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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 Expert's Conservative Assumptions Help Sustain Damages Award Russo v. Ballard Medical Products, 2008 WL 5247934 (C.A. 10 (Utah)) December 18, 2008
A medical inventor created a tracheal catheter that more than tripled the useful life of a prior design and marketed his innovation to Ballard Medical Products--the world's largest manufacturer of closed tracheal systems--under a two-year confidentiality agreement. Ballard agreed to pay a 3% royalty rate for licensing the new design, but it rejected the inventor's request for a guaranteed minimum annual payment of $50,000 and broke off their negotiations. The inventor asked Ballard to return his prototype and materials. The company was "unable to locate" them, but then used the inventor's work to secure two patents and develop a catheter that contained his essential design innovations. Ballard began selling the new, improved catheter in 2001. The inventor sued for breach of the confidentiality agreement and unjust enrichment. At trial, the inventor claimed that the only material differences between the company's old and new catheters stemmed entirely from his innovations and exploitation of his trade secrets. Thus, he was entitled to the entire present value of the company's expected net profits from the new device over the 17-year life of the patents, which his financial expert estimated at $32.3 million. In addition, applying a 3% royalty rate and $50,000 minimum annual payment, the expert projected the inventor's royalties to reach $2.75 million (present value) over the life of the patents. This estimate was "conservative," according to the expert, because he used a 5% annual growth rate when the company achieved 42% growth from 2001 to 2005 and 17% growth in 2004-2005. Moreover, the expert calculated royalties only through the life of the patents--even though he testified that similar medical products have a "very long life." Lastly, the expert told the jury that any changes to his assumptions could yield damages substantially greater than $3 million. The jury found the company liable, and awarded the inventor $17 million for unjust enrichment and $3 million for breach of contract, for a total of $20 million. The company appealed. The truth lay between extremes. At trial, the company had argued that the inventor’s contribution added little value to its independent creation and marketing of the new device, but the inventor claimed that the new device was entirely dependent on his trade secrets. "As is often the case, the jury found the truth to lie somewhere between the extremes," the appellate court said. The $20 million damages award represented only 53% of the inventor's original request; in addition, the expert's use of conservative growth rates was another indication that the jury's assessment fell within the range of the evidence. The company urged the court to limit damages to the two-year span of the parties' confidentiality agreement. After all, the inventor could have patented and licensed his device to a different company, it said. However, this argument was "a strain," the court noted. The parties" agreement did not limit damages, and further, the inventor presumed it would protect his ideas, enough that he did not market them elsewhere. Based on these facts, the jury could conclude that he "had a valid reason for waiting to patent his idea." Moreover, by reducing his original damages request, the jury must have accounted for some of the company's arguments--e.g., that at most, the trade secrets merely lent it a "head start" on its own achievements. The company also argued that the court should limit the inventor's damages to a reasonable royalty, because unjust enrichment damages are appropriate only when the defendant usurps a trade secret to compete with a plaintiff. However, one of the functions of trade secret law is deterrence, the court said. The company must assume the risk for its wrongful acts, including paying the inventor a greater amount than it would have under a lawful licensing arrangement, and the court confirmed the entire $20 million damages award. |
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