by Halligan, R. Mark and Weyand, Richard F

The economic valuation of trade secret assets has perplexed the intellectual property bar for years. The economic and legal issues are seemingly inextricably intertwined. We present here a method for valuation of trade secret assets that decouples the economic and legal issues, rendering the problem tractable.

Several accepted methods exist for the valuation of a property. Depreciated cost, replacement cost, fair market value, and net present value of future cash flows are all proper measures in specific circumstances.

For intellectual property, however, depreciated cost is not appropriate. The direct acquisition cost of intellectual property may be insignificant, as when the intellectual property results from a flash of insight. However, that same insight may result from the sudden emergence of an idea after years of study in the field and years of experimentation in the laboratory. Which, then, is the true cost, the negligible cost of a moment's insight or the sum total cost of the education and experience of a lifetime?

Similarly, replacement cost is problematic. How does one replace a flash of insight? By what means can one predict the machinery of invention? For patents, trademarks, and copyrights, injunctive relief is true replacement, that is, the restoration of the exclusive use of the intellectual property. But trade secrets, once lost in the public domain, are lost forever. The bell cannot be unrung. How then can a replacement cost even be conceptualized, much less determined?

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