Cyber Liability & Insurance

Donald Peterson

• Publisher: The National Underwriter Company
• Year: 2012
• ISBN:
  9781938130250
• Topic: Business
• Subtopic: Insurance
• Index: Business

This book is designed to provide information and guidance to employees of all levels looking for ways to best handle the ever-changing and emerging world of intellectual property, its related issues, and associated risk management concerns. Information on identifying, managing, and controlling e-risk, including cybercrime and e-discovery Includes executive's guide for protecting electronically stored information

Chapter 1: Understanding Intangible Assets

Intangible Assets and Goodwill

It seems that every transaction involves a component of “goodwill.” After participants see a percentage of the purchase price apportioned to goodwill, they often ask: What is goodwill? And no matter what the so-called experts tell you, there’s no easy, black and white, answer.

Goodwill is a concept, not a thing. It usually encompasses a broad array of intangible assets. For example, traditional intellectual property assets such as patents, copyrights, trademarks, trade names, logos, and similar items are often lumped together as goodwill. Similarly, less obvious assets such as proprietary business practices, operational software, information methodologies, and all systems necessary to operate a business and generate returns are also intangible assets lumped together as goodwill. In short, almost anything that contributes directly to generating a positive return on investment can be classified as goodwill.

So how do we value goodwill? Although to state this may be tantamount to admitting poor skills, I certainly recall telling an accounting person that it was what we need the value of goodwill to be to make the transaction “work.” I also asked whether this person could justify this figure to the Internal Revenue Service. In short, valuing goodwill is complex and is heavily dependent on the context in which you make the computation.

It is critical to recognize that no book can definitively define and discuss all intangible assets and goodwill. The range, type, and variety of intangible assets continue to grow over time and will undoubtedly continue to grow in the foreseeable future. Similarly, the importance of protecting these intangible assets, including intellectual property, has also grown. As business and law evolves, understanding them becomes more and more critical in mergers, acquisitions, business reorganizations, bankruptcies, and a myriad of other situations demanding speed, accuracy, and valuation.

These chapters are not written with skilled legal practitioners in mind. Instead, the definitions and explanations are used not as legal definitions but rather as basic explanations of those phrases and terms that often are used without an understanding as to what is meant.

Assets that Are Intangible

In general, intangible assets include far more items than do intellectual property, and they are more easily understood and described than goodwill. We can usually say the following about intangible assets:

• We must be able to prove that intangible assets exist through a document or computer database.

• We have to determine how to develop intangible assets.

• We have to be able to identify intangible assets.

• We have to be able to legally protect intangible assets.

• We must be able to quantify the intangible assets’ value.

• We have to determine an intangible asset’s lifespan.

• We must be able to own intangible assets.

• We must be able to find similar assets in the marketplace.

These concepts are derived from the law, but they are practical guidelines to help you define and recognize intangible assets. Most importantly, we only recognize intangible assets that have quantifiable value.

As previously noted, it is easy to confuse intangible assets with goodwill. The simplest distinction is that goodwill includes all of a company’s nontangible assets but intangible assets includes all nontangible assets that we can measure and manage, and to which we can assign a value. For example, a company’s “good reputation” is goodwill and “corporate brand value” is an intangible asset that we can measure and value.1

It is impossible to create an exhaustive list of intangible assets, because their number is limited only by technology and clever legal and financial minds. For example, a Web site is now an intangible asset with value and is critical to many companies’ business, but ten to fifteen years ago it was non-existent or unimportant. Similarly, in today’s retail marketplace, exclusive contracts with Martha Stewart and other designers are increasingly important, but they did not exist in the past. Even an exclusive contract with a national retailer to supply unbranded goods is a valuable intangible asset if it has a definable life.

It is truly remarkable how common intangible assets really are when we examine a transaction closely. For example, each of the following is undoubtedly an intangible asset to the company or situation:

• Contracts that a casino or nightclub has with comedians, singers, or other performers to perform on a regular basis. These contracts are intangible assets with value to the hotels or nightclubs with which they are affiliated.

• Ongoing contracts to provide services on behalf of a company or the government are intangible assets with value.

• Data and research that companies conduct and collect are identifiable and valuable intangible assets.

Exhibit 1.1

Substantially Incomplete List of Intangible Assets

1. Marketing Assets

• Trademarks and service marks

• Trade names and brand names

• Logotypes

• Colors

2. Technology Assets

• Patents and patent applications

• Technical documentation (e.g., laboratory

notebooks, technical know-how)

3. Artistic Assets

• Maps

• Literary works and copyrights

• Musical compositions

• Photographs

4. Data Processing Assets

• Software and software copyrights

• Databases

5. Engineering Assets

• Industrial designs

• Engineering drawings, schematics, and blue prints.

• Technical know-how and trade secrets

6. Customer-Related Assets

• Customer relationships, contracts, and lists

• Open purchase orders

7. Contractual Assets

• License and franchise agreements

• Operating license

8. Human Capital Assets

• Trained workforce and wages

• Union and other employment contracts

9. Location-Related Assets

• Easements and mineral exploitation rights

• Water and air rights

10. Online-Related Assets

• Domain names and Web site design

• Linkages

Assets that Are Intellectual Property

Depending on the nature of the business, intellectual property may have a great value, including trademarks, copyrights, and others. Intellectual property is different than other sorts of intangible assets because it is legally protected. Indeed, there is specific law that applies to trademarks, copyrights, patents, domain names, and software.2

Intellectual property is generally easier to recognize than other sorts of intangible assets because there are only a few legally recognized categories, including:

• Patents

• Service marks, trade names, and trademarks

• Copyrights

• Trade secrets and proprietary technology

• Domain names

Though we won’t explore it in any detail, recognize that two or more pieces of intellectual property often support each other and are bundled together for valuation purposes. By bundling, we are simply referring to organizing intangible assets into their logical groupings that reflect how they work together...