‘A Kodak Moment’ –Hard truth of Patent Valuation

Kodak IPvaliation_blog11

In Jan 2012, Kodak once leader in photography filed for Chapter 11 bankruptcy protection.  The company struggled to keep up with competitors who were faster to adapt digital revolution. The Chapter 11 bankruptcy protection postpones a company’s obligations to its creditors, giving time to reorganize debts or sell parts of the business. Kodak hoped to escape from bankruptcy by selling a part of patent portfolio. Kodak estimated its 1700 patents including its premium Digital Capture and Kodak Imaging Systems & Services to be 4.5 billion US dollar based on discounted cash flow analysis.

Finally in Dec 2013, those 1700 patents together with 655 Kodak patent applications sold only for just 94 million USD. And the worse was, the company had to license its remaining 20,000 patents only for 433 million USD, restricting its future earnings from those patents.

So how it happened? Were those patents overvalued? How patent valuation works? Why to value (Intellectual Property) IP?

IP valuation prepared for various strategic purposes, for example, financial reporting, litigation support, transactions, pricing, collateralization, tax planning, to identify good practices and to recommend possible policy actions. The main reason for valuing IP is to maximise its value. The valuation process required in-depth understanding of economy, size of the market, industry, uniqueness of technology, competing & existing technologies, future prospects, competitor profile and specific business type that directly or indirectly affect the value of the intellectual property. These data are modelled to estimate the fundamental value of a particular type of intellectual property based on adapted International Valuation Standards. For a company, Intellectual Properties may not guarantee economic success but they can be a very powerful measure of company’s potential value.

IP valuation can be either legal-based or business-based. Legal-based could be because of legal challenges to a patent or owner or litigation over possible infringement. Business-based valuation mainly due to mergers, acquisitions, bankruptcy, licenses, company reorganization and so on.

Though there are several generally accepted ways to measure the value of IP like Cost Approach, Market Approach, Income Approach, and Direct Approach but the accurate valuation of IP remains a major obstacle. Unlike most other tangible assets, an IP right is completely separable from the product to which it claims. For example, patent is not the product it describes, trademark is not the logo it claims and the copyright is not the art per se. We can use a product, logo, or art without owning the IP rights for the same.  In fact we can sell a product but not the IP rights associated with that product, and vice versa. Instead, IP right is a negative right, it grant the right to the owner to prevent others from acting. All these factors add complexity to the valuation of intangible asset like IP.  IP valuations are usually based on assumptions about the IP asset’s future value considering several past & present variables. Complexity increases when the technology involved is a fast evolving one.

In case of Kodak, just two weeks before the auction, United States International Trade Commission (USITC) made the final ruling in Kodak’s outstanding complaint case against Apple and RIM. Kodak’s patent in question, covering a premium technique of capturing still pictures while previewing motion images found to be invalid. Though weeks earlier, the same patent had survived re-examination. They were in desperate need for cash & time was running out, so they could not take the case to Federal Circuit.

For the bidding all the big players like Adobe, Apple, Facebook, Google, HTC, Samsung, Fujifilm etc. organized into a superconsortium featuring world’s biggest technology multinationals with its members reaching almost 98 percent of all computing devices.

Powerful superconsortium made a worse deal; Kodak sold its imaging and printing portfolio and a license to all of its remaining patents to the superconsortium for a total of 527 million USD, slightly above 500 million USD, amount which it required to secure funding from banks and investment funds. Also, Kodak had to drop all legal cases against consortium members and vice versa.

It was a case of ‘monopsony’ where a single powerful buyer dictates terms to seller. Kodak deal was consistent with antitrust laws. However, it is said that superconsortium encouraged “patent peace” avoiding expensive, high-profile courtroom battles. This case also raises lots of question about discounted cash flow method of Patent Valuation. Kodak patent debacle is the classic case of Patent valuation in recent history.

References

1)  http://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_11_learning_points.pdf

2)    http://spectrum.ieee.org/at-work/innovation/the-lowballing-of-kodaks-patent-portfolio

3)      http://kodak.boards.net/thread/5378/kodaks-ip-valuation

4)      http://www.forbes.com/sites/cfainstitute/2011/08/30/is-kodak-worth-3-billion/

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