Royalty Rate Determination Process

Intellectual property (IP) licensing is big business. So big that it has become a $40 billion industry, according to IBISWorld. IP licensing affords IP owners a way of making revenue while maintaining rights to the IP. It allows them to offer their IP under negotiation to other businesses who want to use an invention that they didn’t create themselves. Therefore, in exchange for a fee, such as a royalty rate, the businesses can remain competitive.

However, determining royalty rates can be a challenging task. The following outlines the four-step process in determining royalty rates.

1. Identify key IP rights. IP valuation analysts determine the key rights that are subject to the royalty rate analysis. Therefore, the analysts seek to understand all fields of use, geographic restrictions, exclusivity restrictions, and others.

2. Identify value proposition of IP rights. The analysts determine the actual micro-economic value proposition associated with the rights afforded by the license grant. This entails quantifying the economic impacts of the IP rights.

3. Identify contributions of licensor and licensee. IP valuation analysts determine how each party contributes to the value of an IP. While the licensor naturally owns the IP rights, a licensee also brings value to the table through sales and distribution, manufacturing capability, and others. In order to apportion the contributions in an equitable manner, the analysts must identify what both parties bring to the transaction.

4. Apportion value based on licensor and licensee. The final, and easiest step, is to apportion the value. However, the analysts cannot perform this step without following the three previous steps. Without the other steps, the analysts would not have all of the details necessary to provide a reasonable royalty rate determination.

As shown, the royalty rate determination process takes four steps, but these steps require serious insight. At Pellegrino & Associates, we have years of experience determining royalty rates. Contact us today for more information!

Brands Capitalize on Election Year

When a hot topic consumes the public, it brings forth a host of opinions, debates, publicity, and interest. It’s all everyone talks about–or so it seems. Election years bring nonstop conversations and media attention. Few people escape election years without being bombarded with advertisements, commentary, or discussions about an upcoming election. Therefore, brands that integrate their way into everyday discussions can create more exposure.

Election years can stifle company advertisements as candidates flood media outlets in the pursuit of gaining supporters. However, election years can elicit new ways for brands to create recognition–as long as they tread lightly. Brands must be careful that their message doesn’t appear to take sides. They have to be creative enough to incorporate an election theme, but appear unbiased in the process. Some brands are doing just that.

Chrysler is using two actors who played presidential roles, one in a TV series and another in a movie, to promote two of its new vehicles. Hotels.com takes a light approach with its Captain Obvious mascot running for president. The advertising storyline takes the mascot to all 50 states in a series of commercials. Pop-Tarts is heading a Pop the Vote campaign. JetBlue launched its “Reach Across the Aisle” ad, showcasing how compromise can help reach resolutions, using rows of red and blue that represent political parties. These are just a few examples of clever ways brands are capitalizing on the election.

By using a topic that is at the forefront of consumer minds, these brands resonate with consumers. Election years bring tense competition and nonstop messages. Consumers may find it refreshing to address such topics in a lighter tone. Brands that bravely tackle such hot topics could reap the rewards.

Top Five Sports Team Brands

Recognizable and popular brands bring tremendous value to a company. Consumers gravitate to well-known brands because they feel that the products provided by those brands are trustworthy. After all, they wouldn’t be popular if they weren’t, right? At least that is the logic that many consumers have regarding brands. As consumers, we often choose our groceries and fast food items based on the brand name. For instance, if we want a cheeseburger, we know numerous available fast food restaurants that serve cheeseburgers (e.g., McDonald’s, Burger King, Wendy’s, and others). We also know the different taste, size, and cost of those cheeseburgers. We have become familiar with the brands and often base our purchasing choices on the products we know those brands offer.

While recognizable brands often include the food we eat, brands exist for a variety of other purposes. One of those is entertainment in the sports world.

Sports teams rely heavily on their brand in order to entice fans to attend games and purchase memorabilia. Heavily advertised brands are likely to do better than those less advertised. Providing a plethora of memorabilia (such as clothing, cups, key chains, and more) with recognized logos and brand names also helps raise brand value. The more recognizable a brand name, the more a team can charge for tickets and products. Winning teams also raise the bar for brand recognition, which increases the value of the brand.

According to Forbes, the top five most valuable sports team brands in 2015 were as follows:

  1. New York Yankees with a $661 million brand value.
  2. Los Angeles Lakers with a $521 million brand value.
  3. Dallas Cowboys with a $497 million brand value.
  4. New England Patriots with a $465 million brand value.
  5. Real Madrid with a $464 million brand value.

These numbers identify value based on brand, not necessarily the worth of the brand or the team in general. This means that the brand name alone can provide much value in generating revenue and recognition for a team. Therefore, the more visible the brand, the more valuable it becomes. As you can see, the most popular sports team brands range in sport type – baseball, basketball, and football.

 

Budweiser’s Temporary Brand Change: A Gamble or a Smart Strategy?

It’s not often that a company temporarily changes its brand. Changing a brand is a huge gamble. It’s a gamble because consumers typically do not like change, becoming accustomed to the look, products offered, and reputation of particular brands. Therefore, brand changes can cause confusion and concern that a product has changed as well. However, Anheuser-Busch has recently taken that gamble.

In May of this year, one of the biggest brewers in the world has decided to try a new tactic to attract consumers. In an effort to spike lackluster sales, Anheuser-Busch announced its intent to temporarily change the brand of one of its most popular beers, Budweiser. Taking advantage of a political year, patriotic holidays such as Memorial Day and Fourth of July, and the summer Olympics, the company is strategically timing the brand change. The company announced that the temporary change from “Budweiser” to “America” will extend from May to November, when the elections end.

While changing a brand can prove risky, the brewer is banking that consumers will readily recognize the design as Budweiser. Although the words have been changed on the label, the design and colors are decidedly that of Budweiser’s. In fact, at first glance, a consumer would likely associate it with Budweiser. However, confusion may occur when consumers pay closer attention and realize that the name is different. This may lead consumers to question whether it is a knockoff brand from another company or whether the beer itself has changed in taste.

The company hopes that the “America” rebranding effort will appeal to consumers’ patriotism. However, immediately upon its announcement regarding the change, consumers flocked to social media with negative comments, especially given that the company is not based in America. Despite this fact, Budweiser has consistently remained the “All-American” beer, so the idea of rebranding it “America” may not be so far-fetched after all.

Another risk of rebranding typically includes high costs, especially for large corporations. However, Budweiser is one of the biggest advertisers in the America. It spends millions of dollars on advertising each year, spending more than $275 million on Super Bowl ads alone for the past decade. Therefore, it seems its rebranding effort pales into comparison. The company’s rebranding announcement has sparked numerous articles on the Internet, garnering it more publicity with little effort on its part. The more publicity a company receives, the more recognition it gains and the more it remains on the forefront of consumers’ minds. For the actual design of the rebrand, it is likely that the costs are low considering the company is using a recognized label and simply making minor changes, specifically replacing words.

With a continuing decline in sales and increased competition in craft breweries, Budweiser has to try new ways of enticing its customers. According to Forbes, Budweiser ranked #25 among the brands with the highest value in 2015 at $23.4 billion, with sales of $10.9 billion. Therefore, the costs of rebranding will not likely harm the company, making the gamble worth a try, even if it doesn’t generate the returns the company hopes to gain. It will be interesting to see how the change affects sales by the end of November.

Prince: A Valuable Musical Legend

Many talented musicians have made their mark in the music industry—some more famous than others. However, few have reached the caliber of the world-renown musician known as Prince. Born on June 7, 1958 as Prince Rogers Nelson, Prince began his music career at the young age of 17. Since his early start, Prince’s talents and mark on the industry became widespread over the years, making him a musical icon. Fans loved his mysterious personality and eccentric style. Fellow musicians applauded his musical talents and his efforts in gaining rights to his own recordings.

Prince offered many talents to the entertainment world. Although most widely known as a singer, he was so much more. He was a performer, delivering mind-blowing concert tours. He was an instrumental genius, playing most of the instruments in his first five albums. He was a composer, producer, dancer, and even an actor, earning an Academy Award for his role in the movie “Purple Rain.” While he exhibited many talents, perhaps his biggest and most gifted was his songwriting. Not only did he write his own songs, but he wrote songs for many other musicians such as Alicia Keys, Stevie Nicks, The Bangles, Madonna, and Cyndi Lauper. He loved writing songs so much that he had a vault filled with unreleased music—enough to release an album every year for the next century.

If there were any question about Prince’s success, proof existed in his net worth of $300 million and the many accolades he received through the years. In 2004, he was inducted into the Rock and Roll Hall of Fame. He won a Golden Globe, seven Grammy awards, and an Academy Award. Not only did he receive many awards, but he also boasted an impressive discography of 39 studio albums, 3 live albums, 6 compilation albums, 17 video albums, 136 music videos, 13 EPs, 97 singles, and 1 remix album. At the time of his death on April 21, 2016, Prince had sold more than 100 million records, placing him among the top-selling artists in history.

Even in the event of his death, fans will still purchase his work. In fact, when a beloved musician dies, it is not unusual for his or her record sales to climb shortly after death. People rush to the store to purchase albums in remembrance and to nurse the ache a loss often brings. This is especially true for untimely and unexpected deaths such as Prince’s. While his record sales were not at the height of his career at the time of his death, his death spiked sales by a tremendous amount. In fact, the weekend after he died, album sales reached 399,000 albums, which was a 16,000% increase from the previous weekend.

Many famous musicians, such as Elvis Presley, Michael Jackson, Whitney Houston, and others, continue to bring value to their estates posthumously. Prince will be no exception. His published works and the royalties from songs he wrote for other artists will continue to provide value.  However, Prince’s massive unpublished catalog sets him apart from other deceased artists. Potentially, fans around the world could hear new Prince songs for decades to come, which could make his copyright portfolio one of the most valuable in history after the death of an artist.

Factors That Define Patent Quality

Determining the quality of patents can be a cumbersome task as many factors influence their quality. While patent quality is subjective, it is an important measure in the valuation process. In order to deliver proper patent valuations, an IP analyst must understand the true qualitative aspects of patents.

Factors that influence patent quality are numerous, with various influences including patent strength, breadth, and interest. The following are just a few examples of factors that IP analysts must consider when determining patent quality for a proper patent valuation.

  • Patent prosecution by attorney or agent. An attorney or agent may better understand how to construct claims that will withstand litigation in comparison to an inventor who constructs claims.
  • Number of dependent and independent claims. Patents with a high number of both claims describe more potential inventions and variations.
  • Patent prosecution process. Patents that undergo numerous office actions and claim rejections forces the applicant to refine the patents. The more refined the patents, the less likely they are to face post-grant validity challenges. Therefore, the more exhaustive the patent prosecution process, the higher the quality of the patents.
  • Patent assignments. Arm’s length patent transfers indicate that patents may have quality. Many times patent owners transfer patents among various entities of interest or among entities that they may own. However, when patent transfers occur between patent owners and entities in which the patent owners do no have a vested interested, then the entities’ interest in the patents implies that the patents have some value, which may indicate patent quality.
  • Maintenance fee payments. Companies that pay recurring maintenance fees on existing patents suggest that they find value in them.
  • Prior art disclosure. Substantial prior art disclosure implies the applicant has a deep understanding of the patent space. It also implies that the applicant considered prior art while drafting the patent application. Also, an examiner considers relevant prior art when reviewing a patent. Therefore, it may be harder to challenge the validity of granted patents with an abundance of prior art disclosure.
  • Post-Grant challenges. Patent assets that survive post-grant challenges such as inter partes reviews and ex parte reviews indicate higher patent quality. Patents that survive such challenges become less susceptible to subsequent challenges. Such successes also further assure patent validity over prior art.
  • Infringement wins. Patent owners who assert their patents and win infringement cases prove their patents have good quality. Proof exists in such cases because the patents do not become invalidated despite the efforts of accused infringers to do so.

As you can see, numerous factors exist that IP analysts must consider when determining the quality of patents. However, even with the highest quality patents, if the market does not believe the invention provides utility superior to others in the market, then the patents may have little value. Therefore, while patent quality is an important metric and one that must be considered by an IP analyst, it is only a small part of the larger patent valuation process.

Companies With the Most Patent Activity

Patents provide companies exclusive rights for a fixed period in exchange for the disclosure of an invention. They represent the legal right to exclude others from the market. This enables patent owners the ability to charge higher prices for a particular invention. Patents also provide protection in the event of willful infringement.

In patent lawsuit history, some cases have amounted to more than $1 billion in awarded damages. Such technologies that warranted the highest amount of awarded damages since 1995 involved the following: arthritis drugs, MP3 technology, noise reduction on circuits for disk drives, smartphone software, genetically modified soybean seeds, an operating system, vascular stents, an Internet browser, drug-eluting stents, and a device measuring blood oxygen levels. As indicated, patents protect a wide range of technologies. Without patent protection, the companies that prevailed in these cases would not have had the necessary tools to receive the awarded damages that they did.

This is one of the reasons that patent activity continues to increase each year. Some powerful companies are extremely aggressive with their patent filings. The following ten companies experienced the most patent activity in the last year. The patent activity total includes the number of grants and the number of patent applications from April 1, 2015 to April 1, 2016.

1.   IBM with more than 14,000.
2.   Samsung Electronics with more than 13,000.
3.   Canon with more than 7,600.
4.   Qualcomm with nearly 6,000.
5.   Toshiba with more than 5,700.
6.   Google with more than 5,500.
7.   LG Electronics with more than 5,200.
8.   Intel with more than 4,500.
9.   Sony with more than 4,400.
10. Samsung Display with nearly 4,000.

Not surprisingly, the top companies are technology companies. In the technology world, it often takes many parts of various inventions to make up one functional invention. For instance, smartphones offer a variety of options (e.g., screen unlock swiping mechanism, the design of the phone, etc.) that stem from inventions developed by various companies. Therefore, a smartphone may embody thousands of patents in order to make it a functional phone. In fact, hundreds of thousands of patents impact smartphones today. This is why there are constant patent wars between smartphone manufacturers. In order to stay competitive, these companies must arm themselves with the protection needed to win the constant battles that arise in this industry. Thus, technology companies are likely to remain the top companies in patent activity for a long time.

Craft Beer Names Prove Challenging

“Bottoms Up!” a common toast, can be heard around the world on a frequent basis. One of the reasons is because beer is the world’s favorite alcoholic beverage, and also the third most consumed beverage overall, after tea and water. According to Nielsen Scarborough, more than 110 million people in the United States alone drink it. In 2015, U.S. beer reached about 197 million barrels and $105.9 billion in sales.

While beer has been around for ages, the craft beer trend has changed the dynamics of the beer industry. According to the Brewer’s Association, the number of craft breweries rose from 2,401 in 2012 to 4,225 in 2015. Craft beer production is expected to increase yearly with 25.4 million barrels in 2015 to an estimated 37.4 million in 2020. Craft brewing accounted for 12.2% of share in the beer industry in 2015 and grew 12.8% to reach $22.3 billion. This growth rate is significant as overall beer sales only increased by 0.2%.

The top five leading craft beer brands in 2015 included Samuel Adams, Sierra Nevada, New Belgium, Shiner, and Lagunitas. While these are established craft beers that are widely known, the proliferation of craft breweries adds more craft beer brands to the mix. The trend is so popular that people are crafting beer from home, with an estimated 1.2 million home brewers. As a result, the number of different flavors available today is astounding. With these new flavors and brands comes the task of creatively naming them. However, the large number of breweries and new beers present challenges in the industry.

Too often, craft breweries find themselves in the midst of a trademark battle over a name. What they thought was a fun and creative name that would help consumers associate with a particular brand and flavor often becomes a legal nightmare. The more the craft brewing industry expands, the more likely trademark issues will continue. Many trademark conflicts involve geographic names or brewing terms that have already been used or that may cause confusion. Therefore, craft brewers have to be especially inventive in a crowded space.

While creating unique flavors gives each brewery a competitive edge, creating a unique name is proving to be a challenging task. However, without a creative name, craft breweries will find it difficult to gain recognition. Therefore, they must think outside the box to come up with as interesting names as they do flavors.

Due Diligence: A Necessary Component of the IP Valuation Process

The details in due diligence can make or break an IP value proposition. While IP due diligence often involves the same considerations of traditional business valuations, it also includes considerations specific to IP, such as verifying IP rights.

IP due diligence can be a long and tedious process. However, it is a necessary process for the most reliable and accurate IP valuations. Therefore, IP analysts must ensure they review all aspects of an asset that would affect the value proposition. The following are discrete analysis components of IP due diligence that analysts must factor into a valuation.

  • Performing initial interviews
  • Analyzing historical financials
  • Understanding the IP
  • Verifying IP ownership
  • Commissioning independent counsel review
  • Reviewing enforcement history and ability
  • Performing market analysis
  • Evaluating the regulatory environment
As indicated, the due diligence process involves heavy-duty analysis in a variety of areas. Within each of those areas are a host of other factors an analyst must consider. For instance, in verifying IP ownership, the analyst must consider a number of factors such as title, options & warrants, reversionary rights, and royalty obligations. In order to analyze these factors, an IP analyst may have to review a number of documentations such as patent filings, assignment agreements, inventor notebooks, employee agreements, and others.
Those analysts who consider all components that affect IP value provide solid valuations that can stand up in court, help generate capital, and assist in the buying or selling of IP.

Five Distinct Areas for Copyright Due Diligence

Performing due diligence is a critical part of the IP valuation process. It involves an in-depth review of a company’s intangible assets. Understanding all the aspects of an asset, including administrative aspects, provides the best and most accurate valuations. We discuss  five distinct areas of copyright due diligence next.

Each type of IP involves its own distinct areas of due diligence as they each bring value in different ways. For copyrights, the following areas are paramount when it comes to due diligence.

  1. Verify the nature of the copyrighted material. An IP valuation analyst must learn whether a copyright exists to protect a particular asset. Creators of copyrightable work must satisfy several requirements. If these requirements are not met, then the creator’s asset may have no value. For instance, copyright law excludes ideas, procedures, processes, systems, methods of operation, concepts, principles, or discoveries. However, it protects the expression of such items. Some clients may not always understand the distinction. Therefore, it is important for a valuation analyst to uncover such discrepancies and understand exactly what is being valued. Further, a valuation analyst must understand the strength of the copyright in order to associate an appropriate risk and discount rate.
  2. Verify the nature of the rights to value. Copyrights represent an established bundle of rights. Each right may have its own value proposition. The IP valuation analyst must determine which set of rights is the focus of the engagement. The methods that the analyst uses and the magnitude of the value proposition will generally vary based on the nature of the right under consideration.
  3. Consider administrative issues that can impair copyright value. An analyst must consider various administrative issues such as whether the work is registered, factual, made for hire, or is in the public domain. Further, the analyst must determine whether fair use erodes value, whether the copyright provides notice, and whether it is covered by the Visual Artists Rights Act of 1990. These are just a few of the administrative issues an analyst must consider.
  4. Consider special factors for software. Software presents a unique scenario among IP types in that it may simultaneously receive patent and copyright protection. When determining a software copyright value, an analyst must consider several factors. These include the ease in avoiding infringing activity, the consideration of the Rule of Doubt, and the complete or partial disclosure of the source code.
  5. Consider special factors for semiconductor designs or masks. A number of caveats exist under the Semiconductor Chip Protection Act of 1984. An IP valuation analyst must understand these caveats and whether a semiconductor design or mask meets these caveats. Whether the asset meets these caveats or not can greatly affect an asset’s value. Therefore, an analyst must account for these stipulations or risk providing an improper value conclusion.

As you can see, copyright due diligence is no simple task. It is imperative that an analyst review all aspects, administrative issues, caveats, and more for the most accurate valuation.