The fastest growing sectors of today’s economy are knowledge-based and depend largely on the value of their intellectual property for survival and growth. According to one study, in 1978 twenty percent of corporate assets in this country were intangible assets, of which intellectual property is a subset, but by 1997 seventy-three percent of corporate assets were intangible assets.1 Globally, trade in intellectual property assets makes up “more than 20 percent of world trade, or approximately US $740 billion.” 2 As an added perspective, in his April 23, 2002 statement before the Subcommittee on Commerce, House of Representatives, James E. Rogan, the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office said, IP industries represent the largest single sector of the American economy – almost 5% of GDP- and employ over 4 million Americans. Copyright industries, for example, are creating jobs at three times the rate of the rest of the U.S. economy. In 2006-2007, total copyright industries alone contributed 1.52 trillion dollars, or 11% of GDP of this country, and the growth rates of these industries was more than twice that of the economy as a whole.3
Thus, it is crucial for a knowledge-based business to find out what kind of intellectual property assets it has, through an audit, and then to valuate them. A knowledge based business must do so before it can make informed decisions on where and how to invest its resources to maintain, develop and enforce its intellectual property and, thus, its competitiveness. Such decisions include determining which intellectual property assets to develop, whether or not to continue developing an asset, what licensing fee to charge, which assets are suitable for cross-licensing, how much an asset should be sold for and whether or not to sue for infringement. Put differently, if you don’t know what the crown jewels in your intellectual property portfolio are worth, how do you know you haven’t licensed it away for too little or given away too many rights?
While there is no set formula for conducting an intellectual property audit, it consists primarily of identifying the types of intellectual property assets that the business possesses, those that are important or essential to the business’ revenue growth and protection, what technologies are encompassed in the new products or services that the company is planning to introduce, and a review of existing agreements and disputes involving these assets. The audit is also a good way to find out whether you are properly protecting your intellectual property assets.
With respect to valuating intellectual property assets, there is presently no one method that is suitable for all such assets and each method has its inherent limitations. The three accepted and most commonly used valuation methods are: cost, income and market value.