(First published on LinkedIn in March 2016)
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.
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.
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. 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.
- 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 Depending on the effective date of the valuation, the valuation analyst may trend costs from a historical reference point to the effective date.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.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. 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.
In What Manner Can Intellectual Property Can Be Used As A 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.
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.
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).
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).
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)
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.
What is The Situation In Nigeria With Respect To Intellectual 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.
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.
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.
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.
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.
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. 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.
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.
 Singla, Ankur, “Valuation of Intellectual Property”, available at www.indlaw.com.
 Pellegrino & Associates, LLC, “Valuing Intellectual Property”, 2005.
 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.
 Esomonu J, & Oloyede, A, supra, Note 5.