A reflected European-wide Governance structure that promotes the valuation of IP and helps build trust in the market for such a practice needs to be multifaceted. It is naïve to believe that one single measure will be enough to establish active markets for IP and thus promote the transfer of technology and the promotion of innovation. This paper argues that the establishment of a database containing, on an anonymous basis, information on licensing transactions and the fostering of social acceptance of IP valuation will be technical, yet crucial elements in promoting the Innovation Agenda 2020.
What is the Problem?
When BlackBerry announced it would look for ‘strategic alternatives’ in the Summer of 2013, a range of corporations immediately provided a valuation of it’s over 5000 patents and nearly 4000 pending patent applications. Interestingly, the value that was provided for the portfolio ranged between 2 billion and 5 billion US Dollars. Certainly, these were at the first instance ‘over the envelope’ made patent valuations, yet a differential in value of 3 billion US Dollars leaves a substantial spread (1). We all know that value lies in the eye of the beholder, yet the price differential provided, is too substantial to allow for any serious conclusions of the value of BlackBerry’s patent portfolio. Unfortunately, the BlackBerry case is not an exception, but rather a typical illustration of the challenges and uncertainties surrounding the valuation of intellectual property.
From a European Governance perspective, the question arises as to what governance structures can be put in place to allow for more reliable, trustworthy and comparable IP valuations to be undertaken. In a Post-Credit Crunch era, such a desire for adequate Governance structures comes as no surprise. Too much is at stake for investors, litigators, judges and managers alike. To get a grasp of adequate governance structures, it is helpful to review in the first instance the nature of the challenge we are currently facing, when valuing IP.
What makes IP Valuation so special?
The valuation of IP, like any other type of valuation, remains a forecast, a look into the future; an assessment of what future revenue streams could look like in light of the information one has at hand at present times. This distinguishes a valuation significantly from an accounting statement, which draws a picture of the presence based on past performance and is thus by its very nature more predictable than a valuation. The speculation surrounding future estimates of value is not necessarily a bad thing. In fact, it is systematically used in financial markets to negotiate over price. The richness of valuation methods available allows a willing seller and a buyer to come to a mutually acceptable agreement over price. If one were to reduce this bargaining power of negotiating parties by reducing the means they have at their disposal to determine value, it would mean to seriously intervene in the market, which in turn may be an undesired side effect of a potential governance measure.
Then again, there are other features of IP valuation which make it differ substantially from the valuation of other assets. The valuation of IP is strongly hampered by illiquid markets for IP. The lack of active trading volumes, turn the valuation of IP many times into a very hypothetical undertaking that is not underpinned by market reality. Ultimately, the worth of an item is determined by what someone is ready to pay for it, yet precisely this piece of information is hard to obtain in clandestine over the counter markets; characterized by very few market transactions undertaken in strict confidentiality.
Against this background, the main contribution from a Governance point of view could be to establish databases that allow valuators to gain insights on comparable market information. Japan has had good experience in this regard. Comparable market information of licensing transactions was gathered on an anonymous basis, which allowed placement of the valuation of IP in a concrete market context, rather than undertaking the valuation of IP in an abstract. The EU could benefit from a similar initiative. While technical in nature, it could significantly improve the current uncertainties surrounding the valuation of IP.
Another challenge surrounding the valuation of IP is a lack of an established market practice for the valuation of IP. A range of different corporations provide on the basis of different valuation methods, a range of different indicators of what the value of IP could be. Because these corporations are by and large not accredited, their findings may not be considered as trustworthy and their insights do not stand the scrutiny of comparison. Now, every profession has its way of establishing trust. Academic work gains recognition through peer review. The work of lawyers or accountants gains trust because of a rigorous accreditation process the individual needs to undergo before being allowed to exercise the profession. As usual, each approach has its advantages and disadvantages.
Academic peer review for example takes a lot of time and is many times influenced by the subtle political positions of the reviewers (particularly in the social sciences). Yet, the principle of peer review is increasingly finding application in the very fashionable approach of ‘crowd sourcing’. These ‘Wikipedia’ type of approaches do not place the decision making process over what is right or wrong in the hands of a single institution, but seek to benefit from the Wisdom of Crowds. The rationale of opened, crowd sourced approaches is that ‘given enough eye balls, all bugs are shallow.’ In my latest academic publication I discuss this principle at the example of open source software and find that a crowd sourced governance structure allows to benefit from the collective insights of the masses, provided they can be motivated to offer their insights, yet risks to ultimately benefit an elite as the public at large feels often insufficiently empowered to give an opinion (2).
The other tactic to promote trust in the valuation of IP is to establish a standardized accreditation system and to offer European wide training programs that aspiring IP valuators need to pass, so to harmonize the valuation of IP across the EU This approach to establishing a trustworthy profession is not new and I would like to elaborate its Pro’s and Con’s using the example of the qualification system for the ‘European Patent Attorney’.
The European qualifying examination (EQE) tests candidates’ knowledge and aptitude to represent applicants in European Patent Office (EPO) proceedings. Established in 1979, it is widely regarded as one of the most demanding professional examinations, having been passed by more than 7000 candidates already. In 2012, 2283 candidates presented themselves, yet only 595 passed the exam. Interestingly, there is a wide gap between candidates from founding members of the EU, such as Germany, France or the UK and new members to the EU While candidates from the UK or Belgium had a passing rate of roughly 70%, countries such as Slovakia, Latvia or Croatia did not even have any candidates presenting themselves to the EQE (3). To a certain extent, this may be explained by ‘grandfathering’, a regulation that allows for a limited period of time allowing existing practitioners in new member states to obtain the European accreditation without having to pass the exam. Yet, where are the young people? Where is the next generation in these countries who wants to become European Patent Attorneys and who do not have the years of experience to be ‘grandfathered’ into the system? None of them presented themselves to the exam in 2012.
Thus, there is a gap between new entrants and incumbents, a gap that may widen and ultimately lead to an EU operating on two different levels. That Europe can at times operate at two speeds is not a phenomenon restricted to IP, yet it would be most regretful if we see precisely this shortcoming built into the features of a nascent institution, such as a European IP valuation professional organization. Any type of IP valuation accreditation and training system would thus have to be thoroughly accompanied by adequate institutional measures that establish IP in these countries. Possibly, this can be done with the support of institutions such as the EPO, the World Bank, WIPO or through the various programs the EC runs itself.
Another risk may be that a European IP valuation Professional Organization acts as a gate keeper; as an institution that maintains the rights of those that are in the system and restricts access to new entrants. Again, I would like to use the EQE as an example. European Patent Attorneys are strongly sought after in the market and the hourly rates a European Patent Attorney can charge are quite impressive. Unsurprisingly, those benefiting from artificial shortage in the market, have an incentive to maintain the status quo and keep access as low as possible. In that regard the passing rates of the EQE speak for itself. The lesson that can be drawn from the experience of the EQE is that one must very carefully select who issues the accreditation, what their incentives are and how such an exam is graded.
By all means it should be avoided that the specific incentives and interests of certain groups result in artificial shortage of a much demanded labor force. In that regard ‘grandfathering’, the practice of relying on pre-IP Valuation Accreditation practices and materials, may even reinforce these mechanisms as it may end up privileging existing market participants (which can be mainly found in the advanced economies of the EU), over new entrants that are so new to intellectual property that they have never considered how to adjust. This problem of privileging approaches of incumbents could be ameliorated by incorporating this historical understanding into any market practice or adapting the role of market practice as an interactive device to require consensus across countries of different stages of development (4).
My last point concerns the funding of such an institution. To keep costs as low as possible, it should be explored to what extent it is possible to tap into existing training infrastructures, such as those provided by Universities. Rather than establish a completely new institution that has to break-even in a certain period of time, why not place this new institution under the umbrella of Universities across the EU? In other words; why not try to avoid reinventing the wheel?
Universities would lend themselves well as a host of a standardized IP valuation accreditation system. Universities exist throughout the EU Many times they have over thousand years of experience in teaching and research. An accreditation program for IP could swiftly be fed into the existing executive education training modules of universities throughout the territory. This would be much more cost effective; it would allow tapping into the existing infrastructure of a well-established institution and would assure equal training opportunities across the EU. At the same time it would avoid significant upfront investments and the pressure to recover costs through training and teaching. A symbiosis with existing training institutions will reduce significant funding pressure, while at the same time assuring quality of education and guaranteeing that teaching reflects the latest stage of research.
Going forward, where does this leave us?
A reflected Governance structure that promotes the valuation of IP and helps build trust in the market for such a practice needs to be multifaceted. It is naïve to believe that one single measure will be enough to establish active markets for IP and thus promote the transfer of technology and the promotion of innovation. The EC’s Expert’s Group report is very informative in that regard and I would like to take the opportunity here to emphasize two initiatives: The establishment of a database containing, on an anonymous basis, information on licensing transactions and the creation of an IP Valuation Professional Organization.
A database containing information on licensing transactions can quite easily be created at the various patent offices of the EU’s Member States. It hardly costs anything, but would require some sort of incentive scheme that assures that market participants do in fact communicate the value of their transactions to the institution administering the database.
The establishment of an IP Valuation Professional Organization is somewhat more complex. If and to what extend it will succeed, will to a large extent depend on how it is structured. In my view, such an institution will be more successful if placed within the umbrella of the various universities that exist across the EU Thus, rather than concentrating training and accreditation in the hands of a separate institution, it should be spread across a consortium of Universities across Europe. The advantages of such an approach are self-evident. Major challenges such as contributing to further cleavages within the EU could be avoided. Because the consortium is equally spread, Member institutions from all countries, independently of their economic strength, can contribute. To a certain extent, such a consortium allows also to tap into the wisdom of crowds. Rather than have one monolithic institution decide what is ‘right’ and what is ‘wrong’, a consortium of Universities can tap into a wide range of insights and so adapt better to training needs that will certainly vary across the EU.
The problem of ‘gatekeeping’ is also mitigated. The incentives of Universities are different from those of practitioners. Essentially, academics grading the exam do not benefit from how many (or how few) practitioners there will be in the market. If to the contrary the exams were to be marked by practitioners, they may want to keep access to the profession as low as possible, so to maintain their own privileged status.
Finally, the approach of a consortium of universities running an IP valuation accreditation system, will also positively impact costs. Because universities are established institutions disposing of a functioning infrastructure, the creation of a European wide training and accreditation system for IP valuation will be feasible at relatively low cost. Training space, administration of training programs and exams, all of these are activities that Universities run anyway. Rather than establish a completely new training institution that is completely decoupled from latest research in the field, placing the IP Valuation Professional Organization and Accreditation into a consortium of Universities across the EU will allow to integrate the valuable insights and ideas of all Member states of the EU, will furthermore be much closer to a ‘wiki’ type of approach of knowledge generation and sharing and will avoid the risk of privileging insiders who could use such an accreditation system as a gate keeper.
From a financial point of view, placing the institution within a consortium of Universities will be much more cost effective. Rather than starting from scratch and having to invest in marketing and PR, paying for expensive office space etc., Universities can lend their existing reputation, office space and teaching capacities to such an accreditation system. Clearly, it is time for European wide governance measures that help the Union to its claim to fame as the ‘Innovation Union’. A pan-European wide training and accreditation system for IP valuation could be an important means to achieve that. As usual, the devil lies in the detail; or, more precisely in the structure. The IP Valuation Professional Organization can be placed within a network of universities or within a monolithic institution that needs to be started from scratch. I have a preference for the network approach because I believe in an egalitarian EU that offers an equal level playing field to all citizens of the European Union.
(1) IP Finance Blogspot, 17.8.2013 ‘A Kodak Momentum’.
(2) R.Ghafele & B. Gibert: The Impact of Open Source Software on Employment Creation in the U.S.A. International Journal of Open Source Software and Practices. 2013
(3) EPO website. Last checked 13.8.2013 http://www.epo.org/learning-events/eqe.html
(4) G. Dinwoodie & R. Dreyfuss. Designing a Global Intellectual Property System Responsive to Change: The WTO, WIPO and Beyond. SSRN Working Paper 2009. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1502262 (last checked: 17.9.2013)
This paper was originally submitted to the European Commission, DG Research & Innovation and used as internal preparatory material for the preparation of an Expert Report on IP Valuation, which can be downloaded here
Dr Roya Ghafele is the Managing Director of Oxfirst Limited, a consulting firm specialising in the economics of IP. She holds permanent faculty positions in law and business school with the Universities of Oxford and Edinburgh, and has published with Harvard and Oxford University Press.