Intellectual Property: Valuation, Exploitation, and Infringement Damages / Edition 4

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This book is designed to simplify the process of attaching a dollar amount to intangible assets, be it for licensing, mergers and acquisitions, loan collateral, or investment purposes. It provides practical tools for evaluating the investment aspects of licensing and joint venture decisions, and discusses the legal, tax, and accounting practices and procedures related to such arrangements; examines the business economics of strategies involving intellectual property licensing and joint ventures; and provides analytical models that can be used to determine reasonable royalty rates for licensing and for determining fair equity splits in joint venture arrangements.

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Product Details

  • ISBN-13: 9780471683230
  • Publisher: Wiley
  • Publication date: 4/15/2005
  • Edition description: New Edition
  • Edition number: 4
  • Pages: 888
  • Product dimensions: 7.30 (w) x 10.14 (h) x 1.57 (d)

Meet the Author

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 institutions, 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 Singapore Management University and conducted seminars for the IP Academy (Singapore), the Chinese government, the U.S. Treasury Department, numerous private organizations and corporations, 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 for books, published by John Wiley & Sons, Inc., titled: Corporate Valuation: A Business and Professional Guide;Trademark Valuation; Valuation of Intellectual Property. 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 Associates ( 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 royalty rate studies for communications technology, pharmaceuticals, semiconductor process and product technology, automotive battery technology, lasers, agricultural formulations, biotechnology, 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 testified 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 bachelor of science in electrical engineering, from Rutgers University (1976); coursework toward Ph.D. in the International Business Management Program at Rutgers University. His Professional designations include Chartered Financial Analyst (CFA) from the Association for Investment Management and Research and Accredited Senior Appraiser (ASA) of the American Society of Appraisers.

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 edition: 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 book published by IPRA, Inc. Include: Royalty Rates for Pharmaceuticals and Biotechnology, fifth edition; Royalty rates for Technology, third edition; and Royalty rates for trade-marks and Copyrights, Second edition.

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Read an Excerpt

Intellectual Property

By Gordon V. Smith

John Wiley & Sons

ISBN: 0-471-68323-X

Chapter One


Intellectual property is the central resource for creating wealth in almost all industries. The foundation of commercial power has shifted from capital resources to intellectual property. In fact, the definition of capital resources is shifting. No longer does the term "capital resource" bring to mind balance sheets of cash or pictures of sprawling manufacturing plants. Capital resources are now dominated by intellectual property such as technological know-how, patents, trademarks, copyrights, and trade secrets.

Corporations once dominated industries by acquiring and managing extensive holdings of natural resources and manufacturing facilities. Barriers to entry were high because enormous amounts of fixed asset investments were required to displace well-entrenched players. Today companies that once dominated industries are finding themselves fighting for survival. Upstart companies are creating new products and services based not on extensive natural resource 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 businesses and careers; a significant 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.


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, but the creativity has always been there.

In the world before the Industrial Revolution, early humans moved away from a hunter-gatherer economy to an agricultural based economy. Early humans roamed across large expanses in search of animals to hunt. Self-sufficiency dominated this model. A major shift occurred when early humans decided to stay in one place and grow the materials needed for survival. As an enterprise, agriculture employed virtually everyone in the world and used them in a series of repetitive tasks, done sequentially every season: preparing the ground, seeding, tending, harvesting. Then the cycle was repeated. In the agricultural paradigm, the amount of sun, rain, and temperature were vital to a successful season. People became accustomed to dealing with cycles measured in terms of days and seasons. Most farms were small and capable of supporting only one family, reinforcing humankind's desire to be self-sufficient. Over time, however, it became clear that the agricultural society was constrained by two key elements: labor and land. Farming at a higher level of output-above mere subsistence-required more land and more labor. Expansion of the agricultural economy required collective work and abandoning elements of self-sufficiency.

The Industrial Revolution created a new paradigm. Fueled by a worldwide affluence and an expanding population, the Industrial Revolution was triggered by technology and the realization that some products could be mass-produced and sold much more cheaply than similar handcrafted products. The new paradigm of economic behavior evolved into one requiring large amounts of capital for the purchase of buildings, machinery, and equipment. Companies were formed to raise the needed capital, and individualism took another step backward. The new companies soon learned not only that the cost of producing their goods meant controlling the manufacture of products, but also that vertical integration enhanced cost controls and profits. Soon large companies were acquiring the suppliers of coal, suppliers of rail transportation, and finally the retailers that sold the manufactured products. The new megacompanies sought to become entirely independent with regard to all of the functions required to obtain raw materials; produce subassemblies, component parts, and finished goods; and retail them to the consumer. Self-sufficiency once again stirred but this time the collective took the shape of megacompanies.

Today, the Intellectual Property Age is on us. Although the new paradigm is yet to be played out fully, clearly the trend again continues away from independence and toward a vital need for the talents of others. Interdependence is at the root of the paradigm shift that is taking place. Technology management in the future will center on leveraging technology that is owned to gain access to technology that is needed. Sharing technology is a concept many will find difficult to accept, but accept it they must. As Denis Waitley writes in Empires of the Mind, "The leaders of the present and the future will be champions of cooperation more often than of competition. While the power to maintain access to resources will remain important, 'the survival of the fittest' mentality will give away to survival of the wisest, a philosophy of understanding, cooperation, knowledge, and reason." Access to vital resources has changed because fixed material assets no longer make up the most important resources. Gaining access to technology means cooperating with other companies, even competitors, in order to gain access to their knowledge-based resources. Independence is again being replaced by interdependence. Waitley succinctly explains, "The future leaders will only get what they want by helping others get what they want."

Part of the changes brought about by intellectual property has been the creation of new institutions and ways of doing business.

The mix and makeup of the intellectual property that supports us is continually changing, for example, the Internet, itself resting on communications technology, computer power, and software, enabled by the extreme proliferation of personal computers. The Internet has reminded us 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. We could send these very words almost anywhere in the world with a few mouse clicks. Once done, that action would remove this document from our control, save for the intellectual property legal structure that is in place to enable us to retain rights to this creation and exploit it ourselves or to transfer some or all of those rights to another.

This explosion of intellectual property has led to conflict. One of the buzzwords in the technocratic world is convergence. As an example, the difference between a telephone instrument and a computer was once very clear. Now a cell phone can function as a minicomputer (and a digital camera as well!), and we can use our personal computers to communicate. Once, all of the intellectual property connected with telephony: patented and unpatented technology, copyrights and trademarks, was separated by commerce and fields of use from all of the intellectual property connected with computers. That is no longer the case, and these bodies of intellectual property, and the companies that own them, more frequently collide as they protect their rights. To add another dimension, we can understand that a body of technology or a trademark developed and residing in China could have, for many years, peacefully coexisted with confusingly similar intellectual property in Germany. No longer. There has been geographical convergence as well.


On September 5, 1787, the Committee on Detail reported to the Constitutional Convention that Congress should have the power "to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries."

That recommendation was unanimously adopted without recorded debate, and the provision was incorporated into the final draft of the Constitution. Such a constitutional clause is highly unusual in that it instructs Congress how to promote the progress of the useful arts-namely by securing to inventors the exclusive rights to their discoveries. It is even more unusual in that nowhere else in the Constitution is there any provision for an exclusive right to be granted to any individual or group of individuals; only authors and inventors are so blessed.

America was not the first nation to recognize special rights for inventors.

The patent institution was established by the medieval Venetian state, which articulated the basic feature of the law today: spur innovation through the incentive of limited-time exclusivity by demanding the demonstration to the public of a working model and promising to seize and destroy counterfeit product. Patent rights arise because inventing is an expensive process and costs must be recouped to provide incentives to invest. If others can cheaply appropriate an inventor's innovation, calling it their own without having invested time and energy in it, investments in innovation will not be made.

... Venice institutionalized the right of patent in 1474 in a statute that contained all the main features of contemporary patent law, including requirements that the device be novel, be actually constructed (reduce to practice in modern jargon), and be made public. It also required that it be examined (although the examination was rather informal), that there be term limits to exclusive rights, and that there be remedies for infringement. Finally, the Venetian statute declared that the inventor must teach others how the invention worked and be granted exclusivity in return. ... France, the eighteenth-century textile manufacturing center, also relied on the patent to promote manufacturing innovation and the state itself. The first design patent statute, established by the silk manufacturing guild to encourage creativity within its ranks, was enacted in 1711.... British settlers in the New World brought the English patent practice with them, writing laws in Massachusetts (1641), Connecticut (1672), and South Carolina (1691). As the new nation established itself Thomas Jefferson "set the course for the US patent institution when he authored the 1793 Patent Act."

Many important inventions were first discovered and developed by small companies and inventors who sought personal success: for some as wealth, for others as fame. Without the patent system, likely we would not have the economic power that we enjoy nor the quality of life we cherish. The Continental Congress had in mind the creation of a country and system of self-government like none ever tried before-a system that protected the rights of individuals above all else, a system where the governing body had only the powers granted to it by its citizens. The protection of the fruits of inventive energies seems a natural extension of the Miracle at Philadelphia. Economic prosperity and military strength were imperative for the new experiment to work. By stimulating and encouraging innovation, the United States has achieved economic prosperity that all other systems of government can only envy. Probably the first international recognition of the eminence of American invention came at the Crystal Palace Exhibition in London in 1851. The London Times said, "It is beyond all denial that every practical success of the season belongs to the Americans."

And about the turn of the twentieth century, a Japanese official, Korekiyo Takahashi, was sent to the United States; he subsequently reported, "We have looked about to see what nations are the greatest, so that we can be like them. We asked ourselves, 'What is it that makes the United States such a great nation?' and we investigated and found that it was patents, and we will have patents."

Despite the Japanese appreciation of the U.S. patent system, attitudes have not always been favorable toward patents. Patents grant exclusivity, and antitrust laws work to eliminate monopolies. For quite a while, these two were seen to be in conflict. Licensing limitations by patent owners and the acquisition of similar patents by a single company were seen as restrictive to a competitive economic environment. Liberal attitudes about infringement diminished. Patent rights and the U.S. Treasury Department blocked acquisitions involving keystone patents and trademarks.

New thinking sees U.S. intellectual property laws as a complement to the encouragement of a competitive environment. The Justice Department is more likely than ever to see intellectual property rights as enhancements of competition. First, patent laws create an incentive for companies to research, develop, and commercialize new products and services that can be delivered in a more efficient manner. In addition, the laws encourage the disclosure of information that otherwise would be jealously guarded. Through licensing, this information can be shared and exploited in the most efficient manner. Patent values are again enhanced by this thinking because licensing decisions and limitations are not automatically seen as restrictive and conflicting with antitrust laws. Royalties go hand in hand with value.

Strengthening legal protection around the world for all other intellectual properties, such as trademarks and copyrights, provides similar benefits to these assets and supports high values.


Excerpted from Intellectual Property by Gordon V. Smith Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents



1. Intellectual Property and Intangible Assets in the World Today.

2. Defining Intangible Assets and Intellectural Property.

3. Defining Intangible Assets and Intellectural Property—Tradmarks.

4. Intangible Assets and the Business Enterprise.

5. Accounting Issues.

6. Tax Issues.

7. Valuation Principles and Techniques.

8. Cost Approach.

9. Market Approach.

10. Income Approach: Quantifying the Economic Benefit.

11. Income Approach: Timing  and Pattern of Receiving the Economic Benefit.

12. Income Approach: Evaluating the Risk of REceiving the Economic Benefit and Putting It All Together.

13. When Theory Meets Practice.

14. Special Valuation Situations.

15. Early-Stage Technology Valuation.

16. International issues.


17. Emergence of Intellectual Property Exploitation Strategies.

18. Introduction to Exploitation Strategies.

19. Introduction to the History and Economics of Legal Limits on Licensing Intellectual Property Rights.

20. Economic Contributions of Intellectual Property.

21. Global Exploitation Potential.

22. Risks of Exploitation.

23. Use of the 25% Rule in Valuing Intellectual Property.

24. Licensing Economics and Royalty Rates.

25. Determining a Royalty Rate—An Example.

26. Dealing with Early-Stage Intellectual Property.

27. Tradmark Licensing.

28. Licensing Negotiations and Agreements.

29. Licensing Internet Assets.

30. Another View of Licensing Strategies.

31. Joint Venture.

32. Unversity Technology Transfer.

33. Organizing for the Future.

34. Monitoring License Agreements.


35. Lost-Profit Calculations.

36. Royalty Rates and the Georgia-Pacific Factors.

37. The Analytical Approach.

38. Discounted Cash Flow Analysis.

39. Market-Derived Royalty Rates.

40. Monetary Relief in Trademark Litigation.

41. Estimating Damages for Infringement of Agricultural Biotechnology-Derived Products.

42. A Review of Court-Awarded Royalty Rates in Patent Infringement Cases (1990-2001).

43. Trademark Damage Trends in the Federal Circuit (1982-2001).

44. Recent Decision: Copyright Infringement Damages Can Be Based on Value of Licenses.

45. Trade Secret Damages.


Appendix A: Investment Rate of Return.

Appendix B: Theoretical Foundations for the Determination of a Fair Rate of REtuen on Intellectual Property.

Appendix C: The Use and Abuse of Iowa Curves When Quantifying Appraisal Depreciation.

Appendix D: Financial and Business Information Sources.

Appendix E: Sample Royalty Rates Information.

Appendix F: Overview of New Product Diffusion Sales Forecasting Models.


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