Raymond Rath, Managing Director at Globalview, had his article published in the August/September 2018 issue of the Financial Valuation and Litigation Expert. The FVLE is a bi-monthly journal presenting views and tools from many of the leading experts in financial valuation, forensics/fraud and litigation services.
Ray’s article, Royalty Rate Estimation for Technology IP: Important Considerations, discusses issues which make royalty rate estimation based on historical royalty rates difficult. Key observations include:
Importance of Enforceable Intellectual Property (“IP”) Rights
For many technology companies, IP is a key driver of corporate value. Confirming the legal validity and the degree of protection afforded by IP rights is an important consideration prior to completing the acquisition of an IP intensive firm.
Reduced Availability of Patent Protection
Many parties cite the U.S. Supreme Court’s 2014 ruling in Alice Corp. v. CLS Bank International as evidence that software related patents will be more difficult to obtain and defend.
Creation of Patent Trial and Appeal Board (“PTAB”)
The PTAB was established by the 2011 Leahy-Smith America Invents Act. The PTAB provides an expedited process for parties to challenge the validity of a patent as either not being original or as being too obvious for a patent to be granted.
Possible Changes in Payment of Legal Fees
The 2014 U.S. Supreme Court decisions in Octane Fitness v. Icon Health & Fitness and Highmark v. Allcare Health Management System provide that discretion to award fees in a particular case are returned to the court that is most familiar with the matter. These cases lead to less risk of overturn of a fee award on appeal.
Possible Reporting Bias due to Materiality
Many databases with royalty rate information rely on information filed with the U.S. Securities and Exchange Commission. This data is typically “material” information with a significant impact of the filing company. Royalty rate databases may only reflect more significant IP with sizeable values. Less valuable IP would frequently not require disclosure.
Patents are subject to challenge and patent rights can be determined to be invalid. Royalty rates established before IP enforceability has been legally confirmed should reflect this uncertainty and a lower royalty rate would be expected. Royalty rates established by litigation where IP is determined to be valid would be higher due to the greater certainty regarding enforceability. (For more information, see Probabilistic Patents.