Top Three Lessons From The Woody Allen Lawsuit

Woody Allen wins the largest amount ever paid under the New York Right to Privacy Act from American Apparel. What lessons can be drawn from the $5 million settlement?

First Lesson: In a saturated advertising market, the need to stand out is extremely powerful. With the level of attention celebrities get in consumers’ minds, some advertisers succumb to the unauthorized use of celebrities, increasing the commercial gain. In this case, for the past two years, American Apparel brought significant attention to its brand, beyond the bounds of its target customer base, at a time when it became publicly traded and expanded publicity was welcome by investors. Even if an unauthorized campaign is “quickly” withdrawn, it will have reached the bulk of its potential audience. Legitimate brands pay top dollar for immediate recognition and attention-grabbing graphics.
Second Lesson: The fair market value of celebrity endorsements and advertising may be negotiable, but it is not getting any cheaper to use iconic celebrities. Few celebrities come to mind with greater iconic association as New York and Woody Allen. Despite its claims to the effect that Woody Allen’s negative publicity in the wake of his 1992 break-up would have reduced his commercial value, American Apparel ended up settling for a landmark amount rather than risk losing even more in a trial.
Third Lesson: Celebrity – Brand pairings work both ways. Associating any brand to a famous celebrity is not only commercial speech, but it also transfers the brand’s attributes and reputation to the celebrity. “A brand is much more than its products” is the mantra of marketing executives worldwide; it also includes attitudes and public reputation. The risk of tarnishing a celebrity’s image with unwanted associations will undoubtedly increase the fee, if not kill the deal.
The lawsuit was brought about because of the California-based clothing company’s unauthorized use of Woody Allen’s image and likeness for advertising purposes on billboards and the Internet. I had the opportunity of being asked to review the facts of the case and prepare a report quantifying the amount of damages due Woody Allen.
After performing an extensive value analysis of the celebrity advertising market, I was able to determine a fair market value range for the misappropriated advertising services. In most cases involving rights of publicity, a key challenge is defining the suitable market and obtaining relevant market data.
With the settlement, American Apparel avoided the risk of being found liable for punitive and other damages, in addition to the fair market value of the misappropriation. Given the characteristics of the market, I would expect Woody Allen’s fair valued fee to be no less than the third quartile of the market distribution, approximately $5 million, and may certainly be more considering the negative connotations of the unauthorized use.

Trademark Values in Corporate Restructuring

Abstract

In corporate restructuring under Chapter 11, an asset valuation is a central task for both legal and financial reasons. In the area of intangible assets, however, generally accepted accounting principles (GAAP) do not reflect internally-generated assets such as brands, trademarks, and other intellectual property. In practice, arbitrary rules of thumb are used to fill this gap, and closure, liquidation, financing, and restructuring decisions are made on this basis.

This paper reports the progress that has been made so far in developing theoretical and empirical bases to improve trademark valuation in corporate restructuring. The model and the applied results have been incorporated since 2006 in some of the most significant corporate restructuring cases in the U.S.

The econometric study of trademark values in liquidation and reorganization presented is based on new data being generated as a result of self-regulatory changes in financial accounting –specifically those brought about over the last six years by FASB’s statements 141 and 142 (as well as the international IFRS-3 standard).

The new accounting framework for business combinations requires acquiring entities to perform a detailed purchase price allocation that segregates the values attributable to trademarks and other IP from general Goodwill. Publicly traded companies generally disclose these itemized values in their SEC filings. Recently, we have begun building a database of pre-merger revenue information in combination with specific trademark value allocations from a variety of acquisitions occurring in both liquidation and going concern contexts. Our initial results are consistent with the severe reduction in value that has come to be expected, but reflect a statistically significant non-linearity that has substantial financial impact in large cases.

Presented at:
Western Economics Association International
82^nd Annual Conference, July 1, 2007
Session 94: Topics in Corporate Structure

Patent Valuation Update

On May 2, 2007, I had an opportunity to talk on the subject of patent valuation and the difficulties of identifying patent values in generally accepted financial information.

This is the powerpoint presentation (for full screen click to see it in SlideShare):

Copyright Infringement Damages

What monetary damages can copyright owners be entitled to recover? Section 504(a) of 17 U.S.C. grants three types of damages remedies for copyright infringement:

1. Actual damages in the form of their lost profits in order to “repair” the damage;
2. The defendant’s profits to prevent infringers from benefiting from the illegal act, and;
3. Statutory damages, when unable to prove actual damages or profits and if the work is federally registered.

Other than in the latter case, the amount of damages has to be measurable, and the statutes and case law have established several criteria in this respect. If both defendant and plaintiff occupy the same market, courts tend to prefer lost sales measurements, not unlike trademark or patent infringement; otherwise, the courts tend to prefer a “reasonable royalty” or a “market value” test to determine the hypothetical fee that would have been received. Additional concepts of damages may apply too.

If the copyright owner has previously licensed a work, and the infringement occurs in the same market, the courts will likely use the prior license as a measure of actual damages. If the copyright owner never actually licensed its intellectual property in the same market, the value lost must be approximated from the infringer’s acts, and a ‘Reasonable Royalty’ calculated. A reasonable royalty has been defined as “the royalties customarily paid for the type of use to which the defendant has put the infringing material.” This may either be a lump sum or a royalty derived from profits, or a combination.

When neither proven lost sales (same market) nor previous licenses exist, the court may determine the copyright’s fair market value by employing a market value test; the value of a license that a hypothetical willing buyer would pay a willing seller. An important question here is whether or not a hypothetical negotiation is even likely. If not, then the court may look at alleged harm to the reputation of the copyrighted work, or to the “value of the use” if the copyright owner cannot prove lost sales or the infringer did not directly profit from the infringement (thus making royalty payments speculative).

In some other cases where the infringing use does not lend itself to a reliable valuation, the courts have compensated authors for the loss of the value to their professional reputations suffered by not being credited as the author of a particular work, as well as for the general loss of business good will accompanying the lack of attribution.

As far as the profits obtained by the infringer and attributable to the infringement, the statutes say that the copyright owner may be entitled to the profits attributable to the infringement, unless this is duplicative of the alleged lost sales.

The burden of proof of the revenues and the costs falls on the copyright owner and the alleged infringer respectively. The attribution of the profits to the infringing act is very specific. The infringed work may be intermingled with the infringer’s own original contributions and, in such a case; it can be very difficult for the court to separate the two. The court, therefore, has to rely on an apportionment of the profit but, if the distinction is not reliable, all of the profit is deemed to be attributable to the infringing elements.

The calculation of damages is, therefore, based on three principles:

1. Expert testimony is allowable;
2. Evidence only needs to be reasonably supportable, as opposed to mathematically exact; and
3. All doubts should be resolved in favor of the copyright owner.

Deductible expenses are generally recognized to include direct costs, and indirect operating costs, as long as they are proportionately attributable to the infringing product or service.

Finally, for works that have been formally registered within 90 days of publication, the copyright owner also has the choice of recovering damages amounts determined by statute. This recovery of specific amounts, instead of actual damages or profits, may be for $750, up to $30,000, with respect to any one infringed work. In cases of willful infringement, the court may increase this amount up to a maximum of $150,000, for each work. That is to say, the author of an infringed book can recover statutory damages of $30,000 regardless of how many copies were illegally printed and/or sold by an infringer.[1] In contrast to trademarks and patents, copyrights do not need to be registered to be protected, and registration formalities are only necessary to be eligible for statutory damages awards.

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[1] And if other infringements are later found, no further recovery can be claimed, as the award is limited by work, not by infringement.

Trademark Dilution Revision Act

President Bush Signs the Trademark Dilution Revision Act

On Friday, October 6, 2006, the President signed into law, among other bills, H.R. 683, the “Trademark Dilution Revision Act of 2006,” which amends trademark law to clarify the protection provided in cases where use of a mark is likely to cause dilution by blurring or by tarnishment of a famous trademark. See this article for more details.

Valuing Unproven Technology for Asset Sales

New Developments in Valuing Unproven Technology
for Distressed Asset Sales
By: Fernando Torres, MSc

Introduction

In the context of a corporate bankruptcy, creditors naturally focus on the short-term viability and liquidity of the business. In many cases, pursuing financing to continue operations involves selling assets outside the ordinary course of the core business. Two central concerns in these situations are whether all possible assets have been identified, and if they been accurately valued. Increasingly, the types of assets that are uncovered are intellectual property, such as patents, copyrights, and trademarks.

Depending upon the specific history, industry, and other characteristics of the business, there may be patents and patent applications that refer to technology not critical to the core business. It has been our experience that substantial value can be found in these technology assets if, and only if, an accurate valuation can support a sale.

Frequently, the challenge in valuing these assets is the lack of a reliable secondary market and that their application, outside of the original business, may be unproven or uncertain. The consequence of these characteristics is that the most often used valuation techniques (market-based or discounted cash flow) cannot be reliably applied. In this article, we present an alternative valuation approach that captures the value of the potential these technologies have and provides reliable values for these increasingly prevalent types of assets.

Patent Values as Options

A patent is a right to exclude others from applying the technology described through the claims, and does not constitute the obligation of the patent owner to put the technology to use. This right has a finite lifespan, typically less than 20 years. At this level of generality, a patent it shares the key characteristics with a financial stock option, specifically a “call” option; the right, but not the obligation, to buy a stock for a set price during a specific time frame.

As an example, suppose a patent has only two years remaining and that, if implemented, there is a 30% chance that it will generate a profit of $10 million within one year, and a 70% chance that it will lose $1 million. By the second year, the probabilities and profits are assumed to be the same. These premises generate three possible scenarios at the expiration of the patent’s statutory lifespan:

• A 9% chance of $20 million in profits (0.3 x 0.3)
• A 2% chance of $9 million in profits (0.7 x 0.3 + 0.3 x 0.7)
• A 49% chance of $2 million on losses (0.7 x 0.7)

The key question is what is the market value of that patent? In other words, what is the highest amount a buyer would be willing to pay for this patent? As in most economic decision questions, the answer depends on what else can be done with the resources that would otherwise be invested in this asset; what is the opportunity cost?

Assuming an interest rate of 5%[1], a potential buyer could borrow funds to buy the patent and repay the loan, after two years, including compound interest (At $1.025 per dollar borrowed). The solution can be illustrated considering the following two possibilities:

If the buyer pays $5 million for the patent, the probability-weighted outcome in two years[2] will be $4.6 million in profits, but $5.51 has to be repaid for the use of the funds for two years, so there would be a loss of $0.91 million.
If the buyer pays $4 million for the patent, the probability-weighted outcome in two years will be the same $4.6 million profit, and $4.41 has to be repaid for the use of the funds for two years, so there would be a net gain of $0.19 million.
The maximum amount a buyer with a 5% cost of capital would pay would be $4.17 million[3], that is the amount that equates the outcome with the cost of the funds; it measures the maximum[4] value of the technology. Naturally, in a bankruptcy or reorganization, actual pricing would be lower.

This simplistic example illustrates that, depending on how high the interest rate is, the value of the patent is less than the expected value of the profits. Additionally, it highlights that the necessary inputs are the cost of capital, the term of the patent, its profit possibilities, and the associated probabilities of the scenarios.

In practical applications, the well-known Black-Scholes model allows for the generalization of this approach to a continuous time (rather than discrete “years”), and represents the various scenarios as a probability distribution, mathematically identified by a single risk parameter (the statistical variance). The value of the option or the patent depends then upon the difference between the current value of the patent and the cost of capital, as well as the variance and the time left before the patent expires.

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[1] For instance, the yield on a 2-year U.S. Treasury note.
[2] The sum of $20 million x 9%, minus $2 x 49%, plus $9 million x 42%.
[3] The exact solution is: 2 x (0.3x$10 – 0.7x$1) / (1.05)2 = $4.172 million.
[4] Given the foreseeable applications and alternative outcomes noted.

Trademark Dilution

Is Protection Against Dilution Back on Track?

by: Fernando Torres, M.Sc.

Dilution is a major threat to established and famous trademarks. Naturally, trademark owners look to federal regulations to protect their marks. The Federal Trademark Dilution Act of 1995 (FTDA) amended the Lanham Act (adding section 43(c)) and followed provisions of the Trade-Related Aspects of Intellectual Property Rights (‘TRIPS’), including Trade in Counterfeit Goods which was part of the Uruguay Round of the GATT agreement. The FTDA includes a provision designed to grant dilution protection specifically to “famous” marks, expanding to four the causes of action for unlawful business conduct in relation to famous trademarks:

1. Trademark infringement;
2. Counterfeiting;
3. Unfair competition; and,
4. Trademark dilution.

Trademark dilution is defined in the FTDA as the lessening of the capacity of a famous mark to identify and distinguish goods or services, regardless of the presence or absence of:

• Competition between the owner of the famous mark and other parties, or
• Likelihood of confusion, mistake, or deception

Courts had previously found that dilution can occur as a result of either “blurring” or “tarnishment.” “Blurring” typically refers to the “whittling away” of distinctiveness caused by the unauthorized use of a mark on dissimilar products. “Tarnishment” involves an unauthorized use of a mark which links it to products that are of poor quality, or which is portrayed in an unwholesome or unsavory context that is likely to reflect adversely upon the owner’s product.

Ordinarily, only injunctive relief is available under current law. However, if the defendant willfully intended to trade on the owner’s reputation or to cause dilution of the famous mark, the owner of that mark may also be entitled to other remedies available under Trademark Law, including defendant’s profits, damages, attorneys’ fees, and destruction of the infringing goods. The availability of monetary relief is a significant departure from state dilution laws, which have typically provided only for injunctive relief.

Trademark Law until 1995, as interpreted by state courts, generally required a showing of consumer confusion about the source or affiliation of goods and services. In contrast, Federal Dilution Law protects the distinctive quality and selling power of the trademark itself, even if consumers are not confused. Interpretations varied before the FTDA. The Fourth Circuit Court of Appeals required evidence of actual diminution of the established trademark’s “selling power,” while the Second Circuit required just a “likelihood of dilution”. The 1995 federal standard, by incorporating the spirit of TRIPS, began to be interpreted as requiring only “likelihood” of dilution or damage, and promoted uniformity and certainty in the face of varying state-by-state standards.

Following passage of the FTDA, the circuit courts of appeals split as to whether the statute required the owner of a famous mark to prove actual harm as a prerequisite to injunctive relief. This question was eventually addressed by the Supreme Court in the first dilution case heard, the case of Mosely v. V Secret Catalogue, Inc. In a dilution action between the lingerie company Victoria’s Secret and a small retail company (Victor’s Little Secret) that sold, among other items, adult “novelties,” the Court determined that the FTDA “…unambiguously requires a showing of actual dilution, rather than a likelihood of dilution.” And found against Victoria Secret’s dilution claim. More specifically, the Supreme Court opinion was that:

The mere fact that consumers mentally associate the junior user’s mark with a famous mark is not sufficient to establish actionable dilution…such mental association will not necessarily reduce the capacity of the famous mark to identify the goods of its owner…”Blurring is not a necessary consequence of mental association (Nor, for that matter, is “tarnishing.”) [1]

An important implication of that decision, for owners of famous marks, is that the difficulty, or standard, to protect a truly famous mark is now greater the more famous a mark is, since it becomes less likely that consumers will find that the diluting mark (junior use) actually impairs the distinguishing capacity of the mark. In other words, to succeed in prosecuting a dilution claim, a mark should be famous enough to warrant such protection, but not so much that proof of “actual dilution” becomes impossible.[2]

The Supreme Court decision prompted a second look at the FTDA. The balancing act between the interests of trademark owners, competitors and consumers needed to be addressed by the legislature. The House of Representatives (April, 2005) and the Senate (March, 2006) passed a bill (HR 683) that will establish the “Trademark Dilution Revision Act of 2006” (TDRA) when signed into law by the President.

TDRA amends the FTDA[3] and is, at least in part, based on a submission by the INTA. It specifies that a famous distinctive mark is entitled to an injunction against any person who commences use in commerce a mark that is likely to cause dilution by “blurring,” i.e., impair its distinctiveness, or “tarnishment,” i.e., harms its reputation, even if there is no:

1. Actual or likely confusion among the public;
2. Competition between the owner and the person; or
3. Actual economic injury to the owner.

In an action based on dilution by blurring, beyond an injunction, if the infringer willfully intended to trade on the famous mark’s recognition, or in a case of dilution by tarnishment, willfully intended to trade on the famous mark’s reputation, the owner may also seek damages, costs, and attorneys’ fees, as well as destruction of the infringing articles under separate Lanham Act provisions.

In contrast to current law, precedent, and interpretations of the law, under TDRA actual harm is not a prerequisite to injunctive relief. The revised act also defines dilution by “blurring” as well as by “tarnishment,” expands the threshold of “fame” (denying protection for “niche-only” marks). Finally, trade dress will also be protected if the owner can prove that such claimed trade dress is not functional, is famous, and is famous separate from any famous registered marks included in the claimed trade dress. The first use in commerce of the diluting mark, however, must be after the enactment of the Revision Act for remedies beyond injunction.

For now, protection against dilution appears to be back on track, but until the new law is signed,[4] it still is not back up to speed.

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[1] 537 U.S. ___ (2003); 123 S.Ct. 1115 (2003) page 15.
[2] Snyder, T. “Diluting FTDA Claims: The Supreme Court Narrows the FTDA But By How Much?” Mealey’s Litigation Report: Intellectual Property , April 21, 2003, Vol. 11 #14.
[3] Subsection (c) changes title from “Remedies for dilution of famous marks” to “Dilution by Blurring; Dilution by Tarnishment.”
[4] HR 683 was passed by the House on April 19, 2005, by a vote of 411 – 8, and by the Senate, with amendments, on March 8, 2006. UPDATE: Signed into law on October 6, 2006.