From October 2016 to March 2017 the team is joined by Guest Kats Rosie Burbidge and Eibhlin Vardy, and by InternKats Verónica Rodríguez Arguijo, Tian Lu and Hayleigh Bosher.

Tuesday, 18 February 2014

Valuing Michael Jackson's Image: Science, Art or Alchemy?

There are few IP topics that continue to mystify this Kat more than the valuation of IP assets. On more than one occasion, most recently here, this Kat has sought to understand how the Kodak patent portfolio went from an estimated value of nearly $2.5 billion dollars to an actual court-supervised sale amount of slightly more than one-half a billion dollars. But it is not merely the valuation of patents that reveals massive gyrations regarding the same bundle of patent assets. For those who really like their gyrations in Olympic-size amounts,the recent spate of reports (thanks to former Guest Kat Miri Frankel for alerting this Kat) on the dispute over the value of the estate of the late entertainer, Michael Jackson, who died in 2009 after receiving a fatal overdose of anaesthetic [not "an aesthetic", as an earlier version of this post erroneously indicated], may be hard to top.

The favourite song
of the IRS ...?
Consider the reported numbers. Based on filings with the U.S. Tax Court, the Jackson estate claimed a value of a bit more than $7 million, while the Internal Revenue Service (IRS) gave a valuation of $1.125 billion. The discrepancy between the two valuations is not a typographical error. Indeed, the IRS sought to apply a seldom-used provision, known as the “gross valuation misstatement penalty”, to assess twice the usual amount of the penalty for underpayment (50%). Drilling down further, it appears that the dispute centres on two main assets. The first is the value of Jackson’s image, which the estate valued at only $2,105, while the IRS assigned a value of slightly more than $434 million. In addition, there is a dispute over the value of certain Jackson songs and most of the Beatles catalogue, held in trust and in which Jackson had an interest. The estate valued the songs at zero (!), while the IRS claimed an amount of $469 million. For the record, the IRS back in May 2013 had claimed that the estate was deficient by an amount of $505.1 million, with penalties of an additional $196.9 million (a spokesperson for the estate notably stated that the estate had in fact paid $100 million in taxes, despite the low initial valuation).

Reporter Jeff Gottlieb of the Los Angeles Times, here,summed up the challenges in trying to properly value the estate as follows:
Most estates are much easier to value than Jackson's. You can look up the prices of stocks and bonds. You can check comparable properties for real estate. With a business, you can compare sales with a similar firm. But how do you value Jackson's likeness?" This is something unusual," [Andrew] Katzenstein [a tax expert] said. "He was one of the premier entertainers of our time. So there are really no comparables, and it leaves the valuation question open to a huge range of possibilities. "Do I think his likeness was worth $2,105? No. But was it worth $400 million?"

The Jackson estate probably would argue that before he died, the singer had neither toured nor released a CD for several years, and his public image had been severely damaged by allegations of child molestation. Companies were not exactly begging Jackson to endorse their products or trying to make deals with him. Since he died, Jackson's recordings have gained new life. The estate had earned $475 million, according to a court filing in July 2012. Forbes magazine reported in October 2013 that Jackson was the highest-paid celebrity that year — dead or alive — earning $160 million.
As for the valuation itself, Gottlieb noted that
“… the Jackson estate would have hired appraisers to determine how much his assets were worth at the time of his death, including his likeness. One document mentions a report by the venerable firm Bonhams & Butterfield.” 
The question this Kat would have for Bonhams & Butterfield, here, or whatever firm served as appraiser for the estate, is how does one go about deciding: (I) what is meant by Jackson’s likeness/image; and (II) how to assign a separate and distinct value (as opposed to trade mark rights and copyright) for such likeness/image? Truth be told, there may no aspect of IP (or IP-like) rights less certain than the rights than the right of publicity in one’s likeness (an excellent discussion of the challenges in understanding this right can be found in Professor Sheldon Halpern’s book chapter, ‘Publicity Rights, Trademark Rights and Property Rights”.) Thus, while the valuation of a patent portfolio may differ from appraiser to appraiser and from point of time to point of time, at least there is a common understanding of what constitutes the underlying patent right. By contrast, there is no agreement on what exactly are the contours of the right of publicity, much less how this right is interwoven within the fabric of other IP rights in general, and with the IP rights of Michael Jackson and his estate, in particular.

As such, given the uncertainty in our legal understanding of the nature of the right of publicity, what exactly were the guiding principles for the various appraisers in valuing these assets (even taking into account that the initial valuations might have been more or less stalking positions for the later “negotiations” over the exact tax amount owing)? Lurking behind this question is an even more fundamentally matter, something that this Kat has encountered in various circumstances during his professional career, namely, to what extent is there, or indeed should there be, any substantial overlap between the legal and accounting/valuation understanding of the right of publicity? Taking into account the chasm-like differences in valuation offered by the various parties regarding the Jackson estate, this Kat wonders whether the field of IP valuation might be well-served by considering a way of bridging these conceptual differences. Or maybe, just maybe, treating the valuation of publicity rights as a form of alchemy serves the interests of all concerned.  


Derek Freyberg said...

Gottlieb's article notes that Jackson had taken out a loan of $320 million against the Beatles' catalog, which suggests that the IRS valuation has merit - even if valuation of IP is difficult in the abstract, a willing lender/borrower suggests that the fair market value would be at least the principal of the loan and (considering Jackson's situation) probably quite a lot higher.

Anonymous said...

"A fatal overdose of an aesthetic"?

That must have been some pretty overwhelming art.

Anonymous said...

"The estate valued the songs at zero (!)"

I'm sure that Paul McCartney would be pleased to know...

Frankly, some companies and individuals should know better than to try to undervalue their IP assets so grossly. Of course, the fair value of IP assets (of any asset, really) is notoriously difficult to estimate, but it does not require a lot of expertise to suspect that the value of the Michael Jackson and Beatles songs in the estate is slightly higher than zero.

This reminds me of a dispute in Spain involving the estate of Mr. Ramon Areces, the founder of the well-known retailer El Corte Inglés, at the time Spain's most trusted brand (it has gone rather downhill in the last few years). His testament distributed shares in the privately-held company to his next-of-kin, but with the condition that, should any of them want to sell them, the company would itself have a pre-emption right. When one of the heirs wanted to divest himself of his shares, the company had to value itself, which it did at a surprisingly low price. In particular its entire IP, including that "most trusted" brand, was valued at zero, on the grounds that these assets are, of course, intangible (no shit, Sherlock). Neither the heir nor the judge were particularly impressed by this argument...

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