Commercializing Intellectual Property Rights Question and Answers

Key Business Concerns In Commercializing Intellectual Property Rights

Question 1. How is the valuation of intellectual property done?
Answer:

Acceptable methods for the valuation of identifiable intangible assets and intellectual property fall into three broad categories. They are market-based, cost-based, or based on estimates of past and future economic benefits.

In an ideal situation, an independent expert will always prefer to determine a market value by reference to comparable market transactions.
This is difficult enough when valuing assets such as bricks and mortar because it is never possible to find a transaction that is exactly comparable.
In valuing an item of intellectual property, the search for a comparable market transaction becomes almost futile. This is not only due to lack of compatibility, but also because intellectual property is generally not developed to be sold and many sales are usually only a small part of a larger transaction and details are kept extremely confidential.
There are other impediments that limit the usefulness of this method, namely, special purchasers, different negotiating skills, and the distorting effects of the peaks and troughs of economic cycles.
Cost-based methodologies, such as the “cost to create” or the “cost to replace” a given asset, assume that there is some relationship between cost and value and the approach has very little to commend itself other than ease of use. The method ignores changes in the time value of money and ignores maintenance.

The methods of valuation flowing from an estimate of past and future economic benefits can be broken down into four limbs;

Capitalization of historic profits,
Gross profit differential methods,
Excess profits methods, and
The relief from royalty method.

Discounted Cash Flow (“DCF”) Analysis sits across the last three methodologies and is probably the most comprehensive of appraisal techniques.

Question 2. Explain the usage of the ‘excess profits method’ for the valuation of intangibles.
Answer:

‘Excess Profits Method’ in reference to intangibles looks at the current value of the net tangible assets employed as a benchmark for an estimated rate of return. This is used to calculate the profits that are required in order to induce investors to invest in those net tangible assets. Any return over and above those profits required in order to induce investment is considered to be the excess return attributable to Intellectual Property.

While theoretically relying upon future economic benefits from the use of the asset, the method has difficulty in the alternative usage of assets. But worldwide, future economic benefits are used to arrive at the current valuation of intangible assets.
The excess operating profits method determines the value of the intellectual property by capitalizing the additional advantages generated by the business owning the property over and above those generated by similar businesses, which do not have the benefit of the property.
There are different ways in which the excess advantage may be calculated, for instance by reference to a margin differential or comparing the return on capital employed earned by the business owning the property with that earned by companies without such benefit.
The calculated excess operating profits expected to be earned over the life of the asset in question are then discounted to the present day to arrive at a value for the asset.

It is significant if using this method, to ensure that the excess advantages identified are particularly attributable to the intangible asset in question and not to some other factor like an efficient production facility or distribution network that relates to the business as a whole.

Question 3. ‘Unfair competition is going on in relation to intellectual property.’ Discuss the safeguards and multilateral agreements in this regard.
Answer:

Multilateral Agreements: A number of multilateral agreements in the field of intellectual property deal with unfair competition in intellectual property transactions.

The laws dealing with restrictive trade practices in India are contained under the Patents Act and the Competition Act. The Paris Convention for the Protection of Industrial Property provides for efficient protection against unfair competition.
Article 17 of the Berne Convention for the Protection of Literary and Artistic Works makes clear that the Convention does not prohibit the application of national administrative control this formulation may apply to competition laws.
The Paris Convention allows the grant of compulsory licenses to prevent abuses resulting from the exercise of the exclusive rights conferred by patents.
From an objective point of view, it provides intellectual property rights in order to prevent the conclusion of contract negotiations in the abuse of their exclusive right.
For the restrictions of intellectual property rights, TRIPs agreement to be enough interest, TRI Ps Agreement expressly provides for Article 8 the principle of prohibiting the abuse of intellectual property rights, Article 30 of the exceptions to patentability, Article 31 of the compulsory license system are the embodiment of intellectual property restrictions.
WTO Agreement on Trade-Related Aspects of Intellectual Property Rights expressly recognizes the role of competition policy in ensuring that PRs promote economic growth and innovation. Article 40.2 of the TRIPS agreement provides that:
“Nothing in this Agreement shall prevent members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights hurting competition in the relevant market”.

It allows member countries “to adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices in the light of the relevant laws and regulations”. The repression of anti-competitive practices associated with I PRs is therefore assigned to national competition laws and policies.

Safeguards against Unfair Competition under Multilateral Agreements: As a general rule, any act or practice carried out in the course of industrial or commercial activities contrary to honest practices constitutes an act of unfair competition; the decisive criterion being “contrary to honest practices.

Several multilateral agreements in the field of intellectual property deal with unfair competition in intellectual property transactions. In this context, the need for international cooperation has also been emphasized under the TRIPs agreement.
In particular, consultations among member countries are envisaged, inter alia, through the supply of publicly available non-confidential information.
In this regard, Article 8 stipulates that appropriate measures consistent with the provisions of the Agreement may be needed to prevent the abuse of I PRs or practices that unreasonably restrain trade or adversely affect the transfer of technology.
Article 40 affirms the right of member countries to specify in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having adverse effects on competition in the relevant market and to adopt, consistently with other provisions of the Agreement, appropriate measures to prevent or control such practices.
For example, exclusive grant back conditions, conditions preventing challenges to validity, and coercive package licensing.

Article 31 of the TRIPs agreement lays down conditions limiting the use of patents without authorization of the IPR holder, including both uses by Governments or by third parties i.e. through compulsory licenses.

The TRIPs Agreement also contains several provisions relating to the use of I PRs. First, there are general considerations in paragraph 1 of the Preamble that are accompanied by Article 8(2), allowing Members to take appropriate measures to prevent abusive practices.
Second, there are some very precise provisions concerning competition law. They allow fair use and the possibility of compulsory licensing or the granting of dependent patents, i.e. the granting of a right by public authorities, and against the will of a patent owner, to make use of a patent to the extent necessary to develop a new product.
Compulsory licensing provisions can be included in both intellectual property and competition laws. Article 31 (k) of the TRIPS Agreement, explicitly provides for the granting of such licenses in the case of patents.
Grounds for granting compulsory licenses under competition law have included in the US the use of patents as a basis for price-fixing or entry-restricting cartels, the conclusion of market-concentrating mergers in which patents played an important role, and practices that extend the scope of patent restrictions beyond the bounds of the patented subject matter.
Compulsory licenses may also be issued when cross-licensing unduly limits competition, particularly in cases that involve substitute technologies, i.e. technologies that actually or potentially compete with each other, independently of their intrinsic characteristics.

However, certain exceptions from these conditions are made if the unauthorized use is permitted to remedy a practice determined to be anti-competitive after judicial or administrative process.

Question 4. What is the difference between Intellectual Property Law and Technology Transfer? Please analyze.
Answer:

Intellectual Property (IP) refers to the creations of the human mind like inventions, literary and artistic works, and symbols, names, images, and designs used in commerce.

Intellectual property is divided into two categories:

Industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and Copyright, which includes literary and artistic works such as novels, poems, plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs.
Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their radio and television programs.

Intellectual property rights protect the interests of creators by giving them property rights over their creations. The TRIPS Agreement encompasses, in principle, all forms of intellectual property and aims at harmonizing and strengthening standards of protection and providing for effective enforcement at both national and international levels.

Technology Transfer: As per the Oxford Dictionary, ‘Technology Transfer’ is the transfer of new technology from the Originator to a Secondary IJaor, especially from developed to developing countries In an attempt to boost their economies.

As per the Business Dictionary, Technology Transfer refers to (1) Assignment of technological Intellectual property, developed and generated in one place, to another through legal means, such as technology licensing or franchising. Or (2) Process of converting scientific and technological advances Into marketable goods or services.
In general, it denotes the sum of knowledge, experience, and skills necessary for manufacturing a product or products and for establishing an enterprise for this purpose.
Transfer of Technology is a complex phenomenon necessarily Involving rights, obligations, privileges, and commitments of the parties to transactions. The basic legal document Is the license agreement (or transfer of technology.
If technology is transferred through licensing, stronger IPR protection results in greater innovation, and Increased licensing.
Licensing has the advantage to firms of higher profits due to lower production costs, but involves other costs in terms of contract negotiations, transferring the necessary technology, and in the rents that the innovator must give to the licensee to discourage imitation. By reducing the risk of imitation, stronger IPR protection also reduces the costs of licensing, thus encouraging licensing and freeing up resources for innovation.
Transfer of technology takes place through formal and informal channels. Some of the formal channels include trade, licensing, joint ventures, franchising, foreign patenting, and Foreign Direct Investment (FDI) while the informal channels include imitation and technology spillover.
Technology transfer relates to voluntary or non-market transactions by which a firm gains access to technology developed in another country.
Therefore, policies made to develop a strong IPR regime can help developing countries gain access to foreign technology.
The impact of stronger IPR protection on technology diffusion Is ambiguous in theory and depends on a country’s circumstances.
On the other hand, stronger IPR protection could restrict the diffusion of technology, with patents preventing others from using proprietary knowledge and the increased market power of IPR holders potentially reducing the dissemination of knowledge due to lower output and higher prices.

On the other hand, IPRs could play a positive role in knowledge diffusion, since the information available in patent claims is available to other potential inventors. Moreover, strong IPR protection may encourage technology transfer through increased trade in goods and services, FDI, technology licensing, and joint ventures.

Despite this theoretical ambiguity, the diffusion of technology from countries at the technological frontier to other countries is considered the main potential benefit of the TRIPS Agreement, particularly for developing countries that tend not to innovate significantly.
The other commonly used models of technology transfer are technical assistance agreements, patent and patent agreements, know-how agreements, engineering service agreements, trademark agreements, and other franchisee agreements.

This all requires a huge involvement of IP rights for the best implementation of technology transfer.

Question 5. An Indian automobile company is interested in a joint venture arrangement with a foreign company. It has, however, little knowledge about the due diligence of intellectual property rights in a corporate transaction.
Advise the company regarding :

The purpose of IP due diligence is to serve, and
The scope of IP due diligence.

Answer:

Purpose of IP Due Diligence

IP due diligence is a part of a comprehensive due diligence audit that is carried out to assess the financial, commercial, and legal benefits and risks linked to a target company’s IP portfolio, typically before it is bought or invested in.
It provides detailed information that may affect the price or other key elements of a proposed transaction or even abort the further consideration of the proposed transaction.
It provides a basis for assessing the risk and value of relevant IP assets in a proposed acquisition or sale of intellectual property Scope.

IP due diligence generally seeks to:

Identify and locate IP assets, and then assess the nature and scope of the IP to evaluate their benefits and allocate risks associated with the ownership or use of the relevant IP assets; in particular, it seeks to determine whether the relevant IP is free of encumbrances for its intended business use(s).
Identify problems in and barriers to the transfer, hypothecation, or securitization of the IP assets under consideration.
Identify and apportion between the two parties the expenses incident to the transfer of IP assets under consideration.

Question 6. Companies are investing huge amounts of money in research and development for the creation of intellectual properties may be in the form of new technology, drug discovery, trade secrets, etc. The major concern for the companies is how to protect the IPR. Suggest the strategies for maintenance and protection of confidential information.
Answer:

Intellectual Property Rights are the key elements needed to maintain a competitive edge in the market in today’s dynamic and competitive business environment.

Intellectual property is undoubtedly a business asset and an integral part of the business process. Effective acquisition, management, and protection of intellectual property can mean the difference between success and failure in businesses today.
Thus, companies must take appropriate steps to protect such a valuable asset to get the possible commercial results from its ownership.
The various statutes that have been enacted provide an adequate mechanism of protection for intellectual property rights.
In the case of Patents, a patent can provide an inventor/corporation with a 20-year government-approved monopoly and once his 20 years of protection gets exhausted, the invention can be freely accessed and commercially exploited for the larger good of society by any player who is capable of doing it.
However, it is equally true that some ideas cannot be patented, and indeed, some innovators do not want to patent their ideas/inventions, as, trade secrets or confidential information.

Today more than ever, intellectual property also includes confidential business information, trade secrets, know-how, and key business relationships. If a trade secret is kept a secret, the monopoly on an idea or product may never end.

But once the jinny is out of the bottle, you won’t get it back in, if it is lost it is lost forever and the companies are unlikely to extract sufficient damages from whoever breaches their confidentiality. Trade secrets need to be prevented from being disclosed.
Though it is difficult indeed, but not an impossible task. The textbook examples included the recipe for Coca-Cola and the formulation of the alcoholic beverage Chartreuse, which was only known by two monks.
The need to protect these vital assets is more critical than ever. Knowledge has become the key strategic differentiator. If it is valuable to the company, it is valuable to its competitors as well. Most sophisticated business enterprises (whether small, medium, or large) recognize the need to protect this vital Intellectual Property.

But little real attention is paid to protecting or securing these less formal types of intellectual property.

It has been observed that many companies surprisingly are oblivious to the fact that these vital intellectual property assets are walking out their front door on a daily, weekly, or monthly basis, and heading across the street to rival competitors.
They need to recognize this reality and take steps like creating awareness of the need to protect the company’s most valuable strategic assets without which no effective risk management program can be initiated; and take stock of the company’s core intellectual property.
It is important for a company to know what differentiates them from their rivals and gives them a strategic advantage over them in the marketplace.
There are two principal sources of leakage of trade secrets or confidential information to competitors or other third parties, that is, disclosure and departure.
Disclosure – Trade Secrets can be leaked advertently or inadvertently to competitors or third parties through careless or deliberate disclosure by the company’s representatives.
For example, when a sales representative or accounts manager meets with a potential supply chain provider about pooling resources to go after a new market or business opportunity. During the meeting, proprietary and confidential information is susceptible to be disclosed.
The business purpose of the disclosure or exchange of information might be quite legitimate, but the legal effect of disclosing confidential information without the benefit of a confidentiality or non-disclosure agreement could be disastrous.
Corporations must make it both a corporate policy and business practice not to engage in commercial negotiations with third parties (whether direct competitors or not) without first ensuring that they have a signed Confidentiality or Non-Disclosure Agreement in place.
Departure — The other source of leakage of confidential business information is the exit of Executive(s) or key employees from the Organization. After their employment ceases, the Employee retains the right to use any general skill, experience, and knowledge that he has acquired in the course of performing his normal duties, so that he can continue to earn a living.

This has to be balanced against the employer’s right to protect its confidential information from any disclosure by such an employee. If the employee retains any confidential information about the employer or its business, then such an employee is not entitled to use or convey that information without the employer’s authority/consent.

Question 7. A German company signed an agreement with an Indian company to use its patented technology and trademark to manufacture and market the product in the European market. Suggest how the Indian company assigns the Intellectual Property Rights Patent and Trademark to a German company.
Answer:

An assignment of a trademark must be in writing and with the consent of the Registrar under the Trademarks Act, 1999. A registered/unregistered proprietor can assign a trademark with or without goodwill.

An assignment is usually required to be made for consideration. The application, which is in a prescribed format, can be submitted by either the Assignee or together with the Assignor, before the Registrar of Trademarks for registering the title of a person who becomes entitled by assignment to a registered trademark.
The Assignee, after the assignment is complete, must apply to the Registrar of Trademarks to register his/her title and the Registrar enters the name and details of the Assignee in the Register on proof of title, to his satisfaction.
However, under certain circumstances an assignment cannot be enforced, namely if an assignment will create multiple exclusive rights in more than one person: and if an assignment will create multiple exclusive rights in different parts of India.
Sections 37 and 38 of the Trade Marks Act govern the assignment of trademarks. When a trademark is assigned, the assignee acquires the right to use the trademark and steps into the shoes of the erstwhile proprietor or owner.
A patentee may assign the whole or any part of the patent rights to the whole of India or any part thereof.
There are three kinds of assignments: legal assignments, equitable assignments, and mortgages.
An assignment (or an agreement to assign) of an existing patent is a legal assignment, where the assignee may enter his name as the patent owner. A certain share given to another person is called an equitable assignment and a mortgage is when the patent rights are wholly or partly transferred to obtain money.
A valid assignment under the Patents Act requires the assignment to be in writing, to be contained in a document that embodies all terms and conditions, and must be submitted within six months from the commencement of the Act or the execution of the document whichever is later.

Under Section 68 of the Patents Act, an assignment is valid and enforceable only when it is in writing and is duly signed by the assignor or any person authorized to do so. The written agreement must contain all the terms, conditions, rights, and obligations of the parties thereto.

Question 8. Intellectual property rights are often undervalued, undermanaged, or under-exploited. Comment. What are the major concepts for the valuation of intangible assets?
Answer:

Intellectual capital is recognized as the most important asset of many of the world’s largest and most powerful companies; it is the foundation for the market dominance and continuing profitability of leading corporations.

It is often the key objective in mergers and acquisitions and knowledgeable companies are increasingly using licensing routes to transfer these assets to low-tax jurisdictions.
Nevertheless, the role of intellectual property rights (IPRs) and intangible assets in business is insufficiently understood. Accounting standards are generally not helpful in representing the worth of IPRs in company accounts and IPRs are often under-valued, under-managed, or under-exploited.

Despite the importance and complexity of IPRs, there is generally little coordination between the different professionals dealing with an organization’s IPR. For a better understanding of the IPRs of a company, some of the questions to be answered should often be:

What are the IPRs used in the business?
What is their value (and hence level of risk)?
Who owns it (could I sue or could someone sue me)?
How may it be better exploited (e.g. licensing in or out of technology)?
At what level do I need to insure the IPR risk?

Valuation is, essentially, a bringing together of the economic concept of value and the legal concept of property. The presence of an asset is a function of its ability to generate a return and the discount rate applied to that return.

The cardinal rule of commercial valuation is: that the value of something cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time, in particular circumstances. There are four main value concepts, namely, owner value, market value, fair value, and tax value.

Major Value Concepts are:

Owner Value; Owner value often determines the price in negotiated deals and is often led by a proprietor’s view of value if he were deprived of the property.

Market Value: The basis of market value is the assumption that if a comparable property has fetched a certain price, then the subject property will realize a price of something near to it.

Fair value: Is the desire to be equitable to both parties? It recognizes that the transaction is not in the open market and that the vendor and purchaser have been brought together in a legally binding manner.

Tax value: There are quasi-concepts of value that impinge upon each of these main areas, namely, investment value, liquidation value, and going concern value.

Further, other concepts include:

Cost based valuation
Market price comparability
Economic based valuation

Short Notes

Question.1 Write short notes on the following:

Tie-in arrangements
Employee agreement
Preparing an IP audit

Answer:

Tie-in Arrangements: Tie-in clauses are intellectual property licensing the licensee to obtain raw materials, spare parts, and intermediate products for use with licensed technology, only from the licensor or its nominees.

These clauses also oblige the licensee to use personnel designated by the licensor. The tie-in clauses generally result in monopoly control of the supply of equipment and other inputs by supplying enterprises, leading to “transfer pricing”, “transfer accounting” or “uneconomic output”.
The licensor charges a higher price than for comparable equipment and other input that could otherwise be obtained elsewhere. The use of tying clauses not only affects production costs through the overpricing of inputs but may have an important indirect effect on the import substitution, export diversification, and growth efforts of licensees.

Employee agreement: In Employees or Confidentiality agreements, employees should sign Employment agreements to generally detail the terms of their employment.

Agreement should be signed before the employee commences. Existing employees should be encouraged to sign confidentiality agreements. However, usually, they cannot be forced to do so.
When employees cease employment, the employer gives them a letter confirming this, any monies being paid to them, and reminding them of their confidentiality obligations.
If confidential information is to be divulged, a confidential agreement should be signed before the disclosure is made. The type of agreement will vary depending on the nature and context of the disclosure.

In some cases, a confidentiality agreement must be made as a deed to be legally enforceable. A confidentiality agreement should include the following acknowledgments: The information is secret;

The disclosure is made to the recipient in confidence;
The recipient will not disclose the information to others or use the information for their advantage, without the prior authority of the owner of the information; and
The unauthorized disclosure of the information could cause loss and damage to the owner of the information and the recipient will be liable for this.

Preparing an IP audit:

Clarity about the Purpose Before the actual conduct of an IP audit, it is a necessary pre¬ condition that it is clearly understood by all concerned why the audit is being conducted:

The situations that prompt an audit and the nature and scope of the audit will to some extent depend on why it is being conducted.
In addition, the amount of time and money available for conducting an audit will have a bearing on how the audit is conducted and its eventual outcome.

Background Research for Preparing an Audit Plan Once the purpose of the audit and the available resources for its performance are clear, a major preparatory step for conducting the audit is to understand the company. It is an essential pre-condition for preparing an audit plan, which will be the basis of the audit.

What is done in background research?

Gathering as much information as possible on the company and its way of doing business.
Background research will be the basis of the audit and will provide the auditor(s) with the required background information for preparing a plan for conducting an audit that is comprehensive, focused, timely, and cost-effective.
- Major issues in background research
  - Internal and external relations and interactions:
  - How does the company regularly interact or intend to interact with such as its

Employees;
Vendors;
Customers;
Consultants;
Independent contractors;
Joint venture partners;
Competitions etc.

Business strategy:

How does the company do its business
Does it have written policies in place concerning key aspects of the business?
Does it follow a certain business model?
Does it, for example, engage in e-commerce and, if so, how does it fit in with its overall business strategy?

3. Importance of IP Assets.

Where IP assets are relatively unimportant to the nature of the business as a whole, it might be sufficient merely to confirm that registered IP rights are in good standing and are held in the name of the company.
Where the company’s principal assets are IP, it may be necessary to conduct a more thorough assessment of the company’s IP portfolio and IP-based activities.

Status of IP Management

Does it have an IP policy or strategy?
What is the company’s overall approach to IP management?
How well-informed are its staff on IP matters?

IP disputes.

Has the company been involved in infringement suits, whether as plaintiffs or defendants?
Is the company involved in disputes or potential disputes that involve IP rights?

Preparing an IP Audit Plan.

The last step is to prepare an IP Audit plan.

This will set out the purpose, the scope, how long it is expected to take, the budget, and who will be responsible for which area of the audit plan.
It will deal with the following:
- The scope of the audit;
- The timetable for the audit;
- The responsible person for each part of the audit;
- The form of the final audit report to be produced.

Descriptive Questions.

Question.1 What is the significance of intellectual property management?
Answer: The importance of intellectual property management is as follows:

Effective management of intellectual property enables companies to use their intellectual property to improve their competitiveness and strategic advantage.
Acquiring intellectual property protection no doubt is crucial but its effective management provides much more than just protection for an enterprise’s inventions, trademarks, designs, copyright,s or other allied rights.
Effective intellectual property management requires a company to commercialize its inventions and effectively monitor and enforce its intellectual property rights. Indeed, a company portfolio of intellectual property must be viewed as a collection of key assets that add significant value to the enterprise.

Effective management of intellectual property may be a critical business strategy to maintain sustainable corporate growth and maximization of shareholder value resulting in economic growth.

Question 2. Explain the strategies for effective IPR Management.
Answer:

The strategies for effective management of intellectual property assets require the implementation of a comprehensive asset management plan. In this, the most important step is to review the existing intellectual property assets so as to identify and locate the company’s key intellectual property assets such as:

Patents;
Patentable subject matter;
Copyrights;
Trade marks;
Designs;
Trade secrets;
Domain names;
Mask works;
Inventions;
Works of authorship;
Hardware and
Devices depend upon the nature of business.

Once the intellectual property assets are identified, it becomes important to determine the nature and scope of the company’s rights in intellectual property assets, which may range from outright ownership to a license including contingent rights in intellectual property to be developed in the future.

Capitalizing on intellectual property assets so identified requires a most constructive approach keeping in view, among others, the type of intellectual property assets, the type of business claiming ownership of intellectual property assets, and the long-term and short-term goals of the business organization including intended/possible use of intellectual property assets.
The ownership and control of intellectual property also attract certain risks and this requires strategies and plans to mitigate those risks.

The most important among others is the infringement of rights in intellectual property, the risk management strategy should take into consideration the situations where a company’s own Intellectual Property Rights may infringe the IPRs of a third party, the company has a valid claim of infringement against a third party.

Question.3 What is valuation? Illustrate the methods for the valuation of intangibles.
Answer:

Valuation is essentially a bringing together of the economic concept of value and the legal concept of property. There are four main value concepts:

Owner value;
Market value;
Fair value and
Tax value.

There are quasi-concepts of value that impinge upon each of these main areas:

Investment value;
Liquidation value and
Going concern value.

Methods for the valuation of identifiable intangible assets and intellectual property fall into three categories. They are:

Market-based;
Cost based or
Based on estimates of past and future economic benefits.

The methods of valuation flowing from an estimate of past and future economic benefits can be divided into four limbs:

Capitalization of historic profits: It arrives at the value of IPRs by multiplying the maintainable historic profitability of the assets by a multiple that has been assessed after scoring the relative strength of the IPR.

For example – a multiple is arrived at after assessing a brand in the light of factors such as leadership, stability, market share, internationality, the trend of profitability, marketing, and advertising support and protection.

Gross profit differential methods: This method is often associated with trademark and brand valuation. These methods look at the differences in sale prices, adjusted for differences in marketing costs. That is the difference between the margin of a branded and/or patented product and an unbranded or generic product.

Excess profits methods: This method looks at the current value of the net tangible assets employed as the benchmark for an estimated rate of return.

This is used to calculate the profits that are required in order to induce investors to invest in those net tangible assets. Any return over and above those profits required in order to induce investment is considered to be the excess return attributable to the IPRs.

The relief from royalty method: It considers what the purchaser could afford, or would be willing to pay, for a license of similar IPR. The royalty stream is then capitalized reflecting the risk and return relationship of investing in the asset.

Question 4. What is Discounted Cash Flow (“DCF”) Analysis.
Answer:

DCF Analysis site across the last three methodologies and is probably the most comprehensive of appraisal techniques. Potential profits and cash flow need to be assessed carefully and then restated to present value through the use of discount rates or rates.

DCF mathematical modeling allows for the fact that 1 Euro in your pocket today is worth more than 1 Euro next year or 1 Euro the year after.
The time value of money is calculated by adjusting expected future returns to today’s monetary values using a discount rate.

The discount rate to be applied to the cashflows can be derived from several different models including:

Common sense,
Build-up method,
Dividend growth models, and
The capital asset pricing model utilizes a weighted average cost of capital.

Example: In the discounted cash flow model, it would not be correct to drive out cashflows for the entire legal length of copyright protection, which may be 70-plus years, when a valuation concerns computer software with only a short economic life span of 1 to 2 years.

In short, when undertaking a valuation using the discounted cash flow modeling, the value should never project longer than what is realistic by testing against the major lives i.e. physical functional, technological, economic, and legal.

Question 5. What does the term ‘technology’ mean? What are the factors to be considered while defining the technology in the licensing agreement?
Answer:

Technology is a complex concept. As per the UNIDO Guidelines paper, “Technology or know-how denotes the sum knowledge, experience, and skills necessary for manufacturing a product or products and for establishing an enterprise for this purpose”.

Technology is viewed as any systematic or practical knowledge or skills used

Manufacture of products or application of processes;
Commercial or management purpose in the industry; and
The achievement of any desired result, be it industry or social areas for life.

Transfer of technology is a complex phenomenon necessarily involving rights, obligations, privileges, and commitments of the parties to the transaction.

The basic legal document is the Licence Agreement for the transfer of technology. License Agreement is a formal instrument that serves several purposes.
License may be granted for IP that is necessary to further develop, reproduce, make, use, market, and sell products based on the technology to be transferred.
The terms and conditions of a licensing agreement determine the success of the technology transfer. Therefore, while formulating the licensing agreement, the parties involved should define the technology to be transferred without any ambiguity.

The factors to be considered while defining the technology in the licensing agreement include:

Type of the technology i.e. product, process, facility, software, formula, etc;
Need for additional license for practicing the technology;
Industrial standards or specifications associated with the technology; and
Details required to practice technology.

Other factors that need to be considered for a successful technology licensing are:

Owner/s of the technology;
Nature of ownership;
Other IPRs such as trademarks, copyright, trade secret, etc. associated with the technology;
Nature of technology;
Scope of rights expected from the technology license;
Technology and industry in which the technology can be utilized; and
Terms and value of royalty etc.

Question 6. What does an intellectual property audit mean? What are the types of intellectual property audits?
Answer:

IP audit is a systematic review of the IP owned, used, or acquired by a business to assess and manage risk, remedy problems and implement best practices of IP asset management.

IP audit involves undertaking a comprehensive review of a company’s IP assets, related agreements, relevant policies, and compliance procedures.
An IP audit helps a business to make an inventory of its IP assets or update it and analyze:
Determine in the light of all this information, what actions are required to be taken concerning each IP asset, or a portfolio of such assets, to serve the relevant business goals of the company.
- How the IP assets are used or unused.
- Whether the IP assets used by the business are owned by the company or by others.
  Whether these IP assets are infringing the rights of others or others are infringing on these rights.
An IP audit seeks to uncover unused or underutilized assets, identify any threats to a company’s bottom line, and enable business managers to devise informed business and IP strategies that help maintain and improve its competitive position in the relevant market(s).

Types Of Ip Adult: There are 3 types of IP Audits

General purpose IP Audit: A general or broad IP audit is done in the following types of contexts:

Before establishing a new company it is always important to start up a company to be aware of intangible assets it owns or needs to protect.
When a business is considering implementing new policies, standards, or procedures relating to IP.
When a business is considering implementing a new marketing approach or direction, or is planning a major reorganization of the company.
When a new person becomes responsible for IP management.

Once a comprehensive IP audit has been undertaken, a smaller effort and expense is needed at regular intervals, such as on an annual basis, so that IP assets are reviewed and appropriate decisions are taken, depending on the current and emerging needs of a company.

Event driver IP Audit :

It is generally much narrower in scope than a broad or general-purpose IP audit. Further, the nature and scope of such an audit is determined by the event in question, and the time and resources available for doing it.
Event-driven IP audit is often called “IP due diligence” when done to assets, as objectively as possible, the value and risk of all or a part of a target company’s IP assets.

Limited Purpose Focused Audits:

A limited-purpose audit is typically much narrower in scope than the other two types and is performed under much constrained time schedules. These audits tend to be situational. They are typically used to justify a certain legal position or the valuation of a particular IP.
A limited purpose-focused audit is done in the following types of contexts:

Personnel turnover;
Foreign IP filings;
Using the Internet for business purposes;
Significant changes in IP law and practice;
Clean room procedures;
Preparing for litigation.

Question 7. Briefly list the restrictive practices used in the intellectual property licensing agreements.
Answer:

Restrictive trade practices under the guise of intellectual property licensing can always be corrected by competition authorities. The restrictive practices mainly used in the intellectual property licensing agreements are as follows:

Restrictions after expiration of Industrial Property Rights or loss of secrecy of Technical know-how: The expiration of the term of the patent in an intellectual property licensing agreement signifies that the knowledge and invention are covered by such patent without any obligation.

Where the supplier of the technology imposes any restriction after the expiration of the term of intellectual property rights. The problem may also arise when the secret know-how loses its secret character before the expiration of the agreement.

Restrictions after the Expiration of arrangements: This will generally oblige licenses to pay royalties, during the entire duration of the manufacture of a product or the application of the process involved, without specifying any time limit.

Restrictions on Research and Development: Such restrictions generally involve limitations on the research and development policies and activities of the licensee. The restriction on research and development activities of licensee companies has also been declared as a restrictive practice under the UNCTAD Code.

Non-Competition Clauses: These include the restriction on the freedom of the licensee company to enter into arrangements to use or purchase the competing technologies or products not furnished or designated by the company supplying technology.

Non-competition clauses which may have an indirect effect, oblige the licensee not to cooperate with competing enterprises or to pay higher royalties if it sells or manufactures competing products.

Export Restrictions: These may include conditions restricting or prohibiting the export of products manufactured by the transferred technology. These conditions restrict the export of such products to certain markets or permission to export to certain markets and the requirement of previous permission for exports.

Price-Fining: It involves the practices where the licensor reserves the right to fix the sale or resale price of the product manufactured by the imported technology. This clause covers the price determined by the licensor on goods produced with the help of transferred technology.

Exclusive sales and representation arrangements: Such practices prohibit the freedom of the licensee company not only to organize its own distribution system but also prohibit the licensee company from entering into exclusive sales or representative contracts with any third party, other than the licensor or a party designated by the licensor.

Key Business Concerns In Commercializing Intellectual Property Rights

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