Introduction
The role of intellectual property (IP) in trade and business was recognized as early as the 13th century, with the first legal acts being drafted in the 15th century. Invention protection was incorporated into national law in the 19th century and was strengthened globally through the Paris Convention.
The history of Polish Industrial Property Law (hereinafter “IP”) spans less than a quarter of a century. Disputes related to intellectual property infringement, including those governed by current laws such as copyright and industrial property law, as well as by the Act on Combating Unfair Competition, have a long-standing tradition.
This planned series of articles aims to present key issues affecting procedural economics in claims involving the valuation of the adverse effects of a tort in a business-to-business (B2B) relationship.
The past quarter-century has been marked by the rapid development of methods for valuing business damages. The computing power of portable computers has grown; access to extensive information resources in the public domain and commercially acquired has become easier; and the use of AI agents employing numerous LLM models has become increasingly common.
As a result, individual experts, including court experts, can now apply advanced computational techniques and analytical models to evaluate damages for legal purposes. Complex economic concepts, advanced financial models, and computational methods often go beyond legal knowledge. Ensuring effective communication between litigants is essential to improving the efficiency of evaluating the presented opinions, thereby increasing accuracy and reducing the costs of court proceedings.
Furthermore, new challenges are arising. For example, the reliability of experts’ personal preparation becomes questionable when they rely excessively and uncritically on modern AI tools.
The core ideas: valuation, worth, and price
Experts agree that valuation is based on an opinion-making process. Similarly, there is no disagreement about the general definition of value as the overall assessment of future financial benefits from owning or using the subject of valuation, taking into account risk. Value is inherently subjective, as it is an opinion expressed by a specific entity. Price is a current or future market fact, usually closely linked to supply and demand, and it also results from a decision whose connection to value is hard to determine, especially given the many factors involved in each party’s decision-making process.
The informational function of prices from completed transactions is later used in forming opinions (valuation). However, reliable use of transaction data requires access to commercial databases that contain information on only a small subset of completed transactions. Additionally, this data is sometimes incomplete due to confidentiality.
Valuing IP through comparative analysis poses significant challenges due to its unique characteristics. Inventions, brands, works, and other IP assets are protected by law in different forms, durations, and methods. While it’s generally believed that market transactions should reflect value, this idea often doesn’t hold in practice. Even for assets as liquid as publicly traded shares, prices usually differ from their intrinsic value, and experts’ estimates of that value can vary significantly. For many years, experts have sought to standardize valuation methods to narrow the wide range of valuation outcomes by establishing a methodological benchmark. The International Valuation Standards Council (IVSC) has increased its global influence, advancing IP valuation standardization [1].
Sources of the Dispute Over IP Value
Difficult information conditions in the IP valuation process promote disputes over pricing or costs related to concluded or planned transactions, or to infringements of exclusive rights.
Disputes regarding the value of industrial property rights often arise from:
- Internal (corporate/owner) and external post-audit decisions of offices and institutions, such as tax administration, the National Court Register, aid and investment fund managers, market regulators, NCBR, UOKiK, and KNF, when these decisions raise questions about transaction prices or the market value of IP.
- Identified infringements of rights resulting from the conduct of the parties to the contract or competitors (interference with future benefits from the use of IP or change in the risk profile of IP exploitation, etc.),
- Property settlements for IP co-owners (creators and investors): investment, transaction, inheritance, divorce.
Audit activities can lead to unfavorable tax decisions, demands for the repayment of subsidies or for increased guarantees and financial security for implementing an IP development project, claims for penalties and fines, and other adverse outcomes. A finding of IP infringement triggers a demand that the infringer cease the infringement, remedy the harm, or return any unauthorized benefits obtained. When unilateral transactions are unacceptable to the IP co-owners, it is necessary to negotiate compensation and settlement terms. In each instance, the final resolution is a court hearing.
In expert practice, principles for providing opinions in court disputes on the calculation of damages arising from IP infringements have been established (e.g., [2]; [3]; [4]). IP valuation standards have been published by national and international expert associations (e.g., [1]). Additionally, detailed legal regulations have been introduced that require differentiation of valuation methods and standards depending on the purpose of the valuation: transactional, tax (e.g., transfer pricing issues [5]), investment, and balance sheet (e.g., the Accounting Act, International Accounting Standards IAS, International Financial Reporting Standards IFRS).
Despite these efforts, disputes continue for years and incur substantial costs. A solution to this issue is to improve communication among litigants, lawyers, and economists. With the rapid advancement of IT tools (computing power, extensive databases, global communication), experts are increasingly relying on sophisticated economic models that are difficult to explain. Legal regulations and valuation methods are struggling to keep pace with the fast growth of the digital economy, which is creating new digital assets.
Examples of issues in dispute resolution
Delays in decision-making and lack of evidence for valuations based on a distant retroactive date – the date of the tort. In disputes, the need to determine the value of the subject arises sooner or later. The timing of the professional damage valuation is critical. From twenty years of experience as a court expert, I have observed that this process is often significantly delayed, resulting in substantial uncertainty in obtaining reliable data on the date of the tort. This delays the prompt resolution of disputes, including settlement negotiations.
The lawsuits were based on initial estimates, and the parties’ attorneys and the court then focused on legal issues: identifying the parties’ legal interests, verifying evidence, including from personal sources such as witness statements, and considering appeals of individual court decisions. These processes could take years, during which the court would determine whether there was a causal connection between the defendant’s actions and the incidents that caused losses to the plaintiff’s property; thereafter, an expert was commissioned to estimate the value of the damage.
The key principle in assessing damage or establishing the value of IP retroactively requires that all information used in the calculation must be from no later than the period of infringement (valuation date), i.e., information known during that period and meeting the principle of reasonable forecast.
The rapid growth of publicly available information and commercial database content is reducing the time required to store and access archival data, particularly publicly accessible information. The ability to reliably determine the conditions necessary to value intellectual property rights at the time of the tort, 7-10 years ago, is diminishing. Valuations are becoming more estimate-based because they do not meet the criteria set by valuation standards. The risk that parties can effectively challenge any uncertain aspect of the financial calculation is increasing.
Considering the high cost of economic expertise, including professional IP valuations, it is good procedural practice to prepare relevant information when filing a lawsuit. The expert should develop a method for valuing the dispute subject, identify the data needed, and secure information sources and data during the tort in a form acceptable to the court. Effective communication and collaboration between the lawyer and the economist are essential in this process.
Example:
The entrepreneur contributed a portfolio of patents and know-how related to innovative manufacturing technology for a new product as a non-cash contribution to the company’s capital. This contribution confirmed, in its application to the National Court Register (KRS), the multi-million market value of the industrial property rights (IPR) through its own valuation and a statement from the company’s management board. After five years of operating at a loss, the tax administration challenged the amount of the IPR’s tax depreciation deductions, relying on its own expert valuation. In response, the company presented its own valuation, based on optimistic forecasts and parameters unsupported by market research, state-of-the-art studies, development trends, the activities of entities with competitive IPRs, and financial benchmarks available at the time of valuation.
Furthermore, the simplified risk assessment in this opinion did not account for “catastrophic” events that could reasonably have been predicted at the contribution date if a patent attorney had been retained to analyze the prior art for valuation. It was determined that, as of the valuation date, patent applications protecting a more effective technology were pending.
Ultimately, given the current dispute with the office, it no longer matters whether the company’s management trusted a substantively weak employee or whether the author of the opinion yielded to the demands of an irresponsible management board, which wanted to save on the high costs of obtaining market research reports from independent companies and refrained from purchasing information from commercial transaction and financial databases. If a lawsuit arises, a court-appointed expert will be required to assess the value of the contribution, using the case files and establishing the information conditions as of the date the contribution was made.
Unreasonable requirements and a lack of confidence in valuation methods mean that the parties’ and the court expert’s private opinions are sometimes unreliable.
Example:
Over several years of litigation, the design and trademark infringement were ultimately recognized as unfair competition, involving misleading consumers by making the product appear similar in its packaging and contents. The plaintiff argued that the brand’s image was significantly harmed because the identical product was of much lower quality. The “Before and After” method of damage valuation, commonly used in court expert opinions, involves determining the plaintiff’s financial losses attributable to the tort, sufficient to compensate for the harm. The issue arises early, when the parties select the appropriate brand valuation method (the brand-related industrial property rights portfolio) to assess the economic impact of the brand’s image infringement.
The plaintiff presented extensive evidence of the brand’s pre-tort value and obtained data to establish the causal connection between the defendant’s actions and the loss of some of that brand equity. However, courts often disfavor overly speculative calculations, making it difficult to persuade the defendant to compensate for the loss of brand value—measured as the difference between the pre- and post-tort values—primarily due to evidentiary issues and doubts about the accuracy of brand valuation methods.
Any settlement will only cover lost profits during the period of infringement that are causally connected to the tort, and, if applicable, the repayment of unjust benefits to the infringer.
In cases of so-called “bazaar” sales of counterfeit goods, injunctions are usually obtained to stop further sales and, at most, to recover any undue profits for the seller. Owners of well-known brands in cosmetics, clothing, footwear, and stimulants (e.g., cigars, coffee) have long faced this issue.
It’s hard to establish a causal link between selling a small number of counterfeit premium brand cigars at low prices in a marketplace and the potential loss of similar sales by an authorized distributor of that brand. It’s believed that customers of so-called “premium” brands don’t purchase from marketplaces, so the brand doesn’t lose customers there. Connecting the sale of small-scale counterfeits to damage to the brand’s reputation is nearly impossible.
Example:
After many years of joint investment in developing and commercializing the IP portfolio (patent applications, know-how), one of the prominent investors departs, claiming payment of compensation under the options outlined in the investment agreement, which granted him payment related to the increase in the value of the IP portfolio developed with his participation.
The parties agreed that the current value of the IP portfolio can be reliably determined because a credible valuation was prepared by an independent entity and a negotiated, accepted transaction transferring ownership of the portfolio to an unrelated party.
The partners now believe their initial opinion was mistaken because it failed to account for the income potential of the IP portfolio then held. The financial forecasts were inaccurate, and the investment agreement they reached was vague with respect to this issue. The dispute is also complex to resolve due to the lack of reliable data that would enable a court-appointed expert to value the IP portfolio as of the date of the investment agreement.
Literature
- IVSC, International Valuation Standards.
- Measuring Business Interruption Losses and Other Commercial Damages” – Patrick A. Gaughan, John Wiley & Sons.
- “The Comprehensive Guide to Lost Profits and Other Commercial Damages”, Vol. 1 and Vol. 2 “Case Law” – Nancy J. Fannon, Jonathan M. Dunitz, BVR, 2014.
- Jimmy S. Papas, William Scally, Steven M. Veenema: The Comprehensive Guide to Economic Damages, BVR, 2023.
- “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations”, OECD, 2022.
This is just the beginning; it will be continued in the following article.
