IPEG Intellectual Property Expert Group is an IP consultancy based in Europe

As we both have written previously, the changing nature of technology, product development and sales, and the patent enforcement landscape, have given trade secrets a new-found prominence. Trade secrets are now becoming a much more significant part of a company’s value. As a result, trade secret asset management is becoming (and if not, it should become) a regular part of company board discussions and review.

Director’s duties

While the precise outlines of company directors’ obligations differ from country to country and by entity type, generally speaking, all directors must:

  • Exercise their duties as would a reasonable and prudent person (the “duty of care”)
  • Act in good faith for the benefit of the company and its shareholders (the “duty of loyalty”).

Business judgement rule

Since it is easy to criticize but hard to really know if a director is really acting with good faith or loyalty, the so-called “business judgment rule” protects directors from personal liability if they acted:

  • on an informed basis,
  • in good faith,
  • in the honest belief that the action they took or decision the made was in the best interests of the company.

So, if a director is:

  • not “grossly negligent” in their duties;
  • stayed informed of the facts relevant to their responsibilities;
  • acted in good faith;
  • acted in the best interests of the company,

the director will be protected from personal liability for actions that harmed the business and led it to bankruptcy or other civil (and possibly criminal liability).

What does this have to do with trade secrets?

A lot.

We have found that few companies properly manage their trade secrets. In fact, we believe many company’s sub-par practices put the continued existence of what the companies’ believe to be their trade secrets at significant risk.

This state of affairs should be a major concern of company boards – especially, where a significant store of value comes from information they believe to be trade secrets.  This concern should arise not just out of concern for a company’s well-being – but to protect the directors’ own personal liability.

Director’s duties with respect to IP

Generally, courts treat IP assets like any other corporate asset, which means directors must approach IP with the same due care as they would any other asset.

Such IP related duties for directors may include:

  • Being informed of the value of their IP assets.
  • Ensuring implementation of necessary best practices and internal controls to protect company IP assets.
  • Refrain from misappropriating IP and ensuring the company not misappropriate or utilize misappropriated IP.

IP here includes patents, trademarks, copyright, designs, and trade secrets.

Trade secrets from Neglect to Prominence

A trade secret is any information that is:

  • Secret.
  • Has value.
  • Is reasonably protected.

Broadly speaking, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret.

While in the past the proper management of trade secrets may have been neglected, this is slowly but surely changing for a variety of reasons:

  • Law changes (Defend Trade Secrets Act passed in May 2016 in the USA; The EU Directive on Trade Secret in Europe enacted by member states in June 2018; The Anti Unfair Competition Law updated in China at the beginning of 2018)
  • Increased trade secret litigation particularly involving US companies but not exclusively so
  • Growing interest in trade secrets by the tax authorities (OECD BEPS, Patent Box Tax Regimes in certain jurisdictions)
  • Cyber criminals trying to steal trade secrets
  • Companies embracing Open Innovation and sharing trade secrets
  • The move to outsourcing many business activities (e.g. manufacturing, distribution, etc.)
  • The changing nature of employment – especially where a company hires a tech star who, unbeknownst to the company brings and utilizes in their job their former employer’s trade secrets
  • Pending trade wars being blamed by some on trade secret theft
  • IP reform weakening some other forms of IP like patents.

We are not the only ones who have noticed the increasing significance of trade secrets. For example, Forbes Magazine labelled the ‘Defend Trade Secrets Act’ as the biggest IP development in years.

Few Companies Manage Trade Secrets Well

Unfortunately, many companies are poor when it comes to trade secret asset management:

  • There is a lack of ownership
  • Documentation is poor
  • They are not addressed in company policies or procedures
  • Physical, electronic, process and legal protection mechanisms are poor to non-existent
  • There is no classification of the trade secrets
  • Whether trade secrets were shared with third parties, let alone details on how, is missing
  • Third parties with access to trade secrets have inadequate to no requirements to protect them
  • Trade secrets are not properly addressed in employment and severance agreements, licenses, and other contracts
  • There is little if any information on trade secrets shared between the Legal / IP function and the Accounts / Tax function
  • There is no audit trail.

Recent reports such as the excellent Baker McKenzie report – “The Board Ultimatum – Preserve & Protect – The Rising Importance of Safeguarding Trade Secrets – 2017” highlight in our opinion a major disconnect between what companies say about trade secrets and trade secret asset management and what companies actually do about trade secrets and trade secret asset management.

Some Trade Secret Best practices

Those exceptional companies who have mastered trade secret asset management tend to have the following things in place

  1. A Trade Secret Policy
  2. Education of Employees about Trade Secrets
  3. Robust Fit for Purpose Trade Secret Process & Procedures
  4. A System to Underpin that Process
  5. Good quality trade secret metadata
  6. Trade Secret Governance

Trade secret risks for company directors

As noted above, directors may be personally liable for breach of their duties of care and/or loyalty, and where their actions fail the business judgment rule.

Common claims seeking to hold directors personally liable include:

  • A failure to perform appropriate due diligence when making an acquisition.
  • Misrepresentations regarding the financial health of the organization.
  • Misstatements or omissions regarding potential future performance.
  • Careless management strategy that causes bankruptcy.
  • Breach of duties under applicable securities or other statutory laws.
  • Conflicts of interest.

We believe that all of these risks are impacted by trade secret asset management.

It is no exaggeration to say that nearly all businesses have trade secrets. Quite often they are material to the company’s value. Occasionally, trade secrets comprise the company’s crown jewels.

As a director it is, at least, negligent to fail to:

  • Know about the existence of, let alone ensuring proper management of, trade secret assets that may be material to the company’s value.
  • Ensure that steps are taken to protect against trade secret misappropriation by rogue employees and third-party partners (such as OEMs or distributors).
  • Ensure the existence of reasonable physical and electronic for a company’s trade secrets.
  • Ensure that anyone (employee or otherwise) that can access a company trade secret be informed of and obligated with respect to reasonable trade secret management policies.
  • Ensure that the company takes steps to minimize the risk that new hires infect the company with misappropriated trade secrets (from their former employers or third parties).

If a company becomes insolvent or (if public) has a declining share price, company directors may find themselves personally liable if a court finds that they failed to engage in or require from those they supervised reasonable trade secret asset management.

If only to protect their own liabilities, company directors should become more concerned about proper trade secret asset management.

Donal O’Connell, IPEG consultant and Chawton Innovation Services Limited and David Cohen, former Chief Legal and IP Officer at Vringo, Senior Counsel at NokiaIP lawyer at Skadden Arps and Lerner David.  

Author: ipeg 1 week ago

“What’s the value of my IP” is a question that comes up in the mind of a lot of IP owners, enticed by news of lavishly priced IP rights, they would like to see if they can get their IP monetized in a similar lucrative way. For the companies that receive the question whether they can valuate the IP this is not always good news. “It depends”  is mostly not a reply that is welcomed by a hopeful IP owner, who expects immediate enthusiasm by the valuator and a strong confirmation of his own ideas about how valuable his IP is.

For those that are in the valuation business this may be a familiar sound-bite.

Let’s start by saying that there is nothing like a “fair” valuation. Owners of IPRs have – only experienced market players exempted – way overheated expectations of the value of their IPR. Economists have called this the “endowment effect”. We come to that in a minute. First, in the absence of a specific value that someone is willing to attach to a certain IPR due to specific circumstances, we concentrate on fair value of IPRs.

What is “fair value”? Under US GAAP accounting rules, fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, or transferred to an equivalent party, other than in a liquidation sale. However nice that sounds, in IPR this supposes a market in which both buyers and sellers are equally well informed, both have experience in buying or selling IPR, both operate in a fully transparent market (buyers and sellers are known or can easily be found) and conditions for sale are constant, identifiable, transparent and equally accessible to both purchaser and seller. Most importantly fair value supposes a fair market. That’s the problem in IP as there is no such a thing as a “fair market” for IP.

The endowment effect is particularly present in monetizing of IPR and will hence have a significant negative effect on valuation of IPR. The gap between what people are willing to accept (WTA) to sell their asset or property and what others are willing to pay (WTP) for those assets is commonly termed the “endowment effect” and has been detected for many forms of property. A survey of endowment effect experiments found that the discrepancy between WTP and WTA tends to be highest for public and nonmarket goods such as health and safety measures, lower for ordinary private goods such as mugs and candy bars, and lowest for objects associated with monetary payments, such as lottery tickets.

Buccafusco & Sprigman, in “Valuing Intellectual Property – An Experiment” (2010) performed a test of the endowment effect in a setting intended to mirror an IP market especially with the intent to see whether the endowment effect can be extended also to goods that an owner has created. In all previous experiments, the owners have either simply been given the goods that they are then asked to value or, occasionally, have done something to earn them. None of the previous experiments asked subjects to actually create an object and then value it.

The assumption would be that with IP rights (which are so called non-rivalrous goods, meaning goods that may can be possessed or consumed by more than just a single user) only a reduced endowment effect is likely as these forms of property involve only partial alienation, especially with copyrights. Rights in a creative work such as a poem, novel, screenplay, or even most photographs and other graphic arts does not deprive the original rights holder of possession of a copy of the work. So Buccafusco and Sprigman organized a series of experiments intended to simulate a market for buying and selling creative works to test whether there are any endowment effects in transactions in non-rivalrous creative works.

Their experiment demonstrated a large valuation asymmetry between creators of new works and potential buyers and hence a strong endowment effect (read Buccufusco & Sprigman’s article for the details of their experiments.

Although not measured in case of patents and trademarks, it leads us to believe that the endowment effect in IPRs is particularly prevalent and strong. Making valuations that satisfy both sellers and buyers an almost impossible task. Therefor a caveat is in order for those that seek “honest” or “fair” valuations: there is no such a thing. Don’t let yourself be fooled by valuation companies pretending to give the ultimate professional valuations providing glossy graphs, statistics and attractively designed brochures and opinions.

Be realistic and take any IPR valuation with ‘a grain of salt’, actually pounds of it.

Author: ipeg 1 month ago

A process is an interrelated set of activities designed to transform inputs into outputs, which should accomplish your pre-defined business objectives. Processes should produce an output of value, they very often span across organizational and functional boundaries and they exist whether you choose to document them or not.

A process can be seen as an agreement to do certain things in a certain way and the larger your organization, the greater the need for agreements on ways of working. Your processes are the memory of your organization, and without them a lot of effort can be wasted, and the same mistakes can be repeated.

First class processes facilitate good communication between the information originator and the information receiver, because they help to set and manage expectations and the consistency of the information being given.

Processes must never be allowed to become static, because they are there to serve the organization and not vice versa. Ways and means to take identified improvements systematically into use should exist within your organization and well-established processes can be used as a tool to accomplish this aim.

Your processes define what and how tasks are done and by whom, to ensure repeatability. This is especially important as more in-house functions collaborate more with external entities, intermediaries, service providers, solution providers, etc. sometimes off-shore.

Processes also enable you to set performance criteria and measurement, which can be utilized when identifying the source or root-cause of any problems or excessive variation.

IP processes

Intellectual Property (IP) rights are valuable assets for any business, possibly among the most important that it possesses. It is therefore imperative that whatever IP processes are in use are fit for purpose and add some value to those using these processes.

IP processes perform many useful functions within an organization. They act as agreements and become part of the organization’s memory, ultimately ensuring the facilitation of good communication. IP processes can be an implementation tool, enabling improvements to take place and ensuring repeatability. The IP processes you put in place can also support a learning and developing organization.

Examples of IP processes include:

  • IP creation
  • IP portfolio management
  • IP enforcement
  • IP exploitation
  • IP risk management

If your organization and/or IP function is organized and operates in such a manner that it has very strong functional dimensions, there is a danger that the focus will be centered on internal functions to improve their function performance and not on the overall performance of the organization or on the IP function. This may lead to interfaces or check points being established, based on functional borders and requiring extra hand-offs and approvals. This in turn can limit your ability to manage the whole value chain and lead to sub-optimization of the overall organization.

An organization or IP function with a strong process focus will almost certainly have to be concentrated on business targets and the customer. It will also be one with good understanding of how IP adds value to the business.

IP process descriptions

An IP process description is basically a formal representation of the structure, activities, information flow, resources, behaviors, goals, and constraints of your IP function. This formal modelling of the IP function should facilitate the creation of enhanced understanding of the core activities, as well as the relations that extend across the boundaries of the function. Flow charts are easy-to-understand diagrams showing how steps in a process fit together and this makes them useful tools for communicating on how IP processes work and for clearly documenting how a particular task is done.

Furthermore, the act of mapping a process out, in flow chart format, helps you clarify your understanding of the IP process and assists you in identifying aspects of the process that can be improved. A flow chart can therefore be used to define and analyze processes, build a step-by-step picture of the process for analysis, aid discussion and communication and identify areas for improvement.

Trade Secrets

Trade secrets constitute an important part of a company’s intellectual property portfolio and they are generally any practice or process not known outside of the company. Specifically, for a practice or process of a company to be considered a trade secret it must fulfill three criteria:

  • it must be secret (i.e. not public information),
  • it must provide an actual or potential economic advantage for the company,
  • it must be actively protected (i.e. the company exercises reasonable measures to maintain it as a secret).

Some examples of trade-secret include scientific processes, formulas, product blueprints, algorithms, raw or processed data, software, manufacturing processes, customer lists, financial information, market research studies, internal costing and pricing information, etc.

Although trade secrets have been the neglected step-child of IP, this is slowly but surely changing for a variety of reasons:

  • Law changes (DTSA in USA; EU Directive on Trade Secret in Europe; Anti Unfair Competition Law in China)
  • Increased trade secret litigation particularly involving US companies but not exclusively so
  • Growing interest in trade secrets by the tax authorities (e.g. OECD BEPS Guidelines, Patent Box Tax Regimes including trade secrets as qualifying IP)
  • Cyber criminals trying to steal trade secrets
  • Companies embracing Open Innovation and sharing trade secrets with one another
  • The changing nature of employment
  • Pending trade wars which some link to trade secret theft

Trade secrets are a very important part of any IP portfolio. It is no exaggeration to say that virtually every business possesses trade secrets, regardless of whether the business is small, medium or large.

Trade secrets are an important, but oftentimes an invisible component of a company’s IP portfolio of assets. However, trade secrets can also be the crown jewels within the portfolio.

The process for managing trade secrets

Processes are not just reserved for registered forms of IP like patents and trademarks. I would argue that process thinking is even more critical when it comes to unregistered forms of IP like trade secrets, as there is no external entity like the Patent & Trademark Office holding the hand of the organization and keeping it on the straight and narrow.

I suggest that the trade secret asset management process at the very top level consists of the following key blocks or steps – context; identification; analysis; review; protection; and monitoring.

The key steps in that process

Context: Understanding the environment in which you are operating from a secrecy perspective.

Identification: Working to identify information within the organization which may warrant being treated as a trade secret, since the definition of a trade secret is very broad indeed.

Analysis: Evaluating the information, classifying it, determining who has access and who needs access going forward, etc.

Review: Deciding whether to go ahead and treat this information as a trade secret or not as the case may be. This as such is a business decision.

Protection: Putting the appropriate administrative, legal and technical protection mechanisms in place to ensure that the information has ‘reasonable’ protection in place going forward.

Monitoring: Sanity checking on a regular basis going forward that the information still warrants being treated as a trade secrets, that it is indeed being protected and is any other factors have changed as far as this trade secret is concerned.

The foundations

The strength of any process however lies in its foundations. The trade secret asset management process requires some good foundations, including …

  • trade secret education of employees
  • a fit for purpose trade secret policy
  • a robust trade secret system or tool that underpins the process
  • good quality trade secret metadata (as without data, an organization has not information, and without information, an organization has no knowledge)
  • trade secret governance

Final thoughts

In response to competitive pressures and ever-changing conditions, many IP function are fundamentally rethinking the way they do business. It is most important to be able to clearly link your IP function’s processes and organizational services to your business goals and objectives.

As IP functions strive to keep up with ever-changing customer demands and market needs, there is a growing demand for modelling and analysis of the IP function’s core processes, in order to capture the strategic relationships within the IP function itself and with external partners and players as well, so as to identify areas for improvement.

Given the growing importance of trade secrets, it is imperative that IP functions give some serious thought to their process for managing such assets.

Donal O’Connell, IPEG consultant

Author: ipeg 1 month ago

Suppose you wish to sell your house. Since you seek to sell your house “as-is”, you want to minimize your investment in the selling process and elect not to spruce up your house. To avoid paying a real estate agent commissions, you independently put your house on the market. While some lookie-loos avail themselves of the wine and cheese you serve at your open houses, no serious buyers emerge. The months tick away and, before you know it, you miss the sizzling summer selling season. However, the buying community—consisting of local potential buyers and real estate agents as well as online real estate market places such as Zillow—notices that you failed to attract a buyer. Your house is perceived as an increasingly stale damaged good.

You eventually realize that you have no choice but to retain a real estate agent. Since you are very busy, you do not want to waste your time conferring with a lowly real estate agent. You think, “Isn’t it the job of a real estate agent to sell my house? Since I am prepared to pay a healthy commission at the closing, I simply can’t justify investing time with agents. While I could have provided a lot of nuanced selling points relative to the house, my agent will just have to figure out the selling proposition herself.” Unsurprisingly, not every real estate agent jumps at the opportunity to market your house.

A similar situation often occurs in the world of selling patents. But the plight of the patent broker is much bleaker.

Premature marketing

Premature marketing on the part of unprepared patentees tends to spoil markets sparsely populated by buyers. As everyone in sales and marketing knows, you don’t get a second chance to make a first impression. Further, many patentees are of the mindset that it is the responsibility of the patent broker to invest tens of thousands of dollars preparing marketing documents, patent valuation reports and claims charts on their behalf. These out-of-pocket expenses are on top of the patent broker’s time, travel and overhead costs allocable to clients.

The expenses borne by patent brokers pale in comparison to the efforts they make hustling patents. Selling patents is much more difficult than selling houses. The former is much more nuanced than the latter; much more work is required to understand patents. Patent brokers actually lose money in the first months of their engagements as they invest considerable time in learning about the specific patents, technologies, markets, and extent of infringement. Great effort is expended in surveying the landscape in order to identify potential buyers, who are more effectively engaged when patent brokers tailor value propositions to each buyer’s specific situation. In a sense, patent brokers are more invested at the outset of seller-agent relationships than sellers since sellers can remain on the sidelines until buyers begin negotiating. Since the community of patent buyers, sellers and intermediaries is much more diffuse than is the case with real estate agents, patent brokers do not enjoy the efficiencies associated with repeatedly working with the same players. Patent brokers are under more pressure to execute patent transactions because each day that passes brings the day when the subject patents will become worthless one day closer.

Obviously, the patent broker takes on enormous effort, risk, and expense soliciting buyers for patents. When a deal is concluded flawlessly, there is still a long time between when the patent broker begins marketing the subject patents and when he receives his commission.

Sufficient interest?

However, in many cases, patents just do not attract sufficient interest among potential buyers for deals to close. Quite often, no one has any interest in learning about the patents being marketed. In other situations, patents do attract interest from buyers but sellers get cold feet and withdraw their offers to sell. I am aware of a situation whereby a patentee’s new Intellectual Property Manager simply decided that she did not want her company to use patent brokers anymore; the result was that that company’s patent broker was left at the altar with a stranded buyer. Unfortunately, sellers often refrain from showing their patent brokers the slightest courtesy—some patentees fail to respond to their brokers’ emails and phone calls even when the brokers are proffering up buyers. In these and similar cases—despite investing a not insignificant percent of their careers marketing clients’ patents—patent brokers receive no commissions even though they deliver buyers willing to pay patentees the consideration initially sought. Patent brokers receiving consideration in any form for the value-added services they render—such as introducing the patentee to a buyer who ends up acquiring the patentee’s company rather than just its patents or by facilitating acquihires—is invariably a pipe dream.

Coup de Grace

Even when patent sales close and patentees receive their funds, patentees do not always fulfill their end of the bargains. In other words, some clients stiff their patent brokers. As one licensing executive at a large Silicon Valley-based electronics company told me, “the higher a patent broker’s commission, the more reasons one can find for not paying.” Even in these situations, patentees sometimes deliver their coup de grâce by lambasting not only their particular patent broker but the entire community of patent brokers.

Certainly, many patentees behave completely honorably with their patent brokers. And there is less risk that contingency litigators, compared to patent brokers, will be jilted. However, losing one hard-earned commission should not be tolerated. In any event, how should patentees manage their relationships with patent brokers?

First, if a patentee is uncomfortable working with patent brokers, he should simply refrain from engaging patent brokers. If a patentee can sell his patents by himself, then by all means he should do so. If a patentee can sell his patents quickly, at a high price and without paying a broker a commission, then he absolutely should manage the transaction by himself. The reality is most people cannot sell their houses by themselves. Neither can many patentees independently sell their patents.

Second, patentees that elect to work with patent brokers should treat them with respect. This is not necessarily a magnanimous gesture but a practical consideration. There are millions of issued patents and patent applications. Almost all patent owners would like to monetize their patents in some fashion. The problem is that there are very few patent brokers (roughly twenty throughout the world by my count) that have records of successfully monetizing patents. (Many who call themselves patent brokers are really seeking full-time employment elsewhere. Others believe they can just work their own limited networks without making necessary investments in things like databases. One risk of engaging with these transitory patent brokers is that when they land their next positions, efforts to monetize your patents will come to a screeching halt.) The reality is that for the best patent brokers the volume of inquiries from patentees interested in selling their portfolios exceeds the broker’s bandwidth.

A Few Ideas

Whatever agreements that are negotiated between patentees and patent brokers in good faith and that are upheld are fair game. However, a few ideas for the two parties working in at least a semi-harmonious fashion include:

  • Just as a homeowner is often well advised to apply a coat of paint and to plant flowers in his front yard before showing his home to prospective buyers, patentees should prepare (or have prepared at their expense) marketing documents, patent valuation reports, claims charts or the like.
  • Patentees should be prepared to execute deals that meet predetermined targets. It is simply not fair to encourage a patent broker to shop a patent portfolio around the world for what turns out to be more than a year only to back out of deals that meet predetermined thresholds. If such deals must be avoided, the broker is entitled to some combination of retainer and success fee.
  • In return for paying a lower commission on success, the patent broker should be offered some cash (or stock) retainer. When the patent broker stands to receive a very high commission at the close, patentees often take the attitude that they need not make any effort to educate or assist the patent broker. This stance repels cooperation, to the detriment of closing a transaction. Paying the patent broker during the course of his marketing efforts helps keep the agent focused on the assignment at hand: The absence of retainers often turns a loss of deal momentum into a dead deal. (One equitable retainer arrangement calls for paying larger retainers at the beginning and ends of the engagements when most effort is exerted. Lower retainers can be paid in the middle months, when the broker is waiting for responses from solicited potential buyers.) Further, buyers are often skeptical of buying patents from inventors. These buyers are concerned that the inventor / patentee is too emotionally wedded to his patents and will not relinquish them even if the buyer makes a generous offer. Patent buyers are too busy to risk spending months on a deal only for the patentee to withdraw his offer to sell. When buyers learn that the seller is paying a (monthly) retainer, they begin to believe that sellers are more likely to agree to reasonable offers if for no reason other than to end the pain of paying regular retainers.
  • Both buyers and sellers should consider referrals to successful patent brokers through my new service, com. While I can’t promise that I will feel comfortable introducing every proffered patent to an aligned patent broker, I work with many patent brokers and do what I can to place patents in the hands of patent agents that have brokered similar patents with buyers and licensees.

by: David Wanetick, Director, Certified Patent Valuation Analyst & Author, Business Model Validation

Author: ipeg 1 month ago

There’s an easy way to learn how to cycle. It basically involves getting on the bike and learning by trial and error.

Yes one can read about cycling, watch educational videos, talk to others who can cycle, study all of the components of a bicycle, take a Physics degree, etc. but one should note that one cannot learn to cycle without actually getting on a bike and learning by doing about balance and coordination.

Trade secret asset management

I suggest that the same applies to trade secret asset management. Yes, organisations can read about trade secret laws, digest published case studies, talk to other companies who are doing it well, etc. etc. but at some point I suggest that the organisation will just have to get on the bike and learn by trial and error about balance and coordination with respect to these valuable but fragile assets.

Education of employees

The importance of education of employees about trade secrets cannot be stated enough. It is a self-enlightening process. It is crucial to the overall development of the individual participant and the company or organization at large. Trade secret education provides the participant with knowledge about the world of trade secrets, and enables informed decisions to be made.

Trade secret education makes the participant capable of interpreting things rightly and applying the gathered information in real life scenarios. Trade secret education is not limited to the course material or case studies. Real trade secret education is obtained from then taking these learnings into use in real life situations.

Yes the organisation’s first attempt at educating all of their employees about trade secret may not be perfect. But that interaction with employees is really valuable. What questions were asked? What concerns were raised? How should the course material and delivery be improved? Who needs more advanced trade secret training? Is the training on trade secrets in alignment with how other forms of IP are handled?

Trade secret policy

A corporate trade secret policy is a formal declaration of the guiding principles and procedures by which the organisation will operate, typically established by its board of directors, a senior management policy committee or by the Legal / IP function within the organisation

Yes the first iteration of the organisation’s trade secret policy may need enhancing. It may not properly address all aspects. It may for example have missed required changes to other corporate policies. But creating and deploying such a policy forces an organisation to seriously consider what trade secret asset management means to the organisation.

Trade secret process

A trade secret process can be seen as an agreement to do certain things in a certain way and the larger the organisation, the greater the need for agreements on ways of working. The trade secret process is like the memory of the organisation, and without such a process, a lot of effort can be wasted and the same mistakes can be repeated.

Yes, the first version of the organisation’s trade secret process for the handling of such assets might have some weaknesses. The process may not address all events in the life of a trade secret. Perhaps the first version of the trade secret process does not address the valuation of such assets or the sharing of such assets with 3rd parties. However creating such a process and putting into practice provides an opportunity for great learning.

Trade secret metadata

Metadata is a set of data that describes and gives information about other data. Metadata is simply data that describes other data. Meta is a prefix that in most information technology usages means ‘an underlying definition or description’.

Metadata summarizes basic information about data, which can make finding and working with particular instances of data easier. For example, the name of the author, the date created and the last date modified as well as file type and file size are examples of very basic document metadata.

Some mistakenly believe that because trade secrets are not registered, then the concept of trade secret metadata may not apply. Others mistakenly believe that because trade secrets are meant to be kept secret, then no metadata should exist.


Trade secret metadata summarizes basic information about the trade secret, which can make finding and working with this unique form of IP much easier.

Within an organisation, there are many who could benefit from having access to some trade secret metadata such as C Suite Executives given that trade secrets are some of the most valuable assets within the company, IT and Security given the issues with cyber security; HR given the many employee issues associated with trade secrets; Finance & Accounts given the financial and tax associated linked to such assets; Sourcing & Procurement as many trade secrets are indeed shared; etc.

Yes the organisations first attempts at logging and tracking trade secret metadata may be poor. However, the organisation will quickly learn that having good quality trade secret metadata is crucial. Such metadata serves to provide context and/or additional information about these assets.

“You can have data without information, but you cannot have information without data.” – Daniel Keys Moran

Trade secret governance

Governance is the act of governing. It relates to decisions that define expectations, grant power, or verify performance. In the case of a business, governance relates to consistent management, cohesive policies, proper guidance, well defined processes, KPIs and metrics, and decision-rights for a given area of responsibility.

Trade secret governance is simply about defining the ‘rules’ for those involved in trade secret asset management within the organisation. It is the process of decision-making and the process by which decisions are implemented (or not implemented). Ideally the process should distinguish between strategic and tactical decisions.

Since trade secret governance is the process of decision-making and the process by which decisions are implemented, an analysis of the governance of trade secrets should focus on the formal and informal actors involved in decision-making and implementing the decisions made and the formal and informal structures that have been set in place to arrive at and implement the decision.

Yes the initial attempts by the organisation at trade secret governance might be amateurish.

But this organisation will learn by trial and error what it takes to become really professional with respect to trade secret asset management governance.

Get on your bike !

In the UK, the phrase ‘on your bike!’ is slang, and a rude way of telling someone to go away: “Can you lend me some money?” “On your bike, mate!”. This is not my meaning here.

Rather, I am suggesting that organisations need to get on their bikes and learn about trade secret asset management, learning by trial and error about balance and coordination with respect to these valuable but fragile assets.

Trade secrets have been the neglected step-child of IP.  Historically, little thought, other than perhaps a non-disclosure agreement, was given to valuing and protecting trade secrets.  The current legal and political landscape make the old approach untenable for at least the following reasons:

  • The law is changing – The Defend Trade Secrets Act passed in the USA in May 2016; The EU Directive on Trade Secrets is enacted by member state on 9 June 2018; China enhanced its trade secret laws in early 2018 with revisions to its Anti Unfair Competition Law.
  • Changes in the eligibility requirements and enforcement mechanisms of patent laws around the world, but especially those in the US – and especially as they relate to software and business methods, make trade secrets an attractive mechanism to protect a company’s competitive advantages
  • Cyber-crime – whether from competitors or State actors – are working overtime to trying to steal trade secrets from organisations
  • More and more companies are embracing open and outsourced innovation models which necessarily requires sharing and collaborating on trade secrets with others.
  • Changes in employment models are leading to a highly mobile and transitory workforce where companies have increased risk their employees being poached by actual or potential competitors often with the goal of leverage the employee’s trade secret-rich know-how.
  • There is growing interest in trade secrets by the tax authorities – OECD BEPS Guidelines include trade secrets as an intangible asset requiring proper management; Patent Box Tax Regimes in a number of jurisdictions now allow trade secrets as qualifying IP; The US Government is encouraging US companies to repatriate their IP back to the US.
  • Last but not least, we are seeing increased trade secret litigation especially for US companies but not exclusively so.

Organisations need to get on their bikes.

Donal O’Connell is IPEG consultant. He will be speaking about Trade Secrets Meta Data and its importance for protection of Trade Secrets on a “Workshop Trade Secrets Deep Dive”, which will be held on Friday September 7 at the Conference Centre of the High Tech Campus, Eindhoven (Netherlands).

For the full program, see here

Registration: www.ipegconsultancy.com/tradesecrets



Author: ipeg 5 months ago

The enactment of the Defend Trade Secrets Act (DTSA) of 2016 in the United States creates a new paradigm and is a watershed event in intellectual property law. Former U.S. President Barack Obama signed the bill into law on May 11, 2016, and the DTSA now applies to any misappropriation that occurred on or after that date. A trade secret is any technical or nontechnical information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.

The law allows trade secret owners to file a civil action in a U.S. district court for relief for trade secret misappropriation related to a product or service in interstate or foreign commerce. The term “owner” is a defined statutory term. It means “the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed,” according to the DTSA. Under the DTSA, in extraordinary circumstances, a trade secret owner can apply for and a court may grant an ex-parte seizure order (which allows property to be seized, such as a computer that a stolen trade secret might be saved on) to prevent a stolen trade secret from being disseminated if three conditions are met.

First, the owner must demonstrate, in a sworn affidavit or a verified complaint, that the ex-parte seizure order is necessary. The owner must then prove that a temporary restraining order is inadequate. Second, that immediate and irreparable injury will occur if the seizure is not ordered. Third, that the person the seizure would be ordered against has possession of the trade secret and property that is to be seized. Once the ex-parte seizure order is granted, the court must take custody of and secure the seized property and hold a seizure hearing within seven days. Individuals can also file a motion to have the seized material encrypted.

With this development in the law, trade secret assets are no longer stepchild intellectual property rights. Trade secret assets are now on the same playing field as patents, copyrights, and trademarks. The DTSA reinforces that a trade secret asset is a property asset by creating this new federal civil cause of action.

And there is no preemption. The U.S. district courts have original jurisdiction over a DTSA civil cause of action, which coexists with a private civil cause of action under the Uniform Trade Secrets Act (UTSA), which codified common law standards and remedies from the state level for trade secret misappropriation. It also coexists with criminal prosecutions under the Economic Espionage Act of 1996 (EEA), which makes it a federal crime to steal or misappropriate commercial trade secrets with the intention to benefit a foreign power.

And if the losses from a stolen or misappropriated trade secret are severe, both the board of directors and senior executives of the company will be charged with malfeasance, including the willful failure to take reasonable measures to protect the corporate trade secret assets from insider theft or foreign economic espionage.

What the DTSA Means

A trade secret asset must be managed like other property assets. However, trade secret asset management differs because it first requires the identification of the alleged trade secret asset. Because millions of bits of information within a company can qualify as proprietary trade secrets, classification and ranking trade secret assets is a critical exercise.

Most companies focus on the protection phase of trade secret asset management without first identifying and classifying their trade secrets. This approach is doomed to fail without a thorough analysis. Unless the company knows what it’s protecting, there can be no effective protection. And all three phases—identification, classification, and protection—must occur before an accurate valuation of trade secret assets can be determined.

EONA proofs

Additionally, information assets must be validated in a court of law as statutory trade secret assets. There is no public registry for trade secret assets. The courts require proof of existence, ownership, notice, and access (EONA).  The first element requires proof of existence of the trade secret asset. The litmus test for proving the existence of a trade secret has six factors: the extent to which the information is known outside the business; the extent to which the information is known inside the business; the extent of measures taken to guide the secrecy of the information; the value of the information to the business and to competitors; the amount of time, effort, and money expended to develop the information; and the ease or difficulty with which the information could be properly acquired or duplicated by others.

For proof of ownership, the plaintiff must show that it is the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed. A misappropriator cannot be the owner of a trade secret. However, a person who independently develops or independently reverse engineers the trade secret can be the owner of the trade secret. Further, an employee (who has not been assigned his or her intellectual property rights in the trade secret asset) may also be the lawful owner—instead of the employer.

For proof of notice, the plaintiff must show that the defendants had actual, constructive, or implied notice of the alleged trade secret. A former employee may use his or her general knowledge, skills, and experience. However, a former employee may not disclose or use the trade secrets of the former employer. The former employer cannot claim that “everything we do is a trade secret.” The court will take judicial notice that there is both unprotected and protected (trade secret) information in every company. If the line is unclear, the court will draw the line in favor of the ex-employee.

For proof of access, the plaintiff must prove that the defendant had access to the alleged trade secret. If the evidence shows that the defendant never had direct or indirect access to the trade secret, and there is no conspiracy claim (involving coconspirators that had access to the trade secret), there cannot be misappropriation. This is because misappropriation requires proof of unauthorized acquisition, disclosure or use of the trade secret by the alleged trade secret thief.


The DTSA also requires that the trade secret owner take reasonable measures to protect the secrecy of trade secret assets. This is a much more challenging task today because trade secret assets are no longer at rest in a locked file cabinet in an engineer’s office. Today, trade secrets are in motion and in use via computer systems and networks with access points all over the world.

This presents a huge challenge. Companies must actively monitor the access and movement of critical trade secret assets throughout the corporate enterprise, or risk the serious consequences of forfeiting trade secret assets by failing to take the reasonable efforts necessary to protect these assets.

The Valspar economic espionage case in 2009 is a case in point. In this incident, a 52-year-old senior scientist, David Yen Lee, suddenly resigned from Valspar on March 19, 2009, and bought a one-way ticket to Shanghai, scheduled to leave on March 27. Fortunately for Valspar, a coworker discovered irregularities in Lee’s work computer. Upon further investigation, an unauthorized program called “Sync Toy” was uncovered in invisible Windows files. It showed that Lee downloaded 44 gigabytes of paint and coating formulas, product and raw material data, sales and cost data, and product development and test information.

The FBI was informed and brought in to investigate. The bureau raided Lee’s Arlington Heights apartment and recovered the stolen trade secret assets before Lee’s flight left for Shanghai. Valspar escaped a major disaster because of the alertness of one coworker who spotted irregularities on Lee’s work computer. Like most companies, Valspar’s security readiness was directed to protection against outside intrusions. However, there was little security in place to guard against trade secret theft by insiders and trusted employees.Valspar now faced the reality that a trusted employee could steal a vast amount of trade secrets due to access to computer data and files. The solution: Valspar set up an internal identification and classification system for trade secrets called the CPR (Classify, Protect, Report) model. Valspar now tracks the movement of all critical trade secret assets within the various computer environments with triggers that are activated if unauthorized activities are detected.

The reasonable measures necessary for the protection of trade secret assets continues to grow as the risk of sensitive data loss increases by various means: unauthorized uploading of trade secret assets to an insecure cloud or Web application; unauthorized email communications disclosing trade secret information; unauthorized acquisition of highly classified trade secret assets onto USB drives; and undetected incoming malware, phishing emails, and corrupted Web software all facilitating foreign economic espionage and theft of corporate trade secret assets.


The DTSA provides powerful provisions for ex parte seizure orders, but companies cannot take advantage of these provisions unless effective trade secret asset management protocols are in place before the actual or threatened misappropriation occurs. A court can issue an ex parte seizure order, according to the DTSA, “in extraordinary circumstances” to “prevent the propagation or dissemination of the trade secret” or to “preserve evidence.” These circumstances exist when a trade secret thief is attempting to flee the country, if he or she is planning to disclose the trade secret to a third party, or if it can be shown that he or she will not comply with court orders.

The Valspar case is an excellent example of the necessity for ex parte seizure orders. However, the FBI will not always be there, and the window of time to protect against the loss of trade secret assets and destruction of the evidence will often be shorter than the eight-day period in the Valspar case. This is why a DTSA civil cause of action and an ex parte seizure order are so important to protect U.S. trade secret assets.

The protection of trade secret assets in these circumstances requires emergency actions. Once lost, a trade secret is lost forever. The DTSA requires that the plaintiff (the trade secret owner) file suit (with verified pleadings and affidavits filed under seal) and successfully obtain a DTSA ex parte seizure order before the defendants know the suit has been filed. Otherwise, without the element of surprise, the defendants—often with several clicks of a computer mouse—can transfer the trade secrets outside the country and destroy the evidence of trade secret theft by running data and file destruction software.

Therefore, to take advantage of the robust provision of the DTSA, the trade secret owner must be able to move faster than the trade secret thief. This will require a sea change since most companies have no internal trade secret asset management policies, practices, or procedures in place. Instead, most companies react after the fact by retaining outside counsel to investigate and litigate a long-gone trade secret.

The DTSA creates a new paradigm. If management waits until the trade secret theft occurs to identify what the trade secret is and investigate the evidence of misappropriation, the actual trade secret assets will be long gone before counsel can provide the U.S. district court with the proofs necessary to obtain an ex parte seizure order. The result: if the losses from the trade secret theft are severe, both the board of directors and senior executives of the company will be charged with malfeasance, including the willful failure to take reasonable measures to protect the corporate trade secret assets from insider theft or foreign economic espionage.

DTSA Application

What are the next steps in view of the DTSA? Every organization is different. There are no one-size-fits-all solutions. Each trade secret asset manager must audit existing approaches to protecting trade secret assets, the resource allocations within the organization, and any budgeting issues with protecting trade secrets. However, the catchphrase “we are working on it” will no longer provide adequate cover now that there is a federal civil cause of action specifically designed to protect the trade secret assets of 21st Century, new economy companies.

A fundamental first step should be the creation of an internal trade secret control committee (TSCC). The TSCC should be charged with the responsibility to adopt policies and procedures for the identification, classification, protection, and valuation of the company’s trade secret assets.  The next step should be the creation of an internal trade secret registry (TSR). This is a trade secret asset management system that can be deployed as a cloud-based solution, a corporate server, or a stand-alone work station.

The TSR should operate like a library card catalogue storing necessary trade secret asset information with hash codes and block chaining (a database that sequences bits of encrypted information—blocks—with a key that applies to the entire database) to ensure the authenticity of the data stored in the TSR and to meet the required evidentiary standards in a trade secret misappropriation lawsuit.

Another necessary step is trade secret asset classification, the foundation of a successful trade secret asset management program. This allows trade secret assets to be identified and ranked, so that the level of security matches the level of importance of the trade secret asset. There are now automated trade secret asset management tools available to assist companies with the classification and ranking of trade secret assets. Security, without identification and classification, is doomed to fail. In contrast, securing data after identification and classification of the trade secret assets makes it much easier for the internal security ecosystem to enforce trade secret protection policies and to prohibit unauthorized access, unauthorized disclosure, and unauthorized use.

Today, software tools can protect the company from mistakes that lead to the forfeiture of classified trade secret assets. If a user attempts to email a trade secret document to unauthorized recipients, the software program will immediately alert the user so the mistake can be corrected. Further, classified trade secret assets can be monitored. Administrators can track abnormal or risky behavior that otherwise cannot be tracked until the trade secret is compromised.

Developing a trade secret incident response plan (TSIRP) is another critical requirement. The flow of trade secret assets throughout the corporate enterprise should be tracked with built-in red flags, designed to trigger the TSIRP and activate a designated outside counsel SWAT team to proceed immediately to the courthouse to seek a DTSA ex parte seizure order (and other necessary relief) before the bad actors can destroy the evidence or transfer the stolen trade secret assets outside the court’s jurisdiction.

Employee Management

There are other best practices for trade secret assets now that companies are focusing on the various stages of identification, classification, protection, and valuation. Building a trade secret culture from the top down, with required training and compliance with TSCC policies, practices, and procedures, is at the top of the list. Companies must promote a trade secret culture by prompting employees and users to stop, think, and consider the business value of proprietary, internal information they are creating, handling, an reviewing. A major loss of trade secret assets can put the company out of business. Employees must understand that their jobs depend upon the identification, classification, and protection of the company’s trade secret assets. Onboarding procedures for new employees and offboarding procedures for departing employees are also very important.

The new employee interview process should include protections to prevent his or her former employer’s trade secrets from being exposed. This could include an inquiry to determine if the potential new employee is subject to post-employment restrictions with his or her former employer. If so, there should be a separate review by the company’s intellectual property counsel before the employee is hired.

Further, the new employee hiring process should include an investigation and certification by the new employee that no proprietary, trade secret information of any previous employer is being brought to the company or is being stored electronically in his or her personal email system or other electronic storage locations.

Finally, the prospective new employee should sign an employment agreement with patent and trade secret assignment provisions. He or she should also receive and review the company’s required trade secret policies and procedures. When an employee leaves the company, off-boarding procedures should include a mandatory trade secret exit interview. The interview should be conducted under strict procedures adopted by the TSCC, including execution of a trade secret acknowledgement at the conclusion of the interview certifying that all company devices, documents, and materials, including electronic copies, paper copies, and physical embodiments have been returned. It should also certify that all proprietary and confidential information, stored on any personal computer or mobile device, has been identified and preserved, returned, or deleted under the company’s instructions.

The enactment of the DTSA will usher in a new era. It requires trade secret owners to identify, classify, and protect trade secret assets as property assets. In time, the DTSA will become a precursor for new accounting systems that will provide valuations for trade secret property assets.

This development will unleash the reservoir of untapped intellectual property assets, which will fuel the growth of new economy companies in the Information Age.

by Mark Halligan, partner at FisherBroyles LLP, is recognized as one of the leading lawyers in trade secrets litigation in the United States by Legal 500 and Chambers USA: America’s Leading Lawyers for Business. He is an accomplished trial lawyer who focuses on intellectual property litigation and complex commercial litigation, including antitrust and licensing issues. He is also the lead author of the Defend Trade Secrets Act of 2016 Handbook and coauthor of Trade Secret Asset Management 2016: A Guide to Information Asset Management Including the Defend Trade Secrets Act of 2016.


Author: ipeg 6 months ago

Time travel is the concept of movement between certain points in time, analogous to movement between different points in space by an object or a person, typically using a hypothetical device known as a time machine, in the form of a vehicle or of a portal. Time travel is usually taken to mean that a person’s mind and body remain unchanged, with their memories intact, while their location in time is changed.

What has this to do with trade secrets and trade secret asset management you may ask? Let’s assume that an alleged trade secret theft took place on 15 November 2015. A court case then takes place months later, say on 27 February 2017. At that court case, the plaintiff has to prove three things, namely that the information was a trade secret as of 15 November 2015 and that the accused stole the trade secret and that the theft of the trade secret caused damage to the company.

Of course the defendant will try to prove that information was not a trade secret as of 15 November 2015 or that no misappropriation took place or that no damage was caused. Although the court case is taking place on 27 February 2017, the plaintiff must prove that the information was being treated as a trade secret at the time of the alleged theft, i.e. back on 15 November 2015. Whether the plaintiff treats the information as a trade secret on 27 February 2017, the date of the court case, is irrelevant. Rather the plaintiff needs to transport everyone in that court back in time to 15 November 2015 and show them (rather than tell them) that the information was indeed being treated as a trade secret.

A common objection to the idea of traveling back in time is put forth in the ‘grandfather paradox‘. This paradox is commonly described with a person who travels to the past and kills their own grandfather, preventing the existence of their father or mother, and therefore their own existence.

If a person was able to go back in time, inconsistencies and contradictions would ensue if the time traveler were to change anything. There is a contradiction if the past becomes different from the way it is. Some philosophers question whether these paradoxes make time travel impossible. Other philosophers answer this paradox by arguing that it might be the case that backward time travel could be possible but that it would be impossible to actually change the past in any way.

This ‘grandfather paradox’ is also an issue for those involved with trade secret asset management.

When it comes to trade secret asset management, it is imperative that the person going back in time to access the historical trade secret metadata does not change such data. When the plaintiff transports everyone in that court back in time to 15 November 2015 and shows them that the information was indeed being treated as a trade secret, the plaintiff will also need to show them that such evidence has not been altered subsequently.

A company’s trade secret asset management solution should therefore possess this ability to go back in time, as well as this ability to preserve the historical metadata. In other works, it should have a ‘time machine’ built in.

Donal O’Connell is IPEG consultant. He designed a trade secret management tools for companies and legal & IP firms, as well as accountancy & tax firms, assisting them and their client with the management of these assets. The tool contains a ‘time machine’!

Author: ipeg 7 months ago

Any business professor will tell you that the value of companies has been shifting markedly from tangible assets, “bricks and mortar”, to intangible assets like intellectual property (IP) in recent years. IP in its various forms is increasingly used as the basis of many business and commercial transactions.  It is fundamental for company valuations (merger, acquisition, bankruptcy); negotiations (selling or licensing); dispute resolution (fair recovery and quantification of damages); fundraising (bank loans and raising capital); assisting in decision making (corporate strategy); and reporting (tax and accounting).

Intangible Assets

An intangible asset is an asset that lacks physical substance and includes patents, copyrights, franchises, goodwill, and trademarks.

The International Accounting Standards Board standard 38 (IAS 38) defines an intangible asset as: “an identifiable non-monetary asset without physical substance.”

IAS 38 specifies the three critical attributes of an intangible asset to be …

  • identifiability
  • control (power to obtain benefits from the asset)
  • future economic benefits (such as revenues or reduced future costs)

IAS 38 contains examples of intangible assets such as customer lists, copyright, patents and franchise agreements.

The Value and Valuation of Trade Secrets

The terms value and valuation and their cognates and compounds are used in a confused and confusing but widespread way in our contemporary culture, not only in economics and philosophy but also and especially in other social sciences and humanities. Their meaning was once relatively clear and their use limited. Value meant the worth of a thing, and valuation meant an estimate of its worth.

This blog will explore the subject of the valuation of one particular form of IP, namely trade secrets.Why trade secrets? Well, IAS 38 clearly indicates that a trade secret is also an example of an intangible asset, so long as it meets the three critical attributes – identifiability, control and future economic benefit. Trade secrets are a very important part of any IP portfolio. It is no exaggeration to say that virtually every business possesses trade secrets, regardless of whether the business is small, medium or large.

Trade secrets are an important, but oftentimes an invisible component of a company’s IP portfolio of assets. However, trade secrets can also be the crown jewels within the portfolio.

Why Conduct a Trade Secret Valuation

Before delving into the details of the valuation of a trade secret, it is important to appreciate that the rationale for conducting such a valuation may vary.

  • For management information purposes
  • For strategic planning
  • For value reporting
  • For accounting purposes
  • For liquidation reasons
  • To support a legal transaction
  • For licensing
  • For litigation support
  • For dispute resolution
  • For taxation planning and compliance
  • For fundraising purposes

Transfer Pricing

Throughout this blog, one particular valuation rationale will be analyzed, namely transfer pricing. Transfer pricing is probably the most important issue in international corporate taxation. In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions between enterprises under common ownership or control.

A transfer price is the price at which members of a group transact with each other, such as the trade of goods and services between group members..

Transfer pricing also comes into play when the transaction between group members involves intangible assets and IP like trade secrets. In other words, transfer pricing is not limited to just tangible assets. Due to the rather broad the definition of intangibles for transfer pricing established by the OECD, the scope of the valuation as well as the resulting value will often differ from analyses performed for accounting and management information purposes; as stated in the OECD Guidelines (paragraph 6.7):

Intangibles that are important to consider for transfer pricing purposes are not always recognized as intangible assets for accounting purposes. For example, costs associated with developing intangibles internally through expenditures such as research and development and advertising are sometimes expensed rather than capitalised for accounting purposes and the intangibles resulting from such expenditures therefore are not always reflected on the balance sheet. Such intangibles may nevertheless be used to generate significant economic value and may need to be considered for transfer pricing purposes”.

With trade secrets being a prominent example of Intangibles that are not being reflected on the balance sheet, but which may nevertheless generate significant economic value, it is evident that trade secrets cannot be disregarded for transfer pricing purposes. Trade secrets are explicitly recognized within the OECD Guidelines in Chapter VI Section A.4.2.

Tax practitioners which fail to identify relevant trade secrets as well as to develop a clear understanding of the attributable economic value face a high degree of uncertainty in respect to the question whether their transfer prices reflect an arm’s length compensation for the intangibles contributed by individual group members. Hence, with the growing importance of intangibles as the core value drivers within highly integrated value chains, understanding how to properly cope with intangibles and IP like trade secrets in transfer pricing is one of the key challenges faced by tax practitioners. Conducting a thorough stock-tracking analysis and compiling a respective analysis will be invaluable first steps to reduce uncertainty and risks.

The Requirements for Trade Secret Valuation

Conducting an IP valuation exercise requires transparent inputs, reliable and sufficient data, and objectivity of the person conducting the valuation. This applies also if the IP in question is a trade secret. Ideally, the valuation of the trade secret should have …

  • Transparency – Qualification of the valuation inputs, assumptions, risks, sensitivity analysis, and disclosure
  • Validity – Valid inputs and assumptions as of the value date.
  • Reliability – If a valuation is repeated, it should reliably give a comparable and reconcilable result
  • Sufficiency – The valuations should be based on sufficient data and analysis to form a reliable conclusion
  • Objectivity – The appraiser should conduct the valuation free from any form of biased judgment
  • Various financial and legal parameters – When performing a monetary IP valuation, various financial and legal parameters should be taken into account

From a transfer pricing perspective observing and documenting the above requirements will greatly contribute to the defensibility of the valuation. Tax practitioners need to be aware of in this context that tax authorities are extremely sensitive about the effects of information asymmetries. The basic assumption here, whether justified or not, is that tax authorities are generally at a disadvantage when assessing transactions involving intangibles. As a result, they will frequently second guess the valuations during tax audits. The recent discussion in the context of the BEPS point towards an increased (even reversed) burden of proof for taxpayers, as the OECD explicitly stated in the implementation guidance for hard-to-value-intangibles (BEPS Action 8, Public Discussion Draft, 23. May 2017) that:

“This guidance protects tax administrations from the negative effects of information asymmetry by ensuring that tax administrations can consider ex post outcomes as presumptive evidence about the appropriateness of the ex ante pricing arrangements. At the same time, the taxpayer has the possibility to rebut such presumptive evidence by demonstrating the reliability of the information supporting the pricing methodology adopted at the time the controlled transaction took place”.

Without observing the above requirements for the valuation process, rebutting presumptive evidence (hindsight) presented by tax authorities will be challenging indeed.

Trade Secret Valuation Techniques

Let’s now delve into the details. There are a number of techniques / methods in use when conducting IP valuation exercises. Here are some of the quantitative IP valuation methodologies used.

Income approach

The income approach measures the value of the IP by reference to the present value of the economic benefits expected to be received over the remaining life of the IP

Market approach

The market approach measures value based on what other purchasers in the market have paid for assets that can be considered reasonably similar to those being valued

Cost approach

The cost approach measures the value of a IP based on the cost invested in building the IP, or its replacement or reproduction cost

Discounted cash flow

DCF analyses use future free cash flow projections and discounts them, using a required annual rate, to arrive at present value estimates.

Typically discounted cash flow is the methodology used when conducting a trade secret valuation exercise. Discounted cash flow analysis is a method of valuing an asset using the concept of the time value of money. All future cash flows associated with the asset are estimated and discounted by using cost of capital to give their present values.

When conduction a discounted cash flow analysis in the context of transfer pricing (i.e. a sale of intangible assets and / or the relocation of corresponding functions), one should be aware that the valuation should consider the perspective of the buyer as well as the perspective of the seller (i.e. at arm’s length the buyer will generally anticipate to earn higher profits from the use of the intangibles than the seller and the parties will negotiate a price within a corresponding bid-ask range).


Here are some of the rational economic considerations when attempting to calculate the valuation of a trade secret. They may be broken down into four ‘buckets – costs, timing, benefits and risks. These are the inputs as such which feed into the discounted cash flow valuation calculation.

Associated Costs

Investment outlays. The economic outlay to create or develop the trade secret. This may include such details as the time taken to develop the trade secret, time taken to test it, labour costs involved, investment in physical capital (e.g., equipment, property, etc.) plus other related expenses.

Protection outlays: The economic outlay to provide reasonable protection to the trade secret, and may include administrative, legal and technical protection mechanisms deployed to protect the trade secret over time.

Associated Timing

Protection period: The anticipated protection period as impacted by the likelihood of a competitor discovering through reverse engineering or other proper means. Of course, the trade secret owner himself may decide to declassify the trade secret after a period of time for various reasons. Alternatives: The existence or expected development of acceptable alternatives or substitutes that could diminish or eliminate competitive advantages provided by the trade secret.

Associated Benefits

Investment returns. The economic benefits expected as a result of the trade-secret’s use in a product or service, such as greater sales, price premiums, or cost reduction. Internal capabilities: The benefits gained by the organisation possessing the trade secret in terms of its internal capabilities, and/or improved efficiency and effectiveness.

License or sale:  a trade-secret owner might also consider licensing or selling a trade secret—whether as part of a specific IP transaction or as part of a larger business transaction.

Prior User Rights: Having a trade secret in use prior to another entity filing a patent application gives the trade secret owner prior user rights. The trade secret owner does not require a license to continue to use the patent belonging to that other entity.

Recovery of damages: While typically not a preferred way of generating a ROI on a trade secret, litigation involving misappropriation can also provide investment returns through the recovery of damages.

Associated risks

The risk that the company themselves fails to treat the information as a trade secret, by not controlling access and not putting reasonable protection mechanisms in place. The risk that the trade secret is misappropriated by say a disgruntled employee, a former executive, a collaboration partner, a competitor or a hacker. The risk that an independent party either patents or publishes the information thereby putting the information into the public domain.

All of these economic considerations are also relevant for transfer pricing professionals. Having access to respective information will greatly enhance the reliability (defensibility) of respective calculations.

Trade Secret Valuation Report

A proper and professional trade secret valuation report should ideally contain the following sections.

  • position and status of the appraiser
  • purpose of the IP valuation
  • identification of the subject IP
  • details of any IP-related assets valued
  • addressed audience/addressees
  • premise of the IP value
  • approach and methods used
  • valuation date
  • value date
  • data sources used
  • key assumptions and sensitivities
  • limitations

When compiling the report, it is highly recommended to keep the Corporate Tax Department / Function and/or the external Accountancy & Tax Firm in the loop, as the contents will also be of immediate value for transfer pricing purposes. Not only does an overview (list) of the intangibles constitute a compulsory part of the required transfer pricing documentation, the so-called Master File (see OECD Guidelines, paragraph 5.19), it will also be an invaluable source of information to verify whether the trade secrets have been adequately taken into account in the context of intercompany transactions.

Final thoughts

Trade secret valuation is a challenging task that frequently fails to demonstrate transparency in terms of how it reaches conclusions on asset value. In general, trade secret valuation requires thorough analysis and deliberation, the application of complex methodologies, and good levels of business judgement.

We trust that this overview of the valuation of trade secrets is of interest and of value.

Donal O’Connell & Oliver Treidler

Author: ipeg 8 months ago

Geen onderwerp staat zo vaak in de belangstelling als de vraag naar de waardering van rechten van intellectuele eigendom.

De opkomst van octrooiveilingen – in 2006 gestart door Ocean Tomo [1] in de VS – heeft in elk geval voor een lichtpuntje gezorgd in het zichtbaar maken van de waarde van een octrooi. Veel is er gezegd en geschreven over de betekenis van immateriële waarde (“intangibles”) van intellectuele eigendom en octrooien in het bijzonder. Zowel in de fiscaliteit als in economische verhandelingen wordt algemeen erkend dat octrooien als een “immaterieel” activum of goed moet worden behandeld [2]. Dit heeft echter niet geleid tot een grotere inzichtelijkheid in de “waarde” van een octrooi. De veilingen hebben in elk geval een popularisering van het octrooi als waardefactor tot gevolg gehad. De waarde op een veiling is immers welk bod een – al dan niet anonieme [3] – bieder voor een octrooi doet tijdens de veiling. Zo eenvoudig ligt het echter in de alledaagse werkelijkheid niet.  De waarde op de veiling is de prijs die voor het octrooi wordt geboden. Als de “reserve price” maar laag genoeg is (dat is de prijs waar beneden de octrooihouder niet wil verkopen) dan zal een bod al gauw tot een verkoop leiden, dus tot een verkoopprijs. Is dat echter ook de “waarde” van het octrooi? Het ligt eraan wie je het vraagt. Voor de veilingkoper waarschijnlijk wel en ook voor zijn accountant. Die zullen de betaalde prijs als verwervingskosten opnemen op de balans in de vorm van goodwill. Als in de toekomst dat octrooi licentie-inkomsten gaat genereren dat weer leidt tot een hogere opbrengst dan de verwervingskosten dan heeft dat octrooi een “waarde” verkregen die geen enkele verhouding meer vertoont met de prijs waarvoor het octrooi werd gekocht op de veiling.  Als die kennis bekend zou zijn op het moment van veiling, bv. in de gevallen waar een octrooi wordt verkocht dat al licentie­ inkomsten genereert, dan geeft dat een “houvast” voor de waardebepaling. Vraagt men dat aan een advocaat of curator die zijn cliënt of de rechter commissaris moet adviseren over de waarde van een (aangeboden dan wel in de boedel aangetroffen) octrooi dan zal hij dat doen aan de hand van een risico analyse. In de juridische wereld betekent dat meestal een opinie waarin staat dat ergens ter wereld een prior art publicatie is opgedoken die het octrooi waardeloos maakt (immers nietig doet zijn). In een faillissement situatie wordt bij de waardebepaling rekening gehouden met het feit dat het onderliggende IE recht niet langer onderdeel uitmaakt van een “running concern”. In dat opzicht is een IE recht in feite bederfelijke waar geworden[4].  Wordt diezelfde vraag echter aan een IP bedrijfsmanager gesteld dan zal hij de waarde laten afhangen van de plaats die het octrooi inneemt in de gehele organisatie.  Afhankelijk van het feit of het octrooi ter bescherming dient van eigen producten dan wel leest op producten van de concurrent, waardoor hij “octrooi vrede” kan afdwingen of onderwerp van een kruislicentie wordt.

Naast de juridische betekenis van “waarde” van een IE recht heeft de term uiteraard ook –en soms juist– een economische,  sociologische of filosofische betekenis, welke ik, tenzij de context dit vereist [5], in dit artikel terzijde laat.

Waarderingskarakteristieken IE rechten

Als immaterieel activum, wordt intellectuele eigendom door een aantal eigenschappen gekenmerkt die waardering ervan tot een nogal bewerkelijke aangelegenheid maken. IE rechten zijn:

  1. overdraagbaar; de aan een IE recht behorende exclusieve rechten zijn binnen een identieke business context even waardevol
  2. vergankelijk; producten van intellectuele eigendom kunnen uit de mode raken, in het auteursrecht denken we bv. aan een artiest die zijn populariteit verliest, in het octrooirecht kunnen technologie cycli beperkt zijn, een merk kan door niet normaal gebruik zijn waarde verliezen
  3. riskant; succesvolle IE creatie vereist creativiteit, inventieve arbeid, commercialisatie, alle fases waarvan zijn behept met risico’s
  4. context afhankelijk; zie hieronder, onder “Waarde is Context”.
  5. niet-rivaliserend in consumptie [6]; IE kan simultaan worden gebruikt door een ieder zonder dat de waarde daalt
  6. nuttig uitsluitingsmiddel; IE verschaft een uitsluitend recht anderen van het gebruik uit te sluiten (een octrooipositie kan freedom to operate verschaffen, een auteursrecht verschaft het monopolie op exploitatie, het merk kan het gebruik ervan voor identieke goederen of diensten verhinderen)

 Dat alles maakt waardering van deze rechten tot een ware kunst, zo niet wetenschap. Waarderingsvraagstukken zijn tot nu toe vanuit juridisch oogpunt onderbelicht gebleven. Slechts accountants, economen, investeerders en faillissementscuratoren komen regelmatig met waardevraagstukken in aanraking. De juridische wetenschap heeft zich vrijwel afzijdig gehouden in de discussie over waardebepaling van IE.

Binnen de accountancy[7] gaat het dan om “fair valuing”, bv. om de vraag of de op de balans opgenomen waarde[8] van intellectuele eigendom (meestal in de vorm van goodwill en afschrijving daarop) een “impairment test” [9] kan doorstaan. Een dergelijke test kan gevolgen hebben voor de jaarrekening (en derhalve mogelijk op de prijs van het aandeel van het bedrijf).

In de financiële en economische literatuur en praktijk speelt (waardering van) intellectuele eigendom een rol in “structured finance” met “off balance” financie­rings­constructies, zoals securitisatie van muziekauteursrechten dan wel merk- of octrooilicentie inkomsten) [10].

Waarde is Context

In vele gevallen gaat het bij waardebepaling van IE rechten om de context waarbinnen die “waarde” moet worden vastgesteld.  Alhoewel dit in principe geldt voor alle IE rechten is het bij octrooien het meest zichtbaar. Een octrooi onderscheidt zich als immaterieel activum van andere IE activa. Als een fabrikant van elektronica voor het verhandelen van zijn producten behalve componenten ook octrooirechten van derden moet “inkopen”, bv. in de vorm van een licentie, wordt de waarde van de ingelicentieerde octrooien vastgesteld op de “inkoopwaarde” van die rechten, dus de “licentie prijs” die betaald is om die rechten, die noodzakelijk zijn het product aan de man te brengen, te verwerven. Is er echter een partij die –met de rug tegen de muur – in een juridisch octrooigevecht is verwikkeld, dan is de “waarde” van een octrooi dat hem in staat stelt een tegenvordering in te stellen om zo marktuitsluiting te voorkomen, vele malen groter dan de “objectieve waarde” van een dergelijk octrooi onder normale marktomstandigheden.  En zal dus ook de prijs die de koper bereid is te betalen, hoger zijn dan in “normale” omstandigheden gerecht­vaardigd is. Ondanks het feit dat de door de markt gerealiseerde prijs vaak “fair value” wordt genoemd, is het maar de vraag of dit zo “fair” is, aangezien de “markt” voor octrooien zich niet voorspelbaar, noch logisch gedraagt.

De prijs daarentegen van een activum als onroerend goed is het transactiebedrag dat in de markt tot stand komt als resultaat van vraag en aanbod, of, in een niet-veiling context, het bedrag als uitkomst van een onderhandelingsproces. Deze prijs kan dus hoger of lager zijn dan de waarde. De prijs zal bepaald worden door omstandigheden op de markt, door sterk subjectieve motieven zowel van de koper als van de verkoper, en door hun onderhandelingstalent. De aldus vast te stellen waarde is dan de marktwaarde, ofwel de prijs die de markt bereid is te betalen,  afhankelijk van kwaliteit van het onroerend goed, staat van onderhoud, ligging en algemene marktomstandigheden als toegang tot financiering e.d.

Een ander voorbeeld dat in dit verband wellicht tot de verbeelding spreekt is de waarde van beleggingen (aandelen, obligaties en andere waardepapieren). De heersende theorie in kringen van waardepapier beleggingen gaat uit van een “efficiënte markt”.  Dat idee gaat ervan uit dat de markt van beleggingen alle relevante factoren efficiënt incalculeert, en dus redelijk voorspelbare markt­bewegingen tot gevolg heeft. Het gebruik van “benchmark”-data wordt daarbij als uitgangspunt genomen voor aan- en verkoop beslissingen. Een dergelijk generiek marktconcept voor intellectuele eigendom is – voor zover ik weet – niet ontwikkeld noch breed geaccepteerd. De “markt” voor octrooien is dus alles behalve “efficiënt”.

Waardebepaling en Best Practices

Waarde is een niet alleen een regelmatig terugkerend onderwerp op octrooi­congressen maar leidt tot velerlei discussies, vragen, én academische verhandelingen. Het is ook een nog redelijk onontgonnen terrein, waar standaards en “best practices” ontbreken. Dit blijkt alleen al uit het feit dat er op dit moment over de honderd waarderingmethodes voor octrooien bestaan.  Die onzekerheid over de waarde van octrooien zal zeker niet bijdragen tot een bredere acceptatie van octrooien als een factor waarbinnen de organisatie rekening moet worden gehouden, noch tot een besef dat octrooi beleid tot een vast onderdeel van elke ondernemingsstrategie hoort.  Met waardering van overige IE rechten is het al niet beter gesteld.

Faillissements­curatoren hebben vrijwel geen ervaring met waardering en lijken zich vooral op verklaringen van en accountant te baseren. Het probleem met accountancy is dat men ook daar geen brede ervaring met IE rechten heeft en geneigd is naar in het verleden behaalde resultaten te kijken om die vervolgens te extrapoleren naar de toekomst, al dan niet door berekening van de  NAV (Nett Asset Value), of contant making van toekomstige licentie-inkomsten.

Waardebepaling wordt er voorts niet gemakkelijker op als men zich bedenkt dat waarde­toevoeging wordt beïnvloed door de verschillen in materiële IE rechten.  Bij octrooien speelt de omvang van het geclaimde recht een rol, hoe breder de octrooiconclusies hoe groter de kans dat er een veelvoud aan producten of werkwijzen onder valt. Aan de kostenzijde van de balans van de wederpartij van een octrooihouder –concurrent, toekomstige licentienemer –  betekent dat hoe meer claim elementen hoe groter de kans dat product development dan wel de licentie duurder maakt. Bij brede conclusies zal de concurrent die een zelfde product op de markt wil brengen, meer kosten moeten maken voor bv. design arounds.  Tegenover de kosten van de concurrerende producent, staat echter niet een gelijke “waarde” vermeerdering aan de kant van de octrooihouder, omdat die “waarde” – namelijk de macht om de potentiële concurrent van de markt te houden – zich niet onmiddellijk vertaalt in een hoger (markt)prijs of geldelijke waarde.

Een verdere omstandigheid die waarde van een octrooi beïnvloedt is het recht van de octrooiaanvrager afsplitsingen van zijn oorspronkelijke aanvrage in te dienen waarbij hij de beoogde omvang van zijn recht kan uitbreiden (waarbij veelal gekeken wordt naar concurrerende producten op de markt om, na verlening, in staat te zijn de concurrentie te dwingen een licentie te nemen of met behulp van het octrooi van de markt te weren).

Anders dan bij octrooien, waar de duur van het uitsluitend recht beperkt is, kan bij merken de waarde in hoge mate worden bepaald door intensiteit van het gebruik. Een bekend merk is waardevoller dan een onbekend merk. De waarde van een brand of merk kan voorts worden vergroot door cognitieve gebruiksmaximilisatie (elementen van marketing te deponeren zoals verpakking, slogans, kleuren, opmaak, etc.). Door de mogelijkheid “derivatieven” apart te licentieren (verschillende gebruikers voor verschillende, onder het depot vallende, warenklassen) kan eveneens waarde worden toegevoegd.

In het auteursrecht staat de lange duur van het recht  – 70 jaar na overlijden van de auteur – in geen verhouding tot een industriële creatie die tot octrooi leidt en slechts 20 jaar na aanvrage bescherming biedt. Dit verhoogt de potentiële waarde van een auteursrecht, al was het maar omdat langer royalties over het gebruik van het auteursrechtelijk beschermde werk geclaimd kunnen worden.

Waarde en Experts

Voorspellen welke uitvinding, welk merk, welk auteursrecht of industrieel ontwerp van grote waarde zal blijken te zijn, is niemand gegeven. Eén van de redenen dat er vele octrooien worden aangevraagd op uitvindingen die de tekentafel nooit zullen verlaten, is de inherente onmogelijkheid om aan te geven welke uitvinding ooit zal worden toegepast of  welk geoctrooieerd product een marktsucces gaat worden . Geen uitgever kan voorspellen welk boek of welk muziekstuk de hitlijsten zal halen en dus waarde creëert, voor de maker, ontwerper, maar ook voor de samenleving. Dat er niet zoiets als een “expert” bestaat die op alle waardevraagstukken een sluitend antwoord kan geven blijkt wel uit het feit hoe vaak in het verleden dergelijke experts er naast hebben gezeten als het gaat om het waarderen van een nieuwe vinding of nieuwe ontwikkeling zoals blijkt uit de in noot [11] gegeven “voorspellingen.

Dat maakt waardering van IE rechten een fascinerende bezigheid. Wetenschappelijke studies over waardebepaling van IE rechten zijn, anders dan bijvoorbeeld de waardering van onroerend goed of zelfs van andere immateriële activa,  schaars [12].  De behoefte aan verder onderzoek en unificatie blijft onverminderd groot.

Severin de Wit (Den Haag, IPEG, Intellectual Property Expert Group)

www.ipeg.com – www.ipegconsultancy.com ((severin.dewit@ipeg.com)


[1] Ocean Tomo organiseerde de “auction business”, die echter tot minimale opbrengsten leiden, met gemiddeld een opbrengst die lager ligt dan de historische kostprijs, ondergebracht in een kleinere eenheid en heeft met zich meer gericht op lucratievere activiteiten zoals bv. litigation support en “expert witness” werk.

[2] Margaret Blair en Steven M.H. Wallman (ed.) ”Unseen Wealth: Report of the Brookings Task Force on Intangibles”, Brookings Institution Press (Washington, DC, 2001). R.M.S Wilson en J.A Stenson,“Valuation of information assets on the balance sheet: The recognition and approaches to the valuation of intangible assets”, Business Information Review, 2008, p. 167-182.

[3] De meeste bieders op de door Ocean  Tomo georganiseerde veilingen boden per telefoon (anoniem dus), kwade tongen beweren dat in de afgelopen veilingen vooral “patent aggregators” als Intellectual Ventures (Bellevue, WA, USA) geboden hebben, zie ook Millien en Laurie, “Established and Emerging IP Business Models” , The Eighth Annual Sedona Conference on Patent Litgation conference paper (2007)

[4] Zie “Patent Perishables”, IPEG blog (http://www.ipeg.eu/blog/?p=670)

[5] zie de volgende paragraaf over de kenmerken van IE rechten

[6]  Economen zien industriële eigendomsrechten als tijdelijke monopolies gesanctioneerd door de staat. IE rechten zijn gebruikelijk beperkt tot zogenaamde niet-rivaliserende goederen. Dit betekent dat het IE recht nogmaals of tegelijkertijd “geconsumeerd “ worden (dus gebruikt worden of het genot ervan hebben) door andere consumenten.  Het gebruik door de één sluit gebruik door de ander niet uit, dit in tegenstelling to “rivaliserende” goederen als bv. kleding, dat slechts door één consument tegelijkertijd kan worden gebruikt.  Een mathematische formule daarentegen kan door welk aantal mensen dan ook tegelijkertijd worden gebruikt en is dus niet rivaliserend. Sommige bezwaren tegen de term “intellec­tuele eigendom” hebben dan ook te maken met het argument dat “eigendom”  alleen kan worden toegepast op rivaliserende goederen. Omdat niet-rivaliserende goederen door velen op eenzelfde ogenblik en onafhankelijk van elkaar (elk tegen minimale marginale kosten) gebruikt of gekopieerd mogen worden , behoren producenten van deze goederen een niet geldelijke aansporing te krijgen om dergelijke goederen te produceren en wel in de vorm van een monopolie of exclusief recht.  Het probleem met monopolies echter is dat deze “marktinefficiënte kenmerken” vertonen (producenten rekenen hogere prijzen en produceren minder dan sociaal wenselijk is). De verlening van IE rechten vertegenwoordigt derhalve een “trade-off” tussen de belangen van de samenleving in de creatie van niet rivaliserende goederen (door hun productie te stimuleren)  en de problemen van monopolie­macht. Aangezien die “trade-off” en de relevante voordelen en kosten voor de samenleving afhankelijk zijn van vele factoren die voor diverse producten (i.c. IE rechten) kunnen verschillen wordt wel verdedigd dat de “waarde” voor de samenleving, gelet op de marktinefficiënties, voor elk IE recht varieert. Zie Padraig Dixon en Christine Greenhalgh, “The Economics of Intellectual Property: A Review to Identify Themes for Future Research”, Oxford Intellectual Property Research Centre, Oxford, United Kingdom, November 2002. Zo ook, Greenhalgh en Rogers, “The value of intellectual property rights to firms and society, Oxford Review of Economic  Policy (2007, issue 23, p. 541-567)

[7] Zie voor een overzicht van de aspecten van waardering vanuit GAAP accounting principes, Hunter, Webster & Wyatt,  “Identifying corporate expenditures on intangibles using GAAP”, Intellectual Property Research Institute of Australia Working Paper No. 07/09 ISSN 1447-2317 (Mei 2009).

[8] Over de vraag waarom IE rechten meestal niet anders dan tegen verwervingskosten op de balans worden opgenomen, zie noot 2.

[9] De –financiële – test of de waarde waarvoor een IE recht in de boeken staat, moet worden herzien vanwege al dan niet recentelijk opgetreden “risico factoren”). Zie “Patent Perishables”, IPEG blog, ipeg.eu/blog/?p=670

[10] Zie John S. Hillery, “Securitization of Intellectual Property: Recent Trends from the United States”, CORE (www.wcore.com),  Washington 2004 en F. Scott Kieff, Troy A. Paredes, “An Approach to Intellectual Property, Bankruptcy, and Corporate Control”, Stanford Law and Economics Working Paper No. 305; Washington University School of Law Faculty Working Paper No. 05-07-01.

[11] Een greep uit wat publicaties en uitspraken bevestigt dat beeld (met dank aan dr. Ton Tangena, ex-Philips, octrooigemachtigde bij Tangena en van kan):

“The concept is interesting and well-formed, but in order to earn better than a ‘C’, the idea must be feasible”  – een management professor van Yale Universiteit in antwoord op Fred Smith’s paper waarin hij een betrouwbare “overnight delivery service” voorstelt. (Smith richtte vervolgens Federal Express Corp. Op -FedEx)

 “The advancement of the arts, from year to year, taxes our credulity, and seems to presage the arrival of that period when human improvement must end”  –  Ellsworth, US Commissioner of Patents in 1843

“We don’t like their sound, and guitar music is on the way out.” Een Decca Recording Co. bestuurder die niets ziet in de Beatles, 1962

“I think there is a world market for maybe five computers” , Thomas Watson, bestuursvoorzittter IBM, 1943

“So we went to Atari and said, ‘Hey, we’ve got this amazing thing, even built with some of your parts, and what do you think about funding us? Or we’ll give it to you. We just want to do it. ….And they said, ‘No’. So we went to Hewlett-Packard, and they said, ‘Hey, we don’t need you. You haven’t got through college yet’.” Apple Computer Inc. oprichter Steve Jobs over zijn pogingen om Atari en HP geïnteresseerd te krijgen in zijn Steve Wozniak’s personal computer.

[12] Wie wil weten wat waardebepaling in elk geval niet omvat, leze Patrick H. Sullivan en Alexander

  1. Wurzer, “Ten common myths about intangibles, value and valuation”, IAM (Intellectual Asset Management) Magazine, 2009, Special Report, p. 17-20
Author: ipeg 8 months ago

Intellectual Property (IP) valuation is easily one of the most misunderstood topics surrounding the management of intangible assets. Over the last 20 years we have seen the migration of IP valuation from being a tool for estimating IP damages into more “main stream” applications, and with the explosive growth in IP transactions, the need for assigning a monetary value to IP assets is higher than ever.  Having said that, inside the IP community there is a high degree of frustration expressed by all constituents when it relates to IP valuation: buyers, sellers, lawyers, consultants, etc.

Much of the confusion and frustration around IP valuation stem from an interesting paradox that results from the lack of alignment between IP transactions, deal pricing and reporting requirements. As long as most IP transactions are not being properly valued, while most IP valuations that are done don’t really matter since they happen after the fact, there is no incentive to develop better valuation processes nor is there ever going to be a better set of comparables to refer to.

We lay out a very pragmatic framework to approaching IP valuation: provide a high level view of the evolution of the field, explore the current landscape of valuation circumstances and the problems they present, and offer a path forward for the future.

The Evolution of IP Valuation: From Litigation to Monetization

With its origins in the IP litigation of the 1980’s and 1990’s, the valuation of IP (primarily patents) in the United States was initially limited to damages calculations in legal cases involving claims such as patent infringement.  With the introduction of tax planning involving IP, such as transfer pricing and patent donations, the valuation of intangibles became critical in non-litigation circumstances as well.  Companies were required to include in their tax reporting the fair market value (FMV) of IP involved in transactions, such as the inter company transfer of IP or the donation of a patent to a university.  New accounting GAAP rules related to business combinations, introduced in the early 2000’s, expanded the need for IP valuations even more, as companies were now required to report the Fair Value (FV) of intangibles that were purchased with a target in an M&A deal.  These “Compliance” situations – litigation, accounting, and tax reporting –carry with them a high degree of scrutiny by the court or regulating authorities, and require a third-party, IP valuation expert’s opinion in the form of a report or testimony.

In parallel to the proliferation of tax and accounting rules which mandated the valuation of IP in certain transactions, around the same time (late 1990’s- early 2000’s) the field of intellectual asset management (IAM) was starting to gain momentum with US corporations.  Large companies with significant patent portfolios were leading the way, and with the increase in sophistication of active IP portfolio management, came the need for valuation.  The types of activities where a valuation became increasingly important include: spin-offs, in kind contributions, licensing, patents sales, and other commercialization activities.  Since many of these activities are done for planning purposes or do not result in tax or accounting reporting requirements, these circumstances can be referred to as “Non-Compliance”.  In these situations, due to the low to medium degree of scrutiny and the lack of reporting requirement, the valuation is often done in house or between the parties, without the involvement of a third-party IP valuation expert.

The chart below displays the IP Valuation Spectrum, the compliance vs. non compliance situations and when a valuation expert may be needed (“Compliance” situations are highlighted in a box):

The IP Valuation Paradox

The distinction between Compliance and Non-Compliance situations is critical in understanding the problem with IP valuations. There’s a fundamental difference between the types of valuation done in compliance vs. non-compliance situations (excluding litigation, which is a special case):

In compliance situations, the valuation is usually done after the fact, when the deal has already been finalized, and so the IP valuation is not driving the transaction but rather reporting the transaction. There is single point value that needs to be recorded (as opposed to a range of values that needs to be negotiated).

Non-compliance situations fall intoone of two categories:

  1. 1. Deals involving intermediaries (brokers or patent funds) – there is usually no monetary valuation done before the deal; so the valuation is not driving the deal nor is it reported after the deal;
  2. 2. Direct negotiations between buyer/seller – There are usually valuations done on both sides for purposes of negotiations and therefore there would be a range of values that needs to be reconciled and negotiated between a buyer and a seller.  Here, too, the valuation is not always reported after the deal and so future similar deals cannot refer to it as a comparable.

Hence lies the paradox: most IP transactions today are done in non-compliance situations where the valuation is either not required, not reported or not done; and in compliance situations, where the valuation is required and reported as a single number, it doesn’t really matter since it’s done after the deal is closed.

There do we go from here? Make IP Valuations Matter, and Report Them!

The most common complaints with IP valuation usually fall into three categories:

1. Lack of active markets and a good set of comparables

2. Lack of transparency in valuation methods

3. The nature of intangible assets makes their value “contextual”, such that it’s difficult to assign one value to an asset or to agree on a value between buyer and seller

We argue that the root problem with IP valuation is not in the lack of markets, comps or methods; these are all symptoms of the real problem.  The key to a better IP valuation environment lies in more “Compliance”: higher deal scrutiny, more reporting requirements, and making IP valuation an integral part of deal pricing.  We should strive to undo the paradox: get to a point where most IP transactions are done in a compliance situation, where the IP valuation is required and reported; IP valuations should be done prior to the deal and have a meaningful impact on deal pricing.  This is a long process which could require regulatory, cultural and structural changes which could face many hurdles, but the problem needs to be identified and dealt with.

Let’s take the analogy of buying a house: we all like to refer to the real estate market as a very active market with lots of great comparable transactions for appraisers to work with.  These comps are readily available because every deal is reported somewhere: in the county records, in the local papers, in realtor’s brochures – and with a great degree of detail that allows a thorough comparison and adjustment between properties.

Why cannot intangibles be like that? As long as most IP transactions are not being properly valued, while most IP valuations that are done don’t really matter since they happen after the fact, there is no incentive to develop better valuation processes nor is there ever going to be a better set of comparables to refer to.  And while the value of intangibles will always be contextual in nature, there could be more information available in the marketplace to support a comparison and adjustment of market transactions, as is so successfully done in real estate markets. We need to make IP valuation matter, and we need to report it!

Efrat Kasznik is the President of Foresight Valuation Group, LLC, a boutique consulting firm focusing on IP valuation, strategy and litigation, and is based in Palo Alto, California

Author: ipeg 8 months ago