September 19, 2012 | Issue #120-2  

Federal Circuit ramps up the apportionment calculus

In yet another sign that the Federal Circuit is tightening the evidentiary standards for proving damages in patent utility cases—especially for those concerning “small elements of multi-component products”—it has just held, in a new case, that any royalties resulting from infringement must be based “on the smallest saleable patent-practicing unit.”

The “entire market value rule” (EMVR) is the only—and ever-narrowing—exception to this standard, the court added. Only when the patented feature “drives the consumer demand” for the product can the product’s entire revenues provide a baseline royalty. It is not enough to show that the patented feature was “valuable, important, or even essential” to the product—in this latest case, a laptop computer that contained the patented ODD (optical disc drive) technology. “Nor is it enough to show that a laptop computer without an ODD … would be commercially unviable,” the Federal Circuit held. Instead, the patentee must meet the “higher degree of proof” that the presence of the patented functionality “is what motivates consumers to buy a laptop computer in the first place.”

The court also affirmed well-established precedent (from an 1884 Supreme Court case) that a patentee “must in every case give evidence tending to separate or apportion” the defendant’s profits from a product between its patented and unpatented features, a calculus that has become—particularly for today’s more sophisticated electronic devices, which can include dozens of distinct and separately patented components—an “exceedingly difficult and error-prone task.”

Applying this higher standard in the case, the Federal Circuit made several important rulings regarding the plaintiff’s expert evidence presented in two prior trials before the federal district court (E.D. Tex.). Among them, it found the expert had improperly applied the EMVR, used the wrong valuation date and pricing structure, and relied on a litigation-spawned license that was “far from reliable.” Read the complete digest of LaserDynamics v. Quanta Computer, Inc., 2012 U.S. App. LEXIS 18441 (Fed. Cir. Aug. 30, 2012) in the November Business Valuation Update; the Federal Circuit’s opinion will soon be posted at BVLaw.

Patent litigation reaches record highs, new PwC study shows

Patent holders filed 4,015 infringement actions in 2011—the highest number ever recorded, according to PricewaterhouseCooper’s just-released 2012 Patent Litigation Study. These filings represent a 22% increase over filings during the prior year (2010) and an overall compound annual growth rate of 6.4% since 1991, when the PwC annual study began. Median awards in patent cases have also continued to climb. Last year saw two of the four largest awards, totaling approximately $1 billion each.

“Last year marked the most dramatic change to the U.S. patent system in nearly six decades,” notes the PwC introduction. For example, passage of the Leahy-Smith America Invents Act (AIA) in September 2011 effectively converted the patent system from a “first to invent” basis to a “first inventor to file.” Unlike prior drafts of the legislation, however, the AIA as enacted “did not address the calculation of damages,” leaving any reform in this area squarely up to the courts,” says PwC. In fact, the Federal Circuit’s recent elimination of the 25% “rule of thumb” along with other important rulings “have demonstrated that the courts, not Congress, [will] continue to shape the future of patent law and play the primary role in how patent damages are determined.”

Meyers, Harrison & Pia acquires Fannon Valuation Group

Meyers, Harrison & Pia (MHP), based in New Haven, Conn., and New York City, has just acquired Fannon Valuation Group (Portland, Maine) “creating one of the largest business valuation and litigation assistance teams on the East Coast,” according to the firm’s announcement.

The merger, effective September 17, will combine MHP’s business valuation, forensic accounting, and litigation assistance services, led by Mark Harrison and Kenneth Pia Jr., with the Fannon Group’s expertise in BV, economic damages, and litigation support, as established by Nancy Fannon. “We are extremely excited about the opportunity to work with Mark, Ken, and their entire business valuation and litigation team,” says Fannon, who has joined MHP as its partner in charge of litigation assistance services.

How the CM&AA helped boost this appraiser’s credibility in court

As a longtime litigation expert, Joseph Rippe Sr. (Rippe & Kingston) knows he has got to be “on top of my game” or the opposing attorney will quickly gain the advantage. In a recent court appearance, for instance, he began by reciting his certifications, which include a CPA/ABV and CVA as well as a CM&AA (Certified Merger & Acquisition Advisor) from the Alliance of Merger & Acquisition Advisors. At this point, the judge turned to him and said, “I’ve listened to all your credentials: Can you tell me the difference between them and how they apply to this case?”

After explaining the diverse theoretical advantages of his BV credentials, Rippe told the judge that the CM&AA looks at valuation from a “more practical standpoint,” and so permits him to support his conclusions with market and other economic “realities.” After hearing all the evidence, including the opposing expert’s much lower estimate of value, the judge adopted Rippe’s conclusions, reducing it by only $1.00. As the attorney on the case explained to Rippe, the $1.00 reduction was a “very subtle message” to the other side that its expert “did not have any credibility, so don’t bother to appeal the decision.” (Rippe’s podcast describes the experience as part of AM&AA’s ongoing “Members’ Voices” series.)

Next CM&AA class starts in October. Enrollment has already started for the next CM&AA course, October 15-19 at Wake Forest University in Charlotte, N.C. There will also be a final opportunity this year to gain the CM&AA accreditation at Pepperdine University in Los Angeles on December 3-7. For more information and to register, click here now.

PCAOB says ‘serious’ inspection deficiencies remain high

“In the 2010 reports issued last year, we saw a high level of serious inspection findings, an increase over previous years,” said Jeanette Franzel, member of the Public Company Accounting Oversight Board (PCAOB), in a keynote address to the American Law Institute’s CLE conference in Chicago last week.

“Unfortunately, that spike in inspection findings has remained high in the 2011 reports we are issuing this year,” she added. Common areas where the board is currently finding audit deficiencies include, among others: revenue recognition, fair value of financial instruments, management estimates, testing and evaluating internal controls, related party transactions, and the auditor's assessment and response to fraud risk.

Another frequent problem area—particularly for smaller issuers—is “the audit work related to the issuer's use of equity financing instruments to compensate employees, vendors, and others,” Franzel said. “Many of these agreements and instruments contain complex terms and conditions that impact the manner in which the instruments should be recorded and accounted for by the issuer. “ For her complete remarks, click here.

Pratt’s Stats, Public Stats just added 2012 NAICS codes

We have just updated all the transactions in Pratt’s Stats and Public Stats—which collectively contain data on over 22,000 sold businesses—to reflect the new 2012 NAICS codes just published by the U.S. Census Bureau.

As subscribers and frequent users know, Pratt’s Stats and Public Stats transactions come labeled with both a NAICS code and a SIC code to identify the industry of the sold business, thereby making the review and selection of comparable companies easier and more effective. However, SIC codes—first created by the federal government in 1937—were last updated in 1987. Ten years later, in 1997, the U.S. Census Bureau developed the NAICS system specifically to supplant SIC codes; it has since revised these every five years to reflect the expansion and evolution of new industries. As a result, searching Pratt’s Stats and Public Stats by the most up-to-date NAICS codes serves as one of the most current, comprehensive methods to locate transactions within a particular industry.

FASB to host an ‘encore’ broadcast of its free webinar on private company framework

On Monday the Financial Accounting Standards Board (FASB) announced that it will hold a live, encore performance of its recent webcast, “IN FOCUS: The FASB Private Company Decision-Making Framework Project,” on October 18 from 1:30 to 2:45 p.m. EDT. Those who preregister and participate in the live broadcast will be eligible for up to 1.5 hours of CPE credit, according to the FASB release (which also notes that CPE credit will not be available for group viewing).

The board’s prior webcast on the private company decision-making framework project (on September 14) “generated a lot of interest, questions, and insights among viewers,” said FASB technical director Susan Cosper. “By hosting a second live webcast on October 18th, we hope to give even more stakeholders the opportunity to learn about what’s in the paper, and why their feedback is critical to the success of improving financial reporting for private companies.”

New BVR study benchmarks ‘live’ data for remaining useful lives of intangible assets

Ever since the FASB issued FAS 141R, Business Combinations—now FASB ASC 805—valuation analysts as well as auditors and CFOs may have felt as though they were working in a “data vacuum” when conducting the required purchase price allocations (PPAs), particularly when trying to assign the remaining useful lives of intangible asset values, including (and especially) any noncompetition agreements.

To fill this gap, BVR has just released Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations, a study of 360 distinct business combinations that compiles and organizes the most recently available PPA data. In this easy-to-use guide, readers will be able to:

  • Review all intangible asset categories, including detailed descriptions of the valuation approaches used and checklists of factors to consider;
  • View data slices by intangible; and
  • View intangible categories data by industry.

Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations also delivers key statistical data to benchmark noncompete agreements, support statistical claims of the dominance of intangible assets, and assist in identifying amortization tendencies.

IRS focus is more on operations of FLPs, says Porter

Recent Tax Court decisions have dealt “a significant blow to the lack of economic substance, lack of business purpose, and gift-on-formation positions taken by the IRS in the family limited partnership (FLP) area,” says attorney John Porter (Baker Botts). “Subject to the continuing development of case law and IRC § 2036, if a partnership is valid under applicable state law and the entity is respected by the partners, the Tax Court will recognize that entity for transfer tax purposes,” he says.

In light of these decisions—and in dealing with the IRS at the audit level and in litigation—Porter has seen “the IRS increase its focus on the actual operations of the partnership.” For instance, the IRS now routinely asks to examine the partnership’s books and records, its bank statements, and its operational documents to ask such questions as:

  • Did the FLP make distributions according to the terms of the partnership agreement?
  • Was the partnership operated as a separate legal entity, or merely a second bank account for the decedent?
  • In the formation, funding, and operation of the FLP, did the partners (and planners) dot the proverbial i’s and cross the t’s?

“The IRS attacks on partnership-based valuation discounts can be thwarted with careful planning, documentation, and operation of the entity,” Porter observes. “This includes ensuring that the partners respect the entity and [obtain] qualified, supportable, and well-reasoned appraisals …. when valuing the transferred interests.”

Answering all your FLP questions. Join Porter on Tuesday, October 2, as he launches BVR’s 5th Annual Symposium on Estate & Gift Tax with his presentation, Family Limited Partnerships: The Current Landscape. In this 100-minute webinar, Porter will present a complete regulatory and case law update as well as an overview of the most recent Tax Court decisions in which the taxpayer has sustained “substantial” discounts on FLP values.

More excellent CPE this fall

Tomorrow—Thursday, September 20—join Vincent Covrig and Daniel McConaughy (both Crowe Horwath) for Advanced Topics in Debt Valuation, a 100-minute presentation on how to value debt; how to assess relevant information for that analysis (credit ratings, agency info, etc.); and how to apply that information in your WACC, DLOM, and liquidity analyses. 

BVR’s Online Symposium on Healthcare Valuation continues on September 27 with Medical Practice Valuation in Divorce, featuring Kathie Wilson and Robert Levis (Levis Consulting), who will focus on one of the most frequently litigated entities in divorce cases: the private medical firm. The discussion will focus on the recurring sources of many of those disputes—goodwill values, accounts receivable, patient records and files, noncompetition agreements, regulatory concerns, and more.

Spotlight on new healthcare program and certification at ASA advanced BV conference

Valuation analysts who work in the healthcare niche (or want to expand in this active industry) won’t want to miss the special extended session on Healthcare Valuation: An Interdisciplinary Approach, on Tuesday, October 9, at the ASA’s Advanced BV Conference in Phoenix.

To accomplish its holistic approach, the panel will include representatives from BV as well as intangible assets and IP valuation; real property; furniture, fixtures, and equipment (FF&E); and personal property. Attendees will also learn about the ASA’s new Healthcare Special Interest Group (HSIG) and its new Healthcare Special Certificate of Completion Program, a multidisciplinary advanced course in healthcare valuation that will augment (without supplanting) existing ASA accreditations. For more information on the special healthcare session and a complete overview of the Advanced BV Conference, October 8–10, click here.


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