Professional Documents
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World Academy of Science, Engineering and Technology 53 2009
principles behind the valuation remain essentially the same in “pie” that is generated by the transaction. It is expected that a
each context. Some of the commonly used valuation licensee typically would not pay more for the intellectual
approaches for valuing patents and trademarks are discussed property than the maximum incremental economic value
below. generated by that property. There are three widely used
approaches to valuing intellectual property (or, for that matter,
IV. LICENSING AN INTELLECTUAL PROPERTY any property):
A license represents a transfer of certain rights to an asset A. The cost approach
from the licensor to the licensee. A licensing transaction B. The market approach and
occurs because both the licensor and the licensee expect future C. The income approach
economic benefits from the transfer of such rights. A potential
licensee would be willing to license a technology if it A. The Cost Approach
generates an incremental economic benefit over alternative The cost approach values assets based on the cost to create
business opportunities available to the licensee. For instance, and develop assets. The premise behind the cost approach is
an apparel manufacturer might license a trademark to Mickey that no party involved in an arm’s length transaction would be
Mouse from Disney if it allows the manufacturer to enter a willing to pay more to use the property than the cost to replace
new market ( e.g., kids clothing), serve a larger market, or the property. In the context of patents, a potential licensee
earn a higher return on investment. would not pay more to license a patent than the cost to design
around the technology contributed by that patent. An
Valuating the Licensing fee alternative to designing around the technology would be to
Licensing fees, royalty rates, and other terms of the purchase the technology. Accordingly, a potential licensee
transaction are generally determined through negotiation would not pay more to license the technology than it would
between the licensor and licensee. As such, they represent a have to pay to purchase or create the technology. To see the
market-based outcome. However, the ultimate valuation must cost approach in practice, consider the analogy of a potential
fall within some economically feasible range that takes into buyer looking to purchase a house. Suppose that the buyer is
account the risks to each party involved in the transaction. For considering a house whose asking price is $500,000. If it costs
instance, a potential licensee would typically be unwilling to $50,000 to purchase an almost identical empty lot and another
pay a royalty that is larger than the incremental economic $350,000 to build a new house, then the potential buyer would
benefit generated by the licensed technology. Similarly, a be unwilling to pay more than $400,000 for the house whose
potential licensor would be unwilling to license the asking price is $500,000. In other words, the potential buyer’s
technology for a royalty lower than what it could obtain by design around cost is only $400,000. Of course, if building a
putting that technology to alternative uses. An economic new house takes one year, then the potential buyer might be
analysis of the business opportunities facing a licensor and willing to pay more than $400,000 to avoid costs associated
licensee provides an economically feasible range within which with renting or putting up with the hassle of building a new
they are likely to bargain to reach a final negotiated royalty house. Nonetheless, the $400,000 cost for a new house serves
rate. A number of factors go into the determination of an as a constraint in pricing the existing fully-built house. That is
economically feasible range. These include: incremental the logic of the cost approach. In the context of patents, if a
economic benefit from using the patented technology; particular technology, say, a piece of software code that is
alternative technologies available to the licensee; alternative patented, costs $1,200,000 to design around (in the form of
business opportunities available to the licensor; expected additional programmer wages and benefits), then a potential
economic and legal life of the intellectual property; and licensee would be unwilling to license the patented software
relative risk to each party in the transaction. There are for more than $1,200,000. The key step in developing a
basically three ways in which a licensee (such as the apparel valuation based on the cost approach is to calculate all the
manufacturer licensing the Mickey Mouse mark) might potential costs that one is likely to incur in designing around
benefit from licensing intellectual property. the patented technology. As summarized in Figure 1, for the
• From incremental profits due to the ability to sell software design around, these costs might include labor costs
additional units of the product containing the intellectual related to designing, coding, and testing of the design around.
property (patent, trademark, or trade secret); These costs are measured in terms of full time equivalent
• From incremental profits due to an increase in the price of employees (FTEs). In addition, management and back office
the product containing the intellectual property; and/or costs as well as additional costs related to employee benefits
• From incremental profits due to a decrease in the cost of (health insurance, employer paid taxes, and such) need to be
manufacturing the product containing the intellectual property included.
(over one without the intellectual property). However, the cost approach does have some significant
The fundamental goal of valuation analysis is to calculate drawbacks in the context of valuing intellectual property. If
this incremental benefit to the licensee from licensing the there are no design-around options, then the backward-
intellectual property. This incremental benefit is the economic looking nature of the cost approach may not fully measure the
economic benefit that may be derived from the intellectual
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trademark to the apparel costs an additional $0.80 per unit. distribute, and sell the licensed products. While the licensee’s
The operating profits now increase to $56,364 in the first year, capital investment and fixed costs may be known, success of
$57,288 in the second year, $58,489 in the third year, and the licensed product is not certain. Change in tastes or
$59,598 in the fourth year. The incremental benefit to the industry trends, emergence of competition, or emergence of
apparel manufacturer is the difference in profits between the rival technologies might make the licensed technology less
house brand and trademarked brand. That difference is an valuable or even obsolete. From a licensee’s perspective,
additional $25,864 in the first year, $26,288 in the second licensing the intellectual property (patent or trademark) makes
year,$26,839 in the third year, and $27,348 in the fourth year. sense if the licensee realizes an expected incremental
Therefore, the present value (discounted at 10 percent) of total economic benefit from exploiting the technology after
incremental profits from licensing the trademark are $88,186. accounting for these risks.
This incremental value from licensing the trademark
represents the maximum amount that the potential licensee V. JET AIRWAYS
would be willing to pay for licensing the trademark. If the It is an airline based in Mumbai, India. It is the country's
apparel firm pays more than $88,186 in licensing fees to the second-largest international airline after Air India and the
university, it would lose money and would be better off largest domestic airline, along with Jetlite( In august 2008 it
selling clothing under its house brand. The potential licensee was fully integrated as Jet Airways) . Jet Airways was
would prefer to pay as little as possible (within the 0 to incorporated as an air taxi operator on 1 April 1992. It started
$88,186 range) so that it can pocket the difference. Indian commercial airline operations on 5 May 1993 with a
Conversely, the university would prefer to extract as much of fleet of 4 Boeing 737-300 aircraft. In January 1994, a change
this amount as possible in licensing fees. in the law enabled Jet Airways to apply for scheduled airline
status, which was granted on 4 January 1995. It began
Splitting Incremental Value international operations to Sri Lanka in March 2004. While
The simple answer to how the potential licensee and the company is listed on the Bombay Stock Exchange, 80% of
licensor should split incremental profits is that this is where its stock is controlled by Naresh Goyal through his ownership
the art of negotiation comes in. While actual licensing rates of Jet’s parent company, Tailwinds, and has 10,017
are market-based outcomes from negotiations, economic employees till March 2007.
theory does inform us as to how two economically rational Naresh Goyal, who already owned Jetair (Private) Limited,
firms would arrive at a royalty. Much of this theory was which provided sales and marketing for foreign airlines in
developed within the sub-field of economics known as game India, set up Jet Airways as a full-service scheduled airline to
theory. One well established result from game theory is compete against state-owned Indian Airlines. Indian Airlines
known as the Nash bargaining solution. The Nash bargaining had enjoyed a monopoly in the domestic market between
solution provides insight into how two firms might split some 1953, when all major Indian air transport providers were
economic benefit that would be generated in a transaction nationalised under the Air Corporations Act (1953), and
between them .The basic insight is that, all else being equal, January 1994, when the Air Corporations Act was repealed,
the two parties would equally split the incremental economic following which Jet Airways received scheduled airline status.
benefit if the alternative option is for neither side to realize It operates over 400 daily flights to 64 destinations. Its
any value (they each could equally split the economic “pie” or primary base is Mumbai's Chhatrapati Shivaji Airport with
gain zero from refusing to do so). However, the split is no secondary hubs at Bangalore, Brussels, Chennai, Delhi and
longer 50/50 if either side has alternatives available to them Hyderabad, Kolkata and Pune as focus cities. In July 2008, it
(called “options”).In that instance, the firm with the greater was honored as the world's best long-haul airline after
options can demand (and receive) a larger portion of the pie Singapore Airlines. In a poll conducted in September 2008, it
because it has less to lose from refusing to split the economic was voted as the world's seventh best airline overall. Jet
pie. This result is consistent with the intuition that parties with Airways has also won an award for the quality of its catering.
more attractive alternatives (i.e. “opportunity costs” in According to March 2008 figures, Jet Airways share of India's
economic jargon) are likely to have more power during domestic aviation market stood at 29.8%, including its low-
negotiations. In the example in Figure 2, assume that the cost subsidiary JetLite's share of 7.1%, making it the largest
parties split the incremental profits 50/50. In that instance, the airline in India.
licensee (the apparel maker) would pay the licensor (The However, the irony of the company with the brand “Jet
University) an expected $44,093 ($88,186 ÷ 2) over the life of Airways” was that the trademark was not registered in name
the license. Expressed as a percent of sales, this amounts to an of the company rather it was registered in name of the
11 percent royalty rate. company of which Naresh Goyal was the promoter. For public
subscription of the shares of Jet Airways, the company came
Risks Associated With Licensing Transactions: out with an with an initial public offering (IPO) on February
The licensee, faces a number of risks associated with the 18, 2005. Apart from making significant changes in its red
licensing transaction. First and foremost, the licensee herring prospectus following feedback from market regulator
undertakes the risk of deploying capital to manufacture,
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Securities and Exchange Board of India (Sebi) and investors it Registered proprietor is:
was observed that the major reservation against the IPO was "registered proprietor", in relation to a trade mark, means
recorded in feedback from investors was ownership of brand the person for the time being entered in the register as
name with Jet Enterprises. proprietor of the trade mark
In lieu of these resentment shown by investors for IPO, Jet JEPL can use this logo as under section 28 of Trademark
Airways had decided to buy the brands from Naresh Goyal’s Act 1999,
Jet Enterprises. In fact, the non-ownership of Jet Airways Rights conferred by registration
brand was listed as a risk factor in the airline’s draft (1) Subject to the other provisions of this Act, the
prospectus — post IPO. The new challenge was to valuate the registration of a trade mark shall, if valid, give to the
correct price and subsequent sale agreement of the brand to Jet registered proprietor of the trade mark the exclusive right to
Airways from Jet Enterprises. This demand was also raised by the use of the trade mark in relation to the goods or services
foreign institutional investors just before Jet Airways came in respect of which the trade mark is registered and to obtain
out with its initial public offering. They contented that the relief in respect of infringement of the trade mark in the
trademark and logo should be vested with the airline instead manner provided by this Act.
of being owned by promoter companies. (2) The exclusive right to the use of a trade mark given
under sub-section (1) shall be subject to any conditions and
VI. THE JET AIRWAYS TRADEMARK AND ITS OWNERSHIP limitations to which the registration is subject
INDIA'S largest private airline, Jet Airways, has bought
back the 'right, title and interest' in the "Jet Airways" Agreement between JEPL and Jet Airways
trademark from Jet Enterprise (JEPL), a company owned by There is significant goodwill in the “Jet Airways” name and
its promoter Naresh Goyal along with Mr Hasmukh Gardi, for trademark, which is a registered trademark in India. The use
a one-time fee of $7 million or around Rs 30.44 crore. of the “Jet Airways” trademark (together with certain
Trademark- defined variations thereof) has been licensed to us for use in India on
Under Section 2 (zb) of Trademark Act, 1999 an exclusive, non assignable basis by Jet Enterprises Private
"trade mark" means a mark capable of being represented Limited (a company substantially owned by Mr. Naresh
graphically and which is capable of distinguishing the goods Goyal) (“Jet Enterprises”) pursuant to a Trade Marks
or services of one person from those of others and may Registered User Agreement dated October 15, 2000, as
include shape of goods, their packaging and combination of amended (the “Registered User Agreement”).
colours; and Certain other variations of the “Jet Airways” trademark and
(i) in relation to Chapter XII (other than section 107), a certain other related trademarks (for which Jet Enterprises has
registered trade mark or a mark used in relation to goods or applied, or proposes to apply for, registration) have also been
services for the purpose of indicating or so as to indicate a licensed to Jet Airways by Jet Enterprises on an exclusive
connection in the course of trade between the goods or non-assignable basis for use in India pursuant to a Common
services, as the case may be, and some person having the Law Trade Marks User Agreement dated October 15, 2000, as
right as proprietor to use the mark; and amended (the “Common Law Agreement”). Once a trademark
(ii) in relation to other provisions of this Act, a mark used is registered, such trademark should be licensed to Jet
or proposed to be used in relation to goods or services for the Airways under a registered user agreement.
purpose of indicating or so to indicate a connection in the Under the Registered User Agreement, Jet Airways is
course of trade between the goods or services, as the case may required to pay Jet Enterprises license fees that vary between
be, and some person having the right, either as proprietor or 0.10% and 0.20% of Jet Airways gross revenues (as defined in
by way of permitted user, to use the mark whether with or the Registered User Agreement), while under the Common
without any indication of the identity of that person, and Law Agreement, Jet Airways is required to pay a fixed annual
includes a certification trade mark or collective mark; license fee of Rs.0.1 million for each trademark licensed under
The Jet Airways trademark and its ownership the Common Law Agreement. The Registered User
There is significant goodwill in the “Jet Airways” name and Agreement and the Common Law Agreement are valid for a
trademark, which is a registered trademark in India. The period of fifteen years, commencing October 2000, and are
trademark is owned by Jet Enterprises Private Limited (a renewable at the option of Jet Enterprises for a further period
company substantially owned by Mr. Naresh Goyal) (“Jet of ten years.
Enterprises”). Under the Registered User Agreement, Jet Airways are
Jet Enterprise: The proprietor of “Jet Airways” Logo required to pay Jet Enterprises license fees on a quarterly basis
Jet Enterprise (JEPL), a company owned by Mr. Naresh calculated in the following manner:
Goyal along with Mr Hasmukh Gardi was a registered • 0.20% of our revenue up to Rs.11,500 million;
proprietor and has the license for using the trademark “Jet • 0.15% of our revenue in excess of Rs.11,500 million up to
Airways” in India until July 2005. Rs.23,000 million; and
According to Section 2 (v) Trademark Act 1999, • 0.10% of our revenue in excess of Rs.23,000 million.
For purposes of calculation of this license fee, revenues
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include passenger revenues, cargo revenues and other licensed trademarks , Jet Enterprises will license the use of the
operating revenues but exclude interest income and PSF “Jet Airways” and related trademarks for use in the other
handling fees. Under the Common Law Agreement, we are countries where Jet Enterprises has registered or applied for
required to pay a fixed annual license fee of Rs.0.1 million for registration of the “Jet Airways” trademark and where Jet
each trademark licensed under the Common Law Agreement. Airways seeks to operate in the future. License fees will be
The Registered User Agreement and the Common Law payable to Jet Enterprises for the use of these trademarks
Agreement are valid for a period of fifteen years, commencing under such other license agreements that may be entered into
October 2000, and are renewable at the option of Jet by them with Jet Enterprises.
Enterprises for a further period of ten years. Article 3 of Jet Airways Articles of Association specifies
Jet Airways had to be a registered user to get the license for that Jet Enterprises has, pursuant to certain trademark license
the “Jet Airways” Logo. agreements, granted the Company an exclusive, non-
Jet Airways had to be registered under section 48 of assignable license to use certain trademarks, including the “Jet
Trademark Act 1999, Airways” trademark, in accordance with the terms of such
license agreements.
(1) Subject to the provisions of section 49, a person other Jet Enterprises has pursuant to certain trademark license
than the registered proprietor of a trade mark may be agreements granted to the Company and the Company has
registered as a registered user thereof in respect of any or all accepted from Jet Enterprises non-assignable, exclusive
of the goods or services in respect of which the trade mark is licenses to use certain trademarks on the terms more
registered. particularly stipulated therein. Upon expiration or
(2) The permitted use of a trade mark shall be deemed to be termination of any or all of these license agreements, in
used by the proprietor thereof, and shall be deemed not to be accordance with their terms the Company will, inter alia,
used by a person other than the proprietor, for the purposes of discontinue the use of the name and the marks, and shall not
section 47 or for any other purpose for which such use is thereafter use the same in any form or manner as a part of the
material under this Act or any other law. Company’s corporate name or trade name and shall change
JEPL has used his discretion to license the Logo “Jet its name in such a manner as to delete the word “JET
Airways” as according to AIRWAYS” or its logo or trademarks appearing in the name
Section 2 (r) (ii) Trademark Act 1999, of the Company and:
(ii) by a person other than the registered proprietor and (1) cease and desist from and discontinue the use of the
registered user in relation to goods or services - word “JET AIRWAYS” or its logo as part of its corporate
(a) with which he is connected in the course of trade; and name and/or its the trade name and from using all
(b) in respect of which the trade mark remains registered trademarks, service marks, copyrights, domain names and
for the time being; and designs bearing the name “JET AIRWAYS” or any variation
(c) by consent of such registered proprietor in a written thereof.
agreement; and (2) take all steps as may be necessary for the purpose of
(d) which complies with any conditions or limitations to changing its corporate name as aforesaid.
which such user is subject and to which the registration of the (3) undertake at all times that the Company’s corporate
trade mark is subject; name shall not comprise of any word or expression or logo or
And trademarks similar to the word “JET AIRWAYS” or its logo
Section 38 of Trademark Act 1999, or any variation thereof.
Notwithstanding anything in any other law to the contrary, (4) assign any and all trademarks, service marks,
a registered trade mark shall, subject to the provisions of this copyrights, domain name and designs bearing the name “JET
Chapter, be assignable and transmissible, whether with or AIRWAYS” to Jet Enterprises, at the Company’s cost.
without the goodwill of the business concerned and in respect (5) cancel and terminate all agreements, licenses and
either of all the goods or services in respect of which the trade writings entered into with any Persons which relate to any
mark is registered or of some only of those goods or services. and all trademarks, service marks, copyrights, domain names
Jet Enterprises has taken steps to register the “Jet Airways” and designs bearing the name “JET AIRWAYS” at the
mark and related trademarks outside India. The “Jet Airways” Company’s cost .
trademark is currently registered in Hong Kong, Singapore,
U.A.E., the U.K. and Mauritius and Jet Enterprises is seeking The Deal: Jet Airways Acquires “Jet Airways” Logo from
to register this trademark in certain other jurisdictions outside JEPL
India. Certain parties have raised objections to the registration ¾ Jet air ways decided to go for IPO.
of the “Jet Airways” trademark in the U.K. and in the United ¾ Foreign institutional investors demanded that Jet Airways
States. Pursuant to a letter dated December 15, 2004, Jet should acquire the trade mark “Jet Airways” from
Enterprises had confirmed to Jet Airways that as long as they JEPL before the IPO.
are not in default under any registered user agreements or ¾ Foreign investors had felt that the airline should own the
common law agreements pursuant to which Jet Enterprises has rights for the trademark, instead of a company fully-
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