Two Worlds Colliding? Transfer Pricing and Damages in Intellectual Property Litigation

15 June 2005
By Bryan Ray et al.

The setting of intercompany transfer prices for intellectual property and the calculation of economic damages due to the infringement of intellectual property rights rely on valuation principles. Thus, on its face, a transfer price for a patent, for example, might seem to be indicative of the reasonable royalty rate that would be appropriate for calculating economic damages due to that patent's infringement. However, as the authors demonstrate, that general conclusion, if applied to specific cases, may be overly simplistic and misleading. For example, the economic conditions that underlie each valuation analysis may well differ, resulting in entirely defensible yet different conclusions about the value of the intellectual property in each circumstance.

In this paper, the authors discuss the conceptual frameworks for transfer price setting (focusing on the rules according to US Internal Revenue Code §482) and for calculating economic damages that result from intellectual property infringement. As they point out, each of these valuation assignments requires that one determine an arm's-length price between two parties for the use of the intellectual property at issue. However, a transfer price analysis and a damages calculation for the same intellectual property need not yield the same price for that intellectual property. The authors explore why these differences may arise and discuss the framework for their reconciliation. In conclusion, they recommend increased coordination between a company's tax and intellectual property counsel to help avoid potential conflicts between transfer pricing and intellectual property litigation strategy.

This article was published in the June 2005 issue of Managing Intellectual Property.