Valuing Intellectual Property in Japan, Britain and the United States

Ruth Taplin

• Publisher: Taylor & Francis
• Year: 2004
• eBook ISBN: 9781134296699
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

As over half the assets of many major companies are now intangible assets, there is an increasing need to assess more accurately the value of intellectual property (IP) from a wider interdisciplinary perspective. Re-evaluating risk and understanding the true value of intellectual property is a major problem, particularly important for business practitioners, including business analysts and investors, venture capitalists, accountants, insurance experts, intellectual property lawyers and also for those who hold intellectual property assets, such as media, publishing and pharmaceutical companies, and universities and other research bodies. Written by the foremost authorities in the field from Britain, Japan and the US, this book considers the latest developments and puts forward much new thinking. The book includes thorough coverage of developments in Japan, which is reviewing the value of IP at a much quicker pace than any other country and is registering ever-increasing numbers of patents in the course of inventing its way out of economic inertia.

1 Introduction

Ruth Taplin

As intellectual property (IP) becomes the main component of business activity, the need to value accurately and protect the IP becomes more compelling. Such valuation used to be the preserve of accountants and lawyers, but the expansion of importance in IP in all sectors of endeavours means that an interdisciplinary approach is required encompassing economists, accountants, lawyers, insurance and other financial service experts and experts in the electronics/IT field. Different sectors are developing their IP at different speeds and levels and according to a variety of aspects of IP. Therefore, valuation has become an even more complex exercise with the number of bisecting variables increasing, which calls for a more sophisticated analysis. Added to this is the cultural assessment of IP and the different stages of valuation. Inevitably, America, the largest economy in the world has been setting the standard which descended into chaos after the dotcom boom failed throwing into disarray all attempts at standardised valuation of IP which, some argue, was caused by misguided attempts at valuation by the financial world. Losing goodwill, which is known commonly as reputation, with respect to intangible assets can have disastrous consequences as shown by the Enron and Arthur Andersen debacles. Ethics, brand names and reputations can be the determinant factors to the buyers of a given product or service as well as other stakeholders in the company such as investors and partners. Japan, the second largest economy, is experiencing a concerted drive to innovate its way out of economic inertia. Government, university and private companies are all working together to reassess IP, its role in encouraging much needed innovation and bringing tens of thousands of unrealised ideas to fruition and licensing. In the first book Exploiting Patent Rights and a New Climate for Innovation in Japan,¹ we explain how the new government–industry–university partnership has been encouraging the establishment of Technical Licensing Organisations (TLOs) to promote innovative collaboration between universities and industry² through ‘Promoting University–Industry Technology Transfer’ (the TLO Law). Every issue, from employees’ rights to invention, to the applicability of medical practice and products for IP, to the role of entrepreneurship in creating value and the importance of brand valuation, are being reassessed and redefined.

In the US, where university–industry relations with regard to IP have been long established beginning with the all-important Bayh-Dole Act, influencing both Japan and Britain, there are new moves to understand and define the value of the inventions created at universities at the point of commercialisation. Terry Young of Texas A&M University, a recent past President of the Association of University Technology Managers of America, assesses the role of TLOs in closing the gap between University invention and industry need for inventions which is resulting in greater prosperity for the American economy. Within these essential transactions is the need to try to value accurately the resulting IP. This is pioneering work that needs more attention.

The latest developments in English (and European) patent law

The chapter, ‘Recent Developments in English Patent Law’, written by Anthony Trenton³ in the book Exploiting Patent Rights and a New Climate for Innovation in Japan considered, among other matters, developments in the law of construction of patents in England and anticipated that the approach to construction would be considered by the House of Lords at some stage. As a follow-up to this, it should be noted that the House of Lords has now given leave to appeal in Kirin-Amgen Inc. and Others v. Hoechst Marion Roussel Limited and Others, one of the cases reviewed in the chapter, and the appeal is expected to be heard in Summer 2004.

In the coming year or so, a bill amending the UK Patents Act 1977 is also expected. The expected contents of this bill have been outlined in the Government’s published conclusions following a consultation on the proposed amendments. The amendments will be of a miscellaneous nature. Among other things, the Act will be amended to provide that patents may be obtained for second or further medical uses of known substances or compositions, without being drafted in the ‘Swiss form’. The ‘discretion’ to allow or disallow amendment of a patent depending on the patentee’s conduct will be removed so that the only issues which will arise in amendment proceedings will be whether the amendment is allowable in patent law. Amendments will also be made to the provisions relating to compensation for employees’ inventions. In particular, while an employee will still need to show that the employer has received ‘outstanding benefit’ in order to obtain compensation, the benefit can be derived from the patented invention rather than just the patent itself as was previously the case. Amendments have also been proposed to the threat provisions in the Patents Act (it is a tort in the UK to threaten patent infringement proceedings unless justified). Finally, a procedure will be introduced whereby non-binding opinions can be sought from the Patent Office as to the validity of a patent (where there is a new argument which was not raised during examination) and infringement. The aim of this is to provide a cheap procedure which may avoid the need for full-blown litigation in some cases.

In addition, quite separately, a new streamlined procedure for patent litigation was introduced in England in April 2003. This procedure is available in cases where it is appropriate bearing in mind proportionality, the financial provision of the parties, the complexity of the case and the importance of the case. In contrast with the normal procedure, there will be no disclosure of documents, no experiments, all evidence will be in writing, cross-examination of witnesses will only be permitted on any topic where it is necessary and will be confined to that topic, the duration of the trial will not be more than one day and the date of the trial will be fixed to be around six months after the order for the streamlined procedure is made. It is early days at the moment and it is not clear what impact this will have; however, the patent judges have made it clear that they are keen to ensure that it is used in appropriate cases.

Perhaps the most dramatic changes afoot are still on the horizon. These are the proposals for a (European) Community Patent and the separate proposal for a unified litigation procedure in relation to existing European patents granted under the European Patent Convention. Currently, the position in Europe is that one may either obtain a national patent (from national Patent Offices) or obtain a European patent from the European Patent Office (EPO) under the European Patent Convention. In fact, upon grant, the European patent is a bundle of national patents, granted by the EPO which, subject to post-grant opposition at the EPO, have an independent life from each other after grant. The consequence is that under the current patent system if a patentee wishes to enforce its patents in several jurisdictions (or an alleged infringer defend patent actions in several jurisdictions) this can prove extremely costly, as well as, on occasion, resulting in the somewhat unsatisfactory position whereby courts in different jurisdictions come to different conclusions.

The two proposals on the drawing board are aimed primarily at cutting down on the expense of enforcing patents in multiple jurisdictions in Europe and the uncertainty and inconsistency that can result from multinational litigation. The proposed Community Patent would be a single patent, to be applied for through the EPO, covering the entire European Union. Proceedings would (from 2010) be brought in a single Community Patent Court based in Luxembourg, with an appeal to the Court of First Instance, also in Luxembourg. The court would be able to revoke the patent community-wide, and also order pan-European injunctions. The proposal had, at one stage, seemed to be faltering as agreement could not be reached in relation to jurisdictional issues and the need for translations. However, in March 2003, a common general approach was arrived at whereby the proposal for a Community Patent Court based in Luxembourg was agreed upon and it was agreed that the patent could be filed in one of the three languages of the EPO (English, French or German) and that, upon grant, the claims of the patent would have to be translated into all other languages of the EU. Nevertheless, as well as being likely to be expensive, this latter part of the agreement is leading to further diplomatic difficulties. In particular, at the Competitiveness Council of Ministers in November 2003 agreement could not be reached on the Regulation creating the Community Patent due to disagreements relating to the period for filing the translations of all the claims. Some Member States want the translations to be filed within three months of grant, others want them filed only within two years.

In the meantime, the European Patent Litigation Agreement (EPLA) is well advanced, at least in terms of agreement. The signatories to the agreement would commit themselves to a unified judicial system for dealing with litigation relating to European patents. It envisages the creation of a European Patent Court with a central chamber (the site of which is undecided) and regional chambers, which would have the power to revoke European patents across all designated states which are signatories to the agreement and to rule on infringement. The European patent would thus cease to be a bundle of national patents in the signatory countries but would become akin to a unitary patent. However, while the agreement is well advanced, some states have taken the view that it is incompatible with the Community Patent and that if the Community Patent goes ahead the EPLA should be shelved. While there is, arguably, room for both (particularly as the EPLA may have a useful transitional role during the initial period when a lot of European patents will be in force and not many Community Patents will have been granted), it does seem likely that only one of the proposals will come to fruition. If the Community Patent can overcome the difficulties with translations, then it will be a real prospect, otherwise it seems probable that the EPLA will be the route taken. Either way, it is likely that by the end of the decade we will have a unitary litigation procedure of some kind in Europe. Such a procedure may follow the example set by the current quest to find an International Accounting Standard that will suit the whole of Europe.

The first consideration in assessing the importance of valuing IP and the awareness that IP needs to be protected as the risks and sums involved are becoming greater from different perspectives, is to understand the current swing towards intangible assets, the explosion of interest in valuing IP and the understanding that IP needs protection because the risks and sums involved are becoming greater.

Taisuke Kato, General Manager of Toshiba IP Division Corporate Headquarters in Tokyo, notes how Toshiba understands the importance of placing a value on IP. In developed economies, the migration from manufacturing to services is paralleled by a shift in asset evaluation from physical assets to intangible assets. A well-known example of this, according to Taisuke Kato, is the estimate that two-thirds of the market capital of listed companies in the US can be accounted for by intangible assets, including IP.

While there is increasing discussion on how best to value IP, a unified methodology has yet to emerge. The market value method has its supporters, as it tries to consider not only present royalty streams but also possible future royalty income. However, there remain difficulties in evaluating certain IP assets, particularly future potential. Toshiba is now looking at promotion of a system of relative evaluation that measures their strength in IP against that of their competitors. The consideration here is quantity against quality. Quantity can easily be determined, quality is more problematic, but possible to some extent.

One area where Toshiba has successful IP valuation is the three-tier incentive system that they use to encourage and reward innovation among their researchers and engineers. The first tier is transfer remuneration, under which an inventor can receive as much as 15,000 yen for transferring an idea to Toshiba. Business remuneration is paid if and when that invention is used in product, and licensing remuneration is paid from any licensing income Toshiba might receive for IP. The latter two incentives depend on the market and the extent to which the IP is utilised. Every year, they arrive at a value for productive IP by calculating how much it contributed to actual sales and earned in royalty income. This gave them the basis for open-ended business and licensing remuneration incentives. As a result, there are many cases of engineers receiving IP remuneration of over US$10,000 a year.

Measuring quality, therefore, in terms of value, is another facet of the complexity in valuing IP. This is especially so when intangible assets become the lifeblood of a company and this is also dependent upon the sector.

At an address to Nippon Kyoiku Kaikun, Hitosubashi University, Ian Lewis,⁴ notes how the value of IP within the form of intangible assets has become the key driver of business wealth. He compares the list of companies making up the Fortune 500 in 1975 and then 1995 to find that, in just 20 years, a relatively short space of time for companies of that size, 60 per cent of the companies in 1975 have been replaced. Behind this statistic is a dramatic point. In 1975 the market value of these companies accounted for over 60 per cent of that value in terms of tangible assets, which are the physical objects those companies owned and listed in their balance sheets. By 1995, tangible assets accounted for less than 25 per cent, a reduction of 35 per cent, making intangibles comprise more than 75 per cent of the total values of these companies. The bulk of the intangible assets consists of IP, showing that in a relatively short space of time IP has assumed great commercial and economic significance.

Standardisation

Although all businesses own IP, depending on the type it can become the most important asset of the business. The telecommunications, IT and electronic sectors depend on their ability to patent and copyright their products and software. Richard Fry of TTPCom notes that in his business there are several different types of IP that rely on both patent and copyright. The wireless industry is necessarily driven by standards and the most successful ones are open (in fact they are successful because they are open). Having IP in the standard can be very valuable since, by definition, everyone has to use it, the so-called Essential IPR (intellectual property rights). TTPCom has built a business in licensing IP into the wireless industry beyond Essential IP. This IP can take the form of semiconductor device designs, software or even the design of complete terminals.

Some of the IP TTPCom creates can be novel implementations of the standard. This can, for example, be an idea of how to implement a part of the standard more efficiently. Here, there is some creative or technically difficult step that is needed and the resulting IP has value to their customers in terms of allowing them a more competitive product–for example one which can achieve the same performance on cheaper silicon or at lower power. In general, this IP has relatively short life (typically a few years) so these are rarely patented–simply relying on time to market and technical complexity for protection. With 400 million cell phones being manufactured each year the value of this sort of IP can be quite large if it makes significant savings in component costs.

Another form of IP used by TPPCom is simply the timely implementation of the standard and this applies particularly to software. Here, their customers are simply using the companies to enable them to get to market quicker. However, it could be argued that anybody can get access to the standard and implement it, and with many software developers living in relatively low-wage economies the value of this software ought to be quite low. Fry notes that, fortunately for TPPCom, the value of the software is increasingly in its maturity. With GSM networks now migrating to GPRS, EDGE and 3G and being deployed in 200 countries with more than 500 operators using equipment from 10 different vendors, the scope for interoperability problems is huge. Increasingly, real value is becoming attached to this real-world experience and customers are prepared to pay for it to ensure that their terminals do get into the market quickly and reliably. This is an unusual but valuable form of IP.

This latter form of IP is, of course, not so easy to protect by patent–it is normally protected by copyright and of course, since standards and the network implementations are constantly evolving, by being quick to respond to these.

Brand creates tremendous value as witnessed by many well-known named companies such as Coca Cola, Microsoft or Boeing. It is important in all countries, as shown in Chapter 8 of this book, where Akito Tani examines and explains the 140-page METI (Ministry of Economy, Trade and Industry) report that assesses the possibility of an objective valuation for brands.

Tony Samuel of PricewaterhouseCoopers⁵ notes that particular problems arise for accountants; financial statements are of limited use to users when considering the value of a company’s IP. Only the acquired IP is on the balance sheet, not the internally generated IP.⁶ Therefore, if Coca Cola was to acquire Pepsi (an unlikely scenario), it may feasibly have a value for the brand name Pepsi on its balance sheet, but not a value for Coca Cola. The IP is also shown at acquisition cost, not value. Samuel points out that, while the two were arguably the sam...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contributors
• Preface
• Acknowledgements
• 1: Introduction
• 2: Technology transfer from US universities: The need to value IP at the point of commercialisation
• 3: The role of entrepreneurship and venture businesses in redefining the value of intellectual property in Japan
• 4: Understanding how IP is valued in Japan in relation to medicine
• 5: Intellectual property litigation, liability insurance, issues and solutions
• 6: Protection of intellectual property value/revenue and the insurance solution
• 7: Standardisation and patent pools in Japan: Their effects on valuing IP and limits under competition law
• 8: Redefining brand valuation within the Japanese context
• 9: Japanese patent publications as a source of information
• Appendix: new challenges for the Japanese national universities in the IPR management and spin-off ventures