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The future of IP valuations in disputes


With reference to recent examples such as esure Insurance Ltd v Direct Line Insurance Plc, this article from Intangible Business examines the role of intellectual property in disputes, the role of the expert witness and what to look out for in the future.

2009 will mark twenty-one years of valuing brands. The technique was pioneered in 1984 and famously used in 1988 to defend a hostile takeover of Rank Hovis McDougal by highlighting the value of its brands. Since then brand valuation methodologies have developed to encompass all forms of intellectual property, such as copyright, patents, contracts, technology, and reputation as well as brands.

Valuation methodologies are now fairly standardised. Their use has been accepted by international courts and tribunals, financial authorities and regulators; and intangible asset values must be placed on company balance sheets upon acquisition by listed companies. You might say that after twenty-one years brand valuation has finally grown up.

Lawyers are embracing its use too. Research Intangible Business carried out in summer 2008 from leading commercial lawyers in over 40 of the biggest UK law firms, found that intellectual property was the business asset that was seen valued most frequently, by 68% of lawyers. The main driver behind this growth in valuing intellectual property is its significance to business value. On average, 80% of a business’ value is in its intellectual property. Understanding the value of this intellectual property is important therefore for a number of contentious and non-contentious reasons, including M&A, insolvency, competition, infringement, licensing and general business management.

The significance of valuations
In disputes, 98% of lawyers found intellectual property valuations significant or very significant to their disputes. For non-contentious issues, 97% of lawyers found the valuation of intellectual property significant or very significant in supporting their project objectives. Clearly, when it is used, valuing intellectual property helps. In our experience, the value of the intellectual property is an important contribution to the cases in which it is required. If you think about it, this makes sense. As intellectual property – especially trademarks and goodwill - forms such a large portion of business value, how can its value not be damaged by negative business activity? Or how can knowing its value be anything but central to commercial activity?

Valuations’ future significance
The lawyers we researched thought the role and significance of valuing intellectual property was going to increase. 65% of litigators thought the significance of IP issues to disputes would increase and 75% of non-contentious lawyers thought it would also increase in the future. No-one thought its significance would reduce.

This change will be driven by a number of elements. Firstly, knowledge of what can be quantified reliably will increase. Because the market for valuing intellectual property is relatively small and those capable of doing this for the legal market makes this even smaller, finding the right expert can be difficult. Secondly, as the use of valuing intellectual property increases so will understanding of its application and usefulness to cases. Thirdly, as more businesses invest in intellectual property and a greater portion of their business value is comprised of intangible elements, exposure to damage will become more frequent. Requirements to have this intellectual property valued will therefore increase. This is why lawyers are increasingly exploring the opportunities of intellectual property valuation and expect its significance to increase.

Future role of IP expert witnesses
To meet this demand, the work lawyers do in managing the process and commissioning valuations will become more important. The use of IP expert witnesses is set to increase, according to 65% of litigators, and the use of valuations in non-contentious cases is also set to increase, according to the same number of lawyers.

A recent case which highlights the importance of understanding the role and limitations of expert witnesses can be seen in the case esure Insurance Ltd v Direct Line Insurance Plc. Here, Direct Line’s brand expert’s evidence was rejected as being personal opinion which the court was just as qualified to form. The consumer research was also rejected as ‘the directions of the court as to the scope or methodology of any proposed consumer survey that the parties may desire to put in evidence at trial’ had not been sought. Market research can be submitted as evidence but may need the prior approval of the court. Lawyers and experts who recognise this stand a better chance of their evidence being considered; which illustrates why lawyers’ work is so important.

Businesses use return on investment evaluations extensively to manage lots of different activities. One such area is to measure the benefit of anti counterfeiting programmes. After all, the health and value of the brand is at stake. Another area is where brand value is included into a damages claim either as a head of claim or as contributing to the calculation of losses. This makes a big difference.

As intellectual property becomes more valuable and pervasive, the role of lawyers in quantifying and communicating this value to the client and to the court becomes ever more important.

January 2009 ● Legal

If you would like more information on a particular brand valuation related topic, please call us on + 44 (0)20 7089 9236 or send us an email.Also, check out IP Review for a monthly round-up of IP-related news.