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The Value of Intellectual Property

by Richard Marchitelli, MAI, CRE, FRICS, Executive Managing Director, U.S. Practice Leader, Dispute Analysis & Litigation Support, Valuation & Advisory 

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How do you determine a reasonable royalty rate? How much should be paid to license a well-known, 90-year-old business name and its trade dress (the signature look and feel of the product or its packaging)? What is the proper structure for the payment of a licensing fee?

Last month, a New York State Supreme Court Judge answered these questions concerning the trade name and trade dress of The Palm Restaurants, the largest and oldest U.S.-based, family-owned premium steakhouse chain with 25 restaurants throughout the U.S. and Mexico.

In a groundbreaking ruling that settles the legal issue regarding the appropriate valuation method to calculate lost royalties, the Judge awarded more than $73 million in lost royalties and lost rent to certain family members who own the intellectual property of the famous The Palm Restaurants.

The battle between family members of The Palm Restaurants focused on the alleged diversion of earnings generated by the use of intellectual property. First opened in 1929 by John Ganzi and Pio Bozzi, the restaurant started expanding in the 1970s under the direction of two members of a later generation – Bruce Bozzi Sr. and Walter Ganzi Jr.

Bozzi Sr. and Ganzi Jr. led Just One More Restaurant Corporation, a Palm entity owned by multiple family members, to license The Palm’s intellectual property at a very low cost. Each new restaurant paid a flat fee of $6,000 per year instead of a royalty calculated as a percentage of sales, effectively cutting the minority shareholders (the plaintiffs) out of a significant share of profits.

Relying on a report prepared by Managing Directors Pamela O’Neill and David Benick of our Dispute Analysis & Litigation Support (DALS) team and testimony delivered by O’Neill, New York State Supreme Court Judge Andrea Masley found that the plaintiffs should get 5% royalties on 2007 and 2011 licensing deals — in addition to yet-to-be-determined attorney’s fees and interest.

In preparing the opinion, O’Neill and Benick drafted a report that set a reasonable royalty for use of The Palm’s intellectual property. In addition, the team examined a variety of qualitative factors and evaluated market evidence from the acquisitions of comparable premium steakhouse companies. Masley called O’Neill “an experienced valuation authority” and disregarded the expert analyses put forth by the defendants. The team is currently working on calculating the appropriate interest for the award of lost royalties and lost rent.

As the legal case law evolves in how best to assess damages when the appropriate royalty rate is in question, our team has helped set the precedent for future cases.

Increasingly in today’s economy, the value of intellectual property owned by companies can exceed the value of the tangible assets owned. The valuation of these intangible assets continues to be a topic of importance and debate in the valuation community. Cushman & Wakefield is proud to have contributed its thought leadership to this important issue.

Richard Marchitelli is the U.S. Practice Leader for the DALS practice – solution providers delivering robust advice, meticulous attention to people and detail and quality execution.  Comprised of experts in damages theory, valuation, accounting, finance, economics, land use, real estate industry standards and practices, capital market issues and financial and statistical modeling, the team specializes in dispute analysis, trial support, expert services and arbitration.  cushwakelitigation.com

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