Intellectual Property Is the Foundation of Value

• Author: Russell L. Parr
• Profession: President of Intellectual Property Research Associates
• Pages: 3-19

CHAPTER 1

INTELLECTUAL PROPERTY

IS THE FOUNDATION

OF VALUE

Intellectual property rst entered the lexicon of the general U.S. population in 1993.

Late-night talk-show host David Letterman did not get the nod from NBC to replace

retiring Johnny Carson at The Tonight Show with Johnny Carson. David Letterman’s rival,

Jay Leno, got the job. Letterman went to CBS to host a new late show to compete with The

Tonight Show. NBC threatened to sue Letterman if he used any of his regular running gags

such as “The Top Ten List,” “Stupid Pet Tricks,” and “Viewer Mail,” developed while

Letterman was at NBC. The Los Angeles Times reported, “NBC’s position is that, under

‘intellectual property’ laws, it owns the rights to Late Night with David Letterman and

elementsinthe show....”

1

The general public was aware of the elements of intellectual property such as patents

and trademarks but not the collective term intellectual property, which was largelylimited

to professionals specically operating in the eld of intellectual property.

This book is about intellectual property: patented technology, trademarks, copyrights,

and trade secrets. It describes the methods for valuing intellectual property and the practices

of monetizing intellectual property, including licensing and royalty rates. It also spends

considerable space on the determination of patent infringement damages.

This book also is about intangible assets that in conjunction with intellectual property

create value in a business enterprise. Intangibles are categorized as rights and relationships.

Examples of rights include licenses, contracts, and leasehold interest. Examples of rela-

tionships include an assembled workforce and distribution network. Their value can be

substantial and will be discussed.

The reason for this book is that intellectual property is the central resource for creating

wealth in almost all industries.

Patents conveyexclusive rights to inventors for their innovations.The government allows

a patent owner to exclude all others from using a protected invention for 20 years after

ling for a patent. During the life of a patent, its owner can commercially exploit the patent

invention, license it to others, sell it, or “park” it—not use it and keep all others from using

it, too.

Patents encourage and protect the billions of dollars invested in the development of

new products. Consider breakthrough medical therapies. It costs $2.5 billion to get a new

1http://articles.latimes.com/1993–08–30/entertainment/ca-29527_1_stupid-pet-tricks

3

4 Ch. 1 Intellectual Property Is the Foundation of Value

drug from the laboratory, through development, and through FDA approval.2This massive

investment would never be spent without patent protection. No company would invest this

kind of money in developing a new drug if, after successfully entering the market, anyother

company could market a copy of the new drug. Patents protect investorsby providing them

with an exclusive period of time during which the investor can recover its huge investment

and make a prot. In return for the limited exclusivity provided by a patent, at the end of a

patent’s life, the invention enters the public domain, free for all others to use.

Trademarks convey the messages of value, quality, and safety for coveted products and

services to trusting consumers. These assets are often nurtured over decades of exposure to

the public and enormous support from advertising. By the end of 2017, over $200 billion in

annual media ad spending will support the recognition of trademarks.3Forbes reports the

value of the Google trademark at over $44 billion.4

Think about the single aspect of safety conveyed by a trademark. A thirsty consumer

is interested in buying an amber-colored, sugary carbonated drink. He faces two options.

One is in a dirty glass bottle with an unknown brand name scrawled across the bottle with

a grease pen. The other drink is presented in a gleaming bottle with Pepsi expertly printed

on the bottle. Even though the Pepsi option is more expensive, the decision is obvious for

those desiring a thirst-quenching experience without the risk of poisoning.

Trademarks also provide a consumer with cachet. Cars are a great example. Most cars

produced today can get anyone from point A to point B reliably and safely. BMW and

Mercedes, however,propel their owners with widespread respect and admiration. Enormous

premiums are paid for such attributes.

Copyrights for the entertainment industry protect the creativity that goes into music,

movies, art, and literature. Congress protects copyright owners as reward for their cre-

ativity. Like patents, time and money are required to create art, and the intangible benets

for society for entertainment and amusement are considered worthy of exclusive rights.

Consider comic books. Disney purchased the rights to comic book characters like Iron

Man, the Hulk, the Fantastic Four, the X-Men, and Spider-Man when it purchased Marvel

for $4 billion. Movies, theme parks, and merchandising of the superheroes have earned

Disney billions of dollars annually.

Trade secret lawsprotect sensitive manufacturing, services, and marketing activities vital

to many companies; think of the formula for Coke. Like patents, the development of trade

secrets can be costly. Unlike patents, trade secrets rights do not expire. If the trade secret

can be maintained as a secret, the initial investment can be enjoyed into perpetuity. The

value of all the trade secrets in the world can never be known, butthis book will teach how

specic trade secrets can be valued.

FOUNDATION OF VALUE CREATION

The United States Patent and Trademark Ofce conducted a study to estimate the impact

of intellectual property (IP) on the economy. It identied IP-intensive companies as those

using signicant amounts of patents, trademarks, and copyrights. The report concluded that

IP-intensive industries supported 45.5 million jobs and contributed $6.6 trillion in value

added in 2014, equivalent to 38.2% of U.S. GDP. The study also reported on the impact of

IP in Europe.5

2http://www.scienticamerican.com/article/cost-to-develop-new-pharmaceutical-drug-now-exceeds-2–5b/

3http://www.emarketer.com/Article/Digital-Ad-Spending- Surpass-TV-Next-Year/1013671

4http://www.forbes.com/sites/seanstoneeld/2011/06/15/the-10- most-valuable-trademarks/2/#cc4f4f52c5c6

5“Intellectual Property and the U.S. Economy,” 2016 Update, USPTO.