Copyright: Of Expressions, not Ideas!

It is often questioned why there is no copyright on ideas. Governed by the Copyright Act, 1957, The copyright law protects the creators of literary, dramatic, musical and artistic works & producers of cinematographs films and sound recordings. However, this protection is awarded to the works and a mere idea is not protected under the Act. It is the expression of that idea that is protected. Imagine the typical Bollywood, boy meets girl folklore. The idea has been successfully produced and re-produced in the glorious hundred years of Indian cinema- the same idea, the same underlying theme, but each time(presumably) a different presentation, a different script, a different expression. If the first idea of Laila-Manjnu or Heer-Ranjha was protected, we would never had the opportunity to watch those endless romantic movies!

Thus, there is an economic logic that drives this underlying reasoning of the Copyright Act in India(as any other IP protection Act for that matter). And the economic rationale is if the fist individual who claims an ownership of the idea is given such an exclusive right, then we provide him with a rent-seeking opportunity merely on the basis to be the first one to have an idea.  

Innovation & IP Protection: The 'I' Factor

New information generated has a public goods character that is it is of benefit to the public at large and once common knowledge, it can be widely used. To generate this new information, the Government has to create some incentives. These incentives are in the form of IP protection. The valuation of a asset at the time when these rights are granted to the moment when they create a monopoly position varies tremendously. At the time of granting IP protection, a legal monopoly is generated that is the exclusive right to benefit from the invention and aspire for rent-seeking behaviour. But the extent to which this power generates monopoly power ex-post is referred to as the economic monopoly. This depends upon a number of factor. Most significant amongst others being the innovativeness of the invention that are there closely available and cheaper substitutes available for the product. Availability of closely available substitutes devoids the product of its potential rent seeking behavior. Secondly, as IP enables pricing above the marginal cost of producing a good, it attracts entry of competitors.
Thus, for an IP protection to lead to Significant Market Power(SMP) and thereby, a case for antitrust intervention, the innovativeness of the product and consequently its monopoly power ex-ante become a critical factor. 

Valuation of IP assets in M&As: Recipe to compatible match-making

One of the sine qua non for a successful merger is performance of adequate due diligence and asset valuations. In asset valuations, valuation of IP assets is critical for ensuring a successful transaction outcome. This is particularly true for IP-rich companies. However, valuation of IP assets is often relegated to the backdrop vis-à-vis other valuations. The second important challenge encountered is globalization of deals. Understanding the target’s regulatory environment and cultural attitude towards IP protection becomes critical for a competent valuation. This difference emerges even more strikingly as companies come from different backdrops such as EU and Emerging Economies. Thus, IP rich companies face the twin challenge of valuation of assets and internationalization of deals which often means stepping into unchartered territories.

When transactions are IP rich, a strategic due diligence process benefits from IP intelligence and IP valuation to facilitate target identification, ranking, deal pricing, structuring, setting reserves, prioritizing later-stage “traditional” due diligence tasks and compliance with post deal financing reporting requirement.  When taken in the nascent stage, such a due diligence enables an indepth comprehension of the strategic fit, risks, value extraction; an appreciation of the target’s core and non-core IP assets. Eventually all this can facilitate post-deal IP integration and enhance the probability of realizing full value of transaction.

From the Antitrust perspective too a true determination of the value of IP portfolio is important as it determines the monopoly power ex-ante.

The general practice has so far been to make an estimate and put this lump sum value in the goodwill of the company's balance sheets. Infact even in a developed market like Europe, a recent survey indicates that only 12% of the companies involved an independent third party evaluator to value their assets.

As for the methods to evaluate, there are various valuation methods available: Cost-based, market-based, option based , income-based etc. However, valuation of IP assets is easier said then done, as the traditional methods of valuation such as market based or cost based fail to capture the full value. Another method of valuation is estimates based on past and future economic profits. Which of the models amongst these or an adaptation of them or a hybrid of one or more model best suits the valuation, depends on the particular facts and circumstances of each company as also the information available.

Nothwithstanding the challenges encountered in valuation and the difficulties faced, it is still a fruitful and worthwhile exercise as it helps the company realize the true value of its assets apart from getting a positive market response reflected in its market valuation.