Judge Posner differentiates ‘disabling’ defects from mere ‘weaknesses’ in patent damages
Several recent and celebrated cases have raised the bar for measuring damages in patent litigation. Courts have tightened the application of the entire market value rule, all but barred the use of the 25% rule of thumb, insisted on apportionment of damages between patented and unpatented technologies, and rejected allegedly comparable licenses used in reasonable royalty calculations.
Now comes renowned Judge Richard Posner, from the 7th Circuit U.S. Court of Appeals and sitting by designation over Apple’s suit against Motorola in federal district court, whose recent dual rulings—first on Daubert motions and then on motions for summary judgment—may have raised the bar even higher for financial experts in all cases. As he explains:
The biggest challenge to the judge at a Daubert hearing … is to distinguish between disabling problems with the proposed testimony, which are a ground for excluding it, and weaknesses in the testimony, which are properly resolved at the trial itself on the basis of evidence and cross-examination.
Among the more “disabling” problems Posner found in this case—primarily with the plaintiff’s expert—was his failure to apply rigorous, objective standards to his reliance on benchmark comparables, consumer survey data, and insider information. Despite recent precedent, the expert also failed to disaggregate damages between patented and unpatented technologies in the suit. Finally, the disparity between the parties’ respective experts was a “warning sign,” Posner said, for this and future cases. “Either one of the experts is way off base, or the estimation of a reasonable royalty is guesswork remote from the application of expert knowledge.” Read the digest of both decisions in Apple, Inc. v. Motorola, Inc., No. 1:11-cv-08540 (May 22, 2012, and June 22, 2012) in the September Business Valuation Update. Judge Posner’s opinions will be posted soon at BVLaw.
Top errors and omissions in tax court appraisals
No one likes to focus on mistakes in business appraisals—unless it’s a Tax Court judge. Then appraisers and attorneys will want to pay attention. In their current book, A Reviewer's Handbook to Business Valuation: Practical Guidance to the Use and Abuse of a Business Appraisal (Wiley, 2011), authors L. Paul Hood Jr. and Timothy Lee (Mercer Capital) devote two chapters to a comprehensive review of the most common errors and omissions in tax court appraisals. The top 12:
- Failure to comply with applicable professional standards;
- Overstatement of valuation credentials (or inadequate listing of credentials);
- Too much involvement by the attorney;
- Misapplication of the standard of value;
- Misapplication of the valuation date (most commonly, the inclusion of hindsight);
- Failure to identify the correct business interest to value;
- Bias and/or lack of independence;
- Incomplete or incorrect sources of data;
- Pure reliance on case law;
- Failure to make a site visit or inspection, or conduct management interviews;
- Failure to create a replicable analysis; and
- Inadequate explanation or support for the valuation analysis and conclusions
Ironically, business appraisals can also suffer from too much information and analysis, say Hood and Lee. “The court’s first objection to appraisals is an overarching concern that there are diminishing returns in extensive numerical analyses in the appraisal process and that, no matter how the appraisal is fashioned, it has many areas for subjective determination along the way, which culminates in a subjective opinion.”
Join the authors for the most current overview. On August 9, Hood and Lee will present Omissions & Commissions: Errors, Challenges & Solutions in Business Appraisal Forensic & Valuation Services Conference Reports, a webinar that examines how business appraisers and valuation experts can best prepare themselves, their reports—and their reputations—for the high standard of legal review.
Prevention is worth a pound of cure, but
how much do BV specialists pay for a good malpractice policy?
The last time we surveyed BV practitioners and firms about their E&O insurance, we found that available policies and products had not kept pace with the profession. As one respondent complained, “What IS available is quite expensive and covers only a tiny fraction of what I do.” Said another: “I've been looking but can't find anything that seems to be focused on our industry as BVs.”
Has the insurance industry caught up to the increasing specialization of the BV practice? Have the high prices risen even higher? These are more of the questions that Mike Crain (The Financial Valuation Group) and Gail Markham (Markham Norton Mosteller Wright & Co.) along with attorney Michael Corso (Henderson Franklin) are exploring in their online survey, which we’ve now posted to the BVWire News page. The trio will present their findings in their session on the same topic at the AICPA's Forensic & Valuation Services Conference this November in Orlando, Fla. The survey won’t take long and concerns a critical aspect of practice management; to participate, please click here now.
What’s the DLOM for a protected species?
A new case is causing quite the screech in the estate and gift tax realm as well as in the world of art appraisal. The heirs of an avid collector have already paid millions of dollars in estate tax for her collected artwork, but refuse to pay any taxes for one particular piece, by Robert Rauschenberg, which combines a painting and a found object—in this case, a stuffed bald eagle. Because it’s a federal felony to sell the bird in any form, the estate and their three appraisers claim the piece has zero value, in effect applying a 100% discount for lack of marketability to property that’s impossible or just plain illegal to sell. The IRS, however, is claiming the famous combination is worth closer to $65 million. (This summary post gets the most points for creative headlining—and a possible creative solution.)
Linda Trugman (Trugman Valuation) has been following the intriguing case, too. Although she believes the case is likely to settle before it ever gets to court, it certainly raises interesting issues related to the “definition of fair market value and the appropriateness of a DLOM,” she says. We’d love to see the IRS take the case to trial, too, not only to resolve the valuation questions but also the “is it art or is it a crime?” conundrum, so stay tuned...
More current, relevant insights on DLOM and the IRS—from Mercer
We’ve also been following the series on the discount for lack of marketability—up to five installments now—by Chris Mercer (Mercer Capital). “The conceptual logic regarding the income approach is difficult to refute,” Mercer says, in Understanding the Largest Valuation Discount #5: The Income Approach to Marketability Discounts (DLOMs):
What can cause expected cash flows to minority shareholders to be less than the expected cash flows of the enterprise? What can cause the expected growth in value, from the minority shareholder’s perspective, to be less than the expected growth in value for the enterprise from the viewpoint of a purchaser today? What factors create additional risks for minority shareholders, in addition to the need to bear the risks of the enterprise?
“The answers to these questions lie in a myriad of factors influencing marketability,” Mercer writes, “many of which were summarized in the IRS DLOM Job Aid. With the background laid for future discussion, we move in the next post to a discussion of the market approach when valuing illiquid minority interests, to be followed by an overview of the IRS DLOM Job Aid.” The series will conclude by revisiting the marketability discount from a conceptual basis. “With our growing base of knowledge and understanding, we will then begin to examine the various methods used by appraisers to develop marketability discounts, analyzing them in light of [our] conceptual understanding.”
ASA plans changes to accreditation report requirements
As reported in a recent BVWire, the American Society of Appraisers (ASA) is currently revising the guidelines for the submission of appraisal reports in connection with its accreditation procedures. “These guidelines, along with a revised Guide to Professional Accreditation, should be issued within the next couple of weeks,” says Trey Stevens, vice chair of the ASA’s Board of International Examiners, in the ASA’s weekly E-Update to members.
The revised guidelines will not only provide ASA candidates with a better understanding of the appraisal report requirements, but should also “increase the quality” of submitted reports, Stevens says. He also notes 10 highlights of the current BV report guidelines—among them a checklist that provides basic requirements and general quality standards that any written BV report should contain.
FASB extends ‘step zero’ assessment for goodwill impairment to all other indefinite-lived assets
Last week the Financial Accounting Standards Board (FASB) released the long-awaited Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.
During several months of outreach prior to issuing the final ASU 2012-02, many stakeholders expressed concerns “about the recurring cost of performing impairment tests for indefinite-lived intangible assets other than goodwill,” says the board’s most recent newsletter, the FASB In Focus. Stakeholders also wanted the board to extend the qualitative “step zero” testing for goodwill impairment, as codified in last September’s ASU 2011-08, to indefinite-lived assets. “The amendments do not change how an organization measures an impairment loss,” adds In Focus. “Therefore, it is not expected to affect the information reported to users of financial statements.”
The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after Sept. 15, 2012. Early adoption is permitted; for more information, listen to the FASB podcast.
APB extends deadline for comments to customer-asset draft
The Appraisal Practices Board has extended the deadline for comments to the Discussion Draft—The Valuation of Customer-Related Assets by one month.
Written comments are now requested by Aug. 31, 2012, to: VFRcomments@appraisalfoundation.org.
If you have any questions on the draft, contact Paula Douglas Seidel. Questions on the APB should go to Staci Steward, practices administrator.
Some of the last CPE for the summer
Only a few opportunities remain to fill CPE requirements this summer! On August 2, join Robert Schlegel (Houlihan Valuation Advisors), Alina Niculita (Shannon Pratt Valuations), and Chris Treharne (Gibraltar Business Appraisal) for The Market Approach Today: Deciphering Messages from Markets, Courts, and Common Appraisal Errors.
But save this date: On September 13, tune in to the Advanced Workshop on Regression Analysis, featuring William Kennedy (FTI Consulting) and an intensive, four-hour interactive workshop on applying, analyzing, and defending the use of regression analysis in valuation process.
In last week’s ’Wire, we misstated the name of the AICPA’s annual valuation conference: It is the AICPA Forensic & Valuation Services Conference, to be held this year in Orlando, Fla., on November 11-13. For more information, click here.
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