| Duncan Curley
McDermott, Will & Emery, London
E.I.P.R
Valuation of intellectual property and other intangible assets is regarded even by the parochial standards of some European intellectual property lawyers -as a highly specialist field, dominated by a relatively small number of well known and experienced practitioners. Pre-eminent amongst them is Kelvin King, one of the co-authors of this book. However, it would be a mistake to think that this book is confined to the finer points of valuation methodologies and concepts. What has been produced is of much broader application, setting the technicalities of intangible asset valuation in the overall context of the need to manage and exploit intellectual capital in today's business environment.
The management of intellectual capital has moved to the centre-stage of US corporate planning' and is now increasingly seen by both European businesses and governments as essential to maintaining competitiveness in the new knowledge-based economies of the twenty-first century. This book is therefore likely to be of interest to anyone in the business of intellectual property management, whether that person is a CEO of a small enterprise wishing to gain an appreciation of the value of intellectual capital, an officer in a university technology transfer department or an in-house legal adviser in a research based company depending on innovation for its future revenue streams.
The book contains a summary over-view of intellectual property rights, which is readable and user-friendly. It has been supplemented by 70-odd extra pages of detail in an appendix to the main work, for those requiring more particularity. Sykes and King then set the scene for the valuation chapter of this book with a section entitled "The Management of Intellectual Capital”, which contains some useful suggestions on how to manage intangible assets in a corporate setting, distilled into 11 principles. While a number of these are arguably management common sense, they have been dearly articulated by the authors and make the case powerfully that intellectual capital management should rarely be the exclusive preserve of an in-house legal function.
This section on valuing IP, while not for the faint-hearted, is liberally illustrated with relevant, comprehensible examples that illuminate the authors' explanation of the art of intellectual asset valuation.2 A fundamental tenet of valuation theory is that the value of any asset is the present value of the future economic benefits that can be anticipated to accrue to the owner of that asset.
The authors explain that there are three approaches to asset value: the cost approach, the marker approach and the income approach. The first of these the cost approach - involves simply assessing the replacement cost of the asset in question. The authors point out that this approach has very little to recommend it, in the context of the valuation of intellectual property.3 The second method - the market approach finds little utility in the valuation of intangible assets because of the lack of availability of a ready market for intellectual property rights, ,which are (in general) not developed to be sold, and when they are, the sale is often only one component of a larger transaction, the details of which are usually confidential to the parties to the deal.
The third approach - the income approach - examines the income-producing capability of the asset to be valued, i.e. one is looking to assess the present value of the cashflows anticipated to be derived (in the future) specifically from ownership of the intellectual assets of a business. The authors' favoured method for the predictive assessment of the future profits of a business (arising from ownership Of IPR) involves assuming that the intellectual property of that business (instead of being owned) is notionally sold to a third party and then licensed back. A calculation (based on turnover) for this theoretical licence then produces a hypothetical royalty stream, which can be capitalised (at an appropriate rate of return as to which, more later) to produce the value of the right to use the intellectual capital of the business. This "relief from royalty" methodology is so-called because the business which actually owns the intellectual assets is (in the real world) relieved from paying royalties for exploiting them. The authors point out that this method has the advantage that the notional royalty rate used in the valuation may be cross-checked against comparable royalty rates actually being paid by other businesses for licences of similar intellectual property.
In order to obtain a present day valuation for the intellectual property from a set of future cashflows attributed to the intangible assets of a business (which cashflows may have been driven out by means of the relief from royalty method, above), it is necessary to apply an appropriate discount to these anticipated revenues. This discount must be applied in order to reflect the risk that the predicted cashflows will nor be achieved. In the words of the authors, "£1 in your pocket today is worth more than £1 next year or the year after". The value of money to be received in the future, stated at today's value, and factoring in risk, is thus calculated by using a discount factor, or discount rate. It is in building an appropriate discount rate that the valuer's artistry comes into its own, since one is essentially doing one's best to predict the future. Despite the odd impenetrable mathematical equation (which, in fairness, only make an appearance in order to give robust completeness to the text), the authors describe lucidly the various risks which must be considered in arriving at a supportable discount rate, including (for example) interest rate risk and market risks.
An essential precursor to the exploitation of intellectual property is the due diligence process, and the authors have produced a comprehensive guide, explaining both the nuts and bolts of the process and the need (sometimes over-looked) to keep in mind an overarching rationale for carrying out an IP review. The case studies which feature extensively in this section provide useful real-life scenarios, allowing the reader to place an essentially forensic legal analysis in a business context.
Besides a detailed overview of intellectual property licensing, the authors have produced an interesting chapter on intellectual property securitisation and intellectual property asset as loan security. IP securitisation is one of those topics which surfaces from time to time in journals and in the newspapers, but it has never really featured as part of the meat and drink of European intellectual property transactional legal work. In an economic climate in which European technology companies are struggling to finance growth by traditional means,4 the authors’ foresight including what is a thorough and yet easily-digestible overview of this specialist subject is to be welcomed.
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John Reid
The CIPAJoumal, August 2003
Both authors are well-known in our professional world. John Sykes is a practicing solicitor and an Associate of the Institute. Kelvin King heads his own firm, Valuation Consulting, and also is an Associate of the Institute (Ed.: and a contributor to The Trade Mark Handbook). They bring formidable skills and knowledge to the subject of this book.
The introduction starts with quotes from Ian Harvey, CEO of BTG and Chairman of the UK Patent Office's IP Advisory Committee and from a 2002 PricewaterhouseCoopers/Landwell survey of UK Intellectual Property. Both bring home the severe, although decreasing, lack of understanding of IP despite the crucial importance of IP in the intangibles which nowadays are the critical assets determining success or failure.
John Sykes and Kelvin King's book has considerable overlap with "Building and enforcing intellectual property value: An international guide for the boardroom 2003", also reviewed by me in this edition of CIPA. But their book is aimed, and aimed successfully, at a more specific audience. A board member responsible for how IP and other intangibles are managed should have such a book always to hand. His or her professional advisers (accountants, tax specialists and IP specialists) should have read and understood every word and, where they consider that, for their situation, a different approach is proper than the one indicated in this book they need to marshal their arguments carefully. It would do no harm to their careers for people aspiring to such positions also to have read this book.
The book's chapters are: Introduction, The Management of Intellectual Capital; Understanding Intellectual Property Rights; Valuing Intellectual Property and Intangible Assets; Intellectual Property Due Diligence, with Case Studies; Securitisation and Loan Security; and Summary; with two Appendices: More on Intellectual Property Rights and Case Studies on Legal Rights.
The introduction sets the scene. The importance of the topic is brought out and the nature of the broad concepts dealt with in the book are explained: for instance the breadth of intellectual capital and the key principles of assessing value.
The second chapter, The Management of Intellectual Capital, is probably the most important as the rest derive their significance from recognising the messages from this chapter. Amongst a plethora of pieces of good advice I would highlight three. The first, which the authors place first in the strategic approach they recommend, is the need to develop and implement processes delivering risk control in relation to the intellectual capital of others. The second is explicit recognition that an IP right's value is what it adds to the product or concept absent the right. The third is the danger of not concentrating on the most likely winners and hence the need for regular reviews of whether each item of intellectual capital is delivering or is still likely to deliver, preferably supported by quantitative measures.
A criticism is again, see my other book review, that not enough emphasis is placed on having processes in place that encourage and monitor obtaining of broad-enough IP rights. The authors in their excellent chapter on due diligence give an example of a business based on a patent which turns out not to cover the products sold by the owner or those sold by the competitors. The implicit message is clear enough: good professional work is valuable. But that also needs to be reflected in how IP is managed. Review of work by a professional colleague is distasteful to many but should, I suggest, be recognised as a necessary feature of good IP management. The review could be of 1 out of eg 15 cases and/or only of cases recognised to be especially important.
The third chapter is where we, as practitioners, will be most at home: Understanding Intellectual Property Rights, 43 pages. This is supplemented by Appendix 1, 73 pages. There is the occasional wobble but they provide a good introduction to IP Rights. The reader would surely appreciate that expert advice would be needed on any particular commercial situation. That would help when considering the decision tree on page 390 with its first question, "is the subject matter excluded?". I would not want a non-expert deciding Yes on that simply on the words of the statute. I also would want to be reasonably sure that a potential patent would not leave competitors free to use an equally good alternative before going ahead with a patent application when I answer Yes to the last question, "Is it capable of commercial application?".
With the fourth chapter we are in territory where most of us are not at home: Valuing Intellectual Property and Intangible Assets. It is important to realise that many accountants would also not be at home. This is in part because of the mystique of intellectual property (or? its reputation for deadly dullness) and in part because what is normally assessed as not being open to reliable valuation runs the risk of being treated by accountants as not open to proper consideration. This chapter is an excellent exposition of how the problems with valuing can be solved or at least reduced to acceptable proportions. That the value turns on the purpose for which the valuation is wanted may remind us of the reply of "what answer do you want?" to the question of "what do 2 + 2 make?". It nevertheless just is true. Reading the authors' exposition of this and other aspects of valuation would help most of us in our professional work. Weare trying to obtain valuable IP rights for our clients, preferably the most valuable possible. Greater understanding of valuation would help us in this endeavour. Also we would be in a better position to provide input when our clients are considering options for exploiting IP rights.
The fifth chapter is on Intellectual Property and Due Diligence. I like the authors' division of the subject into positive and defensive; positive where the purpose is to identify rights which can be exploited to enhance the earnings of the business and negative where a business activity might be barred by rights of others. Such as exercise investigates the existence of rights, whether good title exists and, the most difficult, whether they can be enforced usefully. A lot can be learned from this chapter, particularly from it's case studies. Most of the hazards will be well know to most of us but I suspect that all of us would benefit from reading it.
The sixth chapter is on Securitisation and Loan Security. It states that it is an introduction and makes clear that this is a growing area. It provides a succinct analysis of the why and the how of such uses of IP rights. Page 120 in chapter 4 has an interesting table of .examples of debt financing supported by intellectual capital. The weighting towards copyright and trademarks shows the advantages of these rights compared with patents in terms of predictability and time scale.
The last chapter is a summary. It is very short but none the worse for that. The message is that managing intellectual property is a key task for companies. That message is in line with that from the other book I review, not surprising in that text horn ' PricewaterhouseCoopers/Landwell is quoted. This book makes a major contribution to this task in particular by showing how valuation techniques can be used in IP management.
I fear my recommendation is again that every practice should have this book.
Jeremy Phillips
Sweet & Maxwell
No-one is any longer in doubt that intellectual property assets are valuable, but the problem of pinning a specific value to a particular item of intellectual property). remains. Whether it is a matter of fixing a price for the acquisition or disposal of a right, of assessing its worth as security for a loan or indeed for any other purpose, the bridge between accepting that an IP right has a potential value and setting actual figures for that value must still be crossed.
The authors of this attractive, accessible work are well-equipped to assist the reader in comprehending the many issues which arise from IP exploitation and valuation. John Sykes, an experienced solicitor and a partner with Lupton Fawcett, has advised both IP owners and those who invest in them while Kelvin King, a partner in Valuation Consulting, is an enthusiastic and knowledgeable asset valuer. Between them they have made IP valuation a far more accessible subject than it is usually found to be. They have also provided a good introduction to IP exploitation, a subject which has always been accessible in the past but where it is not the legal and technical bits that confound readers so much as the common sense bits.
Following the brief but informative Introduction, the book pans out into two segments, the first consists of two chapters which address intellectual property rights management and the understanding of intellectual property rights in general. These charters are not intended to describe the law so much as to explain how the law affects intellectual property}' management. For this reason the text mentions the laws which govern not merely the United Kingdom but also Germany, the European Union, the United States, Australia and TRIPS as well as regional and international 61ing systems. If function of these chapters is to sensitise non-legal readers to the issues they must face in IP management, then they achieve that end rather well.
The second segment of the book consists of three far more substantial chapters which deal, respectively, with intellectual property valuation, due diligence and securitisation. The valuation chapter has its fair share of algebra, as do all books on IP valuation. In this regard I have often wondered whether, apart from the author, any of the book's typical readers really understand the form~13e which garnish a number of pages. I must confess that I do not and no-one who occupies my little corner of tube IP world seems to understand them either. One certainly never sees comments concerning the cogency or applicability of the formulae in law journal book reviews. However, it is well known that no chapter on IP valuation is complete without them and this book is no exception. The text which surrounds the algebra is however more accommodating. If this book does not actually provide a Do-It-Yourself Guide to IP Valuation, it does provide a basis upon which an IP rights owner should be able to instruct a competent valuation firm to conduct a valuation and, as importantly, to enable him to understand the cature and the utility of the results which that valuation yields.
The chapters on due diligence and securitisation are less formidable in terms of length, appearance and content. In practical terms they are also quite rewarding for the reader, Valuing one's own IP is a little bit like performing one's own open heart surgery-the risk of making a mistake is high and the results of even a small error can be potentially catastrophic. In contrast, many an IP manager or owner may now feel empowered by this book to have a reasonable go at doing his own IP due diligence or to pay a visit to a friendly financial institution and raise funding on the security of his intellectual assets. That this should be so is a tribute to the easy manner in which the authors introduces the IP manager (assuming him to be a first-time reader of this topic) to concepts which are simple in terms of principle even if they are difficult in terms of detailed content.
The book concludes with three case studies on legal rights which, though they serve their purpose, are a little on the short and dry side-particularly when compared with the case study which concludes the chapter on due diligence. A little more factual context, together with an opportunity for the reader to pit his wits against the authors rather than passively absorb their conclusions, will be welcome in this book's next edition.
Andrew Shindler
SJ Berwin
NLJ Book Review Suppliment, 18 July 2003
This book claims to provide the tools to examine the many situations that will require expert opinion and due diligence about the valuation, exploitation and creation of value for intellectual property and other intangible assets – “intellectual capital”. It is aimed at businessmen and those advising them.
This book is far more of a management book than a legal text. In that capacity, it will no doubt be a useful guide to businessmen – it is clear and well-written and full of interesting statistics, practical suggestions and examples.
It starts with a section on managing intellectual capital, most of which is fairly general or basic and should be well-known to all practicing intellectual property lawyers, such as the importance of good confidentiality agreements. It goes on to legally describe intellectual property rights, again this is basic, although it does have the advantage of covering just about every type of intellectual property right in one place.
The middle and largest section of the book deals with valuing intellectual capital. This contains much useful and probably new information for a lawyer, although for the sake of our negligence policies we would probably wish to leave detailed advice in this area to properly qualified experts.
This is followed by an excellent practical chapter on intellectual property due diligence which will be valuable to lawyers, particularly those of a junior or mid-level. This includes a section on licensing intellectual property rights which, although sound, is less detailed than one would have hoped for in a book on exploiting intellectual property rights (and may also be missed given its inclusion in the due diligence chapter).
Although not by any means a comprehensive legal text, this book will be a useful addition to a commercial lawyers library.
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