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Contents
Quick Links to SC&H Group, LLC 2009 MSBA Conference We were excited to see everyone at the 2009 Annual MSBA Conference in Ocean City. If you didn't get a chance to meet us in person, please give us a call. We would be happy to discuss any valuation issues that your clients are contemplating. Congratulations to Scott Wilson from Miles & Stockbridge who was the winner of our $100 American Express Gift Certificate drawing. Valuation and Estate Planning in the Current Environment The challenging economic environment has negatively affected many owners of privately-held businesses over the last 12 months. However, it has also created a unique estate planning opportunity for business owners who may be subject to estate taxes in the future. Due to these economic conditions, the values of many privately-held businesses and other assets have declined significantly due to:
As a result of these temporary declines in the value, business owners can use a variety of techniques to pass stock and other income producing assets to their heirs at a fraction of the long term value of those assets. In combination with the observed declines in the value of many assets, the low interest rate environment further contributes to the attractiveness of certain estate planning vehicles such as:
Our experienced valuation and estate planning experts are available to discuss these opportunities with you and guide you through the process of setting up estate plans and properly valuing interests for estate planning purposes. For more information about our Business Valuation practice, email BVLS@SCandH.com or call (410) 403-1500 | (800) 832-3008.
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Valuations Insights, Third Quarter, 2009 Financial Expert Ensures Proof of Reasonable Royalty In Unjust Enrichment Case Mass. Eye and Ear Infirmary v. QLT Phototherapeutics, Inc., 2009 WL 78064 (C.A. 1 (Mass.)) January 12, 2009
After a "spirited" trial on the merits, a jury found QLT Phototherapeutics (the defendant) liable for misusing the plaintiff's confidential research and proprietary materials in the development of a "blockbuster" pharmaceutical to treat age-related macular degeneration. The jury awarded the plaintiff a running royalty rate of 3.01% of the defendant"s gross sales of the pharmaceutical, and the defendant appealed. The U. S. Court of Appeals for the First Circuit initially reviewed the jury's verdict in favor of unjust enrichment, and found that it met the standards under applicable (Massachusetts) law; i.e., the plaintiff conferred a benefit on the defendant (in this case the unauthorized use of confidential information), which the defendant knowingly accepted without paying for its value. Having lost on liability, the defendant agreed that the appropriate remedy for unjust enrichment would be some royalty rate based on its net sales of the pharmaceutical. "Unfortunately," the court commented, "the parties agree on little else." A financial expert proves indispensible. Under Massachusetts law, the appropriate measure of damages was the "approximate" value of the benefit that the plaintiff's confidential information conferred on the defendant, the court held, and not (when the parties had no agreement to the contrary) on the plaintiff's lost profits. When a jury cannot estimate this value from "common knowledge," the plaintiff must present evidence of its "reasonable" value of the benefit. With these standards in mind, the court reviewed the jury’s damages award in relation to the record. At trial, the plaintiff's expert provided the jury with "important background evidence showing reasonable royalties in the pharmaceutical industry." He testified regarding general industry standards as well as particular licenses that the defendant negotiated with other parties, concluding that a reasonable royalty could be as high as 13.5%, or approximately 50% of the defendant’s net profits from its sale of the infringed pharmaceutical. The defendant also presented a damages expert, primarily to discredit the plaintiff's for his reliance on certain reasonable royalty surveys and his rejection of the 0.2% royalty that the defendant paid other parties. Moreover, because a co-inventor could sell the pharmaceutical independently, the expert claimed that the defendant did not have to pay any royalties at all, and thus the 0.5% that he presented to the jury "was not only fair, but munificent." "From this competing evidence," the court said, "the jury had enough information to establish an approximate valuation of the benefit [plaintiff] conferred on [defendant]." Importantly, "the damages experts ensured that the jury engaged in an effort to determine a reasonable approximation of the value of the benefits [the plaintiff] conferred on [the defendant." That at one point during his testimony, plaintiff's expert referred to the defendant's profits on the sale of the pharmaceutical did not conflict with the requirement that a reasonable royalty rate must be based on defendant's sales. Moreover, the jury "grappled with highly complex, voluminous evidence to reach a reasonable conclusion," the court said. The jury rejected the plaintiff's "out-sized valuation of its own contributions" to developing the pharmaceutical, while simultaneously rejecting the defendant's "cramped" view. The court found no reason to disturb the jury's findings, and upheld the damages award. |
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