings Intellectual Property Sustains Superior Earnings Enhanced Profits and Intellectual Property Investment Rate of Return Analysis Discounted Cash Flow Analysis Comparable License Transactions... acquisitions are driven by intellectual property and since these assets dominate acquired companies, valuations for accounting statements are becoming common reasons for valuing intellectual property Regulatory Requirements Initial public offering (IPO) documents are more often referring to the importance of the intellectual property of the company that is 8 Ch 1 Intellectual Property and Intangible Assets... having access to intellectual property Without intellectual property, profits are low, growth is lacking, and corporate value is lost Corporate managers realize more than ever that access to intellectual property is key to their ability to create corporate value and, more important, key to continued corporate survival The forces driving the licensing and joint venturing of intellectual property include... once again how moveable and perishable intellectual property can be Intellectual property, unlike other forms of property, is not described geographically Even in the beginning, the skills of a craftsman moved with him and those he taught, wherever their inclinations took them Movement was slow, however, dependent as it was on human footpower Now, intellectual property moves instantaneously and globally... the world for all other intellectual properties, such as trademarks and copyrights, provides similar benefits to these assets and supports high values 1.3 NEED FOR INTELLECTUAL PROPERTY VALUATIONS Intellectual property has become part of every aspect of life As a result the reasons for valuing it encompass all aspects of our society We have been called on to value intellectual property for some of the... 28.3 29 Defensive Strategies Cost Centers Profit Centers Integrated Management Visionary Intellectual Property Management Making the Big Bucks Intellectual Property Touches all Aspects of Life Intangible Assets at the Center of Deals E-Commerce and Intellectual Property Specific Trends in Intellectual Property Deal Making Trademark Strategies Intangible Riches Joint Venture 30.1 30.2 30.3 30.4 30.5 30.6... to intellectual property exploitations Dr John A Del Roccili of Econsult Corporation in Philadelphia always brings sharp insight into our discussions, and we appreciate his appendix contribution ix CONTENTS Preface P ART I 1 V ALUATION 1 Intellectual Property and Intangible Assets in the World Today 1.1 1.2 1.3 1.4 1.5 1.6 2 xxiii Some History Legislation Created Intellectual Property Need for Intellectual. .. portion of us earn our living creating and maintaining intellectual property; we are entertained by it, educated by it, communicate with it, and are made and kept healthy by intellectual property 1.1 SOME HISTORY Intangible assets have been with us throughout human history It required a merger between innovations and the rule of law before intellectual property could be identified as a special form of intangible, . Intangible Assets and Intellectual Property 13 2.1 Intangible Assets 13 2.2 Intellectual Property 21 3 Defining Intangible Assets and Intellectual Property Trademarks. Economic Contributions of Intellectual Property 352 19.1 Intellectual Property Contributes Powerfully to Earnings 352 19.2 Intellectual Property Sustains Superior