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Methods of assessing damage to IPR

15 February 2024

The valuation of IPR (Industrial Property Rights) is still an art supported by solid craftsmanship and is only as reliable as it stands up in court. Valuation standards and existing legal regulations do not contain a closed catalogue of valuation methods, allowing for new, creative solutions. One of the critical problems is the quality and origin of data used in financial calculations and the correct selection and application of methods, including the adequacy of the economic model. Good practice requires that the data used in the expert's opinion are separated into those provided by the client/party to the process and those obtained by the expert from independent, reliable external sources. The data supplied by the interested party should be verified by an expert, e.g. through financial benchmarks, purchase of reports from research companies, comparative analysis using reliable databases and other activities that objectify the parameters of the economic model employed in the valuation. Experts have the right to use proprietary valuation methods, provided that they have been published and positively verified by other experts, their application is traceable to a court expert, and they have become part of the sound professional practice of field experts.

In a dispute about the economic consequences of a breach of the IPR, it is necessary to determine the amount of compensation. For this purpose, hypothetical values occurring during IPR operation without a tort (revenues, costs, profits, market shares, etc.) are related to actual values determined based on records: invoices, accounting documents, warehouse data, etc.

Damage valuation methods for procedural purposes differ primarily in the way they forecast hypothetical values during the duration of the consequences of the tort:

  • In the Before and After method, the forecast is usually based on extrapolating previous trends in the plaintiff's business before the tort. Recognized statistical methods are used in forecasting.
  • In the Yardstick method, the forecast is constructed about the actual results of a portfolio of comparable companies from the period of the effects of the tort (however, it must be demonstrated that the results of the plaintiff's company were comparable to the results of this portfolio of companies also in the period before the tort). In a unique situation, when an acceptably comparable portfolio of companies cannot be constructed, the Sales Projection method is used, which uses the plaintiff's forecasts prepared as part of standard operating and investment procedures, e.g. in approved operational plans or business plans. In such a case, however, the expert should verify the quality and effectiveness of planning (e.g. analyze performance deviations from the plan in previous periods) and assess the credibility of all significant assumptions of such a plan. 
  • Method (Market Model) uses theoretical models of the market and competition. The technique requires a reliable analysis of historical market shares and the dynamics of their change, market entry/exit costs, pricing strategies and policies and other important parameters related to market development and competition. In this method, hypothetical market shares often constitute the basis for formulating forecasts of revenues and profits during the period of the consequences of the tort.

The forecast of revenues and profitability of the IPR exploitation field is an essential element of the most frequently used IPR valuation methods. Experts create new strategies, refine existing methods and introduce advanced techniques (e.g. econometric modelling, simulation analysis, stochastic models, and game theory). The rapid development of the digital economy has resulted in new categories of intangible assets in recent years, including digital assets (e.g., NFTs - representing a fraction of the ownership of virtual assets, popular hashtags, influencer brands, sales leads as an element of customer capital and many others). Good procedural practice requires using recognized valuation methods described in professional publications and included in professional standards. The selection and application of valuation methods are also influenced by legal regulations applicable in specific areas (e.g. transfer pricing in tax law).

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