Foresight Valuation Group

Intellectual asset management, intellectual property valuation, strategy and litigation support

Category: Blog

Expert Blog: How to Identify and Track Blockchain Digital Assets

Posted on Modified on by Lynn Dudinsky

In our work as valuation and damages experts in legal disputes, we at Foresight Valuation Group are often engaged in cases that require the identification and valuation of intangible assets held by an individual (for example: a spouse in a divorce) or by a corporation (for example: the patent portfolio of a business) that need to be valued. Some of these intangible assets, like patents, are identifiable through the review of publicly available data sources (i.e., USPTO database) based on known names or corporate identities. However, in recent years we are seeing new classes of intangibles emerge, such as blockchain-based digital assets like cryptocurrency and NFTs, which are held anonymously and thus may be difficult, if not impossible, to identify and trace by a valuation or forensic expert.

Blockchain Digital Assets, for the most part, are held in wallets controlled by the individual or entity. These wallets typically contain a pair of public and private keys that are unique to the individual wallet. The public and private keys contain an alpha-numeric code (varying in length but typically between 25 and 42 characters) that effectively serves as an address (public key) stored on the blockchain to associate the wallet related to any given transaction, as well as a private key that gives the user access to control the public address and execute said transactions. While the blockchain is publicly available for review, be it Bitcoin, Ethereum, Binance or any number of others, such review is based on the public address or key. If you have the pubic address or key, you can easily find all transactions associated with that wallet, what it holds, when it bought and sold a particular cryptocurrency or NFT, and other information. Connecting that public address to the individual or entity is nearly impossible, especially if it is a decentralized finance (DeFi) wallet. A DeFi wallet is traditionally associated with entirely anonymous Digital Asset transactions as opposed to a wallet provided to a user from a centralized exchange such as crypto.com or Robinhood. In order to get a wallet from a centralized exchange, one would typically need to provide personal information through what is known as KYC (Know Your Client/Customer) to confirm one’s identity. In that regard, a centralized exchange is not dissimilar to a bank account where your ID is associated with an account and routing number, but in this case it is associated with a public and private wallet address.

The ability to identify the existence of digital assets at the personal or corporate level depends on the level of familiarity with blockchain-based digital assets.  Recently published studies indicate that the familiarity with blockchain-based digital assets at the personal investor level is largely a function of age demographics, gender and the level of net worth.  Adoption of cryptocurrencies and other blockchain-based digital assets is growing, and by the end of 2021 the overall market value of cryptocurrencies was $2.3 trillion, up from $760 billion in 2020 and less than $200 billion in 2019 (according to CoinMarketCap). While only 16% of U.S. adults have invested in, traded or otherwise used cryptocurrencies, there is far more adoption in the 18-29 year old demographic, particularly men, with 43% of men and 19% of women aged 18-29 have used or traded cryptocurrencies. When focusing on another demographic, high-net-worth individuals, 68% of high-net-worth individuals in the U.S. invest in cryptocurrencies. When it comes to high-net-worth millennials, studies have shown that 83% of millennial millionaires own and plan to buy more cryptocurrencies.

At the corporate level, a recent study was conducted by Diligent Institute which looked at Blockchain Digital Assets (i.e., cryptocurrencies and NFTs) and how directors at corporations were thinking about them in their roles and responsibilities in the boardroom. In this study, directors of both private and public companies were surveyed in May of 2022. The analysis highlighted that, while only 24% of the directors disagree that the ability to understand and incorporate these assets will be important to their global competitiveness, survey respondents also believe that their boards’ current understanding of blockchain-based digital assets was only a 4 out of 10 (with 1 indicating that the board does not understand them at all and 10 mending they understand them completely).

In conclusion, the key to properly including blockchain-based digital assets in a valuation analysis lies in understanding what these assets are, why they are difficult to identify, and whether the client (individual or corporation) is likely to be in a group that understands these assets.  This type of ‘triage’ will help the valuation expert better identify, value and trace these assets.  While the construct of wallets does not always allow public access to assets or transactions on the blockchain, the valuation expert should at least know that there are assets that might exist, and be able to obtain information to access these assets through interrogatories or discovery.

 

Arthrex v. Smith & Nephew: SCOTUS Preserves Inter Partes Review

Posted on Modified on by Lynn Dudinsky

We last wrote about the Arthrex case back in November of 2019 and this blog is a continuation now that the case has finally reached a decision by the Supreme Court. In our previous blog, we described how the United States Court of Appeals for the Federal Circuit ruled that the appointment of the Patent Trial and Appeal Board’s (“PTAB”) Administrative Patent Judges (“APJs”) violated the Appointments Clause of the U.S. Constitution. This decision was based on the lack of direction and supervision of APJs by the presidentially-appointed Secretary of Commerce or Director of the USPTO as well as the lack of independent statutory authority to review the final written decisions by the APJs during inter partes revew. These factors resulted in the United States Court of Appeals for the Federal Circuit to decide that APJs are acting as principal officers, in violation of Appointments Clause, and to remedy the constitutional violation the tenure protections of APJs were invalidated.

On June 21, 2021, the U.S. Supreme Court delivered its written opinion in United States v. Arthrex, Inc. in which it vacated the judgement of the United States Court of Appeals for the Federal Circuit and remanded the case to the Acting Director of the USPTO. In its opinion, the Court addressed the responsibilities of the APJs and, as was the case in the previous ruling, focused on the requirement that APJs, as inferior officers, are required to be directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate. In the case of APJs, the majority opinion concluded that lack of review by a superior officer meant that the APJs wielded unreviewable authority during inter partes review which elevates them to a higher position than an inferior officer, in violation of the Appointments Clause.

The Court then addressed the appropriate remedy for the violation of the Appointments Clause and crafted a tailored approach to overcome the Constitutional violation. The remedy described in Part III of the Court’s opinion created a new framework for review by the Director of the USPTO of PTAB decisions and the ability of the Director to issue decisions on behalf of the PTAB. In crafting this remedy, the Court overcame the lack of review by a Presidential nominee and therefore preserved the status of APJs as inferior officers. The Court was careful to note that this decision “concerns only the Director’s ability to supervise APJs in adjudicating petitions for inter partes review” and does not address over types of adjudications conducted by the PTAB.

It is unclear at this stage how this Director-level review will be made available for parties in inter partes review proceedings and by what standard the Director will review petitions for rehearing by disappointed parties. In 2020 there were more than 1,400 inter partes review petitions and over 400 Final Written Decisions by the PTAB. Given these number, it is unlikely that the Director of the USPTO will review all decisions by APJs, but this framework enabled the Court to preserve the inter partes review process and we are forced to wait and see how this new power by a political appointee will impact the post-grant proceedings of the PTAB.

Damages Expert Blog: Let the Jury Select the Royalty Rate

Posted on Modified on by Lynn Dudinsky

 

In this blog, we are discussing the United States Court of Appeals for the Federal Circuit’s March 2021 decision in the Bayer v. Baxalta case and the discretion is provided the jury in selection a reasonable royalty rate for damages calculations. The details of the case involve the Federal Circuit affirming the District Court’s ruling that a treatment for Hemophilia sold by Baxalta infringed claims owned by Bayer. The purpose of this blog is to highlight the Federal Circuit’s opinion as to Bayer’s damages expert and his methodology of determining, or allowing the jury, to determine the appropriate damages.

Bayer’s damages expert submitted an expert report in which he opined that Beyer was entitled to a royalty rate of 23.75%. He determined this royalty rate based on it being the midpoint of a rather large bargaining rate of 5.1% to 42.4%. This midpoint opinion was based on the Nash Bargaining Solution which was developed by the Nobel Prize winning mathematician who made fundamental contributions to game theory and was memorialized in the popular 2001 film A Beautiful Mind. The damages expert’s opinion that a reasonable royalty is the mid-point of the bargaining range was initially excluded by the District Court on a Daubert Order because the District Court concluded that the expert failed to tie his 50/50 split to the facts of the case. The District Court denied Baxalta’s request to prohibit the expert from testifying on the bargaining range of 5.1% to 42.4% and the jury returned a verdict for damages based on a 17.78% royalty rate and the ruling was appealed.

The Federal Circuit addressed the issue of damages on appeal to determine whether the District Court erred in permitting the jury to pick a royalty rate within the range of feasible rates presented by Bayer’s damages expert. In its opinion, the Federal Circuit explained that there is no precedent that requires an expert to provide a single proposed royalty rate and that there is existing precedent entitling juries to choose an award within the amounts advocated by the opposing parties, in a manner that is not bound to accepting a specific rate proffered by one party’s expert. The opinion highlights the main requirement that the expert must adhere to the use of a reliable methodology in determining the range of hypothetical negotiation royalty rates. In discussing the methodology utilized by Bayer’s expert, the opinion describes how the expert’s testimony demonstrated that he considered and discussed the appropriate Georgia-Pacific factors that were used in the determination of the minimum and maximum royalty rates that Baxalta should have expected during licensing negotiations.

An easy take away from this case is that a damages expert has fulfilled his or her obligations by stating, as Bayer’s expert stated, that “as a matter of economics, any of these royalty rates (between 5.1% and 42.4%) would be feasible outcomes” and the “reasonable royalty is the likely outcome within that range”. However, the Federal Circuit made it clear that such a statement is only permissible when supported by reliable methodologies that adhere to established precedents and only then can the expert leave the final determination of the exact royalty rate to be used to calculate damages to the discretion of the jury. Ultimately, the Federal Circuit affirmed the decision of the jury in selecting a royalty rate of 17.78%, a rate within the range outlined by Beyer’s expert and higher than the 1% royalty opined on by Baxalta’s expert.

IP as a Business Asset: 5 Takeaways from Educating the Next Generation of Business Leaders

Posted on Modified on by Efrat Kasznik

When people ask me what I do, I often describe myself as an educator.  I have held a broad range of conventional and non-conventional teaching positions throughout my life, from being  a tank instructor at the Israeli Defense Forces to being an accounting TA during my business school days at UC Berkeley. Being an educator does not stop in the classroom, but continues every day for me as my line of consulting work involves putting a dollar value on intangible assets.  I often find myself engaging in long tutorials with clients, explaining what intangible assets are, how they bring value, and how that value can be measured.

I started teaching IP Management at the Stanford Graduate School of Business in 2011, in the peak days of the mobile patent wars, when the AIA was just getting signed into law and the words “patent troll” sent a chill down the spine of corporate IP managers.  My class has been one of the first IP classes offered by a US MBA program.  Setting a foot in the door of an MBA program in an elite business school is a humbling experience.  The students are extremely bright, the expectations are very high, and the competition (from other classes) is fierce.  Below are my top 5 takeaways from my decade of teaching IP Management to Stanford MBA students, lessons that I hope find a good use with others planning similar classes in other business schools:

  1. Beating the competition – the first step in teaching a class is getting students to take the class. IP classes are usually not part of the core curriculum in business schools (core topics include business fundamentals like accounting, finance and marketing), but rather fall within the cluster of elective classes, of which there are many.  The list of elective classes in modern-day business schools is long and eclectic, and they are being taught by anyone form Nobel-laureate professors, to professional athletes and celebrity CEOs.  This is not very different from placing a product on a busy supermarket shelve.  A lot of thought needs to go into the title and description of the class to make sure it gets the right attention and conveys the value proposition, so students are more inclined to include it in their busy schedule.
  2. Conveying the value proposition – My passion for bringing IP awareness into the traditional business curriculum has been driven by a strong conviction that lawyers should not be the only ones running the IP strategy in an organization. Having said that, my own conviction is not enough.  Since the topic of IP is regarded as a legal topic, it is not in the main stream of business education, and therefor the value proposition needs to be very thoughtfully articulated to appeal to business students.  In my particular experience, I found that topics like valuation and competitive strategy are good ways to bridge the gap, and highlight the importance of IP as a strategic business asset.
  3. Telling a good story – business school classes are often taught using case studies. It is a traditional way of leveraging on the power of a good story to introduce business concepts in an engaging way.  That being said, IP case studies are not as readily available in traditional business school case libraries.  This requires some creativity on the part of the IP instructor; for example: I have resorted to writing my own case studies (based on fictional versions of actual client cases) or modifying case studies written for other classes (for example: the Google-Motorola acquisition case written for an M&A class, has been converted by extracting the IP elements of the case).  Case studies don’t necessarily have to be long and complex; since the field of IP generates daily headlines, one needs to keep an eye on the news feed and find stories for discussion that are current, which help keep the class relevant and reinforce the value proposition.
  4. Speaking the language of business – the key to making IP assets relevant to business students is in treating them like business assets. Even the word “assets”, a term I use often in my IP valuation practice, is not as commonly used by the legal community that usually refers to “IP Rights”.  This small semantic difference between “Rights” and “Assets” provides the necessary linguistic bridge between the legal world and the business world.  One of the most basic gaps when discussing IP assets in a business context is the fact that these assets are generally not reported on the balance sheets of the companies that created them (under US GAAP or IFRS).  I tackle that early on in my class, by introducing transaction data and valuation approaches to valuing IP assets like any other business assets of the company.
  5. Introducing multiple perspectives – the topic of IP management is multi-disciplinary, spanning the legal, engineering, and business functions of the organization. This type of diversity should be reflected both in the student cohort, as well as in the speakers and topics included in an MBA business class.  As far as students, while my class is primarily an MBA class, we are open to other graduate students from the law, engineering and medical schools.  This student diversity enriches the class discussion and resembles the corporate environment where IP decisions are usually made.  Likewise, the students often appreciate hearing from a broad range of speakers from various organizations and industries: in-house lawyers and outside counsel, startup founders and large company representatives, life sciences and high tech, etc.

In conclusion, I predict that IP will become an integral part of business education in 10-15 years, as more electives are offered by MBA programs, and as other efforts are being made to bring IP awareness into mainstream business management.  Careful planning needs to go into making IP classes relevant and engaging for business students, but this will eventually result in better IP management decision being made across organizations.

 

 

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