Monetary Remedies in Trademark Cases: Materials

Monetary Remedies in
Trademark Cases
132nd INTA Annual Meeting
Boston, Massachusetts
May 22-26, 2010
Presented by:
Weston Anson, Chairman
CONSOR Intellectual Asset Management
wanson@consor.com
800.454.9091
www.consor.com
© 2009 CONSOR 1
Monetary Remedies in Trademark Cases
A. VALUATION ISSUES AND DIFFERENCES IN A LITIGATION CONTEXT
We are dealing here with IP and intangible asset valuation in the context of calculation
of damages for litigation. There are key differences and issues in this context, since
litigation issues by necessity must somewhat modify the approach to the value of the
assets. Some of these key issues include the following:
• What exactly is being valued?
• How do we measure that value?
• Is it a “but-for” or a “before and after” analysis?
• Which valuation methodology should we use to measure damages, and is
it the same for all of the IP assets being valued?
• What lifespan shall we use, and is it the same as a commercial lifespan
would be?
• When did the damage occur, and how do we pick a specific date for
valuation?
• When overlapping IP assets are involved, how do we allocate value
amongst them?
• Is the methodology we’re using the best for the litigation environment (not
necessarily the best commercial method)?
• Can we or should we bundle the assets?
• Will royalty rates be important, and how will they be established?
• What is the definition of damages: legal, commercial, and statutory?
Remember there are at least 10 types of damage awards that may be available in a
piece of litigation, and one must consider the valuation process in the context of which
of those types of damages is being pursued:
1. Reasonable royalties
2. Actual damages
3. Lost profits
4. Economic damages
5. Loss of business value
6. Unjust enrichment
7. Corrective advertising
8. Supplemental/Discretionary
9. Punitive/Enhanced
10. Statutory
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The reason why intellectual property and intangible asset valuation in litigation is
different is primarily a question of context. But what does this really mean? It means
greater freedom in calculating the valuation and damages numbers, and the ability to be
a bit more speculative and not work with absolute mathematical precision (to
paraphrase the court). Often, what works in a litigation context will not work if one were
valuing the same assets for a commercial transaction. Some of the differences
between the valuation of IP for commercial reasons versus for litigation can be summed
up in the following phrases:
• Driven by defendant vs. plaintiff point of view
• All or nothing analysis
• Single point in time analysis
• Enforced transaction environment
• Adversarial approach
• Extremes rather than mid-points of value
• Premium above a marketplace royalty rate (the “Panduit kicker”)
How do we summarize these differences between the commercial valuation of

intellectual property and the valuation for the purposes of damages in litigation?
Perhaps it can best be done by reminding ourselves that the formula in litigation is
Cause (evaluation) + Valuation = Damages. Commercial valuation tends to seek a true
mid-point in value, and both parties from the beginning are seeking agreement on value.
Litigation valuation, on the other hand, adopts an advocate’s position on value, leading
to extreme position. The very nature of litigation alters the perception of value.
Why do we find these perception differences and why do we find such extremes in
opposing valuation presentations during litigation? It is because even the courts
encourage this. As far back as the Georgia-Pacific case where the courts awarded a
royalty, they didn’t award a royalty that was reflective of market conditions. Instead, the
plaintiff’s side asked for 31%, and the defendant’s side showed that there were actual
market comparables at 3%. The court awarded an unrealistic and non-market royalty
rate of 20+%. The exhibit below illustrates a real case study, and the differences in the
damages conclusions reached by the experts for the plaintiff and the defendant.
OPPOSING VALUATION CONCLUSIONS

Action: Federal trademark infringement
Cause: Infringing shoe logos and designs
Plaintiff: Large sporting goods company
Defendant: Large shoe retailer
Plaintiff's Expert: $40.0 million
Award: $60.0 million
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B. EVALUATION OF DAMAGES: CAUSATION
The process of valuation analysis in an IP damages case consists of a three-part

approach:
1. Identification of the act or cause of damages;
2. Evidence of the damages that have been caused; and
3. Calculation or valuation of the economic loss or amount of damages
incurred.
Causation is always the first step in the process. Key questions must be addressed:
How and why did the damages happen? What were the reasons? What is the
economic theory behind the damages? And, from a business point of view, can a true
cause of damages be identified? Evaluation and valuation, therefore, are both equally
important in this IP damages process, and can be thought of as follows:
• Damages Analysis v. Damages Calculations
a) Damages Analysis = Evaluation/Causation
b) Damages Calculations = Valuation/Computation
In trademark cases, causation or the underlying reasons for the damages is still (and
perhaps will always be) in a state of change. Various courts focus on different issues
and require somewhat distinctive tests. The standard “but-for” test or the “reasonable
foreseeability” tests are still acceptable methods of proving causation. However,
economic and business principles today are much more important in establishing the
cause of damages, and courts seem to be more willing and able to understand basic
business and economic arguments. Consistently over the last 100 years, causation
remains the root from which the tree of an IP damages case sprouts. In sum, the first
step in an IP damages/valuation case is an evaluation and analysis of the damages.
How does one assess and evaluate whether damages have taken place? There are a
number of different approaches (and phrases) used to describe IP damages. Among
those phrases are:
• Market impact
• Economic impact
• Future impact
• Future market impact
• Impact on revenue
• Impact on profits
• Image degradation
• Brand value reduction
• Customer impact
• Retailer or wholesaler impact
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• Industry impact
• Trade and marketplace impact
• Impact on licensees
• Impact on contracts and agreements
• Impact on the value of associated trade secrets and / or
supporting technical know-how
• Decrease in the value of flanker or bundled IP assets (e.g.
sub-brands)
• Business interruption
Any of the above phrases can be used to describe the immediate cause of damages,
and any can be the keystone phrase upon which damages theory and proof is built.
The second part of the evaluation process, prior to any calculation of damages, is an
analysis of what exactly has been damaged -- trademarks only, trademarks and brand
names, logos, copyrights, umbrella brands, etc.
Often in these fast-paced days where intellectual property is the driver of virtually all
industrialized countries, damages cases can involve overlapping assets or overlapping
bundles of assets. For example, one could have the following situations:
• A core patent that travels with a proprietary trademark or name, as well as
specific technical know-how to implement usage of the patent.
• A corporate trademark that is accompanied by two sub-brands, along with a
copyrighted character that is also a trademark, as well as a series of copyrighted
materials and a proprietary corporate color – all combined with a corporate brand
name.
• Operating software can be combined with source code, combined with some
patent protection, combined with copyrighted materials, along with a trademark.
Each of these scenarios is possible (and in fact has been faced in actual cases), and in
the 21st century these types of interlocking and overlapping IP cases will proliferate.
Therefore the issue often becomes: What theory or theories of damages does one use
to cover all of the IP involved in the litigation? Does one simply take the primary piece
of intellectual property such as the patent and focus on the damages case based on
that single piece of property? Or, does one build multiple damages cases in the same
litigation, covering damages to patents, damages to trademarks, damages to software,
and so forth?
There are no simple answers to these questions. Instead, complex litigation will
continue to be evaluated and valued for damages on a unique case by case basis –
more than ever requiring intellectual property experts who are truly experienced in field
work with IP, and in hands-on management and creation of intellectual property. As the
evaluation and analysis part of the process is completed, the consulting experts, along
with the attorneys, should identify all possible causes of damages; and evaluate the
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impact of those damaging activities. From there, the expert’s effort and much of the
balance of the legal prep time moves to the valuation process which is essentially the
calculation of damages.
C. VALUATION OF DAMAGES: CALCULATION
The measurement of damages is the quantification of the injury to the plaintiff, who
typically is the owner of the trademark. In other words, damages is that amount of
money that it would take to put the plaintiff or claimant back into the economic position it
would have been in, had there been no infringement – and it’s very important to
remember that the amount of money is not necessarily related to the amount of money,
income, or rewards that the infringer earned. Thus, the damages to the trademark
owner/plaintiff may be far greater (or sometimes less) than the amount of money or
profit or economic benefit that the infringer received. This is partially so because the
plaintiff -- i.e., the damaged party -- may have various damages ranging from reduced
sales to reduced profit margins, and from reduced number of customers to reduced
market share. Therefore it is important when entering into the valuation and calculation
phase of a damages case, that the IP expert and the balance of the legal team have an
unified theory of damages that accounts for all of the injury, both current and projected,
that has been or may be inflicted on the trademark owner.
Three Basic Conceptual Approaches to Damages
While there are many different ways to attack the issue of damages valuation and
quantification, in general three broad approaches are used most often to calculate and
quantify economic or business damages:
1. The “before and after method.” In this approach, one compares the value
of the IP before the damages took place, with the value of the IP after the
damages;
2. The “but for method” in which an expert will quantify the damages by
establishing what amount of income (sales, profits, etc,) would have been earned
by the trademark owner, but for the damages cause by the infringer. This
method typically requires a backward look at economic benefit, as well as
forward looking projections for what would have been earned but for the
infringement; and
3. The “opportunity cost methodology.” In this approach, one can include the
value or income from the IP that the owner or plaintiff would have earned. This is
added to current or opportunity costs, which essentially is the calculation of value
for the income or revenue that the plaintiff or IP owner could have earned in the
future. Taken together, then, these historical and future opportunity costs
become the basis of the valuation or damages calculations.
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In all three approaches, there are a number of different bases upon which damages can
be quantified, or calculated and valued. Damages can take many forms as noted
earlier. And, economic or business damages can be measured in many different ways,
depending on the circumstances, industry, and case-specific circumstances, including
the following:
• Increase or decrease in the number of units sold;
• Increase in production or management costs;
• Decreases in R & D or development costs;
• Increases in capital expenditures to run a business;
• Increase or decrease in working capital needed;
• Increase or decrease in past sales or future sales;
• Changes in the price per unit charged;
• Changes in market share, both relative market share and absolute;
• Reduction in market size; and
• The cost of not being the first to market.
All of these can be used as the basis for the valuation and calculation of damages; and,
in many cases, multiple approaches will be used in order to capture all of the value
imbedded in the damages case.
Damages valuation in today’s world has to be based on creative analytical

methodology. In the famous Panduit decision, the courts finally adopted a version of
economic reality that has been termed the analytical method. The analytical method, in
one form or another, needs to be used in all IP damages cases to establish royalties
and/or to quantify all other damages measurements. It is interesting to note that while
there are four primary methodologies, there are many proprietary methodologies which
often are appropriate in specific situations. The four primary valuation techniques are
as follows:
1. The market approach;
2. The cost approach;
3. The income approach; and,
4. The relief from royalty approach (a variation of the income approach).
D. TRADITIONAL VALUATION METHODOLOGIES
There is a general agreement on standard methodology in place when it comes to

valuation of intangible assets. And, the traditional valuation methodologies used for
tangible assets are, in some form or another, also accepted as traditional approaches to
intellectual property valuation in litigation – remembering that the “tradition” of valuing
intellectual property has a very short history. Until two decades ago, few people cared
about intellectual property value, and even fewer had the professional credentials to
accurately value intellectual property. In fact, until very recently, (and in some cases
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even today, unfortunately), so-called experts at IP valuation were often nothing more
than CPAs trained to multiply columns of numbers.
In addition to the four primary valuation methodologies mentioned earlier in this chapter,
there are also many proprietary, specialized, industry specific, or asset specific
approaches to the valuation of IP and intangible assets. These include proprietary
methods and other theories of value such as the “Next Best Cost” or the profit split
approach. A great amount of standardization exists in intellectual property valuation
methodology in the form of the four traditional methodologies. However, there are a
broad range of modifications, alterations, and adaptations that can be applied to any of
these four.
Having discussed the impact of context on the value of intellectual property –

specifically the litigation context – one also must understand some of the other key
variables. One of the most important factors is time. Typically before one can begin
valuing the assets, or even selecting a methodology with which to value the assets, key
questions must be asked as to: When are we valuing the assets, at what point in time
and for what period of time? Are the IP or intangible assets under scrutiny being valued
as of today; as of five years ago, when the first hint of damages may have occurred; or
when litigation commenced; or 10 years in the future when the useful life of the asset
will be up? In many cases, two points in time will be chosen and in all cases, each of
these time-based scenarios has to be thought through.
We then move from point in time to “the period of time.” By period of time, we mean
nothing more than the period over which the damages are being calculated. Is it the life
of a patent? Or is it the life of a contract or is it some other timeframe? This is a
question of lifespan. The word lifespan in this context is self-explanatory: it means
nothing more than how long the life of the IP or intangible asset is projected to last.
1. Value Definition and Its Impact on Methodology
As we discussed earlier with IP damages valuation calculations in litigation, there are

many more variables than when dealing with tangible assets. Context, time, and cost
are all important. There is one other key variable, and that is the definition of value,
including:
•Fair market value
•In-place value
•Fair value
•Tax value
•Liquidation value
•Deal value
•Licensing value
•Transaction value
•Securitization value
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•Dispersal or disposition value

•Replacement value
•Reproduction value
•But-for value
•Before and after value
•Opportunity cost value
And so, we see that we come full circle. Starting earlier in this chapter by identifying the
four approaches to value, we find the definition of value can mirror the four core
approaches or can take other definitions of value.
2. Traditional Intangible Asset Valuation Methodologies
At the beginning of the valuation process to establish damages, it is prudent, in fact

imperative, that the experts consider all the different methodologies available to value
the particular set of intangible assets. This is particularly so because the information
available may not be perfect (and often is not in litigation.) Data gathering may be
problematical at best, and often the data and information available may determine the
methodology that is used. The methods used to value intellectual property and
intangible assets have many elements in common with the methodologies used to value
tangible assets such as property plant and equipment. However, an important
difference in most cases, particularly in litigation, is in the availability of the necessary
data, such as finding comparable transactions or relevant royalty rates or other financial
information. Comparable transactions and benchmark information needed to establish
a logical and intellectually sound basis for the valuation of damages may be difficult to
acquire and may take substantial interpretation and interpolation.
In the last two decades, the process of valuing IP and the number of people in the
practice area has grown dramatically (unfortunately, the level of sophistication of many
practitioners is not equal to the complexity of the tasks undertaken). Four different
methodologies have become the most important, whether for litigation purposes or for
business and other transactional reasons.
a. The Cost Approach
Whether using historical or future costs, the basic underlying principle for the cost
approach is the principle of substitution. This principle states that the value of an
object or asset or piece of intellectual property is no greater than the cost to
obtain that asset elsewhere whether the cost of obtaining the asset is measured
by purchasing it today or replacing it with a substitute asset of equal strength and
utility.
Two different general approaches are applied when valuing assets using the cost
method: Either historical cost bases or replacement or reproduction costs bases.
Using historical cost, the asset is valued taking into consideration all of the costs
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that have gone into bringing it into its present state, and then calculating the
value of those costs in today’s dollars, remembering that any appropriate
depreciation based on remaining useful life is important. On the other hand, the
replacement or reproduction cost techniques use current prices to calculate the
cost of duplicating or replicating or replacing the asset today. The differences
between the historical cost approach and the replacement cost approach include
adjustments reflecting inflation (or in some cases, deflation due to market
efficiencies, competition, or technological improvements).
There are several different variations to the cost approach method and each one
uses a slightly different definition of cost. For example, the difference between
reproduction cost and replacement cost may seem a question of semantics, but
in fact, those two phrases can be very different things. Reproduction cost
establishes what it would take to construct an exact replica of the intellectual
property, while replacement cost establishes what it would take to create or
purchase a piece of IP of equal functionality or utility. Both approaches to the
cost methodology, historical and prospective, assess the value of the IP or
bundle of assets by measuring the expenditures that would be necessary to
replace the assets being valued. Whether historical or future cost is being
established, there are three general areas of cost that must be examined:
• Hard costs of replication such as materials, acquisition of assets,
etc.;
• Soft costs including engineering time, design time, and overhead;
and
• Market costs including costs of advertising or other costs to build a
market for the IP.
Among the costs to be reviewed include the following, but is not intended as an
exhaustive list:
• Legal fees
• Application/registration and other fees
• Development costs
• Personnel costs
• Advertising costs
• Production costs
• Engineering costs
However, unless a premium is added to these costs, this method does not give
an indication of the economic benefits derived from the development ownership
and utilization of the IP. Instead, it provides a minimum value for the assets.
Because the cost approach is based on the economic principle of substitution, it
is essentially based on the premise that a damage calculation or valuation should
be no greater than the amount which a potential buyer would pay for an asset.
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A brief example of the cost approach to a damages calculation is shown below in

the exhibit below. In this particular case, the client had a group of technology
assets which were rendered obsolete because of infringement. The exhibit
briefly summarizes the cost approach.
COST ANALYSIS
SUMMARY OF HISTORICAL COST

• Hard costs of development $100,000
• Personnel and development costs $25,000
• Market development costs $15,000
• Advertising costs $50,000
• Overhead costs $50,000
TOTAL COST $240,000
Multiplier for current value 160%
Total value, based on cost, expressed in today’s $384,000

dollars
b. The Market Approach
As the name implies, the market approach to the valuation of any asset, tangible
or intangible, is most applicable when a truly active marketplace exists and actual
transactions can found.
The market approach to valuation has traditionally been used with tangible
assets where active markets have existed for decades in areas such as real
estate, equipment, and raw materials. However, most intangible assets, at least
until recently, have not been bought and sold frequently enough to be able to
establish a value based solely on direct market based comparables; and
therefore, analysis and adjustment are almost invariably necessary. In addition,
intangible asset transactions are often cloaked in several layers of confidentiality.
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It is typically difficult to get enough detail on each of the similar or comparable

transactions to be certain that all of the elements of value that make for a
comparable to be used in the market approach have been appropriately
considered. On the other hand, because the market approach utilizes actually
transaction data to the maximum extent possible, and values are derived from
the sale, transfer, license, or other activity of similar assets, it is increasingly the
preferred approach – if the necessary data can be found.
The natural strength of the market approach is its connection to actual market
sales, licenses, rents, and deals; and when the data is available the market
approach is typically practical, logical and applicable to all types of assets – not
just intangible assets. Also, along with the income approach and the relief from
royalty approach, value conclusions under the market approach can be reviewed
in the future to see if upward or downward adjustments are necessary based on
new transaction data.
In order to illustrate the market approach, we’ve constructed the very simple
exhibit below. As the exhibit graphically illustrates, the use of the market
approach depends on finding one or more comparable transactions, and then
extrapolating those comparable transactions to the value of the IP under review.
MARKET APPROACH METHODOLOGY
Valuation of Database
Comparable Sale #1 $10,000
Average of Comparable Transactions $20,000

Adjustment for Asset Size 80%
Market Based Value $16,000
c. The Income Approach
The income approach is one of the most widely IP valuation methodologies.

However, this methodology can be complex and one must decide how to
measure the “income” attributable to the asset. Is it measured as some
theoretical rent? Or is it measured as a premium price that a product may
receive? Or is it measured as a proportion of the operating income earned by a
product or brand? All of these can be used, but one must be careful in selecting
the most appropriate measure. For that reason, the income approach can be
misleading and overly mechanistic and/or arbitrary.
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A brief example illustrates this: An unsophisticated analyst might see that a

branded product is engendering a profit margin of 30% higher than its unbranded
counterparts; and the expert is tempted to attribute the entire 30% to the
trademark or brand. In fact, only some portion of that 30% can be attributable to
the actual intellectual property, as the balance of the increased profit clearly is
being earned because of the higher volumes, better distribution, and more
efficient manufacturing that the branded product almost certainly has. The three
basic parameters of the income approach are simply as follows:
• Future income stream;
• Duration of income stream; and
• Risk or discount rate associated with the generation of the income
stream.
The subtleties come in identifying the alternative measures of economic income

that can be used in this sort of analysis. These can include net revenues, gross
income, gross profit, operating income, income before tax, operating cash flow,
ebitda, net cash flow, expected incremental income, etc.
The most common error in applying this approach is the expert’s lack of
differentiation between the income generated by the total business enterprise or
the business enterprise value; and the value of the income generated by the
intellectual property within that business. In order to use the income approach, it
is critical to separate the stream of income that the IP is generating (and
therefore its value), from the value of the business as a whole.
An additional critical element in using the income approach is that the method
requires that an appropriate capitalization or discount rate be established. One
can take the estimated expected income and apply to it an investment rate of
return for an appropriate number of years, in order to capitalize the income. Or in
the alternative, one can apply a present value discount rate to the stream of
income, which represents the owner’s minimum cost of obtaining the income.
Another caveat in using the income approach is that an appropriate time period
has to be selected – taking us back to the earlier discussion of remaining useful
life.
In summary, when using the income approach the IP or intangible asset values
represent the worth or present value of the future economic benefit/income that
will (or should have) accrued to its owner. This requires projection of future
income, an estimate of the duration of the income stream and/or useful life, and
an estimate of the risk associated with generating the income stream, also known
as the discount rate. An example of the income approach is shown in the exhibit
below.
INCOME APPROACH TO VALUATION
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Annual Income Generated from IP $100,000

• Number of years of income
generation 8
• Gross value of income streams $800,000
• Discount rate adjustment 15.0%
• Net value of income streams ≈ $450,000
d. The Relief from Royalty Approach
This is a variation of the income approach and a variation that is used quite
often in litigation. However, it is most peculiar that in some districts and some
state courts, use of the relief from royalty method is not allowed, particularly
with trademarks. This is counter-intuitive and counter to the market realities of
trademarks as to be almost inexplicable to a non-attorney. The relief from
royalty approach, however, is used so often and is so critically important that
we provide a brief discussion on the topic of finding and establishing royalty
rates.
Briefly, the relief from royalty method of value for IP is the calculation of the
present value of a stream of royalties that the IP owner would have received (or
that the infringer has been relieved from paying). Because it is a method that is
based on objective data, it is often used to establish a baseline damages
calculation in litigation. This approach provides a measure of value by
determining the avoided cost of an infringer not having to pay the appropriate
royalties. It is calculated by assuming that the infringer does not own the
patent, trademark, or copyright and thus has avoided a royalty that he or she
should be paying for its use. This relief from royalty method uses royalty rates
that are based on marketplace transactions or interpolations and uses a
forecast of revenue for the infringer’s actual revenue as the income stream to
which the royalties apply.
Thus, this method combines both the income approach and the market
approach. Value is calculated in the form of an avoided cost or avoided royalty
payment. Specifically when using the relief from royalty approach, the present
value of the future or past royalty streams is the measure of damages. The
assumption, of course, is that the assets would have to be licensed in order to
use them. This method determines what the cost would be of that hypothetical
license, measured by royalty streams. Therefore it incorporates either a
projection of future revenue as in the income approach or past infringer
revenue and relies on comparable royalty rate data.
Usually, data from marketplace comparable license agreements are used as

the source for the royalty rate in the calculation. It must be noted, however,
there is no such thing as an exact market comparable royalty rate. Each one is
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different and reflective of the unique IP for which the rate is being charged.
However, the inclusion of this market-based information adds credibility to the
damages analysis. With both the income approach and the relief from royalty
approach, the results can be revisited periodically for updates as needed.
E. ALTERNATIVE VALUATION METHODOLOGIES
• Monte Carlo Analysis

• Orderly Disposal Value
• Premium Pricing Technique
• Profit Split Method of Value
• Replacement Value
• Reproduction Value
• Return on Assets Employed Method of Value
• Rules of Thumb
• Subtraction Value
• Technology Factor Technique
• The VALCALC® Method
• VALMATRIX® Analysis Technique
F. ESTABLISHING ROYALTY RATES
As noted earlier, the Relief from Royalty valuation methodology is one of the four most
widely used approaches when valuing intellectual property. It can be applied to virtually
any type of intellectual property that has been or could be commercialized. While useful
and accepted in most state courts, the application of reasonable royalties to establish
trademark damages is still in question at the federal level. Indeed, case law has
endorsed its use in the second, fifth, seventh, and eleventh circuits; however, others still
remain on the fence. These hesitations are frankly incomprehensible to any business
practitioner of intellectual property valuation, licensing, or management. Of all types of
intellectual property that we deal with, trademarks are the ones where established
marketplace royalty rate comparables are most readily available; and where believable,
defensible, and provable industry average royalty rates for different types of trademarks
are also available.
That being said, however, caution is needed when using the relief from royalty method.
The methodology is overused by so-called experts and misunderstood by many other of
those same IP experts testifying in courts today. The relief from royalty method is so
beautifully simple that the temptation for many experts is to fall back on it, having spent
considerable hours of their client’s time and budget seeking out royalty rates, and then
applying a very simplistic formula as shown in the exhibit below.
RELIEF FROM ROYALTY TRADEMARK VALUATION
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• Annual Sales of Brand X Widgets $100,000

• Industry Average Royalty Rate for Branded Widgets 15.0%
• Estimated Annual Royalty Income $15,000
• Extended for 10 years $150,000
• Annual Discount Rate 15.0%
Total Value or Damage = $80, 730
There are two kinds of royalties that can be used for establishing a reasonable royalty in
litigation:
1. Royalties that are already established by the parties or closely related parties;
and
2. Hypothetically negotiated or hypothetically established royalty.
An established royalty is that which is already in place and where the trademark owner
has licensed the infringed property to others, and/or where the intellectual property
owner or the infringer has licensed other similar properties. Other sources of
established royalties are industry averages that can be proven, as well as other
comparable transactions. However, caution should be used when looking at
comparable transactions. The second broad type of royalty rates that are useful are
those which would be established in a hypothetical negotiation, based on the knowledge
of the experts involved.
In general, the five approaches to the establishment of royalty rates are:
• Rules of Thumb
• The Analytic Approach
• Industry Averages
• Comparable Royalty Rates and Transactions
• Hypothetical negotiations/market based approach
Within the five general approaches, rules of thumb are the least useful. The analytic
approach is most open to interpretation and manipulation by the so-called expert.
Industry averages can be dependable for some types of IP. Comparable transactions,
where available, can be an excellent source; and the hypothetical negotiation is useful,
provided that the people calculating the royalty rate in the hypothetical negotiation are
actually experienced in the process of licensing.
1. Rules of Thumb
The first rule of thumb is: “All rules of thumb are flawed.” Rules of thumb should
be applied only as a last resort. Nonetheless, a brief discussion of rules of thumb
should include the following:
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• The 25% Rule
This “rule” states that an appropriate royalty rate is established by allocating

25% of profit as a royalty. There are variations on this, of course. Some
experts say that 33% of profit should be allocated to the royalty. The
questions this rule raises are obvious and fall into three broad areas: First of
all, where did this rule come from? No one knows and no one can trace its
origin. Second, what is the definition of profit – is it gross profit, operating
profit, net operating profit, incremental profit, incremental margins,
incremental cash flow, EBITDA, or something else? Is it based on profit of
the entire product line, the entire company, a single product, a single
geographic use? Is the 25% rule applied to the entire selling price of the
product that contains a piece of technology or just to a portion of that selling
price? Obviously, when you are talking about 25% of profit, the licensor
would like to receive 25% of gross profit, while the licensee would be much
more willing to pay 25% of net after tax profit. Clearly, definitional issues
exist.
The third set of observations on the 25% rule revolves around the lack of
analysis of investment required, or the risk profile of the particular industry.
Also, there is a complete lack of analysis as to any other negotiating
conditions or concerns, such as the competitive environment, the market size,
market share, etc. In sum, in our opinion, the 25% rule of thumb should
never be used.
• The 5% of Sales Rule
Again, for unknown but mystical reasons buried in the past, one of the most
popular misconceptions for establishing a suitable royalty rate is that 5% of
gross revenue is an appropriate royalty rate. This very simple and simplistic
approach makes the unjustifiable and frankly foolish assumption that all
intellectual property is the same. In other words, this rule assumes that a
royalty of 5% of sales on a breakthrough cancer curing pharmaceutical is just
as appropriate as a 5% royalty on a bending tool used in Chinese steel mills,
or 5% for the use of the most famous trademarks in the world such as Disney
or NASCAR. This rule of thumb is fundamentally flawed and should never be
used – albeit on some occasions, after analysis and an examination of
comparables, a 5 % royalty may in fact prove to be the proper answer.
• The Variable Profit Split Rule
The variable profit split approach says that a licensee would be willing to pay
as much as 100% of their variable profits as a royalty. In this approach, the
expert proposes that a willing licensee, after covering all of their fixed costs of
manufacturing and marketing, would be willing to pay 100% of their variable
profits or some share of that 100%. This method has been accepted in some
courts. (For example, in a case called Tights, Inc. vs. Kayser-Roth Corp., the
© 2009 CONSOR 17
court established a reasonable royalty of 33% of the infringer’s cost savings

from the patented product design. The court also said that this percentage
could range between 25% and 50% of the variable cost savings.) It should be
noted that the variable profit split is no more intellectually rigorous a
methodology than the other rules of thumb.
2. The Analytic Approach
This approach is another variation on formulaic methodologies for establishing

royalty rates. The so-called analytic approach varies from expert to expert. For
example, in his 1993 book on IP infringement damages and the subsequent
updates, Russell Parr states the analytical approach can be summarized in the
following equation:
Expected Profit Margin – Normal Profit Margin = Royalty Rate
The basis of this analytic approach formula is that the infringer is making unusual
profits on sales that encompass the infringed IP. That being the case, then, the
logic of his approach says that those extra profits above “normal industry profit
margins” should go to the IP owner as damages. While this is fine in theory, it
has two major flaws. The first is how does one define what normal industry profit
margins are, and how does one collect the data to establish those percentages?
The second flaw involves the “expected profit margin” from the infringing sales.
One might be fortunate enough to have access to the infringer’s internal
documents, and find a smoking gun statement that they expect to make an extra
15% on the new product containing the new technology or trademark, but the
chances of that happening are typically slim.
3. Industry Averages
Experts are in debate over the usefulness of “industry average royalty rates” to
be used to establish royalty rates in hypothetical negotiations. It is our opinion
that this can be a very useful tool, given that enough data exists for the type of
intellectual property. Today there are data available for virtually all types of IP
being licensed, including:
• Patents
• Trademarks
• Domain Names
• Copyrights
• Characters
• Software
• Designs
• Directories and Databases
© 2009 CONSOR 18
While industry data is available for many pieces of IP such as trademarks and
copyrights, it is not available for all of them. (Additionally, it should be noted that
using the words “industry average” is a misnomer in the case of intellectual
property. The better phrasing would be “property averages.”) These average
royalty rates, however, change dramatically for different types of properties. In
fact, some of the key variables on royalty rates and the perspective from which
royalty rate patterns should be viewed include the following:
• Royalty rates vary by type of property
• Royalty rates vary by type of product
• Royalty rates vary by type of distribution
• Royalty rates vary by geography
• Royalty rates vary over time
• Royalty rates vary when used in different cultures
The two exhibits below are very different. In the first, covering trademark royalty
rate ranges, the average data is based on a survey done annually by EPM
Communications.
RANGE OF ROYALTIES
BY TRADEMARK TYPE - 2008
Property Type 2008
Art 6.2%
Celebrities/estates 10.2%
Entertainment/character 9.4%
Fashion 8.5%
Music 8.0%
Non-profit 8.3%
Print publishing 8.6%
Sports 10.0%
Trademark/brands 8.0%
Toys/games 8.0%
OVERALL AVERAGE 8.7%

Source: The Licensing Letter – 2008, EPM Communications
TECHNOLOGY ROYALTY RATE RANGES
© 2009 CONSOR 19
Industry Range
Aerospace 2.0% - 15.0%
Chemical 1.0% - 10.0%
Health Care Equipment 5.0% - 10.0%
Electronics 3.0% - 12.0%
Medical Equipment 3.0% - 5.0%
Software 5.0% - 15.0%
Semiconductors 1.0% - 4.0%
Pharmaceuticals 8.0% - 20.0%
Diagnostics 2.0% - 10.0%
4. Comparable Transactions
Having reviewed industry average royalty rates, we now come to the approach
known as the comparables method or the comparable royalty rate method. This
can be a superb way to establish royalty rates, given that sufficient comparable
data with adequate detail is available. In this method, royalties are established
based on other royalty rates that have been negotiated in the market. The value
and reliability of this method, of course, depends on the quality of the
comparables – as well as on the qualifications and experience of the person
analyzing the comparables.
Even within the same types of IP, variations can be substantial; for example,
variations are seen in trademarks for consumer goods, apparel, and sports
apparel. The following exhibit is an example of an actual royalty rate analysis we
performed in connection with an arbitration some years ago over the use of a
consumer goods trademark.
COMPARABLE ROYALTY RATES:

SPORTS APPAREL & TEXTILES
LICENSOR ROYALTY RATE COMMENTS TOTAL
Wimbledon / TM 6.0% 2-4% for advertising 8.0 – 10.0%
Rawlings 3.5% - 5.0% ------- 3.5% - 5.0%
NFL 8.0% – 15.0% 2% for advertising 10.0% - 17.0%
MLBB 6.0% - 12.0% 2% for advertising 8.0% - 14.0%
LA Gear 4.0% - 6.0% 1-3% for advertising 5.0% - 9.0%
© 2009 CONSOR 20
Playboy 6.0% - 10.0% 2% for advertising 8.0% - 12.0%

Bancroft 3.0% - 5.0% Product design fees 3.5% - 5++%
Louisville Slugger 5.0% - 8.0% 2% for advertising 7.0% - 10.0%
RANGE 3.5% - 17.0%
SPREAD 485%
This project focused on the question of what appropriate royalty rate should an
infringer pay for its use of a well-known sports apparel trademark/brand name.
Three things jump out from the exhibit: First, while all of the trademarks listed are
similar, the range of royalty rates varies substantially from one to the other.
Second, in addition to the royalty rate, many trademark licenses include fees for
other activities like design and advertising. Third, the full range of royalty rates
from these eight companies is wide, running from a low of 3.5% in total payments
to a high of 17.0%, charged on net wholesale sales.
Even in this very tightly defined product, the range of royalty rates is very wide.
The range of 3.5% to 17.0% translates into a spread of 485% between the high
and the low. In other words, the 17% royalty rate is nearly five times as great as
the 3.5% royalty rate.
CRITERIA FOR COMPARABLE TRANSACTIONS

1. The licenses involve commercialization of the IP.
2. The intellectual property comes from the same family, (e.g. patents
or trademarks or copyrights).
3. The comparable transactions involve the same geography, be it
U.S. or international.
4. The comparable pieces of IP are equally well-known or equally
valuable.
5. The licensors be of relatively the same size.
6. The license agreements cover similar products and services.
7. The license agreements have similar lives and renewal terms.
8. The licenses have similar exclusivity or non-exclusivity clauses.
9. The licenses should cover products that are similarly priced and
sold through similar channels of distribution.
10. That they not be internal licenses between related entities.
11. The comparable license was negotiated at a relevant date.
12. The comparable transactions have been negotiated between
© 2009 CONSOR 21
willing buyers and willing sellers.

13. The IP covered by the comparable transactions have similar
remaining useful lives.
14. The comparable transactions are reviewed for other non-royalty
compensation.
15. The agreements do not have what are known as tie-in
agreements (arrangements which require the licensee to purchase
products or services from the licensor).
5. Hypothetical Negotiations
The hypothetical negotiation methodology is employed in many cases where

royalties are set in litigation. The hypothetical negotiation environment
(sometimes incorrectly referred to as the “market based approach,”) assumes
that the two parties, IP owner and infringer, would have negotiated an agreement
to use the IP at some point in time in the past – generally that point in time just
before the infringing or damaging acts occurred.
This hypothetical negotiation has a key complication and unleashes an

underlying philosophical debate: In an infringement case, should one assume
that at the date of the hypothetical negotiation there was a willing licensor and
willing licensee sitting at the table? Or, more appropriately in most cases, should
one assume that you have an unwilling licensor/IP owner at the time of the
negotiation? The difference can be substantial. A willing IP owner/licensor will
seek to obtain a fair market royalty rate appropriate to the date in question and
the market conditions then existing. An unwilling licensor/IP owner will demand a
royalty rate substantially higher than market because there is a great probability
that the owner of the IP did not want to license at that time, and instead would
have commercialized the property themselves, or in conjunction with a joint
venture partner or possibility another larger, stronger licensee.
This setting of criteria, and analyzing the negotiation in a retrospective manner, is

a challenging task for any well-trained IP expert. In using the hypothetical
negotiating approach to setting royalty rates, it is imperative that an expert be
found with true field experience in licensing at the relative point in time. This is
where an expert can be of maximum utility to the legal team, provided he or she
has been in the business long enough and has been in the type of licensing
business that is relevant.
HYPOTHETICAL NEGOTIATIONS
1. The consideration of the amount of investment that would be required to

commercialize the IP.
2. What investment rate of return would the IP owner have from alternatives?
3. What is the dollar value of the IP that is the subject of this negotiation?
© 2009 CONSOR 22
4. What other assets and activities would be needed to commercialize the IP

including marketing requirements, manufacturing requirements?
5. What are the other risks in taking the license, including factors such as
competing technologies, start up issues, governmental regulations, etc.?
6. What is the total market size, and the probability of capturing a given share of
that market?
7. What are the competing products or technologies or trademarks against
which the licensee would have to compete?
8. What profit margins would the licensee be likely to earn?
9. What would the licensor’s alternatives have been?
10. Importantly, what was the relative strength of the two parties at the time of the
negotiation? Was the licensee much larger and more powerful and therefore
in a stronger bargaining position, for example?
11. What other compensation might the licensee have been required to provide,
either in the form of other monetary compensation for design fees (e.g.) or
non-monetary compensation?
12. What technological assistance from the licensor would have been necessary
to ensure the success of the licensee at the time of the negotiation?
All these factors should be considered. While some have a relationship to the
Georgia-Pacific case, these are more current, more realistic, and more business
based criteria, which is more reflective of a true arms length negotiation. The
hypothetical negotiation of a royalty rate is only one of several methodologies
that can be used to establish royalty rates.
G. LOST PROFITS IN TRADEMARK INFRINGEMENT
Lost Profits in Trademark Infringement
The obvious issue in the measurement of defendant’s profits arises because the
concept of profit is not defined in the Lanham Act, nor is it uniquely defined in practical
accounting practices. Different industries have various customary definitions and
different companies have differing needs for management and planning purposes. In
practice, the level at which profits are defined tends to be operating profits, before
deductions for interest on debt, income taxes, and any one-time or extraordinary items.
The initial step to defining profits is clearly identifying the infringing sales. This is not
always straight forward, and a non-speculative analysis of the defendant’s sales mix is
necessary. In many instances, only a portion of defendant’s sales may be deemed
infringing revenue.
Direct costs such as materials and direct manufacturing labor are clearly deductible, but
if not all sales are infringing, indirect costs such as sales commissions based on overall
sales, may not be directly traceable to the infringing revenue. Consequently, the
deductibility of what can be loosely considered “overhead costs” is at the core of the
analysis differences. One approach is not to allow any deductions for overhead,
© 2009 CONSOR 23
particularly when infringing sales are not a majority of the defendant’s business and
those expenses would have been incurred even if the infringement did not occur. In
other cases, some or all of the “overhead costs” are deducted from revenue, under the
theory that some of this category of costs was actually incremental with the
infringement. The problem for the damages expert rests on balancing the requirement
to establish a clear nexus between a category of overhead and the sale of an infringing
product (or service).
Case Study
Typically, the calculation of Lost Profit damages in trademark infringement cases first
focuses on determining a suitable measure of the amount of profit actually earned on
the Infringing Sales made by the defendant. In a recent case in the high-end apparel
and accessories industry, the plaintiff argued that the clearly identified infringing sales
had enabled the defendant to obtain substantial profits, as illustrated by the damages
report we prepared based on the detailed sales information produced in discovery.
The defendant provided information on standard costs, which allowed for the calculation
of an estimate of gross profits. Second, utilizing the total expenses itemized in the
defendant’s financial statements, a proportion of applicable incremental costs were
calculated based on the ratio of the infringing sales to the total sales of the alleged
infringer.
The approach to calculating profits was based on the examination of the reported
expenses incurred by the defendant in the normal course of business. We determined
that the following expense categories were justified incremental costs, and then
deducted only those expenses necessary for the manufacturing and distribution of the
infringing sales. These expense categories are:
1. Cost of Goods Sold (Purchases plus net change in inventory)
2. Freight-in (Raw materials)
3. Freight-in (Finished goods)
4. Duty
5. Direct Labor and Payroll Taxes
6. Direct labor – Outside
7. Commissions – Wholesale
After deducting the appropriate expenses related to the infringing sales, we calculated
the defendant’s incremental profits specifically attributable to the infringement of the
Plaintiff’s trademarks for the period up to the end of the infringing period:
© 2009 CONSOR 24
Category Incremental Profits

(Amounts in Millions Grand Total
of Dollars) (as of 10/31/06)
Infringing Sales $ 100.6
Allocated Direct Costs 30.3
Other Allocated
Incremental Costs 25.0
Infringer's Profits $ 45.3
As the table shows, the total amount of incremental infringer’s profits accrued as of the
applicable period are approximately $45.3 million.
Our calculation of infringer’s profits does not include profits associated with any
additional entities related to the defendant, including affiliated manufacturing,
distribution, or retail entities, nor does it include a calculation of pre-judgment interest.
The final amount of damages could include these additional sources of profits if other
allegations in the case were proved and relevant additional information became
available for review.
H. LOSS OF BUSINESS VALUE
In this section we discuss loss of business value as a measure of damages. Loss of

business value is used relatively less often in trademark cases, but is an important
approach to damages. In this section we believe the easiest way to illustrate loss of
business value is by looking at an actual case. The case was tried in federal court and
the expert report illustrating loss in business value follows below. Naturally, it has been
redacted to ensure confidentiality.
Case Study
Pursuant to your request, we have completed an analysis of the loss of business value
of Co. X, as of December 31, 2004 (the “Valuation Date”), as a result of alleged actions
of Co. Y. This analysis was prepared for litigation purposes. No other use for our
analysis is intended or should be inferred.
In conducting our analysis, we reviewed various documents regarding the operations

and financial performance of Co. X, as well as other documents pertinent to the litigation
proceedings. These documents include, but are not limited to the following:
1) Financial statements for Co. X for the years ended December 31, 1994
through December 31, 2004;
2) An asset depreciation schedule, including asset description, cost and
accumulated depreciation;
3) An accounts receivable aging as of December 31, 2004 and information
related to accounts payable as of the same date;
© 2009 CONSOR 25
4) Information related to the primary suppliers of Co. X’s products;

5) Information related to Co. X’s lease agreement;
6) Schedules detailing sales to certain customers for the years ended
December 31, 1999 through December 31, 2004;
7) Information related to specific products sold by Co. X, including product
descriptions and related product detail; and
8) Discussions with Co. X management concerning historical operating
results and the prospects for future results.
Loss of Business Value Analysis
Introduction
The definition of economic loss includes damages for the loss of profits or use
caused by an action. In this case, the calculation of economic loss relates to the
loss of profits and the loss of business value resulting from the alleged actions of Co.
Y, plus legal and other expenses related to this litigation. This report addresses only
the loss of business value subsequent to the Valuation Date. Loss of profits prior to
the Valuation Date and legal and other expenses are not included in our
determination of economic loss. A brief discussion of valuation theory and
methodology follows.
Although there are numerous techniques for determining business enterprise values,
there are only three conceptually different valuation approaches. The three
generally accepted approaches used in determining the fair market value of a
business or business interest are the income, market and cost approaches. The
following is a brief discussion of the three general approaches to value.
In conducting our analysis with respect to Co. X, we relied primarily on the income
approach and supplemented this approach with a review of market data. The
source of the market data we reviewed was the Business Valuation Resources data
base for SIC Codes 3174 and 5013 and NAICS Codes 336399 and 423120 as
reported by Pratt’s Stats, BizComps and Mergerstat/Shannon Pratt’s Control
Premium Study. Our income approach models are incorporated herein as Exhibit I
and Exhibit II.
We elected to use a discounted cash flow approach application in our income

approach methodology. We developed two distinct models. The first model (Exhibit
I) reflects value given the current status of Co. X’s operations, while the second
model (Exhibit II) values Co. X including value related to the sales and profits lost as
a result of the alleged actions of the defendant.
The discounted cash flow approach is based on the premise that the value of the
business enterprise is equal to the present value of the future economic income to
be derived by the owners of the business. The discounted cash flow approach
requires the following analyses: cost of capital analysis, residual value analysis and
operating forecast analysis.
© 2009 CONSOR 26
The cost of capital analysis requires consideration of the following aspects of Co. X
operations: current capital structure, optimal capital structure, the cost of various
capital components, the weighted-average cost of capital, systematic and
nonsystematic risk factors, and the marginal cost of capital.
The residual value analysis requires the determination of the value of the
prospective cash flow generated by the business after the conclusion of a discrete
forecast period. This residual value can be determined by various methods
including the development of a price to earnings multiple, a price to book value
multiple or an annuity in perpetuity approach. In our development of a cash flow
model for Co. X, we elected to use an annuity in perpetuity approach.
The operating forecast analysis includes revenue analysis, expense analysis and
consideration of all other factors affecting the forecast of cash flow, including
working capital, investment in fixed assets, depreciation and income taxes. This
analysis includes consideration of various industry characteristics such as market
dynamics, competitive pressures and regulatory changes among others.
Based on the results of the analyses discussed above, a forecast of net cash flow
from business operations is made for a reasonable discrete forecast period. In this
instance, cash flow is equal to net income, plus non-cash charges such as
depreciation and amortization, minus capital expenditures, plus or minus any change
in working capital.
The cash flow forecast is discounted at an appropriate discount rate, also referred to
as the cost of capital, to determine the present value as of the Valuation Date. The
present value of the discrete net cash flow forecast is summed with the present
value of the residual value. This summation represents the value of the business
enterprise, per the discounted cash flow approach.
Assumptions
Current Value
For the first year of the forecast (the year ending December 31, 2005) in our current
value model, sales increase at the forecasted annual rate of inflation of 1.9% from a
base level of $15,866,504, equal to sales for the year ended December 31, 2004, for
the entire forecast period. The cost of goods sold is equal to 57.1% of sales,
reflecting an average for the three years ended December 31, 2004, for the entire
forecast period.
Operating expenses for year one are forecast from a base expense level of
$5,352,145, equal to reported expenses for the year ended December 31, 2004,
excluding depreciation and adjusted for expenses related to the subject litigation.
Operating expenses increase at the same rate as sales for the entire forecast
period.
© 2009 CONSOR 27
Working capital assumptions are historical results. As noted in Exhibit I-4, working
capital as a percent of sales was assumed to equal 47.7% for the entire forecast
period. Capital expenditures are based on Co. X’s investment in fixed assets as of
the Valuation Date and are equal to $258,622 in year one of the forecast. Capital
expenditures increase at a rate equal to the rate of growth in sales.
The cost of capital is based on an application of the capital asset pricing model, one
application of a traditional build-up approach. Specifically, the cost of equity was
determined for Co. X as follows:
Ke = Rf ÷ ß [Rm - Rf]
Where:
Ke is the cost of equity;
Rf is the risk-free rate of return, estimated as the yield to maturity on 30-year
Treasury securities, or approximately 4.9% as of the Valuation Date;
[Rm - Rf] is the market risk premium, with Rm representing the expected return
on the market portfolio, estimated to equal 7.2% based on historical data
published by Ibbotson Associates (we augmented this assumption with the
addition of an 8.7% risk premium); and
ß, or beta, is an estimate of systematic risk, equal to .72 on an unlevered

basis, based on data published by Ibbotson Associates.
Accordingly, the cost of equity was determined to be 18.8% as follows:
4.9% + (.72 * 7.2%) ÷ 8.7% = 18.8%
The discrete forecast period in our model extends for 10 years. The residual value
at the end of the 10-year discrete forecast period was calculated using the formula
for a growing, perpetual annuity. The formula is as follows:
St = __Dt___
k-g
Where:
St = the present value of all future income streams, as of
the end of year 10;
Dt = the income stream in the first year after the 10-year
discrete forecast period;
k = the cost of capital; and
g = the growth rate of the income stream.
The growth rate in the first year after the 10-year discrete forecast period is equal to
1.9%.
© 2009 CONSOR 28
The resulting net operating asset value, as noted in Exhibit I-3, is equal to
$7,156,000. This value reflects a multiple of 4.2 times earnings before interest,
taxes, depreciation and amortization (“EBITDA”) for the year ended December 31,
2004. This multiple is not inconsistent with our review of relevant transaction data
(sources noted above), which reflected average multiples in an approximate range of
4.0 to 8.0.
Value But for the Alleged Actions of the Defendants
We apply the same general methodology in arriving at a value for Co. X that
includes value related to the sales and profits lost as a result of the alleged actions
of the defendant. The principal differences in our model assumptions are outlined as
follows:
• Base sales increase by $8,200,000 based on an analysis of
relevant product sales for the year ended December 31, 2004.
• Incremental operating expenses equal to 7.0% of the increase of
base sales are assumed for the entire forecast period.
• Additional working capital of $137,936 (net of 5.6% of total assets
held in cash based on figures reported by Risk Management Associates).
• Incremental capital expenditures in year one of approximately
$134,000, reflecting the increase in sales.
The resulting net operating asset value, as noted in Exhibit II-3, is equal to
$24,930,000. The difference in this value and a value of $7,156,000 (as detailed
above), or $17,774,000, reflects the loss of business value suffered by Co. X.
Conclusion
Based on the above procedures and the corresponding underlying analysis, in our
opinion, the loss of business value suffered by Co. X, as of December 31, 2004, can
be reasonably stated as:
$17,774,000
SEVENTEEN MILLION SEVEN HUNDRED SEVENTY-FOUR

THOUSAND DOLLARS
© 2009 CONSOR 29

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Monetary Remedies in

132nd INTA Annual Meeting

A. VALUATION ISSUES AND DIFFERENCES IN A LITIGATION CONTEXT

How do we summarize these differences between the commercial valuation of

OPPOSING VALUATION CONCLUSIONS

B. EVALUATION OF DAMAGES: CAUSATION

The process of valuation analysis in an IP damages case consists of a three-part

C. VALUATION OF DAMAGES: CALCULATION

Three Basic Conceptual Approaches to Damages

Damages valuation in today’s world has to be based on creative analytical

D. TRADITIONAL VALUATION METHODOLOGIES

There is a general agreement on standard methodology in place when it comes to

Having discussed the impact of context on the value of intellectual property –

1. Value Definition and Its Impact on Methodology

As we discussed earlier with IP damages valuation calculations in litigation, there are

•Dispersal or disposition value

2. Traditional Intangible Asset Valuation Methodologies

At the beginning of the valuation process to establish damages, it is prudent, in fact

a. The Cost Approach

A brief example of the cost approach to a damages calculation is shown below in

SUMMARY OF HISTORICAL COST

• Advertising costs $50,000

• Overhead costs $50,000

TOTAL COST $240,000

Multiplier for current value 160%

Total value, based on cost, expressed in today’s $384,000

b. The Market Approach

It is typically difficult to get enough detail on each of the similar or comparable

MARKET APPROACH METHODOLOGY

Average of Comparable Transactions $20,000

c. The Income Approach

The income approach is one of the most widely IP valuation methodologies.

A brief example illustrates this: An unsophisticated analyst might see that a

The subtleties come in identifying the alternative measures of economic income

INCOME APPROACH TO VALUATION

Annual Income Generated from IP $100,000

d. The Relief from Royalty Approach

Usually, data from marketplace comparable license agreements are used as

E. ALTERNATIVE VALUATION METHODOLOGIES

• Monte Carlo Analysis

F. ESTABLISHING ROYALTY RATES

RELIEF FROM ROYALTY TRADEMARK VALUATION

• Annual Sales of Brand X Widgets $100,000

In general, the five approaches to the establishment of royalty rates are:

• The 25% Rule

This “rule” states that an appropriate royalty rate is established by allocating

• The 5% of Sales Rule

• The Variable Profit Split Rule

court established a reasonable royalty of 33% of the infringer’s cost savings

2. The Analytic Approach

This approach is another variation on formulaic methodologies for establishing

Expected Profit Margin – Normal Profit Margin = Royalty Rate

OVERALL AVERAGE 8.7%

TECHNOLOGY ROYALTY RATE RANGES

COMPARABLE ROYALTY RATES:

Playboy 6.0% - 10.0% 2% for advertising 8.0% - 12.0%

CRITERIA FOR COMPARABLE TRANSACTIONS

willing buyers and willing sellers.

The hypothetical negotiation methodology is employed in many cases where

This hypothetical negotiation has a key complication and unleashes an

This setting of criteria, and analyzing the negotiation in a retrospective manner, is

1. The consideration of the amount of investment that would be required to

4. What other assets and activities would be needed to commercialize the IP