Typically, trademark is valued by the premium price charged for a product over that of its competitors. It is estimated that Apple sold more than 500,000 iPads in China this past quarter alone (not counting the gray market sales - source:computerworld.com). Assuming a conservative price premium of $200 (iPad’s average price in China is $900) that equates to at least $100 Million in premium in one quarter alone or $400 Million in a year. While more assumptions are needed to calculate a true trademark value, a rough estimate will put the true value closer to the $2 billion asked by Proview than the price tag of $55,000 paid by Apple.
It may very likely be that Proview got the worst end of the deal, however, there is typically no legal ramification for asking too low of a price when both parties acted in good faith. However, Proview is challenging Apple on the validity of the licensing agreement - whether Proview’s subsidiary, which signed the deal, had the contractual rights to do so.
How did Apple get away by paying so little for the deal? Well, Apple never approached Proview. Proview, when signing the deal, had no knowledge who the ultimate beneficiary was. Apple set up a special purpose company - Application Development Ltd (IPADL) – to negotiate the deal on its behalf without revealing to Proview Apple’s identity. This move is not unusual for a company when the mere fact of the deal will signal the market about its upcoming strategic moves and will threaten its competitive advantage. On another hand, it will help the negotiating terms when the two parties are on uneven grounds – that is when each party values the deal differently. In this case, Proview’s blindness to Apple’s identity drove the deal valuation based on Proview’s prospects of monetizing the iPad name – hence, one can argue that without Apple’s marketing prowess, the iPad trademark would have been worth only $55,000. That is the economic value of the trademark to Proview. Had Proview known of Apple’s identity, it would have been bid up the deal to extract the economic value created by Apple.
There is nothing illegal or unethical in Apple keeping Proview in the dark about its identity. The deal should have reflected the fair economic value of the trademark, and not the strategic value to Apple. A fresh way to assess the fair value is to ask “but-for the Apple deal, how else could Proview have monetized the trademark and how much value would the alternative have created?”
If the courts find the contract not to be valid, then the parties have to agree on what the terms of the deal should have been. Proview seems to be inclined to ask $2 billion, the trademark value created by Apple – and Apple will have to argue that the fair economic value is perhaps closer to $55,000 and that Proview should not be entitled to extort value created by Apple.
Of course, Apple’s argument may only prevail if the courts determine the parties acted in good faith. When ‘bad faith’ is assumed, not only Apply may have to pay any profits made on its iPad sales in China, but also punitive damages.
While Apple’s trademark dispute brings up interesting valuation dilemma, it also tells us the benefit of setting up special purpose entity to negotiate licensing deals without revealing the company’s identity. Next time you are considering licensing IP rights, consult your lawyer about the benefit of special purpose vehicles.
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