The term “intellectual property” is broad, and is widely used
to refer to intangible assets. Intellectual property differs from other forms
of property because it is intangible—that is, it is a product of the human
imagination.
to refer to intangible assets. Intellectual property differs from other forms
of property because it is intangible—that is, it is a product of the human
imagination.
There are various classes of intellectual property: Patents, Copyright
and Trade marks are perhaps the most prominent. Patent law protects inventions
that demonstrate technological progress. Copyright law protects a variety of
literary and artistic works, including paintings, sculpture, prose, poetry,
plays, musical compositions, dances, photographs, motion pictures, radio and
television programs, sound recordings, and computer software programs.
Trademark law protects words, slogans, and symbols that serve to identify
different brands of goods and services in the marketplace. Editor’s note: This article was initially posted by the author on www.linkedin.com
and Trade marks are perhaps the most prominent. Patent law protects inventions
that demonstrate technological progress. Copyright law protects a variety of
literary and artistic works, including paintings, sculpture, prose, poetry,
plays, musical compositions, dances, photographs, motion pictures, radio and
television programs, sound recordings, and computer software programs.
Trademark law protects words, slogans, and symbols that serve to identify
different brands of goods and services in the marketplace.
The question of valuation of intellectual property is a very vital
one for a number of reasons. Firstly, it greatly strengthens the perception of
the importance of intellectual property in contemporary business environment.
Secondly, it lends credence to the idea of intellectual property as any other
property and reinforces the property rights of the owner. For example, a
clearly valued intellectual property gives unambiguous signals to a third party
of its value and the repercussions of violations of such rights.[1] This
article will attempt to analyze the concept of valuing Intellectual Property,
the prevalent approach to Intellectual Property valuation in Nigeria, a world
view of Intellectual Property Valuation, and the way forward.
one for a number of reasons. Firstly, it greatly strengthens the perception of
the importance of intellectual property in contemporary business environment.
Secondly, it lends credence to the idea of intellectual property as any other
property and reinforces the property rights of the owner. For example, a
clearly valued intellectual property gives unambiguous signals to a third party
of its value and the repercussions of violations of such rights.[1] This
article will attempt to analyze the concept of valuing Intellectual Property,
the prevalent approach to Intellectual Property valuation in Nigeria, a world
view of Intellectual Property Valuation, and the way forward.
Methods of Intellectual Property Valuation
There are three generally accepted ways to value Intellectual
Property. These include: the Cost Approach, the Market Approach, and the Income
Approach.
Property. These include: the Cost Approach, the Market Approach, and the Income
Approach.
Cost Approach: A valuation analyst who values
Intellectual Property using the cost approach looks at what it cost to produce
the Intellectual Property, or what it would cost to reproduce the Intellectual
Property on a given effective date. These costs include things like labor,
materials, applied overhead, and capital charges. Depending on the effective
date of the valuation, the valuation analyst may trend costs from a historical
reference point to the effective date.[2]
Intellectual Property using the cost approach looks at what it cost to produce
the Intellectual Property, or what it would cost to reproduce the Intellectual
Property on a given effective date. These costs include things like labor,
materials, applied overhead, and capital charges. Depending on the effective
date of the valuation, the valuation analyst may trend costs from a historical
reference point to the effective date.[2]
2.Market Approach: The valuation analyst who values IP using the market
approach looks for comparable transactions in the same industry and of the same
relative size that recently occurred in the open market. Value is determined
indirectly using the comparable IP transaction as a proxy for value of the
target IP. The reasoning is logical: if the market paid X for rights to the use
or own that IP once, then one would expect that the market would reasonably pay
a similar amount again.[3]
approach looks for comparable transactions in the same industry and of the same
relative size that recently occurred in the open market. Value is determined
indirectly using the comparable IP transaction as a proxy for value of the
target IP. The reasoning is logical: if the market paid X for rights to the use
or own that IP once, then one would expect that the market would reasonably pay
a similar amount again.[3]
Income Approach: This method is the most
principled, requires the most discipline and insight into value-creating
features of the Intellectual Property to complete, and is what valuation
analysts use commonly for Intellectual Property valuation assignments. A
valuation analyst using the income approach bases their opinion on the
Intellectual Property owner’s business plan, marketing and operational inputs,
and other external references. Using this method, the valuation analyst
projects the economic income generated solely from the Intellectual Property
over a discrete period, known as the remaining useful life (RUL) as well as any
residual value after the remaining useful life.[4]
principled, requires the most discipline and insight into value-creating
features of the Intellectual Property to complete, and is what valuation
analysts use commonly for Intellectual Property valuation assignments. A
valuation analyst using the income approach bases their opinion on the
Intellectual Property owner’s business plan, marketing and operational inputs,
and other external references. Using this method, the valuation analyst
projects the economic income generated solely from the Intellectual Property
over a discrete period, known as the remaining useful life (RUL) as well as any
residual value after the remaining useful life.[4]
In What Manner Can Intellectual Property Can Be Used As A
Security?
Security?
As earlier mentioned, Intellectual
Property differs from other forms of property, due to the fact that it is
intangible in nature. Nevertheless, it remains one of the most valuable forms
of assets, and can indeed serve as security when required.
Property differs from other forms of property, due to the fact that it is
intangible in nature. Nevertheless, it remains one of the most valuable forms
of assets, and can indeed serve as security when required.
Intellectual Property could be used as a security by way of either
a legal mortgage, a fixed charge, or a floating charge. The decision as to
which security option is to be exercised over the borrower’s portfolio will be
largely determined by whether security is being granted over registered or
unregistered Intellectual Property. When dealing with registered Intellectual
Property, security will usually be taken through the creation of a fixed
charge.[5]
a legal mortgage, a fixed charge, or a floating charge. The decision as to
which security option is to be exercised over the borrower’s portfolio will be
largely determined by whether security is being granted over registered or
unregistered Intellectual Property. When dealing with registered Intellectual
Property, security will usually be taken through the creation of a fixed
charge.[5]
Fixed charges are equitable (as they grant a beneficial but not
legal interest in secured Intellectual Property) and attach themselves to the
Intellectual Property in question. The lender acquires an equitable interest in
the Intellectual Property but no legal title is transferred. While the wording
used to create the fixed charge is not governed by any statutory or common law
requirements, it is prudent to expressly state that the Intellectual Property
is charged as continuing security for the loan and other obligations set out in
the underlying finance documentation. Ideally the charge should also be granted
by the borrower with full title guarantee; the implication is that the borrower
guarantees that it has the right to grant a charge over the Intellectual
Property in favour of the lender and that the Intellectual Property is
free from other charges, encumbrances, and other rights exercisable by third
parties other than charges, encumbrances, or rights that the lender could
reasonably be expected to know about (such as interests registered against the
Intellectual Property at the Patent Office).[6]
legal interest in secured Intellectual Property) and attach themselves to the
Intellectual Property in question. The lender acquires an equitable interest in
the Intellectual Property but no legal title is transferred. While the wording
used to create the fixed charge is not governed by any statutory or common law
requirements, it is prudent to expressly state that the Intellectual Property
is charged as continuing security for the loan and other obligations set out in
the underlying finance documentation. Ideally the charge should also be granted
by the borrower with full title guarantee; the implication is that the borrower
guarantees that it has the right to grant a charge over the Intellectual
Property in favour of the lender and that the Intellectual Property is
free from other charges, encumbrances, and other rights exercisable by third
parties other than charges, encumbrances, or rights that the lender could
reasonably be expected to know about (such as interests registered against the
Intellectual Property at the Patent Office).[6]
In the event of the borrower’s default, the lender could wish to
sell the secured Intellectual Property to pay off any existing loan obligations
of the borrower. Ideally, the underlying security agreement should expressly
give the lender a power of sale and power of attorney to deal with the
Intellectual Property in place of the borrower (for example, to enter into an
assignment agreement with a third party purchaser). Without an express power of
sale, the lender will have to apply to Court for an order of sale or the
appointment of a receiver. If however, security has been granted by way of a
deed, the lender will have a statutory power of sale and right to appoint a
receiver, exercisable without the need to apply to Court. While the Intellectual
Property remains subject to the fixed charge, the lender should impose
restrictions on the borrower’s ability to deal with the asset (for example, the
grant of licences over the Intellectual Property).
sell the secured Intellectual Property to pay off any existing loan obligations
of the borrower. Ideally, the underlying security agreement should expressly
give the lender a power of sale and power of attorney to deal with the
Intellectual Property in place of the borrower (for example, to enter into an
assignment agreement with a third party purchaser). Without an express power of
sale, the lender will have to apply to Court for an order of sale or the
appointment of a receiver. If however, security has been granted by way of a
deed, the lender will have a statutory power of sale and right to appoint a
receiver, exercisable without the need to apply to Court. While the Intellectual
Property remains subject to the fixed charge, the lender should impose
restrictions on the borrower’s ability to deal with the asset (for example, the
grant of licences over the Intellectual Property).
As title to the Intellectual Property secured by the fixed charge
will remain vested in the borrower however, maintenance of the Intellectual
Property will continue to be the responsibility of the borrower. It is
therefore important that the security agreement obliges the borrower not to do
or omit to do anything which may put either the enforceability or validity of
the Intellectual Property in jeopardy (including failing to pay renewal fees or
take action against infringers)
will remain vested in the borrower however, maintenance of the Intellectual
Property will continue to be the responsibility of the borrower. It is
therefore important that the security agreement obliges the borrower not to do
or omit to do anything which may put either the enforceability or validity of
the Intellectual Property in jeopardy (including failing to pay renewal fees or
take action against infringers)
In transactions where the unregistered Intellectual Property of
the borrower is of little commercial value, security will usually be taken by
including these rights under the umbrella of the general list of assets of the
borrower secured by a floating charge. Fixed charges grant to the lender an
interest in specific assets of the borrower, and as such, the borrower is
prevented from dealing with the charged asset without the consent of the
lender. In contrast, a floating charge usually grants to the lender security
over a general list of assets of the borrower that the borrower is free to deal
with.[7]
the borrower is of little commercial value, security will usually be taken by
including these rights under the umbrella of the general list of assets of the
borrower secured by a floating charge. Fixed charges grant to the lender an
interest in specific assets of the borrower, and as such, the borrower is
prevented from dealing with the charged asset without the consent of the
lender. In contrast, a floating charge usually grants to the lender security
over a general list of assets of the borrower that the borrower is free to deal
with.[7]
What is The Situation In Nigeria With Respect To Intellectual
Property Valuation And The Use of Intellectual Property as Security?
Property Valuation And The Use of Intellectual Property as Security?
In Nigeria, it is fair to say
that the idea of relying on Intellectual Property as a security in a manner similar
to real property, if it exists at all, is yet to be fully embraced by
individuals and corporations alike. The paucity in the use of Intellectual
Property as a security, particularly for debts, is not without cause.
that the idea of relying on Intellectual Property as a security in a manner similar
to real property, if it exists at all, is yet to be fully embraced by
individuals and corporations alike. The paucity in the use of Intellectual
Property as a security, particularly for debts, is not without cause.
A major challenge in the use of Intellectual Property as security
remains the value to be attached to the Intellectual Property. Unlike tangibles
that can be subjected to easy valuation based on the physical attributes of the
security, Intellectual Property unfortunately cannot pass this test with same
ease. The owners of the Intellectual Property do not always understand the
commercial value of the Intellectual Property assets of their enterprise, and
professionals have still not found a way to subject Intellectual Property to
proper valuation.
remains the value to be attached to the Intellectual Property. Unlike tangibles
that can be subjected to easy valuation based on the physical attributes of the
security, Intellectual Property unfortunately cannot pass this test with same
ease. The owners of the Intellectual Property do not always understand the
commercial value of the Intellectual Property assets of their enterprise, and
professionals have still not found a way to subject Intellectual Property to
proper valuation.
The risk and complication that trails the use of Intellectual
Property as a form of security has made it a non-attractive form of
security in Nigeria. The nature of the uncertainty in the use of intellectual
property as collateral is something that cannot be wished away. At present, it
is difficult to assure lenders taking intellectual property as security that
their interest has, in fact, been properly perfected or secured. The reason is
that there is apparently uncertainty among practitioners as to where and how to
file notices, what constitutes notice of a security interest, who has priority,
and what property is covered by a security interest.
Property as a form of security has made it a non-attractive form of
security in Nigeria. The nature of the uncertainty in the use of intellectual
property as collateral is something that cannot be wished away. At present, it
is difficult to assure lenders taking intellectual property as security that
their interest has, in fact, been properly perfected or secured. The reason is
that there is apparently uncertainty among practitioners as to where and how to
file notices, what constitutes notice of a security interest, who has priority,
and what property is covered by a security interest.
Intellectual Property owners are disadvantaged when it comes to
attracting external financing since they do not usually have the track record
or collateral often required by banks. This challenge arises because the loans
secured with intellectual property are more costly to negotiate and administer,
if they can be arranged at all. Furthermore, there is still insufficient
knowledge and education about the unique nature of Intellectual Property
rights, thus it can be understood why Nigerians are reluctant to base loan
agreements on Intellectual Property being the existing collateral.
attracting external financing since they do not usually have the track record
or collateral often required by banks. This challenge arises because the loans
secured with intellectual property are more costly to negotiate and administer,
if they can be arranged at all. Furthermore, there is still insufficient
knowledge and education about the unique nature of Intellectual Property
rights, thus it can be understood why Nigerians are reluctant to base loan
agreements on Intellectual Property being the existing collateral.
What Is The Attitude From The Rest Of The World?
While it is admitted that Nigeria has been seemingly hesistant in taking
up Intellectual Property as a form of security, the same cannot exactly be said
of other countries of the world, and developed nations in particular. In other
words, persons in various parts of the world, natural and artificial persons
alike, have recognized and exploited the relevance of Intellectual Property as
a valuable asset, and have moved with the times to good effect. Many
industries, notably the electronics, software, healthcare, consumer goods,
telecommunications, media and entertainment are substantially dependent upon
this intangible asset.
up Intellectual Property as a form of security, the same cannot exactly be said
of other countries of the world, and developed nations in particular. In other
words, persons in various parts of the world, natural and artificial persons
alike, have recognized and exploited the relevance of Intellectual Property as
a valuable asset, and have moved with the times to good effect. Many
industries, notably the electronics, software, healthcare, consumer goods,
telecommunications, media and entertainment are substantially dependent upon
this intangible asset.
Intellectual Property is quickly becoming the most prized asset of many
companies. In a survey conducted by the United States Patents and Trademarks
Office (USPTO) in the year 2011, Intellectual Property in the U.S. was valued
at over $5 trillion[8]. The development of new technologies and the viral
spread of communication networks have facilitated the rise of businesses that
own very few tangible assets and owe their success almost exclusively to their
Intellectual Property. The ability to use Intellectual Property rights as the
object of security interests is being recognized as an attractive prospect,
rather than a mere eccentricity.
companies. In a survey conducted by the United States Patents and Trademarks
Office (USPTO) in the year 2011, Intellectual Property in the U.S. was valued
at over $5 trillion[8]. The development of new technologies and the viral
spread of communication networks have facilitated the rise of businesses that
own very few tangible assets and owe their success almost exclusively to their
Intellectual Property. The ability to use Intellectual Property rights as the
object of security interests is being recognized as an attractive prospect,
rather than a mere eccentricity.
Much of corporate wealth is now tied up in Intellectual Property. It
increasingly constitutes a larger percentage of the overall value of U.S.
businesses and can be appropriated as a form of security. In today’s business
world, the Intellectual Property portfolio of many companies forms an important
part of the company’s assets. As such, banks and other financial institutions
lending money to companies (in Western Europe, the U.S.A., Canada and other
developed countries) are increasingly taking security over borrowers’
Intellectual Property portfolios as part of a security package, particularly in
transactions where the Intellectual Property held by the borrower is of
significant commercial value.[9]
increasingly constitutes a larger percentage of the overall value of U.S.
businesses and can be appropriated as a form of security. In today’s business
world, the Intellectual Property portfolio of many companies forms an important
part of the company’s assets. As such, banks and other financial institutions
lending money to companies (in Western Europe, the U.S.A., Canada and other
developed countries) are increasingly taking security over borrowers’
Intellectual Property portfolios as part of a security package, particularly in
transactions where the Intellectual Property held by the borrower is of
significant commercial value.[9]
What Can And Should Be Done?
Banks could revisit their lending policies and conditions for
collateral, to provide more room for the use of intangible assets as is the
nature of Intellectual Property. An increase in collaborative efforts between
agencies designated to administer Intellectual Property in Nigeria, and
organisations such as Intellectual Property Lawyers Association of Nigeria
(IPLAN) would also be helpful. Beyond all that, there is need to create public
awareness on the value inherent in the existence and ownership of Intellectual
Property, and furthermore, encourage property valuers to expand their focus to
figuring out the worth of intangible assets.
collateral, to provide more room for the use of intangible assets as is the
nature of Intellectual Property. An increase in collaborative efforts between
agencies designated to administer Intellectual Property in Nigeria, and
organisations such as Intellectual Property Lawyers Association of Nigeria
(IPLAN) would also be helpful. Beyond all that, there is need to create public
awareness on the value inherent in the existence and ownership of Intellectual
Property, and furthermore, encourage property valuers to expand their focus to
figuring out the worth of intangible assets.
Endnotes
[1] Singla, Ankur, “Valuation of Intellectual Property”, available at
www.indlaw.com.
www.indlaw.com.
[2] Pellegrino & Associates, LLC, “Valuing Intellectual Property”,
2005.
2005.
[3] Ibid.
[4] Ibid.
[5] Esomonu J, & Oloyede, A. “Intellectual Property as a Form of
Security”, Seminar Paper on Secured Credit Transactions Presented at the
Faculty of Law, University of Lagos, 2011.
Security”, Seminar Paper on Secured Credit Transactions Presented at the
Faculty of Law, University of Lagos, 2011.
[6] Ibid.
[7] Ibid.
[8] http://trentostler.com/blog/security-interests-intangibles-approach-the-tangibles/
[9] Esomonu J, & Oloyede, A, supra, Note 5.