January 12, 2011 | Issue #100-2  

Free copy of monthly December economic outlook and forecast data – would you use this monthly?

The Economic Outlook Update™ (EOU), BVR’s quarterly review and forecast of the US economy, is considering publishing a monthly supplement (12 issues a year) in addition to the quarterly reports. This monthly supplement can be used as a more current basis for the economic conditions component of your valuation reports, giving you the most up-to-date, complete, and cost effective economic data and forecasts available anywhere. We have created an issue for valuation dates in December 2010, available at our Free Resources page. We want to know if BVWire readers would find such a monthly report useful. Check out the report and send an email to Adam Manson, EOU Managing Editor at adamm@bvresources.com with your thoughts!

Federal court rejects 25% patent infringement damages rule of thumb

By now, you’ve probably heard about last week’s decision in Uniloc U.S.A. v. Microsoft Corp., in which the Federal Circuit Court of Appeals resoundingly rejected the 25% “rule of thumb” in the calculation of patent infringement damages. Despite its prior wide use by patent authorities and passive acceptance among courts, the Federal Circuit declared the 25% Rule inadmissible under Daubert “because it fails to tie a reasonable royalty base to the facts of the case” and, as an abstract and largely theoretical construct, “is a fundamentally flawed tool.”

The court confirmed Microsoft’s patent infringement liability, but reversed the jury’s $388 million award and remanded the case on the sole question of damages. To pass Daubert, any expert’s calculations “must carefully tie proof of damages to the claimed invention’s footprint in the marketplace,” as supported by the Georgia-Pacific factors, “and the hypothetical negotiations that would have taken place.”  The court also rejected the expert’s use of Microsoft’s $19 billion entire market share as a “check” to support reasonable royalty damages, when the patented component did not create the basis for customer demand. Look for the case digest in the March 2011 Business Valuation Update—and we’ve just posted the court’s landmark decision as a free download at BVR’s IP Valuation Resource Center.

The expert failed Daubert before. Interestingly, Uniloc’s expert—a Ph.D without any apparent BV credentials— also appeared for the plaintiff in IP Innovation LLC v. Red Hat, Inc., 2010 WL 986620 (E.D. Tex.)(March 2, 2010). With Judge Rader from the Federal Circuit presiding, the court found the expert committed a “stunning methodological oversight” by simply assuming that the oft-unused patented feature supported a royalties derived from 100% of the defendants’ revenues. Moreover, the expert relied on a general consultants’ study instead of prior licensing agreement to improperly inflate the rate. (That case digest was reported in the June 2010 BVU and the court’s decision is now also available for BVWire readers as a free BVR download.

IP experts in demand. Taken together, the two cases signal a tightening of federal standards in calculating reasonable royalty rate damages in patent infringement cases—and a Daubert rejection of any expert calculations that fail to meet the heightened evidentiary hurdle. Learn more this Friday, January 14, in “Damages in Patent Infringement Lawsuits,” Part 2 of BVR’s Advanced Webinar Series on Lost Profits Damages, featuring Robert Surrette (McAndrews Held & Malloy) and Richard Bero (The Bero Group and a contributor to The Comprehensive Guide to Lost Profits Damages, 2011 edition). Click here for more information about this Friday’s webinar.

To define FV the valuation analyst should know the particulars of the case law

In last week’s BVWire we highlighted an active debate occurring on LinkedIn’s BV Professionals Group.  The issue is “who should know the legal definition for standard of value - the attorney or the appraiser?”

We received a number of comments, including this from Jim Alerding (Clifton Gunderson):
“The questions posed are very good ones for most practitioners.  Certainly I would confer with the attorney to determine what and whether they believe the standard of value to be.  In some cases attorneys have asked me for input on what the appropriate standard might be and the attorney makes the final call (as long as the valuation analyst feels it is a reasonable conclusion).  Divorce cases sometimes present different issues relating to standard of value.  In many cases there is no clear standard of value in a particular divorce jurisdiction and even the case law presents, usually impliedly, different standards in different cases in the same jurisdiction.  It has been my experience that in most such cases it is important for the valuation analyst to know the particulars of the case law to be applied to the particular case.  This means that it might not be defined in terms we are familiar with, such as "FMV."  For example, a jurisdiction might believe that 1) a sale of the business should not be assumed; 2) personal goodwill should be excluded; 3) but salable personal goodwill should be included; and a pass through entity should not be tax affected.  How do you define that in a standard?”

Risk free rate in lost profits cases varies from state to state

“In lost profits cases, dealer termination cases come up quite often,” Robert Lloyd (University of Tennessee College of Law) told listeners last Friday during the BVR webinar Discounting Lost Profits: Case Law & Methods – A Legal Perspective. One case in particular, Diesel Machinery, Inc. v. B.R. Lee Industries, Inc., 418 F.3d 820 (8th Cir. 2005) is a good example. The case’s particulars include:

  • A road-building equipment dealer sued a manufacturer that had wrongfully termi-nated its dealership agreement.  The defendant’s damages expert, a credentialed and experienced analyst, used a discount rate of 17.5% in calculating the present value of the plaintiff’s damages
  • “South Dakota law required a risk-free discount rate.”
  • “There is a difference between discounting to present value damages awarded in a lawsuit, and discounting to present value the value of a business based on a future stream of lost profits.”

“The Court struck the expert’s testimony,” explained Lloyd, “because the law required risk free discount rate.” Co-presenter Mike Crain (Financial Valuation Group) adds “the court made a finding that it should be risk free rate. As the expert we should be asking an attorney whether the law emphasizes something specific or if it is left up to the expert.  Talk to the lawyer and if the lawyer isn’t sophisticated you may have to explain that they should look at the question as to whether the cases of personal injury and wrongful death should apply in business cases in that jurisdiction. If you are in South Dakota you do want to use a risk free rate until that case is reversed.

To purchase the webinar transcript click here.

Damodaran and the new “single transaction” value of Facebook

Referring to the big news that Goldman Sachs invested in Facebook, Aswath Damodaran asks, on his blog Musings on Markets: Can you extrapolate from a single transaction amount to an overall value?

“Sure, as long as the transaction is an arms length one and all you are getting in return for your investment is a share of the company's equity. If, as is common, there are side benefits or side costs that go with the transaction, extrapolation will yield a misleading estimate of value. In the case of the Goldman transaction, there are plenty of reasons to be skeptical.”

Damodaran touches on the same share valuation question for private companies--reviewing financial data, future projections, ownership protections, and references, in a companion paper “Valuing Young, Start-Up and Growth Companies: Estimation Issues and Valuation Challenges.” 

So, “is Facebook worth $ 50 billion?” he asks. Read his always entertaining blog post for the answer.

DOL schedules February 3 deadline for comments on proposed rule requiring ESOP valuators be fiduciaries

The DOL’s Employee Benefits Security Administration is holding a hearing regarding the proposed rule regarding the definition of a fiduciary, which included mandating all valuators of private company ESOPs be fiduciaries to the ESOPs they valuate.  The hearing is scheduled for March 1, 2011 in Washington, D.C. and the DOL is accepting public comments until Feb. 3, 2011.  The press release is available on the DOL’s website

Mercer Capital offers free buy-sell agreement webinar

On January 18 (12:00pm - 1:00pm CST)Chris Mercer will provide “a 10-step business development plan to help the business appraiser help their referral sources and – in turn – create business opportunities for themselves.”

Click here for more information.

Recent SBA loan rule—and activity—increases BV work

“During the week of December 12th, 2010, the SBA approved almost $1.5 billion in Small Business Jobs Act loans, representing the highest weekly volume since the agency began tracking loan data,” Scott Gabehart, CBA tells BVWire.   “This should generate a healthy increase in SBA loans requiring business valuations over the course of 2011,” he believes. The increased loan activity is one factor; a second is the SBA’s requirement that loans that involve a change in ownership and more than $250,000 of goodwill have business valuations from certified appraisers.

Control premia and discounts with Trugman, Trevino, and Jefferies

Many appraisers rely on control premium data (mostly from the BVR/Factset Control Premium Study), but little discussion beyond Brad Pursel’s excellent summary article has gone into the source, makeup and meaning of this data.  On January 20, expert appraiser Linda Trugman will join Gene Trevino and Spencer Jefferies for “The Use and Application of Data for Control Premiums and Discounts.”  

Learn how healthcare reform affects business valuation

The December 14 ruling by the Federal District Court in Richmond, Virginia that key provisions in the recent healthcare reform law is unconstitutional was yet another reminder of the mercurial changes happening to the healthcare industry.  On January 25 BVR kicks off the Online Symposium on Healthcare Valuation with “One Year Later: Assessing the Impact of Healthcare Reform on Value.”  Featuring Mark Dietrich, Don Barbo, and Carol Carden, this program will kick off BVR’s groundbreaking series with an in-depth look at how healthcare reform has and will affect valuations this year.  For more information, click here.

Make way for the best tool since Duff & Phelps risk premium report
At the end of this month, BVR and Duff & Phelps will unveil the game-changing Duff & Phelps Risk Premium Calculator, designed by Roger Grabowski and James Harrington and available exclusively through BVR.  The Calculator is a web-based model into which users can enter 1-18 inputs.  The Calculator delivers an Executive Summary, an Excel spreadsheet as well as an HTML package of your results, which include four Cost of Equity estimates (one that is unlevered) and considers industry specific risk should the user choose to account for it.  Grabowski and Harrington have also built functionality into the Calculator that analyzes and reports on high financial risk companies – one of many features never previously available in any risk premium tool on the market.
Two other ground-breaking features that the Duff & Phelps Risk Premium Calculator can tout are: 1) built-in risk free rate lookup – you no longer need to retrieve the rate yourself, the Calculator finds it for you based on your valuation date, and 2) the Calculator makes the equity risk premium adjustment – a crucial step often overlooked by valuation analysts.  A one-year subscription (unlimited use) to the Calculator includes two years of data (including the most current year), as well as a PDF of the most current year’s Duff & Phelps Risk Premium Report and will be available for $399.  For $759 you can get the Calculator that includes all historical data, 1995-current year – as well as a PDF of the most current year’s report.  If you want to give the Calculator a whirl you can still purchase a PDF of the 2011 (or any past year) report for $275 that includes a free, one-time use of the Calculator.  Any D&P purchase through BVR automatically gains you access to two exclusive webinars; save the dates: Jim Harrington will demo the D&P Calculator on February 8 at 10 a.m. PT/1 p.m. ET and Roger Grabowski will discuss the 2011 D&P Risk Premium Report and its underlying data on March 1 at 10 a.m. PT/1 p.m. ET.
Look for more news on the D&P Risk Premium Calculator in next week’s BVWire, but in the meantime you can download a sneak peak of the COE estimates here.   


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Damages in Patent Infringement Lawsuits
January 14, 2011
10:00am - 12:00pm PT
Featuring: Rick Bero and Robert A. Surrette

The Use and Application of Data for Control Premiums and Discounts
January 20, 2011 10:00am - 11:40am PT
Featuring: Linda Trugman, Gene Treviño, and Spencer Jefferies


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