‘Let’s kill all the valuators’
Henry VI, Part 2, is hardly one of Shakespeare’s most famous plays, but it may contain one of the bard’s more famous lines, uttered by Dick the Butcher to an anarchist assemblage: “First thing we do, let’s kill all the lawyers.…” Flash forward three thousand (or so) years, and an assemblage of BV professionals on LinkedIn is still discussing the recent article on the future of valuation litigation. Written by two top-tier attorneys, the article (which we first introduced here, with a follow-up here) serves as a “cautionary tale” for appraisers, says Richard Conn, who initiated the new LinkedIn discussion (membership required). “Here we have Shakespeare’s ‘Dick the Lawyer’ saying, ‘Let’s kill all the Business Valuators.’”
What is of a continuous surprise to me is that honest, reasonable experts can have such diverging opinions of value and almost always, coincidentally, directionally in accordance with the bias of their clients. If absolute objectivity is the modus operandi of the valuation profession then there still will be cases [in which] opposing experts materially disagree upon the valuation of an asset. Indeed, this is exactly why the court resolution process exists.
But statistically speaking, [such cases] should be in the minority. So, from this vantage point I have a great deal of sympathy towards [the attorneys’] position of, “if the valuation profession only serves to throw dust in the court’s eyes and make the ultimate resolution all that much harder—why bother engaging them?”
Responds R. Christopher Rosenthal: “In the vast majority of valuation litigation matters we testify in, the availability of public market data is limited if [not] nonexistent. To the extent that relevant market data does exist, our work is focused on that data and how to interpret and arrive at a conclusion of value for the subject company. Based on my experience, it would be challenging in many cases for the finder of fact to arrive at an opinion of value without valuation expert testimony.”
The article’s premise is “naively simplistic,” Conn agrees, yet the authors’ message is clear: “Valuation experts are not providing assistance to the court (as is their duty); are primarily acting as advocates for their clients; and should be engaged only in those cases where non-expert evidence is insufficient.”
Oh, but wait—first the lawyers may sink their
The 2013 Report on the State of the Legal Market, just published by the Center for the Study of the Legal Profession (Georgetown University Law Center) and Thomson Reuters Peer Monitor, finds much ado about very little, which, all dramatic allusions aside, is never good news for the BV profession and its reliance on this crucial referral base. Overall, the 2012 demand for attorneys was up just 0.5% from the previous year, as measured by billable hours. In addition to “sluggish” growth, the U.S. legal market also suffers from “declining productivity, falling realization rates, and the need for further expense reductions.”
The U.S. was not alone; the U.K. legal market also slowed, and—with the stalling of economies in China and Brazil—demand for attorneys is also dragging in Asia and Latin America. “It is becoming increasingly apparent that the market for legal services in the United States and throughout the world has changed in fundamental ways,” the report says. If the legal profession is to stay afloat in this “increasingly difficult and challenging environment,” it will have to show a collective clear thinking, strategic focus, and flexibility in addressing rapidly changing realities.
“Is it time to burn the ships?” the report asks, alluding to the legend of Cortez—the Spanish conquistador who, upon landing on the shores of the Yucatan in 1519, ordered his men to burn their ships so they had no choice but to move forward and conquer the Aztec empire. On a less dramatic level, the report urges the profession “to force ourselves to think outside our traditional models and, however uncomfortable it might be, to imagine new and creative ways to deliver legal services more efficiently and build more sustainable models of law firm practice.”
ASA exploring new brand, new name
“There are a lot of changes on tap for ASA marketing and communications,” says Arlene Ashcraft, the editor of the ASA’s weekly E-Update, in her latest missive to members. “The ASA Board of Governors recently approved funding to explore re-branding the Society with a fresh and more modern logo.” A focus group consisting of members and nonmembers (within the U.S. and abroad) will explore changes to the ASA logo and discuss the implications, nationally and internationally, of its name, “American Society of Appraisers.” “The focus group plans to make recommendations to the Board of Governors at its midtermmeeting in March,” Ashcraft says, with more news to come.
Practice-specific marketing plans are also in the works, as an ASA marketing and communications team, led by marketing director Todd Paradis, continues to work closely with the committees representing the various disciplines within the ASA. “These plans consist of lead generation, advertising, promotions, news releases, tradeshows … and much more,” Ashcraft says.
Another big change: By spring the ASA should have a new website. A “beta” version should be available for review by the midterm meeting of the board, and the launch will take place shortly thereafter. New features should include an improved “Find an Appraiser” search, a “major facelift” of the ASA store, and better/easier navigation tools. The goal for the site is to permit members to conduct their business “quickly and easily,” Ashcraft says, and “be a site ASA members will be proud to send clients to.”
Posner (once again) takes aim at ‘pie in the sky’ patent damages
In his continuing quest to “fix” the broken patent system in this country—particularly its manifestation in long, costly, and invention-stifling litigation—Judge Richard Posner (7th Circuit) wants federal courts to use the two most ready tools at their disposal: the appointment of neutral damages experts and the application of a more precise calculus of damages.
“Among the things a judge can do is assign a neutral expert to assess the claims of damages from both sides,” Judge Posner said in a recent article by a New York Times op-ed columnist. Such court-appointed neutrals are sure to “have a deep understanding of the issues,” the judge says, and can explain them “to a jury in a jargon-free manner.” (That may be so, but neither Posner nor the Times mentions the high-profile Oracle v. Google case, in which the federal court struck portions of the report by its appointed expert for ignoring the strict exception to applying the entire market value of an infringing product.)
Far more important, the Times piece continues, is for judges to continue their scrutiny of patent damages. “Instead of allowing companies and their experts to come up with pie-in-the-sky estimates of what they are owed by the infringer,” Posner wants them to calculate precisely how much the infringing component is driving demand for the product. “If they can meet that challenge, then fine,” he says. “But it’s difficult.”
Thus, in the equally high-profile Apple v. Motorola litigation, Posner dismissed both experts—and the entire case—after concluding that neither side came close to meeting the current, rigorous standards for precision and objectivity (which might be summed up as what amounts would an expert calculate in a nonlitigation role). The case is currently on appeal, and the NYT piece posits that if Posner’s standards hold up, “there is a decent likelihood that his new formulation will become the standard in the federal judiciary—and the costly patent wars, which take money from shareholders and consumers alike, will finally come to an end.”
Expert’s damages in cookie case … crumbles
In a new Daubert decision, Posner continues on his judicial quest for tightening the gatekeeping role in patent cases. Although the plaintiff’s expert was “highly qualified” and competent to estimate damages in the case—which involved a patented formula for creating cookies free of trans fats—she made several critical errors in her opinions and calculations.
First, after speaking with the plaintiff’s scientific expert, she concluded there was no acceptable, noninfringing substitute for the patented formula, a factor that substantially boosted her royalty rate. Her reliance was allowable, the judge ruled, but her inquiry failed to establish whether cookies made with a substitute would actually sell. For that information, she could have talked (but didn’t) to the plaintiff’s industrial baking expert as well as its marketing and consumer experts. “I don’t understand why” she didn’t talk to these experts, Posner said, and struck her conclusion that there was no noninfringing alternative that would have cost the defendant something less than a “hefty royalty” to implement.
Even if there was no “perfect” substitute for the patented formula, any royalty for infringement “would depend on the cost, in higher production costs and loss of business to competitors, of the best imperfect substitute,” the judge observed, “and [the plaintiff’s expert] offered no evidence about either cost.” Instead, she relied on three comparable licenses to project the maximum amount of profits the defendant put at risk by failing to secure a license. However, one of the agreements involved a lump-sum payment and a licensee “wholly dissimilar” to the defendant; another concerned a complex litigation settlement that the expert failed, in any way, to analyze. Only the third license might “possibly” support a reasonable royalty, the judge held, limiting the expert’s testimony to this basis but dismissing her market share calculations as unreliable. Read the complete digest of Brandeis University v. Keebler, Nos. 1:12-cv-1508 et seq. (N.D. Ill., Jan. 18, 2013), in the April Business Valuation Update; the district court’s decision will be posted soon at BVLaw.
Who still uses the excess earnings method?
That’s a good question, says James Alerding (Alerding Consulting). After all, none of the BV professional standards explicitly feature the excess earnings method (EEM)—but neither do they expressly preclude its application. In Alerding’s experience, the EEM “is still commonly used in valuation circles, especially in divorce cases and litigation cases involving smaller businesses.” BV appraisers also use it to determine a purchase price for a shareholder interest in a small business, he adds, and “these are just a few of the contexts in which I have seen the EEM used within the past year.” Elements of it also appear in fair value for financial reporting, in particular when discounted multiyear excess earnings provide support for valuing specific intangible assets, he points out. “In fact, paragraph 33 of SSVS-1 mentions that specifically.”
Even appraisers who no longer routinely apply the EEM will run across the method in others’ reports and will need to know its “pros and cons” to provide an informed critique. Don’t miss the webinar tomorrow, February 14, The Excess Earnings Method, in which Alerding will provide a thorough overview of the method’s strengths and weaknesses, as well as its particular application in valuing goodwill in divorce.
New IVSC paper on valuing liabilities
This week, the Standards Board of the International Valuation Standards Council (IVSC) published a new discussion paper titled “The Valuation of Liabilities.”
Based on a framework that excludes liabilities arising from financial instruments, the new paper proposes a working definition of liability (“an obligation which could result in an outflow of resources”) as well as related guidance and practices. “The board is seeking views on the types of liability that should be included in any future IVSC pronouncements, within the proposed framework of excluding liabilities arising under a financial instrument or other form of contract in this instance,” says this month’s IVSC E-News. The board also wants to hear “about the methods currently being used to value different types of liabilities and any difficulties encountered in practice.” Comments are due April 30, 2013.
New, improved standards. The IVSC has also just issued an exposure draft of Amendments to the International Valuation Standards. The proposed changes include clarifying:
- The applicability of the standards to valuation reviews;
- Matters to be considered before relying on information provided by others; and
- The need to identify the “unit of valuation.”
Comments to the exposure draft are also invited by April 30.
PwC says family businesses are ‘thriving’ worldwide
The owners of family businesses “are positive about the future, and the majority are looking to grow the business in the next five years,” says a new survey by PricewaterhouseCoopers. Results from a poll of nearly 2,000 owners and managers across more than 30 different countries “prove that family firms are robust, vigorous and successful. They are ambitious and entrepreneurial and delivering solid profits, even in the continued uncertain economic environment.”
PwC also provides an “interactive” benchmarking tool by which visitors to the site can compare their own metrics to both the quantitative and qualitative data collected from survey participants. Their additive participation in the survey “will not only help you see where you are, relative to your peers, but help you set a strategic course for where you want to go” as a global family business.
For your Valentine: roses and CPE?
On second thought, better stick with the roses and a fine dining reservation. For the best of BV-related CPE, reserve your place at these fine sessions:
- On February 26, Part 2 of BVR’s Online Symposium on Healthcare Valuation continues with attorneys James Pinna and Matthew Jenkins (both Hunton & Williams) presenting “The Stark Law and the Anti-Kickback Statute,” an important overview and update of current regulations for appraisers in the healthcare sector.
- On February 28, the Online Symposium on Economic Damages begins with the Advanced Workshop on Lost Profits Calculations, featuring Robert Gray and James O’Brien (both ParenteBeard). This intensive, four-hour workshop is free to subscribers to the full Symposium and will cover the process for calculating lost profits from start to finish, using case studies and “live” examples. The Damages Symposium will continue throughout 2013 with other advanced topics. More information here.
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