Michael D. Moberly March 8, 2012
For starters, management teams, boards, and other business decision makers must recognize the economic fact that 65+% of most company’s value, sources of revenue, and building blocks for growth today evolve directly from intangible assets of which intellectual property is one.
It’s certainly correct to assume then, in most business transactions, e.g., mergers, acquisitions, strategic alliances, and venture capital initiatives, etc., intangible assets and IP will not only be in play, they will be very much a part of any subsequent deal and can have a significant influence on a deals’ outcome.
Transaction due diligence therefore should be ‘laser focused’ on achieving two key objectives:
- identify, unravel, and assess the status, stability, fragility, and defensibility of the targeted IP plus the underlying and contributory intangible assets
- ensure control, use, ownership, and value of those assets is sustainable and equally important, have the capability to monitor any/all fluctuations in asset value and competitive advantages in both pre and post transaction contexts.
Patents can obviously be significant sources of competitive advantage, value, serve as potent (defensive – offensive) weapons, and/or be leveraged in a relevant market space. This makes intangible asset and IP monitoring an essential component to any due diligence process. That’s because the (monitoring) findings can have a bearing, as noted above, on a transactions’ outcome in terms of how it may influence the relevant parties decision, i.e., invest – don’t invest, buy – don’t buy, etc.
Patents are widely presumed, sometimes naively so, to be the strongest form of IP protection because they:
- grant legal standing to exclude all others from making, using, selling, offering for sale, or importing the issued IP for a period of years.
- are assumed to deter bad actors from infringing, stealing, or misappropriating the patented subject matter.
With respect to the latter, there are global business realities that are routinely overlooked or dismissed regarding the real deterrent effect of issued patents. By definition, deterrence means inhibiting the behavior/conduct of others. That said, there are two types (levels) of deterrence.
The first one is referred to as general deterrence which, in the case of an issued patent, means that a vast majority of us, perhaps 95+%, would respect an issued patent and thereby be deterred from engaging in infringement, misappropriation, or theft of that IP.
The second one is referred to as specific deterrence, which again in the case of an issued patent, translates more as a question, i.e., what would deter the growing global cadre of infringers and legacy free players from continuing to engage in IP infringement, misappropriation, theft, product piracy-counterfeiting, etc.?
Unfortunately, seldom are either of these deterrence factors (realities) addressed in conventional, snap-shots-in-time, one-size-fits-all, check-the-box types of IP – intangible asset due diligence. The truth is, all forms of intangible assets (IP) are vulnerable and subject to being compromised, stolen, misappropriated, counterfeited, infringed, or have their competitive advantages illicitly undermined. The culprits, in addition to rising numbers of wily insiders, emanate from highly predatorial, sophisticated, and organized independent and/or state sponsored actors.
Today, it is prudent to assume the risks and vulnerabilities to any company’s intangible assets and IP to global economic – competitive advantage adversaries is persistent, asymmetric, and unfortunately, generally successful.
So, in today’s globally aggressive business (transaction) environment, relying solely on one of the several (common) formulas for calculating patent value must include, in my view, a very big ‘it depends’! If the calculation doesn’t incorporate this important caveat, it’s prudent to seek another, and perhaps more experienced valuator. In other words, correctly arriving at the value of a patent starts by finding competent practitioners well versed in not just IP, but intangible assets and the persistent and asymmetric risks and threats to those assets’ value and usefulness.
Absent the necessary currency of knowledge in not just the array of global risks to intangibles, but a comprehensive understanding how such risks will materialize, how such risks adversely affect (intangible) assets, and what additional safeguards are necessary to combat, counter, and/or mitigate those risks, it can be embarrassingly imprudent to assume asset value and competitive advantages will meet even the most gloomy projections.