| August 29, 2012 | Issue #119-5 |
A century-old twist in patent law leads to Apple’s $1 billion win As our continuing reports on the tightening standards for recovery in patent infringement cases have made clear, federal courts now require financial experts to provide “in every case” an apportionment of damages between the unpatented and patented features of the product. Here’s the twist: That strict apportionment standard, most recently articulated in Uniloc v. Microsoft as well as the Oracle v. Google litigation, applies only to suits based on infringement of utility patents. Compare that to the remedy under the Patent Act of 1887, which still entitles the holders of design patents to an “infringer’s entire profits” without the need to split damages between the patented design and the product bearing the design. That standard came into play when Apple sued Samsung for infringement of its iPhone and iPad design. After Apple’s expert calculated its damages based on the century-old remedy, Samsung’s expert tried to rebut it with calculations that apportioned damages. Apple argued under Daubert that the expert’s report was irrelevant and contrary to the law—and in a pretrial opinion, the district court agreed, finding that the expert also failed to use an accepted methodology and incorrectly applied another legal precedent in patent cases (the Panduit factors). Consequently, last Friday, a jury handed the American-based Apple an award of $1.05 billion against South Korean-based Samsung. Samsung has vowed to appeal, while Apple intends to use the victory—and the federal recovery standard for design patent infringement—to launch similar suits against other competitors in the smartphone and computer tablet industry. Read the complete digest of Apple, Inc. v. Samsung Electronics Co., 2012 U.S. Dist. LEXIS 90877 (June, 28 2012) in the October Business Valuation Update. The court’s Daubert opinion will be posted soon at BVLaw. DE Chancery admits that size premium debate is still ‘evolving’ After last week’s item on the new statutory appraisal decision by the Delaware Court of Chancery in In re Orchard Enterprises, we received thoughtful responses related to the court’s findings on the company-specific risk premium (CSRP) and the size premium adjustment:
These comments beg further questions and perhaps a fuller excerpt from the court’s opinion:
It’s our latest free download. To help you answer these questions and obtain a complete overview of the court’s reasoning, we’ve just posted In re: Appraisal of The Orchard Enterprises, Inc. as the latest resource on our free downloads page. Read it and please do send any further comments to the editor. New research by Duff & Phelps suggests size effect persists over longer periods “Does the size effect still exist?” asks Jim Harrington (Duff & Phelps), in a new article written especially for subscribers to the Duff & Phelps Risk Premium Report & Calculator. “In the last 40 years, many researchers have investigated the size effect and reached a variety of conclusions,” including Fama-French’s study of “small-minus-big” (SMB) returns over five different periods, which suggested the evidence for a size effect is “weak.” However, Duff & Phelps believes that “examining average monthly returns may not be the proper measure to use and that examining ‘performance over period’ may be a better gauge of relative return,” Harrington says. “After all, the performance of an investment over a period is what is important to an investor, since it tells the investor how much money is in his (or her) pocket.” Accordingly, the D&P researchers evaluated the SMB series over several periods, looking at “actual performance over every possible combination of start dates and … end dates.” Their conclusion: The empirical evidence suggests that the size effect is persistent over longer periods. “The 1980s were not good for small stocks, but small stocks may have recovered their footing in more recent periods,” Harrington writes. “We do not dispute that the size premium ‘waxes and wanes’ and may even be negative when measured over some time periods. However, the evidence suggests that over longer periods of time small stocks do outperform large stocks, and that an adjustment for size is appropriate.” What does Daubert have to do with death, divorce, taxes? It may now be as certain as all of the above, at least for financial litigation experts. In preparing for the next round of legal case summaries for the Business Valuation Update, for example, we’ve collected more than eight court decisions concerning Daubert challenges to economic experts (and we routinely run only 10 to 12 digests per issue, so this accounts for over half). The trend toward Daubert becoming “de rigeur” in pretrial proceedings shows no sign of abatement and every sign of pervading all types of actions. In these eight cases coming up, federal and state courts apply the Daubert standard (or the equivalent) to experts who have calculated damages for lost profits, reasonable royalty, trade secrets, hospital litigation, lost business value, bankruptcy, oil and gas, and securities. How to protect yourself (and your report) from the inevitable challenge: On Wednesday, August 29, join Nancy Fannon (Fannon Valuation) and Jonathan Dunitz (Friedman Gaythwait Wolf and Leavitt) for the conclusion of BVR’s Online Symposium on Litigation & Economic Damages, with a Case Law Update: The Latest in Lost Profits and Motions to Exclude Experts. Only two days left to comment on APB customer-assets draft The Appraisal Practices Board (APB) would like to remind you that all comments to Discussion Draft – The Valuation of Customer-Related Assets are due this Friday, August 31. Private equity finding fuel in the energy field With 56 private equity deals completed so far this year, the energy industry isn't quite flowing with the same activity as last year, but plenty of energy deals are still coming through, say the experts at PitchBook. Since the beginning of 2011, PE investors have bought a stake in 191 U.S. companies in the energy industry, according to the PitchBook Platform, with over a third of the deals falling into the $50 million-to-$250 million range. Predictably, Texas is home to over half of the deals in the exploration and production (E&P) sectors, says PitchBook. Since 2009, PE investors have invested in 156 energy exploration and/or production companies, and Texas has been home to just about half (49%) of those deals. Other states with E&P companies attracting PE attention are Oklahoma (with a 13% share), Colorado (7%), and California (5%). Texas is also home to the ASA Houston energy conference. On Thursday, September 13, the ASA’s Houston Chapter will be hosting its second annual Energy Valuation Seminar. Conference organizers have created an agenda focused equally on current appraisal topics in the energy field (valuing oil and gas interest, with and without reserves) as advances in technology (updates on liquid natural gas, nanotechnology, and mineral leasing). For more information and to register, click here. Correcting the 7 most common errors in the market approach today “Ignoring the market evidence during periods of recession is a recipe for poor quality service,” said Rob Schlegel (Houlihan Smith & Co.), during BVR’s recent webinar on The Market Approach Today: Deciphering Messages from Markets, Courts, and Common Appraisal Errors. “We just cannot do this. Yet understanding the market results during these periods of particularly high growth or high shrinkage is much more difficult than during stable periods.” In fact, “market methods themselves yield insight into the economic and industry influences on the buyers and sellers,” Schlegel added. “This is the pressure we see in the actual marketplace that strains the hypothetical exchange between the willing buyer and willing seller. Knowing this information in the market helps us to defend discount rates [and] cap rates. Shrinkage of market value of equity during the periods of recession accentuates debt proportions, unless of course the debt is revalued, and distorts your WACC inputs, so be careful of that, even if [you] choose not to apply market evidence directly, only as a sanity check.” In any application of the market approach today, co-presenter Alina Niculita (SPV) cautioned against the following most common errors in appraisals:
In sum, the third presenter, Chris Treharne (Gibraltar Business Appraisals) said, “The income approach is just an extension of the market approach.” After all, “where do we get the discount rate data? It is from publicly traded guideline companies. As Howard Lewis [former head of IRS engineering and appraisal team] likes to say, we only have one approach and that is the market approach.” FASB issues new ASU on codification amendments and offers free info session on private company framework Last week, the Financial Accounting Standards Board (FASB) issued its Accounting Standards Update No. 2012-03—Technical Amendments and Corrections to SEC Sections. The 289-page ASU 2012 contains detailed amendments to the FASB Accounting Standards Codification project. Of perhaps less painstaking interest to valuation specialists in the financial accounting field, the FASB will also be hosting a free, two-hour, live webcast on its private company decision-making framework on September 14. For more information and to register, click here. The fifth edition of BVR’s perennialbestseller, the Guide to Personal v. Enterprise Goodwill, is now available. Highlights of new content include:
To read the complete table of contents and to order, click here. More from BVR’s winning webinar series As announced in earlier editions of the Wire, we’ve selected five attendees at random from last week’s webinar Valuing Wineries & Breweries, each of whom will receive his or her choice of beer or wine from BVR’s home region of Portland, Ore. With a high turnout (due to fantastic content from presenter Jim Andersen), the odds were long, but the lucky five are:
Congratulations to all five! And although we have no plans (yet) to include another raffle, our upcoming webinars are all winners:
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