Intellectual Property Valuation and Innovation

Towards global harmonisation

Ruth Taplin

• Publisher: Routledge
• Year: 2013
• Print ISBN:
  9780415532150
• eBook ISBN:
  9781134716890
• Topic: Social Sciences
• Subtopic: Ethnic Studies
• Index: Social Sciences

With the recent global economic crisis, attitudes and practices in relation to intellectual property valuation are changing as exemplified by the dichotomy explained in this book, which makes it unique. While there has been a move towards global harmonisation in terms of valuation of both tangible and intangible assets that are based on innovation, there is also a tendency against global harmonisation because of cultural attitudes and practices of different countries. This can be seen most acutely in relation to intellectual property valuation in Asia, especially East Asia, which often differs from the West's perception of valuation. The book is written by experts in intellectual property, valuation and innovation who are mainly practitioners covering innovators, marketers, accountants, social innovators and business and management academics. The breadth and practitioner background of most of the contributors make the material relevant to those involved in valuation, economics, business, management, accounting and finance, law and maritime insurance. This book takes an interdisciplinary approach that cross-cuts all the above-mentioned disciplines and takes the understanding of intellectual property valuation to a new level.

1 Overview and introduction

Ruth Taplin

Valuation

Valuation has always been a difficult concept and in my edited volume Valuing Intellectual Property in Japan, Britain and the United States¹ it became clear that valuation is an art not a science.

This is becoming more true with a move away in recent years from too rigid accounting standards or too lax ones such as fair value for insurance valuation and a move towards more flexible negotiation in tune with the economic climate. Valuation increases in complexity according to field such as residual value in the maritime industry or value attached to products and services in the financial services sector, whether it is tangible or intangible assets to be valued such as fine art or patent/trademark respectively and depending on the national, regional and cultural perceptions of value. What has emerged, which we will address in this book, is a dichotomy in which valuation, innovation and intellectual property (IP) are moving towards a global harmonisation while at the same time being limited in this direction by specific countries cultural practices.

There are many dimensions to the valuation of both tangible and intangible assets and the recent stresses that the banking sector put on capital markets through the fiasco of subprime lending and other questionable practices that distorted and then slowly but surely degraded the value of banking products had a knock on effect throughout the world economies leading to a shortage in liquidity and loans to businesses and for the housing market. This economic shock has led in this book to a re-visit of the subject of value in relation to not only tangible but also largely intangible assets and the processes of innovation that can be used to promote growth and re-balance economies. While a re-think is taking place as to what can add real value to both tangible and intangible assets it must be done within the context of some sort of global harmonisation, for national markets are becoming so interdependent through global business and banking that there is an imperative for ideas of innovation and valuation of both tangible and intangible assets on a global basis.

Tangible assets

If we begin with tangible assets such as objets d'art, the value is often in the eye of the beholder. Michael Findlay, for example, notes in his book The Value of Art: Money, Power, Beauty² that the valuing of fine art may be defined at three levels that are inextricably linked. These are the commercial level in which art is valued as an asset, the social level in which art is valued as a status symbol and the aesthetic level in which the value may be described as beauty in the eye of the beholder. The first is relatively quite straightforward in that the market price that the fine art can fetch determines its tangible asset value. The second has to do mainly with trends, with some art being valued socially at a higher level than other objets d'art at certain periods of time. Trends are often cyclical. As to the value that accrues to a piece of artwork depending on the individual tastes of the buyer, this is often completely random and is influenced by the psychology of the individual. Innovation is often involved in terms of fine art in, for example, a picture innovating in terms of style or form. Valuation in its tangible form can also occur within the global context of trade such as in the maritime industry.

In Chapter 6 Stephen Allum assesses residual value in relation to the maritime industry of shipping and shows how new ways of valuation must be forged for ship owners to plan in the future for, among other activities, buying new ships. The maritime industry, one of the earliest industries to operate globally on a cross-border basis to facilitate maritime trade, which constitutes 90 per cent of world trade, can teach us a good deal about innovation and valuation. Of all industries it is the maritime industry that can give us clues of how value is created, mainly in terms of tangible assets within the framework of global harmonisation.

Allum notes that when loans were used to buy assets, these loans pushed up the value of assets. This rise in the value of assets sparked yet more lending, which in turn pushed up asset prices further.

After 2007, with the impending financial crisis, assets depreciated and lending fell because ship owners were no longer able to pay their debts. Allum argues that this has led to a new paradigm, that of residual value.

Lease financing is an important tool for acquiring durable goods and it accounts for nearly a third of the new industrial and commercial equipment sold annually.

Generally, a lease contract transforms a risky new real asset into two components, a front-end financial asset with fixed periodic payments over a known term, and a back-end residual physical asset that covers its economic life beyond lease termination.

Therefore, the residual value refers to the expected value of the used physical asset at the end of the lease. The main source of uncertainty embedded in the back-end residual asset is the risk that the future market value of the underlying asset at lease termination will vary from the projected residual value. This price fluctuation is commonly known as residual value risk. A lease is thus a loan of a physical asset that depreciates over time: it exposes the lessor (lender) to not only default risk on the contractual lease payments but also to fluctuations in the lease-end residual value of the underlying asset.

Residual value risk is the greatest uncertainly in lease financing because forecasting residual value several years in advance is fraught with difficulty.

Intangible assets

As this form of valuation for tangible products can be so complex it follows that intangible assets of IP are even more sophisticated. However, in recent times valuation of IP has been further complicated by what some believe is the impending demise of copyright, perhaps trademarks and even patents. It may be argued that patenting is on the wane but it is perhaps more accurate to state that there are good patents and bad patents. The former will ensure the continuation of patents especially in sectors such as pharmaceuticals, which by necessity relies on patenting to protect the enormous sums needed for research and development (R&D) for new innovative products to be created. This does not mean however that even when patenting remains a good positive necessity, the form will continue to be the same. Moves towards open source and open innovation, which will be defined by Tim Jones of Future Agenda in Chapter 2, emphasise cooperation, which will mean more patent pools and other forms of knowledge sharing that may not involve intellectual property rights (IPR).

However, it may be seen in the case of the bankruptcy of a former world-leading firm Kodak that IP does retain its value and can be used for collateral purposes. In December 2012 Eastman Kodak sold its digital imaging patents to a consortium of bidders for US$525 million (£322 million). The company, which was a pioneer of photography, sold roughly 1,100 patents to pay off its creditors after it filed for bankruptcy in January 2013. Among those participating in the consortium led by Intellectual Ventures and RPX, who are both patent aggregators that dedicate themselves to buying and then licensing out rights to patents, included Samsung, Apple, Google, Amazon, Research in Motion (BlackBerry) and Chinese Huawei Technologies. Kodak decided to pull out of the digital camera business because, some argue, they did not exploit effectively development in this field, which allowed East Asian firms in particular to develop this area, taking the business from Kodak. Kodak has now exited bankruptcy and will become a much smaller digital-imaging company.³

What is certain is that the link between IP and innovation and the need for new forms of valuation to understand the true market value of intangible assets will not be diminished in the future anytime soon.

It is possible to see how innovation, IP and the need for more flexible, negotiated methods of valuation are required to deal with future ways of ascertaining market value for intangible assets, for services and the creation of products based on knowledge and information technology.

Good and bad patents?

East Asia, like the US and Europe, makes a conscious link between IP and innovation.⁴ These countries see that this linkage leads to economic growth and business success. This emphasis can be seen very clearly in the high-profile dispute between Samsung (which is a South Korean company) and Apple (which is US based). This dispute has led to the re-emergence of the underlying definition of what constitutes good and bad patents.

It is possible to argue that the patent system has failed in the Samsung-Apple case because it is monopolistic, which has bad connotations. This is because the patents involved award a limited duration to the inventor or those who have bought or own the patent. This means that the value is diminished for the inventor especially when the company they work for offers them a limited sum of money and then goes on to exploit the inventor's idea for vast sums of money. The consumer also loses in terms of value as the mark up is very high and not based on the quality and importance of the idea.

The patent, however, is both good and necessary because the inventor explains the details of the invention instead of keeping it secret for fear of not being given credit or remunerated properly. The patent is awarded in exchange for a monopoly for exploiting the invention.

Are many, including a number of inventive creative people, against patents because a lot of employees have to sign their rights to their invention away to the company? Or is it because inventors are rewarded directly but in lesser amounts than they deserve by the company? Without innovative and creative people there is no innovation, or the need for patents. When patenting deprives inventors of the rewards they richly deserve patents become a negative experience for the inventors. Conversely when it rewards and safeguards their ideas and livelihood then it becomes a positive experience. This is all part of the dual perspective of good and bad patents.

Employees rights to compensation

Japan was woken collectively in both the business and judicial world by the then unheard of case of an inventor suing his company from California where he took up residence after feeling cheated by not receiving proper remuneration for a groundbreaking invention. This was, of course, the Nakamura Shuji case in which he was instrumental as an inventor in developing the two-way light-emitting diode (LED) semiconductor, which glows blue when electricity is passed through it. This invention netted his employer Nichia Corporation a great sum of money through the invention becoming a 404 patent. Judge Shitara Ryuchi made one of the most important decisions in relation to patents and IPR in the history of the Intellectual Property Division of the Tokyo District Court in the form of a new employees rights to compensation law, which had not changed substantially in content since the Patent Law of 1960.

In awarding the inventor Nakamura Shuji proper compensation by taking into account that he created this invention himself and the actual invention was originally assessed negatively by a Nichia representative, Judge Shitara added value to the inventor's creative idea.

In calculating the compensation due to Nakamura Shuji, the Tokyo District Court itself decided that half of the sales amount was due to the exclusive right of the two-way invention; that the profit due to this patented invention would be calculated by multiplying half of the sales amount by 20 per cent, which is a hypothetical running royalty rate of the invention; and that US$1.09 billion was the amount of profit that Nichia obtained from the two-way invention. Nakamura settled with Nichia Corporation in 2005 for 844 million yen (US$8 million) as the Tokyo High Court overturned the decision of the District Court, which had initially awarded the inventor 20 billion yen (US$187 million). This made the Japanese Business Federation pleased as it realised that employees were not to be given too great a reward for their inventions that would become too costly for employers to afford. The Tokyo District Court found that Mr Nakamura was solely responsible for the invention, contrary to the statement issued by Nichia that the invention was a joint effort. The fact that Nichia had bought the invention for US$2.7 million and had assessed the potential value of the blue LED in a negative light, at one point even ordering Mr Nakamura to cease further research of this highly important invention was why the contribution to the employer was deemed to be only 50 per cent.⁵

The signs here were very clear that standard accounting methods such as royalty rate were too limited and rigid to assess the value of a highly important invention that had been at first incorrectly assessed negatively, then turning into a massive money-spinner for the corporation employing the inventor. The company would have fared much better if it had been flexible and negotiated with the inventor acknowledging the real value of his invention. What could have been a good patent became a toxic point of dispute that placed the employer in a negative light damaging its brand value. Value, as we shall see in this book, comes in all different forms and intensities and cannot just be assessed by accounting methods. Brand, the value of public relations, continued good will of the inventor and public, and consumer perception all comprise valuation. Culture does as well, for what may have a certain value in one country or region of the world may have another value somewhere else even for the same product.

For exa...

Table of contents

• Cover
• Half Title
• Routledge Studies in the Growth Economies of Asia
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Notes on contributors
• Acknowledgements
• List of abbreviations
• 1 Overview and introduction
• 2 Future of innovation and intellectual property
• 3 Creating value in health care through social innovation
• 4 The financial reporting of research and development costs and its signalling effects on firms' market values
• 5 Value-energy interrelationship and dynamic added value taxation
• 6 Residual value insurance in the maritime sector
• 7 From co-creation to entrepreneurialism: mobile apps and other examples
• 8 Big Data and innovation
• 9 Innovation, valuation and crisis
• Index