Intangible Asset Valuations

by Michael Parrington, February 2013

Do increasingly harmonised international accounting standards provide enterprises with improved scope to recognise and value their intangible assets?


Intangible Assets are becoming the dominant means for creating value at the modern enterprise.[1] Open any modern day textbook on business strategy and a focus on competitive advantage is evident. However, rather than only concentrating on financial capital or physical resources such as buildings, equipment, manufacturing facilities, or finished goods, instead strategy focuses on investments in non-physical intangible assets derived from human capital, social capital and organisational capital.[2]

Enterprises will develop investment strategies to obtain these physical and non-physical assets, with the expectation of growth and future income.  An enterprise can achieve this through organic growth and creation of internally generated assets or by acquisition of another entities assets.  It is suggested that the chance of enterprise success is equal with either growth or acquisition strategies, and that the typically large enterprise derives 30% of its income through acquisition.[3]  Therefore, the typical enterprise includes intangible assets that are both internally generated and acquisition derived.

Today’s enterprise has intangible assets that account for more than two thirds of their value.[4] In fact in 2007 the S&P500’s value was derived from firms with an average of 85% in intangible assets, which had grown significantly from 38% in 1982.[5] This trend of an increasing proportion of enterprise assets being non-physically derived intangible assets seems set to continue as more businesses look to intellectual property professionals to create new products and services. Many of these new intellectual property products and services will be from industries that don’t exist today.

Accounting is the method used for representing business enterprise activities in monetary terms, so that an interested party can make informed decisions regarding the enterprises current, historical, and future potential performance.  These figures are normally represented in a balance sheet, income statement, and cash flow statement, where the balance sheet is supposed to represent the assets that the firm owns against the liabilities (debt) and shareholders’ equity of the enterprise.

Modern balance sheets can display a large disparity between the book value and the market value of an enterprise.[6]  It is perhaps concerning to note that even with the knowledge that an increasing proportion of value being derived from intangible assets, that there are still as much as 49% of enterprise value that is not captured and remains unrecorded on the balance sheet.[7]  This can be due to a number of factors, such as depreciation and inflation, misrepresenting long held tangible assets below market price or fair value,[8] but is also due to the non-representation of intangible assets on the balance sheet.  However, others propose an opposing viewpoint and have suggested that the balance sheet is in reality only a record of enterprise cost and not value, and should be left as such.[9]

With the understanding that intangible assets are important comes the realisation that in order to be recognised, an asset must have and be able to demonstrate a value for its owner.  That is to say if an asset is to appear on an enterprise balance sheet, or form the basis of a legal damages or compensation, then it must be represented in a monetary term in a similar way to that of a tangible assets such as buildings. Moreover, not only should these intangible assets demonstrate a value, that value should be a fair, reasonable and realistic value. However, the realisation of such a value of an intangible asset is not a simple task and is open to considerable disparity due to reasoning for valuations, valuation methodologies, skill of valuation professionals, regulatory provisions, and case law.

Accounting standards are developed to improve the quality of financial information available to stakeholders of an organisation as well as improve the comparability between enterprises, by regulating the methods and criteria for identity, recognition, valuation, and ongoing disclosure in an enterprise accounts.  With many enterprises currently operating, or seeking to operate beyond their own national borders, the creation of unified standards, by the harmonisation of national standards with international standards, seems sensible if it offers improved financial information to stakeholders and economic benefits to enterprises.

This paper aims to show the basic principles that exist today in regards to the identifying, valuing and disclosure of intangible assets and to highlight some of the relevant standards and what they mean in regards to accounting, as well as identifying some key elements to improve the scope for enterprises to recognise and value their intangible assets.


To help with a general understanding and provide an appropriate starting point it is important to consider how, in basic terms, an enterprise reports its assets, and the meaning and linkage between value, assets and property. According to the Blacks Law Dictionary the definition of ‘value’ is ‘the monetary worth or price of something; the amount of goods, services or money that something commands in exchange’.[10] An ‘asset’ is defined as ‘a thing or person of use or value’,[11] and ‘property is defined as ‘the right to possess, use, and enjoy a determinate thing (either a tract of land or chattel); a bundle of rights’,[12] or ‘any external thing over which the rights of possession, use, and enjoyment are exercised’.[13]

The point of looking at these three definitions is to note that the terms are inextricably linked.  That is to say in order for an enterprise to recognise an asset, there must firstly be rights of ownership (property) in the asset, and secondly it must be able to prove a definite value.  Another important point to note is in regards to the nature of an exchange, which represents a point in time, or to ensure that it is clearly understood, value is relevant to a particular point in time, and therefore the value of an asset is constantly changing.

According to accounting theory the method for an enterprise representing its assets and the claims against those assets (liabilities and shareholders equity) is the balance sheet, where

Assets = Liabilities + Shareholders’ Equity

In this way, accountants record the owned assets on an asset register that also assigns to each item a value at a point in time, which is commonly the end of an accounting period.[14]  Against this a list of the liabilities, or requirements for the firm to pay money owing out, is also tabulated and a total sum is arrived at.  The shareholders’ equity is simply the difference between the sums of the recorded assets less the sum of the liabilities owing.

The relevance of this equation is where assets are not represented in the balance sheet and only represented ‘off balance sheet’.  ‘Off balance sheet’ value could include value that has been written down by depreciation, appreciation of assets that are only recorded at cost, as well as those of non-represented intangible assets.[15]  In this case it can be assumed that if the ‘off balance sheet’ assets were represented on the balance sheet then the total value of assets would increase, without the sum of liabilities increasing, which should increase the value of shareholders’ equity, such is the nature of the double entry accounting system.  Therefore, due to ‘off balance sheet’ assets, the true value of the enterprise may not be represented correctly in the balance sheet.

Interested parties, such as investors or shareholders, should understand that due to items such as ‘off balance sheet’ assets, a disparity exists between the book value and market value of an enterprise.  The easiest demonstration of this is with enterprises traded on the active stock markets. Here the market capitalisation of an enterprise will show an estimation of the total value of equity, by calculating the outstanding shares owned by the current market price of those shares. It is very relevant that the outstanding shares will have been sold by the enterprise during its public offerings at a different figure to the current market value of those shares, and that recorded book value figure will be in balance with the recorded asset values against recorded liabilities.  In other words the market capitalisation only indicates the market expectation of the asset portfolio of the enterprise, it does not change the actual balance sheet of the enterprise.

Of course not all enterprises are publically traded, and the reason for understanding the value of an asset may not only be for investment purposes.  There can be numerous reasons that valuations are completed on enterprise owned assets, which can include valuation for damages in litigation cases, a framework for understanding the potential value of intellectual property prior to commercialisation, the structuring of holding companies for tax purposes, allocations of business units for employee bonus schemes, and valuations for identifying assets for sale, to name but a few.[16] The type of value that is considered is therefore dependant on the reason and type of appraisal that needs to be performed and to what means that valuation will be used.

What are Intangible Assets?

It is reasonable to assume that the reader of this paper understands the concept of tangible assets and monetary fund assets.  If you can see it and/or touch it then it exists and it is intuitively understood that a value can be attributed to it, but when an item isn’t able to be seen and/or touched the realisation of value is not so intuitive.  This is perhaps why International Accounting Standards Board (‘IASB’) defines an intangible asset as an ‘identifiable non-monetary asset without physical substance’.[17] Therefore the first component in valuing an intangible asset for representation on a balance sheet or for other purposes is to conceptually understand what can be deemed to be an intangible asset, so as to identify it.

According to the resource view of an enterprise its intangible assets, or intellectual capital, is sourced from human capital, social capital and organisational capital.[18]  In compliment of the tangible financial resources owned by the business, a strategic business leader will think in terms of using these intangible resources to develop strategies for creating differentiated products and services that will bring value to the business entity, some of which will become recognised as intellectual assets.  This is to suggest that the enterprises resources are co-dependent and innovation is the key to the creation of intangible assets.

Human capital, as the name suggests, is based on the people working at the enterprise, and is derived from the knowledge, experience and skill of those individuals.[19] The people who work at the firm will ultimately create, develop and manage products and services that will generate value for the enterprise.

Social capital includes the relationships that the business entity has with its networks and stakeholders, especially those from external individuals and business entities.  The premise is that very few enterprises have the necessary resources to function independently and rely on relationships with its supply chain to enable differentiation.  Customer relationships are obviously pivotal to value creation.[20]

Organisational capital is sometimes referred to as structural capital. It is the genesis of enabling the workforce to develop the opportunities to create value for the enterprise.[21] At the highest level it is based on the values and beliefs of the enterprise leaders and how their beliefs trickle down to create an organisational structure enabling the human capital to utilise its knowledge.[22]  For example if the culture of the enterprise is to grow through the support of innovation then organisational resources will be afforded to projects that can develop intellectual assets.

From this base of human, social and organisational capital, and when specific knowledge can be clearly identified, described, can be shown to create or generate value, is owned by the enterprise, and is capable of being sold or transferred to an alternative business entity, then it can be described as an intangible asset. These owned intangible assets are normally defined by contractual legal rights, non-contractual relationships, intellectual property, or as goodwill.[23]

Contractual legal rights are written agreements that are in place between parties.  There are many and varied types of contracts that can form the basis from which to generate income or create cost savings for an enterprise, either individually or in combination with other assets, and in this way show a value that is separable.[24]

Non-contractual relationships are akin to that described by the resource view as social capital, and are more difficult to separate.  However, relationships can be very valuable to an enterprise, and some enterprises will pay handsomely to acquire and leverage synergistic relationships.  For example recently there has been a focus on high quality talent, and some businesses have been acquired just to take advantage of the existing workforce.[25]

Intellectual property is perhaps the most important and easily understood of the intangible assets in the modern economy, and is created by legal rights that provide the owner with a ‘monopoly right for certain types of imaginary property’.[26] Four different but related categories and associated rights for intellectual property exists: patents, copyrights, trademarks, and trade secrets.

Goodwill has been very difficult to define in any exacting terms and it is said that many have differing views on any accurate description.  Goodwill is perhaps best described as an earnings potential that is manifested as value that can-not be accounted for by all of the separable assets, intangible and tangible.  For example goodwill might represent high market share, high profitability, positive reputation.[27]

An important point to note is that, by their very nature, each intangible asset is distinctive, and it is has been suggested that the value of an intangible asset is in part gained from how it is differentiated from other intangible assets of a similar type.[28]  This is of course perfectly consistent with the business strategic approach, which is to use differentiation in order to gain competitive advantage, and is why intangible assets are valuable to enterprises.

Valuation methods

‘The raison d’etre of business assets is to provide a return on the investment required to obtain and assemble them… the greater the return, the greater should be the assets value’.[29] The purpose of the valuation is therefore to discover the value of the asset by quantifying the return to the business.  The accepted methods for calculation of intangible asset values are therefore consistent with those of general financial theory, and fall into three categories: cost method, market method, and income method.

The cost method is based on the premise of assessing the cost of an intangible asset by measuring the value of a substitute asset, and falls broadly into two sub categories of reproduction cost or replacement cost.  The concepts of functionality, being the ability to perform the same task, and utility, being the ability to provide an equivalent benefit, are important considerations for a valuation expert in both of the cost valuation methods.[30]

Reproduction cost is understood to be the current cost to make an exact duplicate of the existing asset,[31] for example making an exact copy of an existing building.  In this way the replica offers the same functionality and utility as the existing asset.  However, and as mentioned earlier, intangible assets are distinctive and so the reproduction cost method is rarely used, with replacement cost usually being the most appropriate method.[32]

Replacement cost is the current price to recreate an asset that provides the same utility as the existing asset.[33] The valuation appraiser would need to be aware that modern methods, materials and design may actually mean that a replacement could provide greater utility than the asset it is replacing, and that this should be taken into account when arriving at a valuation figure.[34] At the same time it is important to factor in the changes to value apparent due to remaining useful life and how this can affect the current value of the asset.

In assessing the cost of creating an intangible asset it is also important to capture not only the obvious attributable costs such as labour and materials, but also the indirect costs and benefits of ownership of the asset.  These indirect costs can be apparent from the remaining useful life, i.e. interest on capital invested.[35]

The benefit of the cost method is that it is easy to assess and collect relevant figures, and with good accuracy. However, its major pitfall as a valuation method is that it fails to capture the future benefits that might be realisable.[36] Because of its pitfalls, the cost method is usually recommended as a check of values arrived at by alternative methods, but is also seen as the determinant of value that a shrewd investor would pay as a maximum for an asset.[37]

The market method is discovering the price according to the Keynesian economic model, or where the demand and supply meet.[38]  In this way it is based on multiple recent historical transaction prices that have been paid for assets.  To use this method effectively requires there to be an active market where there are multiple willing sellers and purchasers, so that the asset price can be clearly identified.[39]

Where active markets exist the market method will produce the most accurate price for an asset, and is therefore in those circumstances it is the best method for valuing an asset.[40]  However, intangible assets generally do not fit directly into this category of an active market, and as such appraisers normally seek to use comparable assets that are readily traded as a benchmark for the valuation.  This may seem straight forward, and there are many active public databases that can provide guidance for similar assets,[41] especially for those assets bonded by similar royalty structures. In reality as the intangible asset becomes more unique the likelihood of finding a similar asset to benchmark becomes less likely. Moreover, where this comparable asset method is used the valuation appraiser must make adjustments for the differences, which can be exacerbated especially when the intangible asset forms part of a ‘business combination’.[42] For example when valuing a business combination the valuation expert may look to the sale of a comparable company to see what the factor for price-earnings was in that transaction and use this as the basis for valuation, or for publically traded companies use the stock price.[43]  Being able to justify the reasoning behind the comparable is pertinent if it is to be used.

The income method is the method preferred for asset valuation by the financial specialists as it seeks to discover the value of investments being made today through analysis and understanding of the future benefits and costs associated with that investment.  From an enterprise strategic position the income method is used for capital budgeting and qualification of a project in financial terms, where management teams analyse the future benefits against risks so as to decide whether a project is worthwhile pursuing.[44]  The common technique used by enterprises is discounted cash flow modelling, and it is also a method utilised by valuation appraisers for discovery of asset value.

Discounted cash flow is based on the premise of incremental income, the time-value of money, and the risk versus return trade-off. Effectively it is the discovery of the incremental cash flows that will occur due to ownership of the intangible asset versus those that would be achieved without the intangible asset, and where those future incremental cash flows are tempered by the discounting for risk.[45]

Incremental cash flows require a detailed discovery process to arrive at a projected income statement, or future sum of money, for the life of the intangible asset.[46]  The calculation of the incremental cash flows is only for those cash flows that would not have occurred or be apparent if the intangible asset did not exist or was not utilised.  This tends to require a detailed understanding of the business together with detailed and supported business plans, normally developed through a capital budgeting process.  However, in some cases cash flows can be discovered more easily, for example where a company licenses out a technology and can be benchmarked. In this case the relief from royalty model, where estimations are made of the royalty that does not have to be paid for use of a technology due to ownership, can be utilised.[47]

To this stage the future sum is calculated without risk being accounted for, but in reality each project carries risks to varying degrees.  Enterprise and relevant project risk can come from many and varied sources,[48] but it is easy to understand that the chances of future income being realised from a contracted license for use of technology, or a building, is less risky than that of a project for a new technology that has just applied for patents.  The risk that is specifically relative to a project is taken into account through what is known as discounting relative assumptions made to arrive at the risk-adjusted discount rate.  In simple terms discounting is the reverse of compound interest.[49]

The risk-adjusted discount rate seeks to assist in discovering the present value of a future sum by adjusting the cash flows for inflation, uncertainty as to whether or not the cash flows will be achieved, and the opportunity cost against an alternative investment.[50] There are various ways to arrive at a relevant risk-adjusted discount rate, with the most common being the application of a risk premium specific to for the intangible asset project, being added to the weighted average cost of capital relevant to the enterprise.[51]  Problems associated with this are that the capital asset pricing model assumes a diversified portfolio, which assumes no unsystematic risk,[52] and thus it has little relevance if valuing an individual asset. Moreover the current methodology to arrive at a risk premium for intangible assets is open to significant individual assumptions due to little theoretical guidance.[53]

The other issue with discounting is that it does not account for the variation of risk over the life of an intangible asset.  For example a pending patent recently applied for may be a highly risky investment requiring a very high-risk premium to be applied to its projected cash flows. However, that same patent two years later may have been granted a full patent right and so its risk premium would be significantly lower.  Of course management could also decide not to continue with a patent application if they discover alternative technologies offering similar utility, or if the patent is relatively weak in giving a monopoly. There are various methods that have been used to try and capture this variation in risk over time and make appropriate variations to the relevant risk premium in different periods or to different decisions, such as decision tree’s and real options.  However, these methods still provide significant margin for error in terms of the decisions that can be made as situations change and accordingly to the valuation of intangible assets, and add vast complexity.[54] Decision trees and real options are perhaps more as a benefit to strategic and business planning and capital budgeting rather than valuation.[55]

The income method is detailed and normally requires specialised financial knowledge to use effectively. The important point to derive in regards to valuation from the overview of the income method is that it is subject to significant variation depending on the assumptions that are made by the people predicting the incremental cash flows and risk premiums.  In terms of the valuation of intangible assets this perhaps is clearly demonstrated by an understanding of the risk-return trade off and standard distribution, that being the risk of success is in general similar to the risk of failure, which can create a significant disparity between the valuation today and the realised valuation.

Standards Overview

After understanding what can be deemed an intellectual asset, how they might be valued, and how they are represented in an enterprise balance sheet, it would seem that recognition of those assets by an organisation would follow a simple three-stage process to: identify the intellectual assets owned by the enterprise; appraise the value of those assets; and disclose to balance sheet.  Whilst this may be true in part, the actual ability to follow this process is governed by accounting standards, legal statutory requirements and those requirements developed through case law.

There are generally three levels of standards that are developed relevant to accounting and valuation, these are regulatory standards, legal-guidance standards and self-regulatory standards.  In Australia the regulatory standards are legislated by the AASB, which is a government agency under the Australian Securities and Investments Commission Act 2001 (Cth).[56] The primary responsibility for the AASB under the Act is to formulate accounting standards under s334 of the Corporations Act 2001 (Cth).[57] In the USA, and in a similar way to the AASB, the Financial Accounting Standards Board (‘FASB’) develop accounting standards for the private sector, that are recognised as authoritative by the statutory body of the Securities and Investments Commission (‘SEC’) who have that power invested in them by the Securities Exchange Act of 1934.[58] Other nations have similar systems.

Relevantly, the AASB are also assigned to work with other similar nations agencies to converge national standards with international standards so as to ‘develop a single set of accounting standards for worldwide use’.[59] In line with the development of a common accounting standard, the AASB has been working to integrate the Australian regulations by making them equivalent to International Financial Reporting Standards (‘IFRS’) that are issued by the International Accounting Standards Board (‘IASB’).[60] This integration has been a requirement since 1 January 2005, although the AASB still retains a number of local standards.

The IASB is an independent standard setting board that works with national agencies ‘to develop a single set of high quality, understandable, enforceable at a local level, and globally accepted financial reporting standards based upon clearly articulated principles’.[61]  There are close to 120 countries that are currently using the standards, including Australia, Canada, Brasil and the European Union countries.[62]  It is also suggested that the United States of America (‘US’) and Japan will integrate the IFRS standards and decide on obligatory requirements for companies in the near future.[63] However, in the US there is resistance to move away from the Generally Accepted Accounting Principles (‘GAAP’) as these GAAP standards are precise and understood,[64] even though foreign entities with operations in the US can file accounts with the SEC based on IFRS principles.

The guidance standards in Australia those are provided by the Australian Securities and Investments Corporation (‘ASIC’) as a recommended procedure according to their interpretation of the law, which if followed should to prevent them exercising their legislative power. In other jurisdictions these types of standards may require a detailed understanding of how to interpret statutory provisions and case law.

Self-regulatory standards are those that are created by expert organisations such as the Accounting and Professional Standards Board (‘APESB’), American Institute of Certified Public Accountants (‘AICPA’) or the International Standards Organisation (‘ISO’).  In general the industry experts assist in creating a procedure that is based on best practice. These organisations are not part of government and do not make laws or regulations, however, it is not unusual for these standards to be adopted by government agencies or referenced in case law,[65] and accordingly it is recommended in most instances that these types of standards are followed unless there is good reason not to.

Standards and Identification of Intangible Assets

Returning to the three-stage process, the starting point is the identification of intellectual assets.  From strategy, an enterprise will seek to create and increase value through: acquisition or mergers for control of externally owned assets, which are either individual assets or a business combination of multiple assets; organic growth, or the development of internally generated assets; or from a combination of both.  This is where a major point of conjecture arises in the current standards for the valuation of intangible assets, as internally generated intangible assets are not accounted for in the same way as acquired intangible assets.

IFRS 3, created by the IASB in conjunction with FASB, and has its equivalent in SFAS 141,[66] was created to set international regulatory standards for the acquisition of assets in business combinations where there is a controlling ownership takeover.  In general this standard sets expectations for clear identity of the controlling entity, the date of the transaction, recognition and measurement of the acquired assets, and measurement and recognition of goodwill.  In particular intangible assets must be recognised measured at their ‘fair value’ at acquisition date according to the ‘acquisition method’[67] of accounting for business combinations.  Further to this goodwill is recognised as the difference between the purchase price and the fair value of the recognised and measured assets and liabilities.[68]  Where this difference creates a positive value the amount is recognised as a goodwill asset in the balance sheet, and where this is a negative figure the amount is recognised in the revenue statement.[69]

In Australia, and according to AASB 138, which is directly derived from IAS 38 and will be treated here as the same standard,[70] the first hurdles for an intangible asset to be recognised is that it meets an identification criteria, that being: it meets the definition of an intangible asset; is distinguishable from goodwill; arises from contractual rights, or is capable of being identified separably from the business entity so it could be ‘sold, transferred, licensed, rented or exchanged’.[71]  Further to this the criteria for recognition of those intangible assets is that future economic benefits will arise due to that intangible asset, and the asset cost can be identified.[72] However, this is where the requirements of the AASB 138 standard start to display an issue in regards to the potential for recognition by an enterprise, as an intangible asset is always considered to have met the recognition criteria when acquired, either as an individual asset or as part of a business combination, as per IFRS 3 and SFAS 141, but internally generated intangible assets are not so easily recognised.  For example IAS 38 prevents the recognition of any internally generated ‘brands, mastheads, publishing titles, customer lists’ and similar items from being recognised as intangible assets.[73]  This is in stark contrast to that of similar assets that are acquired according to IFRS 3 or even by the IAS 38 standard.

In regards to internally generated intangible assets IAS 38 prevents any investment from research from being capitalised to the balance sheet,[74] but assuming that an intangible asset can separately identify the research phase from the development stage then IAS 38 requires any spent funds during the development stage to be expensed unless they meet all of six recognition criteria.[75] These recognition criteria require the enterprise to prove that the intangible asset is technically feasible, they intend to use it to derive value and that value will bring future economic benefit, and that they have adequate resources to complete the development.[76]  Assuming these six criteria are met the intangible asset can be recognised and capitalised to the balance sheet, together with future expenses.

The situation for US incorporated private firms is more difficult as ASC 350 requires directly attributable costs for internally generated intangible assets to be expensed, unless meeting specific exceptions such as for computer software for sale or use.[77]  Both IAS 38 and ASC 350 seem to be divergent from the whole premise of what an intangible asset actually is, that it would require thought and research to create, which incurs costs.  Currently this makes it difficult for enterprises to represent their potential for organic growth on the balance sheet.

Even when IAS 38 allows an internally generated intangible asset to be recognised on an enterprise balance sheet, a hypothetically identical intangible asset acquired would be at ‘fair value’[78] whereas the internally generated would be at directly attributable accounting cost.[79]  This removes the objective comparability between the assets.

The question that must be proposed is that if one of the purposes of a unified accounting standard is to improve the underlying economics in the balance sheet, better reflect the investment and evaluation of such, and allow comparability between business entities,[80] then how does the recognition of acquired intangible assets on the one hand and non recognition of internally generated intangible assets on the other aid comparability between enterprises? Perhaps the most obvious demonstration of the difference and discrepancy in recognition is in regards to goodwill.  Goodwill is an asset according to SAFS 142, and even though it should be deemed an intangible asset according to the definition of an intangible asset, it is not classified as such by IAS 38 and cannot be recognised when it is internally generated.  This is in contrast to the standard for acquired goodwill, as this can be recognised on the balance sheet as an asset according to IFRS 3 and SAFS 141. This would seem to remove objective comparability for users of financial information.

Standards and Appraising Value of Intangible Assets

When intangible assets have been identified according to the regulatory standards criteria it means that they are recognised and can appear in the balance sheet. Before appearing on the enterprise balance sheet the intangible assets must first be measured by valuation.  The standards for valuation generally fall into two parts, firstly the requirements for accounting purposes, and secondly the requirements for the preparation of the valuation.

IAS 38 has different requirements for accounting for intangible assets depending on the assets source. Internally generated intangible asset should be initially valued only based on the directly attributable costs that meet the recognition criteria.[81]  Separately acquired intangible assets must be valued at the actual transaction cost, including those directly attributable costs in having the asset ready for use.[82]  It should be noted that the transaction price for a separately acquired intangible assets might have been assisted by asset valuation prior to the transaction, although this is not an absolute requirement.  In both of these cases it is reasonable to suggest that this is an easy measurement for an internal accountant to accurately make.

On the other hand IAS 38 is aligned with IFRS 3 and SFAS 141 that separable or grouped intangible assets, purchased as part of a business combination, will be the fair value at acquisition date.[83] From 1st January 2005 the IFRS 13 standard became relevant, which is more aligned with SFAS 157 and ASC 805 in regards to the definition of an intangible asset, where ‘Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants as of the measurement date’.[84]

IFRS 13 is helpful in providing the principle framework with which to arrive at a fair value, through a hierarchy for disclosure.  There are three levels to the hierarchy, which is based on the quality of the available data inputs for arriving at the sum, through cost, market or income methods.[85] Level 1 is the best available inputs, i.e. an active market for the direct asset so as to derive market price.[86] Level 2 is similar to that described earlier where comparable assets are used to arrive at a valuation.[87] Level 3 is where inputs of an active market are not available, which allows the enterprise to use its best data in the circumstances to arrive at a valuation.[88]

Fair value at acquisition date requires an expert understanding of valuation principles and methodology and is therefore not such an easy calculation for an internal accountant to measure. Additionally an internal or stakeholder accountant could also be subject to significant bias in arriving at a valuation.[89] Even though the standards note that these valuation can be completed by internal management, providing an orderly transaction suggests a preference for an independent valuation based on thorough methodology, or in short that a valuation expert whom is skilled in the art of intellectual asset valuation.

The art of preparing a valuation is open to personal bias of the valuation expert, as well as the valuation methods used in arriving at the estimated sum being capable of significant disparity.[90]  The IFRS and SFAS are based on principle rather than procedure, and there is limited guidance in the in regards to the methodology and inputs that should be used to arrive at the estimation of fair value, and nothing regarding the required details of a suitable valuation report. However, self-regulatory standards organisations such as ISO regarding brand valuation,[91] and AICPA for business and intangible asset valuations,[92] and APES for valuation reports,[93] offer similar approaches to each other and guidance to the correct preparation, to begin to bridge the gap and enable a common approach for intangible assets.  These standards are in line with the regulatory standards for valuation approaches, but additionally provide more detailed guidance on the expectation of what valuation inputs (observable and unobservable) should be considered when preparing a valuation, including both the analysis of financial and legal factors.  Owing to the importance of the valuation estimation in the realisation of intangible assets on an enterprise balance sheet, it is worthwhile understanding the requirements of an independent valuation appraiser.

The genesis of a valuation report is the engagement of the appraiser by the engagement party, which must detail the scope, purpose, valuation date, standard of value, intended use including restrictions, and type of engagement.[94] The appraiser must ensure that they have no conflict of interest and that there will be sufficient and quality information available for them to complete the valuation report.[95] Assuming that there is sufficient information available, then the appraiser will be able to use their information analysis and valuation skill to arrive at a valuation sum for a valuation report.  If there is not sufficient information, or if requested the appraiser may only provide a calculation report which is a more basic document, not necessarily relevant for intangible asset realisation on balance sheets.[96]

The valuation report document provided by the appraiser should include comprehensive details of the information and assumptions used in arriving at a valuation sum.[97] The report should detail any relevant information that may affect the valuation: the type of engagement such as valuation, summary or calculation; sources of information; statements regarding the appraiser, such as independence from engagement party and qualifications; analysis of interest, such as intended use, applicable standard of value, assumptions and considerations; non-financial details such as management team, industry sector, facilities, and economic environment; financial info such as method of valuation, discount rates, financial statements and assumptions; ownership information about the intangible asset, including legal rights; valuation adjustments; and most importantly a conclusion of value.[98]

The self regulatory standards give some good guidance in relation to the data required for financial information, but still stop short of giving a standard procedure for calculations according to the cost, market or income approach, which leaves the valuation open to disparity based on the views and methods of the appraiser.

Highlighted in the above-mentioned regulatory and self-regulatory standards is the recommendation for management to use an independent appraiser, who is an expert in valuation.  In Australia the regulatory guide ASIC 112 provides guidance on its statutory legal interpretation of the Corporations Act 2001 (Cth.), and relevant case law interpretations upon the requirement for independence of an expert, where the key criteria are that the expert ‘should be, and appear to be, independent’,[99] and ‘give an opinion that is genuinely its own opinion’,[100] as well as guidance on interaction with interested parties and use of third parties.[101] Brooking J noted the requirement and importance of the expert in Phosphate Co-operative v Shears (No 3)[102]

Unless high [independence] standards are observed by those who prepare these [expert] reports, there is a danger that the systems established for the protection of the investing public will, in fact, operate to their detriment… The experts integrity from baneful influences are essential.[103]

With similar authority, ASIC 111 provides more specific guidance regarding the content of independent expert reports, including: how transactions should be analysed, expert methodologies and assumptions, report requirements, and potential regulatory action. Notably, the standard requires an expert to be just that, as Gyles J noted in Reiffel v ACN 075 839 266 Ltd[104] ‘it is implicit… that such an expert will exercise care, skill and judgement appropriate to the relevant field of expertise in forming and expressing the opinion’.[105]

Without doubt different jurisdictions will have variations on the Australian requirements and local laws should always be taken into consideration when preparing valuation reports.[106]  For example in the US some observers believe that the requirement for a skilled expert witness will be an increasing one in litigation in federal and across multiple state jurisdictions.[107] This is derived for the decisions in two key cases.  In Daubert v Merrell Dow Pharmaceuticals, Inc.[108] the Court held that the Federal Rules of Evidence, Rule 702, overrode the previous Frye ‘general acceptability’ test for the acceptability of scientific evidence.  Here the Court implemented a ‘flexible test’ for the reliability of ‘scientific’ evidence, thereby providing greater scope for the Court in deciding if evidence was valid.[109]  This flexible test has since 2011 been added to Rule 702.[110]  In Kumho Tire Co., Ltd. v Carmichael[111] the Court extended the reach of the acceptable evidence to include that which was non-scientific as long as it was ‘technical’ and ‘specialised’ knowledge.  This so called ‘Daubert Test’ has subsequently also been adopted as precedent by the Canadian Supreme Court in R. v Mohan.[112]

This requirement of an independent expert may not seem to directly affect the ability to represent valued assets on a balance sheet, but may have indirect consequences if not followed, especially if relied upon for future transactional, compliance, litigation or tax purposes.  For example evidence of how the common law courts may deal with poor methodologies, even when experts evidence is provided, are seen in Caracci v Commissioner of Inland Revenue (‘CIR’).[113] In this case the CIR had issued excise tax penalty notices to Caracci for incorrect valuation of assets during an ownership change.  The Tax Court heard the original case and found in favour of the CIR, even though they dismissed the methodology of the CIR’s expert witness, and came up with their own valuation of the asset at USD 5m supposedly based on the market value of invested capital.  The Appeals Court reversed and rendered the Tax Courts decision re-affirming the definition of ‘fair value’ and noting inter alia that the CIR’s expert had made errors due to incorrect selection and application of valuation methodologies used to derive the initial excise notice.  The Appeals Court also found that the Tax Court had made its own errors in selection and application of valuation methodologies.[114]

This case additionally demonstrates that unless there is an accepted valuation methodology that becomes a regulatory standard then consistency of application in the courts, especially in multiple jurisdictions, could be subject to variable decisions.

Standards and Disclosure to Balance Sheet

The adjustment of the balance sheet to correctly represent the identified and valued intangible assets is a relatively easy process for any qualified accountant.  Other than those items that can be expensed and represented directly on the revenue statement,[115] intangible assets are identified together with their values and added to the assets side of the ledger with either the corresponding reduction in cash reserves, or increase in the liabilities side of the ledger by debt or equity.  Thereby maintaining the integrity of accounting theory and balance sheets.

IFRS 3 realises the difficulty of correctly understanding all values in the current accounting period especially if a business combination is acquired immediately prior to the end of an accounting period, and as such adjustments are possible within 12 months of the acquisition date if relevant to the acquisition date.[116]  After this period the assets acquired in a business combination are dealt with as a consolidated disclosure with other assets of the owning enterprise.[117]

The more detailed requirement for representation of intangible assets follows their recognition in regards to their carrying amount and the related measurement, useful life, and disclosure.  For measurement the enterprise has two choices for each asset or asset group, it can use a traditional physical asset style approach where the asset retains its initial cost less any amortisation or impairment, or alternatively the enterprise can use the revaluation model.[118] The revaluation model allows a periodic update to the fair value of the intangible asset at the date of the revaluation, less and accumulated depreciation or impairment following that valuation.[119] Due to the potential of tax modification there are some strict requirements on revaluations being clearly identified as a positive or negative surplus in equity, but sometimes in the revenue statement as a profit or loss where this eventually affects equity through retained earnings.[120]

The revaluation model perhaps intuitively suits the intangible asset, but as fair value is its primary requirement and the standards require an active market, the cost model is usually the required approach for brands, patents, trademarks and copyrights owing to their unique nature.[121] In regards to fair value IFRS 13 directs that the initial disclosure of value calculation should be according to the level and type of inputs used to arrive at the valuation.[122]

The useful life of an intangible asset is either finite or infinite.[123] The finite asset, for example patents or contracts, is depreciated over its useful life in a diminishing proportional or straight line approach,[124] in much the same way that a piece of industrial equipment would be treated.  This is an understanding that the asset value decreases over time due to obsolescence.  However, some assets useful lives are described as infinite, such as a Trade Mark or Brand, where the value of the asset is not expected to diminish over time and they are expected to continue similar cash flows.  These infinite assets can not be amortised, but must be annually tested for impairment, or if impairment is indicated, although their status can change to finite if this requirement becomes obvious.[125] In both cases the intangible assets must be written off when no future economic benefits are expected to flow to the enterprise.[126]

Disclosure is all about being able to comprehensively explain how the enterprise has accounted for the carrying amounts of each of its intangible assets or classes of intangible assets.  Amongst other things IAS 38 requires disclosure on the carrying amount, the measurement method, the useful life, related amortisation methods and impairments, indication of whether the intangibles were internally generated or purchased separately or as part of a business combination, fair value, and details regarding revaluation.[127] In addition to this IAS 27 requires ongoing disclosure in relation to the ownership of intangible assets, where any change must be disclosed with profit or loss on those changes being represented in the revenue statement.[128]  IFRS 13 requires additional disclosure in regards to those assets based on fair value, especially where the calculation is based on level 3 inputs.  This includes proof of sales, issues and settlements, and relevant profit and loss, and importantly a written sensitivity analysis on how the assumptions on the level 3 inputs may change.  Interestingly IAS 38 also encourages disclosure on intangible assets that are not recognised in their standard, which suggests a more detailed requirement for all investments.

It can be seen from an overview of the current standards that there is a more detailed system for the recognition of intangible assets by enterprises, that is: identify, recognise, measure/value, and disclose intangible assets that are owned by the entity, acquired individually or as part of a business combination, or internally generated.

Points on International Harmonisation

The harmonisation of accounting standards on either an international level, such as the IASB and FASB, or national level to the international standards, for example the AASB, or US GAAP with IFRS are based primarily on providing a better and consistent quality of enterprise financial information for comparability and investment decisions by stakeholders.  Therefore, the question on intangible assets is a subset of a much larger accounting question.

In regards to accounting there are many detractors who would prefer that standards are not increased or imposed for the comparability between organisations for investment or other purposes. Some argue that active markets already exist for comparison of business enterprises, and this is in the financial markets that constantly price the overall valuation of enterprises according to their market cap. Others argue that this may give a market or fair value for the portfolio of business assets, but still does not give good visibility to individual assets and will, though not on the balance sheet, only appear as a hypothetical overall change in goodwill in comparison to equity.  Although in agreement with the market cap principle, it is suggested that rather than have unclear valuations for individual intangible assets, if value is to be recognised on the balance sheet then a default to goodwill is the best answer.[129]  However, even the default to goodwill can lead to problems of correct value representation, as it is not subject to the same amortisations as intangible assets, thereby benefitting executives who wish to show the market improved earnings ratio’s.[130]  Others argue that speculative items such as intangible assets should not appear on the balance sheet at all.[131] This is because intangibles can loose value very quickly, especially where innovations replace intangible technology assets, or new competitors enter the market, suggesting that including their value on balance sheets leads to overvaluation, with the best solution being the disclosure of the intangible asset but not recording of its value.[132]  Some commentators also argue, the methods required to maintain so-called fair value introduces ‘unwanted subjectivity, distorts reported earnings, and greatly increases earnings volatility’.[133]

With these fundamental arguments against standards, an important reason for enterprises to recognise intangible assets returns to business strategy.  It is said that most enterprises currently have very poor processes in place for measuring and managing their intangible assets.[134] However, when properly managed intangible assets can lead to competitive advantage, improve market position, increase revenue, and when using this information and communicating it to stakeholders can increase their overall enterprise valuation.[135] In this way harmonising standards can also assist enterprises in creating structures and methods to improve their management and therefore realisation and valuation of intangible assets.  In relation to multinational organisations, or those business enterprises with a potential to expand outside their national accounting standards jurisdictions, the implications of harmonisations of standards should bring the economic benefits of a single accounting system.

The general position on whether the harmonisation of the standards to IFRS is providing the stated benefits is that empirical evidence suggests that they are, particularly in regards to higher quality accounting information standards and comparability between statements.[136]  The evidence also suggests that where enterprises had already adopted IFRS standards balance of information between interested parties was improved as enterprise private information was made available to analysts, reducing sinister practices such as insider trading and thus enabling comparability.[137] Furthermore, studies show in particular that where the IFRS are obligatory and enforced in local jurisdictions barriers to international investment are reduced,[138] and costs of preparation of financial statements is reduced, thereby returning economic benefits.  Certainly from this perspective the harmonisation of standards provides enterprises for greater scope and reason to realise and value intangible assets.

In regard to the recognition of intangible assets it seems that the fundamental issue is not that of meeting the stated goals of the benefits of overall harmonisation, but in the unequal recognition of internally generated intangible assets with those that are acquired.  This statement seems at odds with empirical evidence of information quality and comparability, but is simply expecting a higher standard for financial information. The trend that standards organisations such as IASB, FASB, and national accounting standards boards that have harmonised these international standards is, inter alia, to rectify this intangible asset inequality issue.

The office of the AASB on behalf of the IASB and supported by the FASB generated a discussion paper regarding the initial accounting for intangible assets.[139] This paper focussed on the factors relating to identification, recognition, measurement, and disclosure for internally generated intangible assets setting forward a recognition or direction for each.

From identification viewpoint the position is simple: fundamentally there is no difference in the underlying nature of an intangible asset that is organically internally generated, or is alternatively acquired.[140] The recommendation being internally generated intangible assets should be recognisable in the same way as they are when purchased as part of a business combination according to IFRS 3 framework.[141]

Consistent with the IFRS 3 framework, recognition of intangible assets could be confirmed if planned investment can be linked with costs to create the asset, if future cash flows are probable.[142]  This would include those intangible items not currently recognised in IAS 38, where intangibles would be measured and recognised on the balance sheet at fair value.[143] There is consideration in regards to the principles behind valuation, and it is suggested that there is considerable work to do in regards to standards in this discipline.[144] Some concerns in this area relate to costs of using an external appraiser, and the methodologies used to assess cash flows can be inconsistent especially where valuation is a developing skill,[145] and it is being suggested to standard setters that a bucket list of what should be considered as insignificant for valuation is clarified.[146] Furthermore the issue seen in cases such as Caracci,[147] where the Tax Court developed its own version of a valuation and was subsequently overruled by the appellant Court, disregarding expert appraisers valuations, would be minimised where the valuation items and methods are specified in regulatory standards. In courts that have accepted the ‘Daubert Test’, where peer review from the self-regulatory standards would be possible, may not have the same requirement as those that have not adopted the test.  This is a philosophical question between whether to follow the IFRS method of principles of valuing intangible assets, i.e. market or income method based on the quality of inputs, or implementing explicit rules such as those commonly seen in US GAAP.[148]

The recommendations are that once recognised the carrying amount of internally generated intangible assets would be treated identically to acquired intangible assets in that continuing impairment, amortisation, and disclosure would follow the IFRS 3, IAS 38, IFRS 13 and IAS 27 framework.[149] For those intangible assets that do not meet the identification, recognition and measurement criterion, the recommendation is that these are still required to be identified in disclosure.[150]  This is already an opt-in on standards such as IAS 38,[151] as they can still have saleable value.  This provides scope to include greater details on all investments, so that stakeholders can make decisions that are based on non-financial information as well as financial information.

The trend is to create a single worldwide accounting standard through the convergence of varying international standards, and adoption of international standards by nations that are enforced locally.  Through the improvement of the international standards, to enable the recognition of internally generated intangible assets as per acquired intangible assets, together with improvements in the identification of relevant intangible assets, improved methodologies and standards for valuation appraisal, and fair value continual disclosure of intangible assets, together with economic benefits, will give enterprises improved scope to recognise and value their intangible assets.


Business strategy sees key executives of enterprises developing business plans that invest funds to create assets that will return future profits and cash flows.  These business plans are either to grow organically or through acquisition of third party assets. The organisational view of a business enterprise means that these investments are human, social, and organisational assets, many of which are intangible assets.

Accountancy is the measurement scorecard for business enterprises, and ultimately the financial statements should accurately represent the value of the enterprise.  However, as was seen many intangible assets are not adequately represented by enterprise balance sheets.

Regulatory standards in different jurisdictions assist the preparer of financial statements to identify, recognise, value and disclose intangible assets.  Essential to this process is the valuation of those intangibles, which can be measured using cost, market, or income methodologies to arrive at a fair value.  Self-regulatory standards are in place to assist appraisers to expertly value the intangible assets of an enterprise, which expect both financial and legal aspects to be taken into consideration.  It is recommended that for the purposes of an enterprise mitigating the risk of future legal and related issues, that using an independent expert in the preparation of valuations is pertinent.

The harmonisation of international standards is intended to improve the quality of financial information for stakeholders, and improve comparability between distinctive enterprises.  There is evidence to suggest that overall this is occurring, in particular returning economic benefits to adopting nations.

However, the current issue with the standards is that there is a disparity between the representations of acquired intangible assets on balance sheets and internally generated intangible assets that are more likely to be represented off balance sheet.  Upgrading the standards to remove this disparity in representation between internally generated and acquired intangible assets so that they can be accounted for with a similar framework, in addition to the continuing harmonisation of international standards, should improve the ability of enterprises to recognise and value their intangible assets.  This will return greater future profits and cash flows for the enterprise thus completing the business strategy benefit.



A Articles / Books / Reports

Allen, Abigail M. and Ramana, Karthik, ‘Towards an Understanding of the Role of Standard Setters in Standard Setting’ (2012) (Forthcoming; Harvard Business School Accounting & Management Unit Working Paper No. 10-105) (May 24) Journal of Accounting and Economics (JAE)

Birgitte Andersen, Ludmila Striukova, Intangible Asset and Intellectual Capital: Where Value Resides in the Modern Enterprise (2004)

Billiot, Mary J. and Sid Glandon, ‘The Impact of Undisclosed Intangible Assets on Firm Value’ (2005) Vol. 13(No. 2) (June 2005) Journal of Accounting and Finance Research 67

Bogoslaw, David, ‘Global Accounting Standards? Not So Fast’ (2008), Bloomberg Businessweek  <>

Boos, Monica, International Transfer Pricing: The Valuation of Intangible Assets (Kluwer Law International, 2003)

Brand-Finance, ‘Australian Intangible Asset Review’ (2008)

Caty, ISO 10668 and Brand Valuations: A summary for Appraisers, April 2001

Cezair, Joan A., ‘Intellectual Capital, Hiding in Plain View’ (2008) 21(2) Journal of Performance Management 29

Chistopher Buccafusco, Christopher J. Sprigman, ‘The Creativity Effect’ (2011) 78(1) University of Chicago Law Review 31

Chris Rose, John Cronin, Rachel Schwartz, ‘Communicating the Value of Your Intellectual Property to Wall Street’ (2007) 50(2) Research Technology Management 36

Christopher Heuer, Richard Romero, ‘Prescription for Valuing Intangible Assets in Health Care’ (2007)  (September / October) Value Examiner 7

Churchwell, Synthia, ‘Financial Reporting Goes Global’ (2006)  Harvard Business School Working Knowledge 1 <>

Dan Lovallo, Patrick Viguerie, Robert Uhlaner & John Horn, ‘Deals without Delusions’ (2007) 85(12) (December) Harvard Business Review 92

David Goldheim, Gene Slowinski, Joseph Daniele, Edward Hummel, Joghn Tao, ‘Extracting Value from Intellectual Assets’ (2005) 48(2) (March-April) Research Technology Management 41

Deloitte, A Roadmap to Accounting for Business Combinations and Related Topics (Accounting Standards and Communications Group of Deloitte & Touche LLP, 2009)

Francois Brochet, Alan Jagolinzer, Edward J. Riedl, ‘Mandatory Ifrs Adoption and Financial Statement Comparability’ (2011) (11-09) (April) Harvard Business School Accounting & Management Unit Working Paper 1

Billiot, Mary J. and Sid Glandon, ‘The Impact of Undisclosed Intangible Assets on Firm Value’ (2005) Vol. 13(No. 2) (June 2005) Journal of Accounting and Finance Research 67

Heberden, Tim, ‘When Will an IP Valuation Be Helpful in Informing Legal Decisions?’ (2008)   <>

Higgins, Robert C., Analysis for Financial Management (McGraw-Hill, 10th ed, 2012)

Hunter, Dan, The Oxford Introductions to US Law: Intellectual Property (Oxford University Press, 2012)

John Tao, Joseph Daniele, Edward Hummel, David Goldheim, Gene Slowinski, ‘Developing an Effective Strategy for Managing Intellectual Assets’ (2005) 48(1) Research Technology Management 50

Jonathan E. Kemmerer, Jiaquing Lu, Profitability and Royalty Rates Accross Industries: Some Preliminary Evidence (2008)

Joshi, Dhruv, ‘Intellectual Property Valuation Using Income Approach Method for Technology Licensing’ (2011) 3(6) (Dec) Information Management and Business Review 302

Keys, Robert, ‘Initial Accounting for Intangible Assets Acquired in Business Combinations: Research Results’, (Australian Accounting Standards Board, 2012)

Leung, Peter, ‘Are Regulations Needed to Increase Market Transparency?’ (2012) Managing Intellectual Property  <>

Maddox, Jeff, ‘A Capital Markets Approach to IP Valuation’ (2011)   <>

Mark Halligan, Richard Weyand, ‘The Economic Valuation of Trade Secret Assets’ (2006) 9(8) (February) Journal of Internet Law 19

Martin Pergler, Eric Lamarre, ‘Upgrading Your Risk Assessment for Uncertain Times’ (2009) (No. 9) (January) McKinsey Working Papers on Risk 1

Michael J. Mard, Steven Hyden, James S. Rigby, Intellectual Property Valuation (April 20 2000)  <>

Moss, David A., A Concise Guide to Macro Economics: What Managers, Executives, and Students Need to Know (Harvard Business School Press, 2007)

Muraco, Jason M., Trends in the Allocation of Intangible Assets for Purchase Accounting, Series Trends in the Allocation of Intangible Assets for Purchase Accounting

Needleman, Sarah E., ‘Start-Ups Get Snapped up for Their Talent: Entrepreneurs Face Dilemma over Offers Aimed at Acquiring Their Software Engineers’, The Wall Street Journal September 12 2012 <>

Paul Flignor, David Orozco, ‘Intangible Asset and Intelectual Property Valuation: A Multidisciplinary Perspective’ (2006)  (June)

Pearson, Thomas C., ‘Proposed International Legal Reforms for Reducing Transfer Pricing Manipulation of Intellectual Property’  451

Pitkethly, Robert, ‘The Valuation of Patents: A Review of Patent Valuation Methods with Consideration of Option Based Methods and the Potential for Further Research’ (1997)

Pyrah, Alli, ‘Microsoft V Motorola Could Define Frand Standards’ (2012)  Managing Intellectual Property  <>

  1. Duane Ireland, Robert E. Hoskisson, Michael A. Hitt, Understanding Business Strategy: Concepts and Cases (Thomson South-Western, 1st ed, 2006)

Ramanna, Karthik and Sletten, Ewa, ‘Network Effects in Countries’ Adoption of Ifrs’ (2012) (No. 10-092) (September 19) Harvard Business School Accounting & Management Unit Working Paper 1

Reinbergs, Indra A., ‘Note on Valuing Private Businesses’ (2001) (9-201-060) (April 25) Harvard Business School Publishing 1

Sellin, Jesper, ‘Brand Valuation: Legal Analysis Now Standard’ (2011)  Managing Intellectual Property  <>

Shaikh, Junaid M., ‘Measuring and Reporting of Intellectual Capital Performance Analysis’ (2004) (4) (March 2004) The Journal of American Academy of Business 439

Smith, Gordon V., Trademark Valuation (John Wiley & Sons, 1997)

Smith, Gordon V. and Parr, Russell L., Valuation of Intellectual Property and Intangible Assets (John Wiley & Sons, 2004) ch. 11

Sudipta Basu, Gregory Waymire, ‘Has the Importance of Intangibles Really Grown? And If So Why?’ (2008) 38(3) Accounting and Business Research 171

‘Valuation of Intangible Assets: Four Case Studies’ (Valuation Consulting Limited, 2006)

Vittorio Chiesa, Elena Gilardoni, Raffaella Manzini, Emanuele Pizzurno, ‘Determining the Value of Intangible Assets – a Study and Emperical Application’ (2008) 5(1) International Journal of Innovation and Technology Management 123

Watts, Karthik Ramana and Ross L., ‘Evidence from Goodwill Non-Impairments on the Effects of Unverifiable Fair-Value Accounting’ (2008) 08-14 (May 15) Harvard Business School Accounting & Management Unit Working Paper 1

Wirtz, Harald, ‘Valuation of Intellectual Property: A Review of Approaches and Methods’ (2012) 7(9) (May) International Journal of Business & Management 40

Vijayakumar and Filma, Brand Valuation and ISO 10688


B Cases

Caracci, et al v Commissioner of Inland Revenue (5th Cir. 2006) 456 F.3d 444

Daubert v. Merrell Dow Pharmaceuticals, Inc. (1993) 509 U.S. 579

Kumho Tire Co., Ltd. v Carmichael (1999) 526 U.S. 137

Phosphate Co-operative v Shears (No 3) (1988) 14 ACLR 323

  1. v Mohan [1994] 2 S.C.R. 9.

Reiffel v ACN 075 839 266 Ltd (2003) 45 ACSR 67


C Legislation

Australian Securities and Investments Commission Act 2001

Corporations Act (2001) (Cth.)

Federal Rules of Evidence 1975, Article VII, Opinions and Expert Testimony, Rule 702, Testimony by Experts.

Securities Exchange Act 1934 (US)


D Treaties


E Other

AICPA Statement on Standards for Valuation Services No. 1 Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, June 2007, Durham, North Carolina

APESB, APES 225 Valuation Services, July 2008

ASIC, Regulatory Guide 111, October 2007

ASIC, Regulatory Guide 112, October 2007

Australian Accounting Standards Board, For Students (2013)  <>

Australian Accounting Standards Board, AASB 138 Intangible Assets, 2009, AASB, Melbourne, Australia

Black’s Law Dictionary (9th Ed. 2009)

Financial Accounting Standards Board, SFAS 141 Business Combinations, December 2007, FASB, Norwalk, Connecticut

Financial Accounting Standards Board, SFAS 142 Goodwill and Other Intangible Assets, July 2001, FASB, Norwalk, Connecticut

Financial Accounting Standards Board, SFAS 157 Fair Value Measurements, September 2006, FASB, Norwalk, Connecticut

Financial Accounting Standards Board, ASC 805 Business Combinations, December 2007, FASB, Norwalk, Connecticut

Financial Accounting Standards Board, FASB Facts About FASB (2013) <>

Government of Western Australia – Department of Treasury and Finance, AASB 138 ‘Intangible Assets’ Summary

International Accounting Standards Board, IAS 1 Presentation of Financial Statements, IASB, London

International Accounting Standards Board, IAS 27 Consolidated and Separate Financial Statements, IASB, London

International Accounting Standards Board, IAS 36 Impairment of Assets, IASB, London

International Accounting Standards Board, IAS 38 Intangible Assets, IASB, London

International Accounting Standards Board, IFRS 3 Business Combinations, IASB, London

International Accounting Standards Board, IFRS 13 Fair Value Measurement, IASB, London

International Standards Organisation, Benefits of International Standards <>

International Accounting Standards Board, About the IFRS Foundation and the IASB (2013) <>

International Accounting Standards Board, IFRS Foundation: Who We Are and What We Do, (2013) < <>

Shorter Oxford English Dictionary (6th Ed. 2007).

The Australian Accounting Standards Board, Intangible Assets Project (2012)

TASC Foundation Education, IAS 38 Intangible Assets



[1] Shaikh, Junaid M., ‘Measuring and Reporting of Intellectual Capital Performance Analysis’ (2004) (4) (March 2004) The Journal of American Academy of Business 439, 439.

[2] R. Duane Ireland, Robert E. Hoskisson, Michael A. Hitt, Understanding Business Strategy: Concepts and Cases (Thomson South-Western, 1st ed, 2006) 35-37.

[3] Dan Lovallo, Patrick Viguerie, Robert Uhlaner & John Horn, ‘Deals without Delusions’ (2007) 85(12) (December) Harvard Business Review 92, 92.

[4] Shaikh, above n 1, 439.

[5] Chris Rose, John Cronin, Rachel Schwartz, ‘Communicating the Value of Your Intellectual Property to Wall Street’ (2007) 50(2) Research Technology Management 36, 36.

[6] Higgins, Robert C., Analysis for Financial Management (McGraw-Hill, 10th ed, 2012) 23.

[7] Brand-Finance, ‘Australian Intangible Asset Review’ (2008) 1, 2.

[8] Higgins, above n 6, 23.

[9] Smith, Gordon V., Trademark Valuation (John Wiley & Sons, 1997) 8.

[10] Black’s Law Dictionary (9th Ed. 2009).

[11] Shorter Oxford English Dictionary (6th Ed. 2007).

[12] Black’s Law Dictionary (9th Ed. 2009).

[13] Ibid.

[14] International Accounting Standards Board, IAS 1 Presentation of Financial Statements, IASB London [54-58].

[15] Cezair, Joan A., ‘Intellectual Capital, Hiding in Plain View’ (2008) 21(2) Journal of Performance Management 29, 33.

[16] Heberden T., When Will an IP Valuation Be Helpful in Informing Legal Decisions? (2008).

[17] International Accounting Standards Board, IAS 38 Intangible Assets, IASB, London [8].

[18] Ireland, above n 2, 35-37.

[19] Michael J. Mard, Steven Hyden, James S. Rigby, Intellectual Property Valuation (April 20 2000).

[20] Ireland, above n 2, 35-37.

[21] Ibid 35-37.

[22] Mard, above n 19.

[23] Smith, above n 9, 4-6.

[24] Ibid 4-6.

[25] Needleman, Sarah E., ‘Start-Ups Get Snapped up for Their Talent: Entrepreneurs Face Dilemma over Offers Aimed at Acquiring Their Software Engineers’, The Wall Street Journal September 12 2012.

[26] Hunter, Dan, The Oxford Introductions to Us Law: Intellectual Property (Oxford University Press, 2012) 1.

[27] Mard, above n 19, 5.

[28] ‘Valuation of Intangible Assets: Four Case Studies’ (Valuation Consulting Limited, 2006) 1, 8.

[29] Smith, above n 9, 9.

[30] Wirtz, Harald, ‘Valuation of Intellectual Property: A Review of Approaches and Methods’ (2012) 7(9) (May) International Journal of Business & Management 40, 41.

[31] Mard, above n 19, 12.

[32] Wirtz, above n 30, 41.

[33] Mard, above n 19, 12.

[34] Ibid.

[35] Wirtz, above n 30, 41.

[36] Pitkethly, Robert, ‘The Valuation of Patents: A Review of Patent Valuation Methods with Consideration of Option Based Methods and the Potential for Further Research’ (1997) 6.

[37] Wirtz, above n 30, 41-42.

[38] Moss, David A., A Concise Guide to Macro Economics: What Managers, Executives, and Students Need to Know (Harvard Business School Press, 2007) 23-29.

[39] Wirtz, above n 30, 42.

[40] ‘Valuation of Intangible Assets: Four Case Studies’ (Valuation Consulting Limited, 2006) 1, 10.

[41] David Goldheim, Gene Slowinski, Joseph Daniele, Edward Hummel, Joghn Tao, ‘Extracting Value from Intellectual Assets’ (2005) 48(2) (March-April) Research Technology Management 41, 44.

[42] See, eg, Deloitte, IAS Plus, April 2004. ‘IFRS 3 defines a business combination as the bringing together of separate entities or businesses into one reporting entity’.

[43] Reinbergs, Indra A., ‘Note on Valuing Private Businesses’ (2001) (9-201-060) (April 25) Harvard Business School Publishing 1, 2-5.

[44] Higgins, above n 6, 23.

[45] Higgins, above n 6, 23.

[46] Goldheim, above n 41, 45.

[47] Wirtz, above n 30, 43.

[48] Martin Pergler, Eric Lamarre, ‘Upgrading Your Risk Assessment for Uncertain Times’ (2009) (No. 9) (January) McKinsey Working Papers on Risk 1.

[49] Higgins, above n 6, 250-251.

[50] Ibid 250-251.

[51] Wirtz, above n 30, 45.

[52] Higgins, above n 6, 300-301.

[53] Wirtz, above n 30, 45.

[54] Higgins, above n 6, 324-325.

[55] Ibid.

[56] Australian Accounting Standards Board, For Students (2013).

[57] See, Corporations Act 2001 (Cth.) s334, ‘AASB’s power to make accounting standards… (1) The AASB may, by legislative instrument, make accounting standards for the purposes of this Act. The standards must not be inconsistent with this Act or the regulations’.

[58] Financial Accounting Standards Board, FASB Facts About FASB (2013).

[59] AASB, above n 56.

[60] Ibid.

[61] International Accounting Standards Board, About the IFRS Foundation and the IASB (2013).

[62] International Accounting Standards Board, IFRS Foundation: Who We Are and What We Do, (2013).

[63] Ibid.

[64] Bogoslaw, David, ‘Global Accounting Standards? Not So Fast’ (2008), Bloomberg Businessweek.

[65] International Standards Organisation, Benefits of International Standards (2013).

[66] International Accounting Standards Board, IFRS 3 Business Combinations, IASB, London [4–18].

[67] Ibid [4].

[68] Ibid [32].

[69] Ibid [34].

[70] Australian Accounting Standards Board, AASB 138 Intangible Assets, 2009, AASB, Melbourne, Australia.

[71] IASB, above n 17, [11-12].

[72] Ibid [21].

[73] Ibid [63].

[74] Ibid [54-56].

[75] Ibid [57].

[76] Ibid [57-61].

[77] Financial Accounting Standards Board, ASC 805 Business Combinations, December 2007, FASB, Norwalk, Connecticut.

[78] IASB, above n 17, [35].

[79] Ibid [65, 71].

[80] Financial Accounting Standards Board, SFAS 141 Business Combinations, December 2007, FASB, Norwalk, Connecticut.

[81] IASB, above n 17, [65].

[82] Ibid [27].

[83] Ibid [33].

[84] International Accounting Standards Board, IFRS 13 Fair Value Measurement, IASB, London.

[85] Ibid [61, 67, 73].

[86] Ibid [80].

[87] Ibid [81].

[88] Ibid [86-89].

[89] Chistopher Buccafusco, Christopher J. Sprigman, ‘The Creativity Effect’ (2011) 78(1) University of Chicago Law Review 31, 33.

[90] Billiot, Mary J. and Sid Glandon, ‘The Impact of Undisclosed Intangible Assets on Firm Value’ (2005) Vol. 13(No. 2) (June 2005) Journal of Accounting and Finance Research 67, 72.

[91] Caty, ISO 10668 and Brand Valuations: A summary for Appraisers, April 2001

[92] AICPA Statement on Standards for Valuation Services No. 1 Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, June 2007, Durham, North Carolina.

[93] APESB, APES 225 Valuation Services, July 2008.

[94] AICPA Statement on Standards for Valuation Services No. 1 Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, June 2007, Durham, North Carolina, [11].

[95] Ibid [12].

[96] Ibid [21].

[97] Ibid [23].

[98] Ibid [22-30].

[99] ASIC, Regulatory Guide 112, October 2007 [8-15].

[100] Ibid [16-20].

[101] Ibid [13-19].

[102] (1988) 14 ACLR 323, 339.

[103] Ibid.

[104] (2003) 45 ACSR 67.

[105] Ibid, 87.

[106] AICPA, above n 92, [10].

[107] Smith, Gordon V. and Parr, Russell L., Valuation of Intellectual Property and Intangible Assets (John Wiley & Sons, 2004) ch. 11.

[108] (1993) 509 U.S. 579.

[109] Ibid.

[110] See, Federal Rules of Evidence 1975, Article VII, Opinions and Expert Testimony, Rule 702, Testimony by Experts.

[111] (1999) 526 U.S. 137.

[112] [1994] 2 S.C.R. 9.

[113] (5th Cir. 2006) 456 F.3d 444.

[114] Ibid 462.

[115] IASB, above n 17, [68-69].

[116] IFRS, above n 66, [45].

[117] International Accounting Standards Board, IAS 27 Consolidated and Separate Financial Statements, IASB, London.

[118] IASB, above n 17, [72-75].

[119] Ibid [72-80].

[120] Ibid [85-87].

[121] Ibid [78].

[122] IFRS, above n 66, [93].

[123] IASB, above n 17, [88-96].

[124] Ibid [97-98].

[125] Ibid [107].

[126] Ibid [112].

[127] Ibid [118-122].

[128] IASB, above n 117, [41(e) 41(f)].

[129] Keys, Robert, Initial Accounting for Intangible Assets Acquired in Business Combinations: Research Results, Series Initial Accounting for Intangible Assets Acquired in Business Combinations: Research Results (trans, Australian Accounting Standards Board, 2012).

[130] Ibid.

[131] Shaikh, above n 1, 441.

[132] Billiot, above n 90, 73.

[133] Higgins, above n 6, 24.

[134] Chris Rose, John Cronin, Rachel Schwartz, ‘Communicating the Value of Your Intellectual Property to Wall Street’ (2007) 50(2) Research Technology Management 36, 36.

[135] Ibid 36-37.

[136] Francois Brochet, Alan Jagolinzer, Edward J. Riedl, ‘Mandatory IFRS Adoption and Financial Statement Comparability’ (2011) (11-09) (April) Harvard Business School Accounting & Management Unit Working Paper 1, 3.

[137] Ibid 7.

[138] Churchwell, Synthia, ‘Financial Reporting Goes Global’ (2006)  (January 23) Harvard Business School Working Knowledge 1.  See also Francois Brochet, Alan Jagolinzer, Edward J. Riedl, ‘Mandatory Ifrs Adoption and Financial Statement Comparability’ (2011) (11-09) (April) Harvard Business School Accounting & Management Unit Working Paper 1, 5-8.

[139] The Office of the Australian Accounting Standards Board, Initial Accounting for Internally Generated Intangible Assets, 2008.

[140] Ibid.

[141] Ibid.

[142] Ibid.

[143] Ibid.

[144] Keys, above n 129, 18-21.

[145] Ibid 18-21.

[146] Ibid 18-21.

[147] Caracci, et al v Commissioner of Inland Revenue (5th Cir. 2006) 456 F.3d 444.

[148] Bogoslaw, David, Global Accounting Standards? Not So Fast, Series Global Accounting Standards? Not So Fast (trans, 2008).

[149] The Office of the Australian Accounting Standards Board, above n 132.

[150] Ibid.

[151] IASB, above n 17, [128].

US Copyright, The Internet, and the Dilemma of Formalities

by Michael Parrington, September 2013

Prior to the convergence of ‘the internet’[1] and personal computer (“PC”) technology, many of the traditional business models that relied on copyright were not only protected by copyright laws, but also protected by the cost of obtaining the necessary infrastructure to make high volume copies and distribution networks for those high volume copies.[2] Continuing improvements in computer technology gave the ability of digitisation, enabling exact copies of creative works at a cost-approaching zero.[3] When linked with the internet and its decentralised end-to-end architecture, widespread distribution with little requirement of physical distribution is enabled for almost anyone with a computer.[4]

These new technologies have given the ability for society to consume, distribute and create content that is both innovative and socially beneficial,[5] from the professional and amateur writings in personal or networked blogs and wikis, photography that’s edited and posted online, music and movie production at home or private studio for upload to online sites such as YouTube and Facebook, all of which can qualify for copyright protection. At the same time these new technologies have given the individual user the ability to create works based on those previously created, such as writings of fan fiction for favourite movies, spoofs and parody’s of films and television shows, and reproductions of existing music.[6] As such, the potential societal benefits provided by these new technologies also presents a risk to the incomes of original creators and the firms that invest in the production of those works.[7]

Prior to 1976, the US Copyright Act required a series of formalities as a prerequisite for copyright, where failure to comply would lead to forfeiture of copyright protection.[8] These formalities ensured that the owners of the copyright could be identified and located, and moved all other works to the public domain, where it was available for use without permissions.[9] In 1976 the process began to remove formalities from being a requirement for copyright, so that today copyright protection is automatically available to even the simplest of creative works,[10] and many that are readily available to any user of a computer attached to the Internet.[11]

Before the digital age removal of the formalities regime seemed to make perfect sense,[12] yet, with the digital age providing the ability for many to create both primary and derivative works at low costs, this is leading to arguments of what the balance should be between – on the one hand, the cultural benefit to creativity and access presented by new technology, and on the other, the economic benefit of those investing time or money in creative content business models.[13] The difficulty of the situation is commented on by the Supreme Court, “the more artistic protection is favoured, the more technological innovation may be discouraged; the exercise of copyright law is managing the trade-off”.[14]

The past few years have seen scholars suggest that one of the methods to help readdress the imbalance between economic and cultural values, is to reintroduce prerequisite formalities.[15] At the outset this may seem reasonable and straightforward, but the arguments of the protagonists for a return to the formalisation, and the antagonists for the opposite are becoming more polarised.[16] This essay first provides a brief historical background on computers and the internet, a baseline for copyright today, then examines the viewpoints and some of the proposed systems for a return to a formalities system in US copyright.


Copyright finds its original principles in the UK Statute of Anne 1709. It gave the originator of a work a series of exclusive, although transferable, rights to print, reprint or import the work over an initial term of fourteen years and the option for an additional fourteen years from the date of first publication.[17] The first federal Copyright Act 1790 (U.S.) was closely modelled on the Statute of Anne and was supported by the Constitution, giving rights to owners only for “printing, reprinting, publishing and vending”[18] based on the protection of the relevant technology of the time, the printing press.[19]

At this stage, the barriers to entry to the content creation and distribution markets were high[20] – newspapers and books required a printing press and also a physical distribution network. This meant that private writings were difficult to disseminate to a wide audience without the financial support and physical distribution infrastructure from a content creator, such as a publisher.[21] As such the business models of the content creators were protected.

Enter the computer. Until the 1970s, research departments, educational facilities and big business were the primary users of computer systems. This started to change in 1973 with the introduction of the Alto microcomputer at Xerox Parc,[22] and particularly in 1981 with the release of the IBM PC and subsequent open licensing of the Microsoft DOS Operating System.[23]

Developments in microprocessor and storage technology meant costs were reducing and making a home computer more affordable, and by 1983, IBM introduced the XT PC for sale with vastly improved processing speeds and an option for a 10-megabyte storage capacity, and so began the ability for large volumes of data to be stored on a home computer.[24] ‘Clone’[25] PCs were built on the back of the Microsoft Operating System License, meaning ‘Clone’ PCs and related accessories for mass data storage and high-quality printing were available on a common platform.[26] Software that enabled greater volumes of data to be stored in less space, such as MPEG-I,[27] and accessories for reproduction, such as the CD burner and laser printers gave the home user access to a machine and accessories capable of digitisation, exact copying, printing and storage. Still, at this stage, high quality, high speed content copying of movies, music, and books required specialist systems[28] and a physical distribution network. This was to start to change with the internet being made available for commercial development in 1991,[29] thus enabling host-to-host computer communication.[30]

The start of the internet dates back to 1969 with the connection of four computers and a project piloted by the US Department of Defense through its Advanced Research Projects Agency (“ARPA”).[31] The ARPANet was created to discover if a series of connected computers were capable of maintaining communication and data integrity should one of the computers be made redundant through a nuclear attack.[32] Redundancy was enabled by the creation and merging of the Transmission Control Protocol / Internet Protocol (“TCP/IP”) data packet sharing and unique computer identification protocols by engineers Vinton Cerf and Dr. Robert E. Kahn.[33] In simple terms, this enabled a data file to be sent from one computer to another via any connected computer and, at the same time, reliably verify the file has been sent and received.

At this stage it was still a system for computer enthusiasts, but in 1992, Tim Bowers-Lee, an employee of the European Particle Physics Laboratory, wrote the code built on the infrastructure of the Internet creating the Uniform Resource Locator (“URL”). It enabled real-time graphics and text processing and thus the birth of the World Wide Web[34] – the easy ability for the common person or company to connect in a commercial manner through the Internet.

Subsequent developments in the infrastructure of the internet and supporting software allowed any person with a computer connected to the internet to engage in commerce, file sharing, and posting to bulletin boards.[35] The internet that is experienced today, further enabled advances in large file sharing, blogs, social networks, wikis, folksonomies, email, cloud computing and virtual worlds.[36] The so-called ‘semantic’ web is being developed with the goal of further enhancing data communication commonality to help find, share and combine information more easily.[37]

These developments in software, which give the ability to create and copy, the capability of mass data storage by anyone, and the ability for widespread distribution of digitised files at little cost, have thus removed the economic barriers to entry leaving copyright and technology systems only to protect the business models of the content creators.[38]

Over the generations, copyright law has adapted to new technologies as they became apparent,[39] but is currently having its validity tested due to the proliferation of the computer, hand held devices and communication technologies based on the platform of the internet. With exponential increases of internet adoption and computers expected to continue, with an even greater number of services to be conducted online,[40] this pressure is unlikely to diminish. Finding the right balance between the expectations of the public good and the private rights of the individuals, as a result of the new technology, is a point for divergence.

Currently copyright is a part of the US Intellectual Property Laws and the US Congress can grant copyrights to authors so as to “promote the progress of… useful Arts, by securing for limited Times to Authors… the exclusive Right to their respective Writings”[41]. In Twentieth Century Music Corp. v Aiken[42] the Court stated, “the immediate effect of our copyright law is to secure a fair return for ‘authors’ creative labour. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good”. Based on this, the Copyright Act 1790 (U.S), and its subsequent revisions, is not a regulation that protects ideas or symbols, rather it governs creativity and moreover the expression of ideas.[43]

The ownership of the copyright initially vests with the creator of the original work, the ‘Authors’, and for a very long time, either 70 years after the passing of the author, or if a work for hire 95 years from publication or 120 years from creation.[44] Covering much more than it did in 1790 a work of authorship now includes, among others, works of a literary, musical, dramatic, pictorial, motion picture, audiovisual and sound recording type.[45] Today if the author has created a work that is deemed original and suitable subject matter that is fixed in a tangible form, then it is said to subsist,[46] and the author is granted a series of exclusive rights for reproduction, adaptation, distribution, performance and display.[47]

When any of the exclusive rights are infringed then the owner can demonstrate liability when they can prove “ownership of a valid copyright, and copying of constituent elements of the work that are original”.[48] This is whether or not the infringement has been made for economic gain or otherwise, or been knowingly infringed upon.

To balance the exclusive private rights against the general public good, they are subject to a number of limitations such as compulsory licenses,[49] first sale doctrine[50], fair use doctrine,[51] specific categories of copying required for computer networks,[52] and the public domain.[53]

Additionally, works of authorship such as computer programs, music and movies can have extended [para-]copyright protection provided to them by the Digital Millennium Copyright Act (“DMCA”) (1998) (U.S.), which was introduced to update the laws of the digital age in line with the 1996 World Intellectual Property Organisation (“WIPO”) Treaty.[54] This enabled the owner to add code that protects their work, where the DMCA forbids the use of any devices that evade digital rights management (“DRM”) systems.[55]


Part I – Subsistence & Two-Tiered Formalities

Prior to the revisions of the Copyright Act 1976 (U.S) three formalities were required to secure copyright protection and period renewals in a work of authorship.[56] These formalities were: registration with the copyrights office, depositing copies of the work with the Library of Congress, and placing an appropriate copyright notice on the work.[57] When these formalities were not followed, a work would enter into the public domain,[58] where the public domain is all of the works not subject to copyright protection.[59]

As of 1 January 1978, the Act altered this to a work being protected as soon as it was fixed in a tangible form, and removed the requirement to be published in order to have copyright protection. Nevertheless, until 1992, registration of the copyright was required to enable the copyright term to be renewed.

Congress removed the absolute formalities requirement and especially that of the copyright notice in line with the Berne Convention from an effective date of 1 March 1 1989, so “the enjoyment and the exercise [of copyright] shall not be subject to any formality”.[60] This is where the US Copyright Office conceded its copyright position based on utilitarianism to the European copyright principle basis of natural rights and attribution.[61] These changes to copyright subsistence had the effect of allowing virtually any work that passed the basic creativity test to be protected by copyright.[62] For example, something as simple as writing or responding to a blog, writing an email, uploading a family video or posting a ‘selfie’[63] on a social media website would be capable of qualifying for copyright protection.

This ‘amateur’[64] type creation of content is among the reasons the protagonists for change recommend a return to a formalities system in the US.[65] There has been a massive increase in the creation and distribution of content by the amateur due to the abilities afforded to them by high-quality, cheap hardware and software for home based creation, access to high-speed internet and content distributing websites.[66] The facts on this show that 44% of internet connected Americans have either published or responded to blogs, uploaded pictures and shared files.[67] Yet, at the same time, many of the younger generation of internet users are unaware of their copyright rights, or those of others.[68] This suggests that there is a significant amount of copyrightable works sitting on the internet without clear claim by the owner, as well as millions of people sharing copyrighted works without the permission of the owner.[69]

The protagonists argue a fundamental problem of automatic subsistence is that it is not culturally beneficial because it reduces the volume of works available in the public domain.[70] They suggest that a return to formalities as a prerequisite to copyright subsistence will reduce the total volume of works that are protected by copyright, as an owner would need to claim works or loose them to the public domain.[71] The cultural benefit argument is justified in copyright based the works of Hegel, but also Locke.[72] The natural rights belief is generally against the over reach of law that may constrain or restrict the individual right to ownership and ability share the work with others, where in the case of copyright the creation of new works requires the sharing of all works otherwise it will be at the detriment of overall cultural development.[73] This is seen in the reading the Copyright Clause, as it is developed not only to provide a private economic benefit, but also to “to stimulate artistic creativity for the general public good,”[74] and “intended to increase and not to impede the harvest of knowledge”.[75]

The reasons for the formalities requirements prior to the 1976 Copyright Act were well documented. The House Report 94-1476 discussed the existing law and saw the requirement for notice as a relatively easy step to take in guaranteeing copyright and principles of the Copyright Act.[76] Furthermore the copyright notice served as a clear claim of copyright to others, identifying the owner and the available period remaining for protection.[77] It was also clear that copyright would not apply to any work that was unclaimed, thus entering the public domain.[78] Although no longer an absolute requirement for copyright subsistence, the formalities of notice, registration and deposit is still supported by the Copyright Act 1976 (U.S.) and its use offers benefits to the copyright holder in terms of the ability to take action for and gain remedies against infringement.[79]

Notice was a requirement for copyright prior to 1 March 1989, and had led to what many considered to be unreasonable loss of copyright protection. For example in the Estate of Martin Luther King, Jr. v CBS,[80] the famous 28 August 1963 speech by King of “I have a dream” had been witnessed live by 200,000 people and copies of the speech had been handed out to journalists, as well as the speech being broadcast on national television and radio. However, in 1999, the Court ruled that the speech was unpublished due to the provisions of the Copyright Act 1909 (U.S.), particularly that a limited distribution of the speech to journalists was not deemed a publication and neither was a public performance of the speech.

Today, notice is a reasonably easy, low cost step that an owner may take to lay claim to copyright. In the case of any visual copies, the notice is as simple as placing an applicable mark in a reasonable location,[81] stating ‘Copyright’ or recognised symbol, the date of publication, and the name of the owner.[82] For example, ‘Copyright © 2013 by Michael Parrington’. The benefit of providing the notice is that it clearly identifies the owner that makes claims to the rights, and should make potential infringers aware that copyright is claimed in the work. From a remedies perspective, the owner of the copyright will also significantly increase the potential damages claim, as the argument of ‘innocent infringement’ is unlikely to be plausible.[83]

The copyright owner may register either published or unpublished work at any time during the copyright period.[84] The process of registration is relatively straightforward and can be completed online.[85] It requires the completion of an application form, an online filing fee of US$35 and nonreturnable copies of the work that will be ‘deposited’.[86] There are numerous advantages to the registration of copyrights. The first is a practical consideration, as for any owner of a US work cannot bring a civil action for infringement without first registering the work with the Copyright Office.[87] Secondly, it is required to qualify for statutory damages or attorney fees,[88] and is prima facie evidence of a valid copyright as long as it is registered within five years of publication.[89] Additionally, it is common for an Author to license or sell their copyright to a third party, for example a publisher. In this case a transfer of ownership may be recorded with the Copyright Office,[90] and this will transfer the benefits of registration to the new owner.[91] Nevertheless, when there is exclusivity in a license transfer of rights, its is important that a properly executed legal document expressing the terms of agreement is used as an unsigned document or fax without terms is insufficient to prove ownership.[92]

In the pre 1976 Copyright Act, failure to deposit may have led to a forfeiture of copyright as well as fines.[93] Today deposit is not required for copyright protection – and if there is no publication or registration then there is no requirement to deposit.[94] However, when a work is registered, a deposit must be made, and if a US work is published then a deposit must be made within three months of the publication to the US Copyright office or Library of Congress,[95] otherwise fines will occur and registration may be invalidated.[96]

This identification of the copyright owner through notice, and preferably with registration including that of ownership transfers, is a benefit that the protagonists would like to see as a requirement on all works, for reasons that will be discussed in further part II. It is fair to suggest that deposit is the least important of the protagonists interests in having a return to formalities, however, the cultural benefit is clear in the importance in maintaining a history of works that may otherwise disappear.[97]

For authors who create infrequently, the cost of registration in the current system may seem insignificant; although there is no doubt that there is an economic burden to the registration of copyright especially for those authors who regularly create.[98] This perhaps goes to the overall natural rights of attribution versus the utilitarian argument regarding the value of a work and whether it is worth registering for potential future returns, and whether this should preclude copyright protection. As a purely financial argument it is unlikely anyone will register a work for $35 if that work will likely never return an income to the owner.

The antagonists see no need to reintroduce prerequisite formalities, advising that the large content creators already utilise the available US two-tiered system,[99] and that this utilitarian consideration falls to economics and financial risk. In regards to the economic argument, it is important to understand the goal of a firm as to its financial investment activities. In accordance with Bentham’s utilitarian philosophical justification for copyright and private property rights,[100] the goal of the firm is the maximisation of shareholders wealth, as this will be the efficient and productive use of societies scarce resources.[101] In providing this return for its investors, the firm must grapple with uncertainty of returns and timing of returns, also known as risk.[102] These factors lead to investment decisions being based upon the risk profiles of different investment opportunities, and to a point where, if an investment is too risky it will be abandoned.[103]

In terms of risk profile, the lack of notice or registration of works potentially makes it very difficult to clearly identify that it is copyright protected or claimed. This may create an issue for the large content creator when investing in the development of a new song or film only to find out at a later date that it is considered an original work of a different owner or derivative work of a previously created copyrightable work.[104] The registration of works thus, can clearly demonstrate ownership of copyright and it has been suggested that the clear identification of copyrighted works through a registration system would be of tremendous benefit to the large content creators so as to locate and secure rights for its investments.[105] Although it should be noted that even with the two-tiered formalities system, the amateur or individual professional is unlikely to pursue an infringement through the courts due to the costs of the action, whether formalisation exists or otherwise.[106]

Part II – Duration

Since the original federal Copyright Act 1790 (U.S) gave periods of protection of 14-years with an optional extension of an additional 14- years if the author was still alive, there have been subsequent extensions to those periods supported through revisions by Congress, and the removal of the requirement to formally renew so as to secure a full term of copyright protection.[107] Pivotal to the period of protection is the revision of the Copyright Act 1976 (U.S.), which initially provided that, for works created after 1 January 1978, the period of protection extends to the life of the author or last surviving author for joint works for 50 years, before having an additional 20 years added as modified by the Copyright Term Extension Act 1998 (U.S.) (“CTEA”).[108] Where the work is made for hire that is 95 years from publication or 120 years from creation,[109] or, for those works published before 1 January 1978, the period is 95 years from the publication or registration.[110] For an unpublished or unregistered work then as long as it was finally published before 2003 the copyright will remain until 2047.[111] In general terms this means that only those works made before 1923 have fallen into the public domain.

Noting that the rights to copyright ownership could be bequeathed to surviving spouses, next of kin, executors of estates, or otherwise transferred to a third party, it suggests that being able to locate the current owner of a copyrighted work, even where the original holder is identified, may be expensive at minimum or even impossible.[112] This is because of a lack of recordation of those current copyright owners,[113] notwithstanding the issue of automatic subsistence also creating a similar problem. It seems quite an absurd proposition when considered in relation to other physically held ‘real’ property or even other types of intellectual property, such as patents.[114]

This ever increasing issue is referred to as ‘orphan’ works, an analogy coined to suggest that the copyrighted work has lost or been abandoned by its parents, or owners.[115] In terms of culture the risk of not being able to adequately identify the owner of the original copyright, so that a derivative work, or even a restorative work, can be created is placing a “brake on culture”.[116] The protagonists suggest that a return to a prerequisite formalities system will ameliorate this issue by making all of the copyright owners locatable.

To place some facts on just how difficult a task it might be to locate the current owners of copyright in works, it is suggested that 75% of the silent films from the 1920s are orphans.[117] 22% of the publishers of the books in the libraries of Carnegie Mellon can-not be located,[118] and the US Copyright Office suggest that they have no idea just how many copyrighted works have been orphaned.[119]

There has been suggestion that the way to overcome this would be nothing to do with a return to prerequisite formalities, and rather everything to do with reducing the duration of copyright protection to a more reasonable time frame. However, the likelihood of this has been rejected by the Supreme Courts in Eldred v Ashcroft[120]. In Eldred the constitutionality of the extension to the duration of copyright in the CTEA was challenged as it did not only give power of monopoly for ‘limited times’ and prevented the first amendment right of freedom of expression by works falling to the public domain. The Court held that Congress had not gone beyond its power in the copyright clause, and that freedom of expression was adequately dealt with in the fair use doctrine and ideas being excluded from protection.

Picking up on this, antagonists point towards the protection already afforded in the Copyright Act for use of existing works, namely the ‘fair use’ doctrine. The fair use doctrine is said to “operate as a check on the monopoly powers that copyright holders would otherwise enjoy over the creative output”.[121] It allows for the use of copyrighted works without needing to gain permission to or pay the owner for use of the copyrighted material especially, but not only, for “criticism, comment, news, reporting, teaching, scholarship, or research”,[122] and in this way is said to help balance the interests of cultural diversity over the private interests of copyright owners.[123] For example where the protagonists suggest that ‘mash-ups’,[124] ‘fan-fiction’[125] and ‘music sampling’[126] are popular categories of modern creativity that can be restricted by locating the owner for permission to use, the antagonists will suggest that the law is reasonable.[127]

The application by the courts of fair use relevant to this type of modern creativity enabled by technology, and particularly ‘mash-ups’ and ‘music-sampling’ is given some guidance by Campbell v Acuff-Rose Music[128]. The members of the 2-Live Crew had created a parody ‘oh Pretty Woman’ based on the original of Roy Orbison’s bands ‘Pretty Woman’. The Court ruled on the weight of the four factors used to determine fair use,[129] and especially that the character of the work was ‘transformative’ and unlikely to cause effect to the market value of the original, even though the 2-Live Crew copied extensively from the original, therefore on balance fair use.

It has been suggested that fair use is applied inconsistently, is a doctrine that needs a lawyer,[130] and “the most troublesome law in the whole of copyright”.[131] In Warner Bros. Entertainment, Inc. and J. K. Rowling v RDR Books[132] the defendants were attempting to publish an online encyclopedic non-fiction guide ‘Lexicon’ to the Harry Potter fictional works, to assist the readers of the fictional works with their understanding, which they contended was fair use. The publisher and author contended that the guide was in breach of their exclusive rights as elements were substantially copied in terms of quotes, phrases, plots, summaries of scene’s etc. The Court agreed with the plaintiff that the defendant failed to establish fair use due to substantial elements being taken from the original works that were not needed to create a reference guide. To try and fully understand the difference between why Campbell was successful in showing fair use and RDR Books was not, even though substantial elements were copied in both, is not so straight forward, and especially for those unfamiliar with the idiosyncrasies of the legal system, such as an amateur.

In light of the inconsistency of the fair use doctrine, the protagonists sensibly to suggest that anyone who is about to make a creative work from an existing work should seek the permission of the owner, so as to avoid future possible costly litigation. Consequently, it would seem completely reasonable that a return to a formalities system where the owner is responsible for ensuring that the copyright is registered and noted, so as to have the ownership of those works clearly and easily locatable, and thus allow those works that are perceived as having little economic value or owners who care not for maintaining copyright in their works to fall to the public domain.[133]

The antagonists point to the fact that the last decade has seen a massive increase in blogging, posting of photographs to sites such as Flikr, self-expression on Myspace and Facebook, etc. and with very little hindrance or requirements for the courts to become involved, suggesting that much of the argument for any reform in the copyright law is a scare campaign.[134] For example, its very unlikely that if a husband and wife create a Michael Jackson ‘Thriller’ styled wedding dance, and post it online, that they can expect the owners of the original music movie to sue or serve a DMCA take down notice.[135] In this way they argue that the creation of amateur content is not really seen as a threat to the large content creators as high quality content ‘wins’ because it is still what people want to see, pointing out that the top three most watched channels on YouTube are from the professional large content creators.[136]

Conversely, protagonists may point to cases such as Los Angeles Times v Free Republic,[137] where the operator of an internet forum was sued by the publisher for allowing re-posting news articles. The court ruled that fair use was not applicable, even though reproduced for comment, as the works were generally verbatim copies. This type of case seems the exception rather than the rule, especially as evidence suggests that the content creators are not being financially damaged,[138] and so why should they bother heading to the courts even for the millions of daily infringements that are occurring.[139]

Industry (content sector) Annual Growth 08-13 Expected Growth 13-18

Internet Publishing and Broadcasting in the US 9.4% 17.3%
Performers and Creative Artists in the US -1.5% 1.3%
Musical Groups and Artists in the US -1.2% 2.0%
Independent Label Music Production in the US -0.5% 0.3%
Major Label Music Production in the US -2.8% 2.0%
Music Publishing in the US -3.8% 1.0%
Movie and Video Production in the US -2.8% 2.5%
Movie Theatres in the US 1.4% 1.7%
Movie and Video Distribution in US -1.7% 0.2%
Television Production in the US 1.6% 4.9%
Television Broadcasting in the US -1.1% 1.7%
Photography in the US -1.9% 1.6%
Magazine and Periodical Publishing in the US -4.6% -0.5%
Newspaper Publishing in the US -6.8% -3.7%
Book Publishing in the US -1.4% 0.6%
Radio Broadcasting in the US -2.3% 1.3%
Software Publishing in the US 4.3% 1.7%
Most of the content sectors in the US place the reason for poor economic growth between 2008-12 directly with the disposable income of the American consumer, who suffered as a result of the Global Financial Crisis.[140] Interestingly, most sectors have adapted their business models to suit the requirements of the internet consumer.[141] It is particularly clear from Table 1, that Internet publishing and broadcasting sector has performed strongly in the same period, and that with the exception of newspaper and magazine publishing that all content creation sectors are expecting annual growth between 2013 and 2018. The conclusion that should be drawn from the financial forecasts of the content sectors is that the current copyright system with its two-tiered formalities is protective of copyright owners, suggesting they may see no need to change to a prerequisite system.

If the antagonists are correct and there are, indeed, few legal challenges to amateur created derivative works, then their argument to not interfere with current formalities, or other parts of copyright law, seem quite reasonable. Although, as noted earlier, are the content creators also protected by the inhibitive court costs for the individual professional or amateur starting an action and is this a happy medium that the courts see as a tempering mechanism?[142]

Finally, if the content providers are already known to add a notice and register their works with the copyright office, this point of the benefit of prerequisite formalities promoted by the protagonists may already be a worthless argument, as owners could be identified, located and permission to use could easily be sought. Furthermore, clear direction on the courts sentiments towards fair use on amateur type works are demonstrated in Free Republic, where the court noted as long as fair use principles were followed the practices would not be infringement.

Part III – Technology Measures

Contracts and end-user-license agreements may also limit a digital users ability to legally access and use digital works for transformations, whether protected by copyright or not.[143] In particular there has been a growing trend to overcome and exclude protections that may be legitimate in copyright law through the use of contract laws and in particular DRM systems. These systems can in many ways add additional limitations to the use of copyrighted works. For example, iTunes may limit to five the number of devices that a purchaser of music can physically use, whereas the first sale doctrine should allow ‘lawfully made’ copies under the ‘fair use’ provisions.[144]

Probably the more controversial systems for limitation are the DRM systems, which have been used to prevent fair use of digital data for transformative use.[145] The DRM systems are protected by anti-circumvention legislation in the US,[146] which was brought in with the DMCA and gives both civil and criminal remedies against an infringing party,[147] to which there are limited exceptions only.[148] Congress’s purpose with the introduction of the DMCA was to prevent technological developments from being slowed by copyright law and in particular protecting 3rd parties such as internet service providers against secondary infringement actions, which could not be started until takedown notices had been delivered to the secondary infringing party.[149] Thus section 512 may have also created a pseudo requirement, for those who wished to sue, to register the works so that statutory damages could accumulate, similarly to standard copyright.[150]

The protagonists suggest this is a part of the current US legislation that may be problematic and that could benefit from the reintroduction of formalities to copyright. They say current code of the DMCA protects large content creators and potentially disadvantages cultural development by providing technological protection for anti-copying technology and anti-access technology.[151] Broadly speaking section 1201 prohibits the act of circumventing anti-access technology and the making or selling of devices that circumvent,[152] but does not require the clear identification of the inclusion of a DRM on the work by the data provider. The interesting piece of the statute is that circumventing an anti-access measure is in violation of section 1201 as this has the possibility of preventing the user of taking parts of the work for what would otherwise be considered fair use in copyright law, as fair use does not authorize unauthorized access. For example if an artist was taking components from a song so as to create a parody of that song then the use without any anti-circumvention device would be considered fair use,[153] but if the file is digital and protected by an anti-circumvention measure then breaching that device could be a violation of section 1201. Noting there is no specific fair use exception in the statute.

The protagonists are concerned that DRM systems can be used as a legal sword to control legitimate uses. In The Chamberlain Group, Inc. v Skylynk Tech., Inc.,[154] the plaintiff manufactured a garage door that used a ‘rolling code’ security mechanism, and the defendant manufactured a universal access remote control to enable access to the Chamberlain ‘rolling code’. One supposes this was to prevent legitimate aftermarket competition. However, to establish a violation of the DMCA, it must be shown that the DRM system being circumvented has some “reasonable relationship to the protections that copyright otherwise affords”. The Court ruled that this was not the case as the owners of the Chamberlain door were entitled to access the operating code. The Chamberlain case, and also similar cases such as Lexmark International, Inc. v Static Control, Inc.[155] brought on violation of section 1201, would help form the antagonist’s belief that the courts do not unreasonably apply this para-copyright without the support of the underlying copyright rights, and as such it does not need reform. Although, on the other side of the coin, DRM’s may already be providing the protagonists with a quasi-formalities system, as the amateur creator has little use for protecting their creative investment and, likely, will not protect it with a DRM.[156]

Still, the protagonists suggest that these DRM systems provide the content creators with a very powerful set of protection provisions that go well above those of copyright law.[157] Certainly the courts have had difficulty in this area, for example in Universal City Studios v Chorley[158] the court would not consider fair use in relation to section 1201 and would not address the constitutional question of limiting free speech by not allowing fair use considerations. In support of the protagonists, there is a proposed bill that was introduced into the House of Representatives on 8 May 2013, with the purpose of “amend[ing] section 1201 of title 17, United States Code, to require the infringement of a copyright for a violation of such section”.[159]

In this case having a formalities system that enables copyrighted works to be identified, may enable users to know if they can legitimately access works protected by anti-circumvention measures, or otherwise know where to seek permissions.

Part IV – Suggested Systems and Their Merits

There have been a number of methods suggested for a reintroduced formalities system, which generally revolve around the principles of opt-in or opt-out. In many ways the opt-in registration for copyright system already exists, even then if only as a prerequisite enabling an infringement case to be brought before the courts.[160] However, as noted, registration is not a condition to copyright protection,[161] and has led to a general reduction in registrations since removed as a prerequisite formality.[162] Whilst registration is a choice, it may be one that many are unaware of or choose not to complete, which will not remove the problems associated with orphan and other unclaimed works.

The harsh formalities of the old opt-in regime of the pre 1976 Acts, unreasonable, as many comprehend them, now seem to be favoured in a proposition for a return to prerequisite formalities for copyright.[163] Proponents of this change, such as Lessig, have suggested that copyright protection should be conditional to the registration and renewal of copyright,[164] with a 5-year term with renewal up to 14 times. Others such as Landes and Posner suggest a similar system that is tied to 20-year periods.[165] The suggestion is these registration systems would be administered through a market-based system similar to that of URL registrations for web addresses.[166] Even so it is likely that events such as King could not be completely ruled out as a possible side effect.

With the economic arguments of an opt-in system set aside, and even though these methods seem a reasonable way to overcome the issues of orphan works and automatic subsistence, they both suffer from the same principle problem. That is that they contravene the revisions of the Copyright Act 1976 (U.S.) and ultimately the multilateral treaty agreements based on Berne ensuring copyright is not conditional on formalities.[167]

It should be noted that, even if Berne specifically forbids reinstatement of formalities on foreign works, the requirements of Berne do not absolutely prevent the US from reinstating formalities requirements on US works as Berne specifically preserves domestic laws.[168] In this understanding, such a change to reinstate formalities could be as simple as reverting the wording in the relevant sections of the statute back to “shall use a copyright notice” from the current version “may use a copyright notice”.[169] The issue of such a change would be that it likely discriminates against local US creators, and that US creators could use the internet to manipulate the origin,[170] and therefore, in conjunction with maintaining the integrity of multilateral agreements, it is highly unlikely that congress would be interested in considering such a change.

The opt-out system is another muted by the protagonists and comes from the idea of open source software. Open source software is where the author retains the copyright, but contractually licenses the ‘free’ use of the software to the general public, where the actual uses for the software may be governed by agreements to freely license any adaptations of the original software (derivative works) to all other users.[171] A well known open source software is the Linux operating system and the free release of the operating system Kernel by Linus Torvalds in 1991, which has been developed by many firms as a basis for their computing systems.[172]

From the open source software model a more generally applicable system has been created for artistic works. The Creative Commons License allows anyone to use the owners works based on a broader set of restrictions. These are: Noncommercial, which allows the work to be used for any purpose that is non-commercial; No Derivative Works, is self explanatory and allows any other use of the work; Share Alike, that allows derivative works to be shared with others only if governed by an identical license to that of the original.[173]

Though these opt-out license systems seem reasonable solutions, they are still voluntary, and as for the current copyright formalities system, there will be a large percentage of individuals who will not use it.[174] Moreover, it should be noted that these systems are contractual and cause for concern is that they have not been tested in regards to the law in regards to termination.[175] In the 1976 Copyright Act there were the provisions for termination, provided by congress, to enable authors to terminate existing contracts that had been entered into before the actual value of the work was understood.[176] The ‘termination right’ came into effect on 1 January 1978, on all works that were not ‘made for hire’ and allow the author to reclaim all of the exclusive rights after 35 years but before 40 years.[177] The first case to interpret these provisions is Scorpio Music, et al. v Willis[178], in which Mr Willis had tried to regain the rights to 33 songs, such as ‘YMCA’ and ‘In The Navy’, that he had co-authored but during the 70s had granted his rights in the songs to the publisher. The Court found that Mr Willis had standing under section 203 of the Copyright Act to be treated separately to the other authors and terminate his grants, which the publishers had argued against.

More relevantly to open source and creative commons licensing, is that the Scorpio Court also found that, even though the assignment of rights was contracted beyond the initial term, “upon termination, Mr. Willis would get back what he transferred – his undivided interest in the whole”.[179] This suggests that there is the chance that the courts may find in favour of authors, or inheritors, who wish to regain full control of what they have assigned in open source or creative commons licencing prior to the end of the termination period.

The purpose of the open source and creative commons licenses are perhaps different to standard assignments of rights in the music, movie and literary works to publishers, and to overcome the ‘termination right’ it could be suggested that the author has abandoned the rights. Then again, abandonment is a very rare and can only occur if the copyright owner intends to this and makes this purpose overtly clear though an act,[180] which it could be suggested is the purpose of a creative commons license, although, abandonment is not assumed if the owner does not exploit the work or enforce the copyright against infringers,[181] which suggests this would be a tough argument to persuade the courts.

Both the opt-in and opt-out systems described are suggested methods to overcome the problems associated with the lack of prerequisite formalities in US copyright, by effecting copyright laws directly. Without direct effect to copyright or international treaties, there is scope for at least a partial resolution to the same problems by using the provisions of the DMCA and technology on copyrighted works, whilst still protecting the private rights of owners.

Firstly, even though Berne requires that formalities are not a prerequisite for copyright subsistence, it does not prevent other US domestic laws from existing in parallel as “protection in the country of origin is governed by domestic law”.[182] Additionally, as long as all rights of the copyright holder to remedies in the court are not subject to a registration requirement, then registration is still supportive of enhanced remedies such as statutory damages being available without contravening Berne.[183] Foreign works would also be subject to any local provisions in so much as they would be required to conform to US rules of evidence and procedure, which is not prevented by Berne.[184] These three points suggest that registration of anti-copying and anti-access provisions to copyrighted works could be supported as a requirement of the DMCA, and additionally provide enhanced remedies or limitations for action in the US Courts for violations.

Secondly, section 1201 of the DMCA provides copyright owners with significant additional protections of their intellectual property by the use of DRM systems, but currently no requirement to provide notice of those mechanisms or registration.[185] The addition to the legislation of the requirement to register and provide notice of DRM could resolve many of the issues the protagonist proponents of both the opt-in and opt-out regimes hoped to achieve with prerequisite formalisation of copyright, whilst still providing necessary protection for the content creators. For example, the registration of a DRM system could become a requirement of (1) protecting a copyrighted work in a digital form, and (2) a prerequisite for enforcement action of section 1201. Such a registration system could also allow for creative commons license type rights of access, and clear identification of this as the intent of the DRM and underlying copyright owner.

Thirdly, the over protection of automatically subsisting copyright would be minimised in the digital space by the financial investment required to protect a copyrighted work with a DRM. That is to say that an amateur would be unlikely to add a DRM system to their work, even if they would like to retain copyright. Finally, such a system could guard against both the innocent access to DRM systems, ensuring that DRM systems are in line with the limits of their rights in copyright law.[186]

Such a formality would not need to create a new administrative office as the requirements of registration and notice of DRM could be easily added as an extension to the existing formalities requirements of the US Copyright Office’s notice, registration and deposit.

It has been noted that this type of registration of DRM systems would be consistent with the 1996 WIPO Copyright Treaty that first envisaged DRM protection of intellectual property.[187] Additionally, the treaty suggested balance between the protection of the authors and the legitimate acts of users of copyrighted materials that are protected by copyright law, and this would also be a method to provide such a balance.[188]

The registration and notice of a DRM ultimately seems supportive of the fundamental intent of the US Constitutions progress clause “to promote the progress of… the useful arts”[189] by ensuring that the works are available for the public use and general good as intended by the Copyright Act, but also “by securing… to authors… the exclusive right to their respective writings”[190] the clear protection intended for the creator. This is also consistent with the fundamental philosophies of copyright in that it would help ensure that natural rights of the author are retained, and the utilitarian economic rights are protected. Moreover, out of the three systems discussed, this proposal seems consistent with the requirements of Berne, which is likely necessary for any proposal for reform of an act with a direct or indirect affect on copyright law.

However, experts including the antagonists would suggest that existing copyright law only needs fine tuning,[191] and that the law will find its balance, as it eventually does, such is the basis of the common law. They would note that the markets also tend to discover a balance to innovative technologies by destroying old business models and creating new ones in order to sustain.[192] They could also suggest that no one has a crystal ball to the future and technology, thus there could be new developments around the corner that would make the current discussions on formalities require different legislation.[193] To support this they could show that the courts have (1) dealt heavy blows to companies incentivising copyright infringement over the past two decades, even where they have tried to adapt technology to past court rulings[194] and (2) that the free market supported by these court decisions seems to have dealt with problems such as peer-to-peer file sharing, as publishers of high value content seem to be growing or set for significant growth in the next five years.[195] Thus the courts and markets combined in overcoming the previous doom and gloom of piracy where some of the same protagonists proposed an absolute need for statutory licensing.

The most likely scenario of all is that the status quo will remain, as “an overhaul of US copyright law has historically required a Herculean effort”,[196] and many concerned that any changes could in fact create a worse situation than is currently apparent.[197] On top of this, history shows that any significant reforms to copyright law can take decades to be realised, as was seen in the 1976 modifications that began reform discussions in the 1950s,[198] perhaps suggesting that waiting for the courts and markets will occur anyhow. Any proposal for change will need to demonstrate to Congress that considerable pain is being suffered by the US citizen, otherwise it is likely that it would suffer the same fate of failure and for similar reasons as seen in Eldred.[199]


This paper has looked at the issues created in copyright law that have been highlighted by the new abilities for almost anyone to create, copy and distribute copyrighted works using the new technologies provided by the internet and associated technologies.

The removal of prerequisite formalities, when linked to automatic subsistence, duration, technological protection measures, and unclear limitations have been said to damage the volume of works available in the public domain for the cultural development of future works. This is because it is difficult to identify owners, understand what is fair use, and remove technological measures even for fair use.

The opposing side of the argument is that the provisions already in the copyright act enable fair use, providing adequate cultural benefit, but also protect the private rights of owners from infringement in their works. They suggest that the two-tiered formalities system when linked with copyright and para-copyright is functioning satisfactorily.

The current proposals were considered to see if there is likelihood that Congress would consider introducing the changes, but it was discovered that there are some fundamental issues likely preventing opt-in and opt-out systems in copyright law. Conversely, use of para-copyright was seen as able to overcome those issues and provide similar benefits as it sits parallel to copyright law.

Finally, it seems that even though the reintroduction of a formalities system has some merits, the most likely scenario is that the situation will remain the same and wait for naturally occurring legal and market adjustments, unless significant damage to the US citizen can be demonstrated.

[1] “a global computer network providing a variety of information and communication facilities to its users, and consisting of a loose confederation of interconnected networks which use standardized communication protocols”, Shorter Oxford English Dictionary (6th ed. 2007).

[2] Dan Hunter and Gregory Lastowka, ‘Amatuer to Amatuer’ (2005) 46 William and Mary Law Review 951, 965-967.

[3] Urs Gasser and Silke Ernst, ‘From Shakespeare to DJ Danger Mouse: A Quick Look at Copyright and User Creativity in the Digital Age’ (Research Publication, No 2006-05, The Berkman Centre for Internet and Society, June 2006) 5 <http://ssrn/abstract=909223>.

[4] Ibid 4.

[5] John Palfrey, Urs Gasser, Mirium Simun and Rosalie Fay Barnes, ‘Youth, Creativity, and Copyright in the Digital Age’ (Research Publication, No 2009-05, The Berkman Centre for Internet and Society, June 2009) 80 <>.

[6] Gasser and Ernst, above n3, 7.

[7] William Fisher III, Promises to Keep: Technology, Law, and the Future of Entertainment (Stanford University Press, 2004) 31.

[8] Christopher Sprigman, ‘Reform(aliz)ing Copyright’ (2004) 57 Stanford Law Review 485, 486-487.

[9] Ibid, 487.

[10] Ibid, 488.

[11] Hunter and Lastowka, above n2, 965-967.

[12] Sprigman, above n8, 489.

[13] Brad A. Greenberg, ‘More Than Just a Formality: Instant Authorship and Copyright Opt-Out Future in the Digital Age’ (2012) 59 UCLA Law Review 1028, 1041.

[14] MGM Studios Inc. v Grokster, Ltd., 125 S. Ct. 2764, 2775 (2005).

[15] Jane Ginsburg, ‘The US Experience with Copyright Formalities: A Love/Hate Relationship’ (Research Paper, No 10-225, Columbia Journal of Law & the Arts, 18th January 2010) 3 <>.

[16] Greg Sandoval, ‘The head of the Copyright Office says the law is broken: but can she fix it in time?’, The Verge (online), 20th March 2013 <>.

[17] Dan Hunter, Intellectual Property (Oxford University Press, 2012), 29-30.

[18] Copyright Act of May 31, 1790, ch. 15, 1 Stat. 124 (1790).

[19] Hunter and Lastowka, above n2, 966.

[20] Michael Porter discusses the five forces that are relevant to entry into, or protection of, a market. Two of the ‘barriers to entry’ for a new entrant are the capital investment costs and the access to distribution so as to be able to compete with the industry incumbent. If the ‘barriers to entry’ are high then it is difficult to successfully enter the market. See Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors: With a New Introduction (Free Press, 2008).

[21] Peter S. Menell, ‘Envisioning Copyright Law’s Digital Future’ (2002) 46 New York Law School Review 63, 66.

[22] A Brief History of the PC, (29 August 2013) Policy Vol. 21 No. 3, 35 <>.

[23] David Yoffie and Renee Kim, ‘Apple Inc. in 2010’ (Case Study No 9-710-467, Harvard Business School, 1 September 2010) 4.

[24] Comment, ‘1983: The IBM Standard Takes Over’ (Dec. 2002) 21 PC Magazine 5, 141.

[25] “Clone” PCs were hardware systems designed to mimic the IBM x86 computer systems that operated a Microsoft Operating System.

[26] A Brief History of the PC, above n22, 35.

[27] Fisher, above n7, 15.

[28] Ibid 18-25.

[29] Michael Rustad, Rustad’s Internet Law in a Nutshell (Thomson Reuters, 2009) §1.1.

[30] Ibid, §1.2(a).

[31] Ibid, §1.1.

[32] Ibid, §1.1.

[33] Ibid, §1.2(a).

[34] British Broadcasting Corporation, ‘The Great Leveling?’, The Virtual Revolution, 29 May 2010, Dr. Aleks Krotoski.

[35] Rustad, above n29, §1.5(c).

[36] Ibid §1.5(c).

[37] Ibid §1.5(d).

[38] Gasser and Ernst, above n3, 4.

[39] Hunter and Lastowka, above n2, 965-966.

[40] IBISWorld, ‘Percentage of services conducted online’ (Industry Report No F320, IBISWorld, August 2012).

[41] United States Constitution art I § 8.

[42] 422 U.S. 151, 156 (1975) (‘Aiken’).

[43] Copyright Act 1976 (U.S.) § 102(b), codified as 17 U.S.C. § 102(b).

[44] 17 U.S.C. § 302.

[45] 17 U.S.C. § 102(a).

[46] 17 U.S.C. § 102(a).

[47] 17 U.S.C. § 106.

[48] Feist Publications, Inc. v Rural Telephone Service Co., 499 U.S. 340, 361 (1991).

[49] 17 U.S.C. § 115.

[50] 17 U.S.C. § 109.

[51] 17 U.S.C. § 107.

[52] 17 U.S.C. § 512.

[53] See, 17 U.S.C. §§ 108, 110, 1008, which specify some additional special limitations on the exclusive rights.

[54] World Intellectual Property Organisation Copyright Treaty, adopted in Geneva on December 20, 1996.

[55] 17 U.S.C. § 1102.

[56] Lawrence Lessig, Free Culture: The Nature and Future of Creativity (Penguin Books, 2005) 136-139.

[57] Hunter, above n 17, 44.

[58] Stephen McJohn, Intellectual Property: Examples and Explanations (Aspen Publishers, 3rd ed, 2009) 126.

[59] The public domain includes any official publication from the U.S. government as well as those items that may have previously enjoyed copyright protection but have come to the end of their protected period, for example works published prior to 1923. Palfrey, Gasser, Simun and Barnes, above n 5, 82.

[60] Berne Convention for the Protection of Literary and Artistic Works, as amended on September 28 1979, art 5(2) (‘Berne’).

[61] McJohn, above n58, 158.

[62] Ginsburg, above n15, 3.

[63] A “selfie” is a colloquial term for taking a photograph of ones-self.

[64] An “amateur” user of the Internet “[receives], build[s] upon, copy[s]… and retransmit[s] original information” without “financial and proprietary motives”, Hunter and Lastowka, above n2, 965-967

[65] Ginsburg, above n15, 3.

[66] Hunter and Lastowka, above n2, 982-984.

[67] Gasser and Ernst, above n3, 6.

[68] Palfrey, Gasser, Simun and Barnes, above n5, 84-90.

[69] John Quiggin and Dan Hunter, ‘Money Ruins Everything’ (2008) 30 Hastings Comm/Ent Law Journal 203, 247.

[70] Lessig, above n56, 225-227.

[71] Ibid.

[72] David Dante Troutt, ‘I Own Therefore I Am: Copyright, Personality, and Soul Music in the Digital Commons’ (2010) 20 Fordham Intellectual Property, Media and Entertainment Law Journal 373, 389-390.

[73] Ibid.

[74] Aiken, 422 U. S. 151, 156 (1975).

[75] Harper & Row, Publishers, Inc. v Nation Enterprises, 471 U. S. 539, 545 (1985)

[76] H.R. Report No. 94-1476, 94th Cong., 2d Sess., at 146-149 (1976) (U.S).

[77] “Under the present law the copyright notice serves four principal functions. . . : (2) It informs the public as to whether a particular work is copyrighted; (3) It identifies the copyright owner; and (4) It shows the date of publication.” Ibid 143.

[78] “[A] person acting in good faith and with no reason to think otherwise should ordinarily be able to assume that a work is in the public domain if there is no notice on an authorized copy or phonorecord and … if he relies on this assumption, he should be shielded from unreasonable liability.” Ibid 148.

[79] 17 U.S.C. § 411-412.

[80] 194 F.3d 1211 (11th Cir. 1999) (‘King’).

[81] 17 U.S.C. §§ 401(c), 402(c).

[82] 17 U.S.C. § 401(b).

[83] 17 U.S.C. § 504(c)(2).

[84] 17 U.S.C. § 408.

[85] United States Copyright Office, Copyright Basics (17 July 2013), United States Copyright Office, 7 <>.

[86] Ibid.

[87] 17 U.S.C. § 411.

[88] 17 U.S.C. § 412.

[89] 17 U.S.C. § 410(c).

[90] 17 U.S.C. § 205.

[91] 17 U.S.C. § 201(d)(2).

[92] Radio Television Espanola v New World Entertainment, 183 F.3d 922 (9th Cir. 1999).

[93] Sprigman, above n8, 487.

[94] United States Copyright Office, above n85, 10.

[95] Ibid 8-9.

[96] McJohn, above n58, 133-134.

[97] Talibah-Mawusi Smith, ‘Culture, Knowledge, Law and Community: When the Well Runs Dry Dig Deeper: The Case for Funding the Public Library, A Necessary Resource for Minorities’ (2012) 22 Berkeley La Raza Law Journal 137, 142-143.

[98] Lessig, above n56, 254

[99] Ginsburg, above n15, 3.

[100] Hunter, above n17, 16-25

[101] J William Petty, Arthur Keown, David Scott Jr., John Martin, Peter Martin, Michael Burrow and Hoa Nguyen, Financial Management: Principles and Applications (Pearson Education Australia, 5th ed, 2009) 3.

[102] Ibid 4.

[103] Ibid 4-9.

[104] Ginsburg, above n15, 2.

[105] Ibid.

[106] Ibid 25.

[107] Lessig, above n56, 133-135.

[108] 17 U.S.C. § 302(a) – 302(b).

[109] 17 U.S.C. § 302(c).

[110] 17 U.S.C. § 304.

[111] 17 U.S.C. § 303.

[112] Lessig, above n56, 222.

[113] Ariel Katz, ‘The Orphans, the Market and the Copyright Dogma: A Modest Solution for a Grand Problem’ (2012) 27 Berkeley Technology Law Journal 1285, 1286, 1288.

[114] Lessig, above n56, 223.

[115] See, footnote 18, Katz, above n113, 1290.

[116] Lessig, above n54, 227.

[117] Greenberg, above n13 , 1040.

[118] Ibid 1039.

[119] See, FN6, Ibid 19.

[120] 537 U.S. 186 (2003) (‘Eldred’).

[121] Palfrey, Gasser, Simun and Barnes, above n 5, 81.

[122] 17 U.S.C. § 107.

[123] Palfrey, Gasser, Simun and Barnes, above n 5, 81.

[124] “a Mash-Up is where the vocal of one song is laid over the music of another”, Gasser and Ernst, above n3, 7.

[125] “[fan fiction] is fiction written by fans of a movie, TV Show… or the like. The fiction develops new plots by using characters, situations, or locations of the fan’s media work”, Gasser and Ernst, above n3, 7.

[126] “sampling [is], where the creator takes a portion of one sound recording and reuses it as an element of a new recording”, Gasser and Ernst, above n3, 7.

[127] See Gasser and Ernst, above n3, 8-9.

[128] 510 U.S. 569 (1994) (‘Campbell’).

[129] See, e.g., 17 U.S.C. § 107.

[130] Lessig, above n56, 224.

[131] Dellar v Samuel Goldwyn, Inc. 104 F.2d 661 (2d Cir. 1939).

[132] 575 F.Supp.2d 513 (SDNY 2008) (‘RDR Books’).

[133] Ginsburg, above n15, 2.

[134] The Economist Debates, Copyrights and Wrongs (14th July 2013) <>.

[135] The DMCA provides a number of “safe harbour” protections for online service providers, which requires the issue of take down notice and non-compliance with that notice prior to being heard by a court, see 17 U.S.C. § 512.

[136] The Economist Debates, above n134.

[137] 2000 U.S. Dist. Lexis 5669 (C.D. Cal. March 31, 2000) (‘Free Republic’).

[138] See Table 1.

[139] Quiggin and Hunter, above n69, 247.

[140] See, e.g. Kevin Boyland, ‘Internet Publishing and Broadcasting in the US’ (Industry Report No 51913b, IBISWorld, March 2013) 9-10, Matthew MacFarland, ‘Performers and Creative Artists in the US’ (Industry Report No 71151, IBISWorld, December 2012) 5, Matthew MacFarland, ‘Musical Groups and Artists in the US’ (Industry Report No 71113, IBISWorld, November 2012) 5, Antonia Donava, ‘Major Label Music Production in the US’ (Industry Report No 51222, IBISWorld, March 2013) 5-10, James Crompton, ‘Music Publishing in the US’ (Industry Report No 51223, IBISWorld, July 2012) 8, Agata Kaczanowska, ‘Movie and Video Production in the US’ (Industry Report No 51211a, IBISWorld, April 2013) 5, Matthew MacFarland, ‘Movie Theatres in the US’ (Industry Report No 51213, IBISWorld, June 2013) 4-5, Agata Kaczanowska, ‘Television Broadcasting in the US’ (Industry Report No 51312, IBISWorld, February 2013) 4-6, Kiera Outlaw, ‘Photography in the US’ (Industry Report No 54192, IBISWorld, April 2013) 5, Jesse Chiang, ‘Magazine and Periodical Publishing in the US’ (Industry Report No 51112, IBISWorld, July 2013) 5-8, Austen Sherman, ‘Newspaper Publishing in the US’ (Industry Report No 51111, IBISWorld, July 2013) 9, Jesse Chiang, ‘Book Publishing in the US’ (Industry Report No 51113, IBISWorld, June 2013) 4.

[141] Ibid.

[142] Ginsburg, above n15, 25.

[143] Gasser and Ernst, above n3, 11.

[144] McJohn, above n58, 174.

[145] Gasser and Ernst, above n3, 10-11.

[146] 17 U.S.C. §§ 1201, 1202.

[147] 17 U.S.C. §§ 1203, 1204.

[148] 17 U.S.C. §§ 1201(a)(1)B-E, 1201(f-h).

[149] Greenberg, above n13, 1051.

[150] Ibid, 1051.

[151] 17 U.S.C. § 1201.

[152] 17 U.S.C. § 1201.

[153] See, Campbell, 510 U.S. 569 (1994).

[154] 381 F.2d 1178 (FED.Cir. 2004) (‘Chamberlain’).

[155] 387 F.3d 522 (6th Cir. 2004), where Lexmark tried to use DRM to protect its ink cartridges and Static controls manufactured a chip to overcome the DRM. The Court held that the DRM did not prevent reading or copying and was not an ‘access control’ and the DMCA was therefore inapplicable.

[156] Quiggin and Hunter, above n69, 248.

[157] Lessig, above n56, 143-152.

[158] 273 F.3d 429 (2d Cir. 2002).

[159] Unlocking Technology Act of 2013, 113th Cong., 1st Sess. (2013) (U.S.)

[160] 17 U.S.C. § 412.

[161] 17 U.S.C. § 102(a).

[162] Sprigman, n8, 495-497.

[163] Ginsburg, above n15, 3-4.

[164] Lessig, above n56, 249.

[165] William Landes and Richard Posner, ‘Indefinitely Renewable Copyright’ (Working Paper, No 154, John M. Olin Law & Economics, 1st August 2002) <SSRN:>.

[166] Lessig, above n56, 289.

[167] Berne, above n60.

[168] Ginsburg, above n15, 3.

[169] McJohn, above n58, 130.

[170] Ginsburg, above n15, 3-4.

[171] McJohn, above n58, 115-116.

[172] Computer History Museum, Linus Torvalds (3rd September 2013) <,Torvalds/>.

[173] McJohn, above n58, 116.

[174] Sprigman, above n8, 496.

[175] Greenberg, n13, 1060.

[176] Brian Caplan, Navigating US Copyright Termination Rights (August 2012) WIPO Magazine <>.

[177] 17 U.S.C. § 203.

[178] 11 Civ. 1557 (BTM), 2012 WL 1598043 (S.D.Ca. May 7, 2012) (‘Scorpio’).

[179] Ibid.

[180] Melville Nimmer and David Nimmer, Nimmer on Copyright (Matthew Bender, 2013) Ch. 13.06.

[181] Ibid.

[182] Berne, above n60, art 5(3).

[183] Ginsburg, above n15, 6-7.

[184] Ibid 5.

[185] Pamela Samuelson and Jason Schultz, ‘Should Copyright Owners Have to Give Notice about Their Use of Technical Protection Measures?’ (Research Paper, No 1058561, UC Berkeley Public Law, 19th November 2011) <SSRN:>.

[186] Ibid 72.

[187] Samuelson and Schultz, above n185, 72.

[188] Ibid.

[189] art I § 8.

[190] Ibid.

[191] Bruce Lehman and Ronald Brown, ‘Intellectual Property and the National Information Infrastructure: The Report of the Working Group on Intellectual Property Rights’ (White Paper No KF2979.U55, US Patent & Trademark Office, September 1995) 17.

[192] Joseph Schumpeter, Capitalism, Socialism and Democracy (Routledge: 1942).

[193] Lehman and Brown, above n191, 5.

[194] See e.g. A&M Records, Inc. v Napster, Inc., 239 F.3d 1004 (9th Cir 2001). See e.g. Metro-Goldwin-Mayer Studio’s, Inc. v Grokster Ltd., 545 U.S. 913, 930 (U.S. 2005).

[195] See, e.g. Figure 1.

[196] See, e.g. comments by Pallante. Sandoval, above n16.

[197] See, e.g. comments by Rick Carnes, Ibid.

[198] Ibid.

[199] Lessig, above n56, 236-239.

One Response to US Copyright, The Internet, and the Dilemma of Formalities

  1. madge gafford says:

    Timely ideas , I loved the specifics , Does anyone know where I might obtain a template US NAVPERS 1336/3 form to type on ?

Comments are closed.

A Short History of the Common Law

by Michael Parrington, October 2012

Why is its history so important to an understanding of the common law?


History helps to understand how the platform for common law was created, why the procedure helped produce and gradually develop the body of law deemed the common law, and how the common law professionals helped administer, develop, and maintain law and procedure, and why it is still relevant today.

The common law was a historically deemed term that meant a law common to the people of England, controlled by the Royal courts.[1] However, this essay also considers the development, through history, of the common law to another understanding as the body of law created by judges, and in that sense the law not created by equity or statute.[2]

Without a power platform for upholding and legitimising the law making decisions of the judges there would have been little chance for the common law to be created or maintained. Development of a hierarchical and centralized system of the courts, originally empowered by the kings and later the parliament, was the fundamental basis from which the judge made common law was enabled and maintained. Today this hierarchical platform is still in place and understanding how it continues to legitimise legal decisions is important.

From this centralised court system developed a procedural method of deciding legal outcomes in a consistent but continually restated way through the courts and their decisions. This was based on a culture and method of adversarial argumentation between the parties in disagreement, originating through the writ system and developing into the current system that is known as precedent.

This detailed procedural system requirement had the need for legal professionals that were skilled in understanding, arguing and applying the law on behalf of clients in the various court settings. Their association and internal scholastic approach would ensure legal procedural consistency and development of record keeping, which are critical to the common law courts and its procedures.

Legal Platform

The commonly accepted historical understanding is that the basis for the foundation of the common law dates back to the Battle of Hastings in 1066, and the beginning of the Norman rule of England by William I. Before this time there was a system of uncentralised Anglo-Saxon law in the entity known as England, where as well as the Court of the King, witenagamot, each county would separately rule in disputes, in their own courts, according to their local customary law, through the Shire and Hundred Courts.[3] This community centric law was seen as well accepted by the communities that it served and importantly provided the basis for control of the people.[4]

William I required control of the whole of the kingdom of England to retain his power and income, and as such allowed the inherited system of local customary laws to remain. However, he ensured that his representatives, the sheriff’s, policed Shires.[5] The Normans were no strangers to administration of lands as they were already an established system of control over the realm of the Franks, and William I would impose a modification to the traditionally developed system of feudalism to take administrative control adding the locally functioning feudal Baronial and Manorial courts.[6] Feudalism was by its nature a hierarchical system of power and social control based on land tenure, and mutual benefit through income and military support passed upwards, and the Kings protection downwards.[7] The English feudal system had the King at the top of the tree with control over the entire Kingdom of England, nobles who sat next in line as tenant-and-chief were wealth land-owners by decree and plead of allegiance to the King, and below this were various tenants of the land.[8] This hierarchical system has endured and ensured power and central control of the common law.

William I set up the Curia Regis, or King’s Court, to stand side by side with the feudal courts, ecclesiastic and custom law courts, and would travel with the king within the realm, to hear petitions of his subjects, before he would rule. During the twelfth and thirteenth centuries, greater numbers of individuals would seek the kings justice due to dissatisfaction with the local laws, which they saw as unfair and unjust.[9] The king began to leave decisions that could be dealt with under existing laws to the autonomy of the curia regis, and to enable his obligations to be met the king began to appoint ‘justiciars’, or judges, whom were official representatives of the King, knowledgeable about the law.[10]

Over time a split of the curia regis occurred, one part became a permanent body of justices of the Curia Regis, formed to hear the ‘common pleas’, and became known as the Bench of Common Pleas. This Court would no longer travel with the King and would sit in a central location at Westminster, as ratified by the Magna Carta.[11] The other part was the ‘Justices in Eyre’, effectively as a sub-branch of the curia regis. These itinerant judges would travel to various regions of the country, known as ‘circuits’, to resolve disputes on behalf of the king and would apply law consistently. The idea of this was to replace the local courts with authoritative courts of the king that were accessible by the people, and it is notable that the decisions, not reasoning, of these courts were recorded.[12] As such the body of law created by these judges formed much of the basis of the common law.

Two other courts, formed from the curia regis, that were important for the basis of the common law being developed were the Court of Exchequer, which was primarily set up of advisors to hear disputes of a financial nature, and secondly the coram rege, or Kings Bench who were kings direct advisors, responsible for business affecting the king.[13]

Thus the three common law courts had developed, all empowered by the king, and all operated by professional judges who were knowledgeable in law and able to dispense with the same (common) law across the realm. This centralisation of the courts enabled a small group of legal individuals to flourish, developing a legal procedure that was repeatable and controllable, empowered initially by the king. It is true that there were numerous other courts that were developed for other areas of law, such as equity, admiralty and ecclesiastical, and that these other courts had to find a functional balance with the common law and vice versa, and also integrate statutes from the king and later parliament, but the three common law courts, and revisions of like over the next four centuries, ensured the platform for the development of the common law.

Roll forward to the late seventeenth century as the next major development in the platform for the common law is seen when parliament took over from the monarchs as being the legitimate power source of law and installing the crown by consent, following the Glorious Revolution which overthrew Charles II and installed William of Orange to the throne.[14] This is to state that the Parliament, through the power installed in it by the people, could now enact laws, normally in the form of statutes or acts, which were by royal decree so as to maintain the common law platform.[15] The Parliament was first called in 1265 by Simon de Montfort as an advisory body to the king, where the House of Lords was made up of the noble hereditary land holders, and popular representatives from the counties and boroughs in the House of Commons.[16] Even though the actual make up and selection criteria of the representatives may have changed, especially in the House of Lords, this is still the same basic two-chamber model of government that can be seen in Britain and Australia today.

From the eighteenth century the parliament modified the structure of the courts to remove some of the excessive divisions that had occurred since the thirteenth century. In England the Court of Common Pleas, Exchequer, King’s Bench, Chancery and Admiralty were removed under the Judicature Act 1873, and were replaced by two courts, The High Court and the Court of Appeal.[17] These new courts were divided into five divisions representing the old courts that had been replaced, notably returning the courts to a clearly hierarchical system where the common law jurisdictions could be centrally administered, with the House of Lords maintaining its importance as the highest court of appeal in the land.

Australia inherited the English law in 1787 through Governor Phillip’s commission, and set up a court system based on the English system in New South Wales and what became Tasmania.[18] The other states followed a similar path in their formation, as they inherited the structure and body of English law at the time of colonisation.[19] Over the decades that followed versions of the Judicature Acts in England were also enacted in Australia giving each state a similar structure to that in England invested in a Supreme Court. In Australia it would be remiss not to mention the additional level of hierarchy added through the Australia Constitution and the judicial power being vested in the federal High Court and federal courts,[20] with final appellate review vested in the High Court. The last relevant point here is that until the Privy Council (Appeals from the High Court) Act 1975 the relevance of the right to appeal to the English Privy Council meant that Australian law was inextricably linked to English law.

Thus the hierarchical structure and platform for the centralized legitimization, development and maintenance of the common law, with its parliament, courts, decree by crown and professional judiciary that is still relevant today had been set in place.

Legal procedure

Churchill is believed to have said to the Queen ‘always remember the further back you can look, the further forward you can see’,[21] and the relevance of historical decisions in the English common law system can not be denied when examples of the 1352 Statute of Treasons is still relevant in cases tried in the twentieth century.[22] Through the procedure that began in the thirteenth century the body of the legal decisions that are the common law was built, and it is those procedures that still govern the methods by which the system functions and grows.

The writ system from the twelfth century was not a new system developed by the Normans or the common law courts,[23] but it was a system that complimented the method of formalizing the delivery of justice in the hierarchical centrally controlled system. The person seeking a legal decision to be reached over a dispute, called the plaintiff, would apply to the kings representative in the Chancery and purchase a writ. From this the requirement to bring the person whom the legal decision was to be made against, called the defendant, would be organized by the kings representative in the Shire, the sheriff.[24]

The writs were very specific in regards to the action that was to be brought, including details such as time limit, modes of proof, enforcement etc., as such many new writs were being constantly issued.[25] The writs greatly expanded the ability for a plaintiff to bring a case against a defendant, and began to build sequentially as new courses of action were sought, as it was believed that ‘if some wrong were perpetrated, then a new writ might be invented to meet it’.[26] One of the most common writs was that of trespass, of which there were numerous categories, and were applied very mechanically and required a show of directness. For example if a woman had lost her hand after being treated carelessly by direct contact from a doctor then her cause of action of trespass might be upheld,[27] however, for example, the doctor may not be guilty of trespass if she had lost her arm where a friend had administered the treatment upon the doctors advice, as the action by the doctor would not have been direct.

Relevant to the hierarchy of the courts, was the right of appeal that was formed initially through writ procedures. This was not necessarily as it is understood today as the courts of the time were still highly centralized, however, a person had the right of appeal if they believed the court had been mistaken in its judgment through the writ of error. Additionally, appealing to a higher court, such as the Kings Bench, was available through the writ of certiorari.[28]

Perhaps the most important point borne from the early instances of the kings courts and the writ system in the common law was the birth of stare decisis, or that each case should be treated alike, and the birth of the doctrine precedent. Precedent is contained in judicial decisions on an ever-increasing volume of individual, but sequentially decided, legal cases. Precedent also relies on the hierarchical nature of the courts where a reason for a decision in a court higher in the hierarchy is binding, otherwise known as the ratio decidendi.[29] Other parts of the case that are not specifically relevant to the decision and the ruling can help guide future cases are said to be obiter dicta. It is said that the ratio decidendi of a past case may not be apparent until the decision in a future case, so deciding between the ratio decidendi and obiter dicta can be difficult.[30] The procedure followed by the judges in interpreting and creating the precedent, and the barristers in the typical adversarial arguing method, is for the barristers to propose alternative arguments on the current facts of the case in past precedent, and the judge to use analogical and deductive reasoning to discover the relevance of past precedents to any current case. This procedure of discovering the rule of law in a case has created the main body of the common law, and has led to the development of many legal principles.[31]

As the legal procedural system moved past the medieval period and into the eighteenth century this procedural development became a more significant. However, it is still in the procedure of the writs that one starts to see the ability for the common law to adapt to the requirements of society, and also for society to adapt to the common law. In 1258 the nobles, concerned about the proliferation of the writs, pressured the king to stop the flow of new writs, and in the Provisions of Oxford new writs were prevented from issuing.[32] An interesting legacy developed from this as the judges began to allow legal fictions, or untrue facts, to enable new types of cases to be brought before alternative courts, either of common law or otherwise. It is argued that these legal fictions allowed a large body of law to be created outside the common law courts that were subsequently appropriated by the common law courts.[33]

Moreover, a form of legal fiction has been important and forms part of the culture of legal argumentation relevant in order to curtail strict precedent that might be out of step with developing societal norms.[34] It is primarily where a story is proposed as socially and legally acceptable, although alternative, ‘fiction’, to the story told by precedent in order to create a new precedent that is in agreement with existing precedent, but always seemingly based on the facts of the current case.

The development of product liability over the centuries is perhaps a good example of how the legal procedure in the common law courts develops new posited law, with the use of legal reasoning, including fictions. A famously relevant case is often used to show how the common law developed the basis of product liability. In 1932 in Donoghue v Stevenson[35] the plaintiff brought a case against the manufacturer (defendant) of a ginger beer, which had been purchased by a friend for the plaintiff from a local shop. Upon consuming the drink the plaintiff noticed remnants of a snail in the bottle and subsequently became quite ill. The Court found that the manufacturer was liable in negligence even though there was no direct contract between the manufacturer and plaintiff, or even the shop and the plaintiff. This case was decided through the legal procedures such as using past precedent, barrister argumentation, and judges through their legal reasoning. In this case Lord Aitken famously developed the ‘neighbor principle,’[36] suggesting that who in life is my neighbor should also be precisely who in law is my neighbor, and as such any acts or omissions that injure my neighbor are my responsibility. Thereby creating a believable fiction to enable the court to reach a rule that modified and agreed with prior precedent. The ratio decidendi reached in the case being that a manufacturer is liable to a duty of care to the ultimate consumer, where that consumer has no prior chance of product inspection.[37]

This was not as simple as deciding the product liability rule only on the facts of the Donoghue case, as there had been developments since 1837 in prior precedent that gradually removed the directness of contract and liability between the plaintiff and defendant as being the only course of legal action, and opening up indirect actions in negligence, where each case built upon sequential use of the prior precedents. In 1837 in Langridge v Levy[38] the Court decided there was a duty of care on the plaintiff because of the “consequences of fraud” rather than a direct liability to the plaintiff.[39] In 1842 and Winterbottom v Wright[40] the plaintiff relied on the Langridge case, however the judge denied this finding no directness of contract between the parties, and noted concerns that allowing the alternative action might open the legal floodgates. In 1869 and George v Skirvington[41] the judge finds no liability in contract, but creates a linkage between ‘fraud’ and ‘negligence’ seeing the two as similar in the context. Lastly in 1883 and Heaven v Pender[42] the judge found for the plaintiff in negligence, noting that there is a duty from one party to another even where there is no direct contract, and that a duty of care must be given by a supplier to ensure goods that are used avoid creating danger to another.

Today the process of the judicial decision making with its legal reasoning, barristers with their adversarial legal arguments, and the hierarchy of courts driving commonality of legal precedent is key in the development and maintenance of the common law.

Legal professionalism and the protection of the common law

The essay discovered earlier that professional judges developed out of the requirements of the centralisation of the court systems. It should be noted that this professionalism of judges was the requirement of the kings common law courts and not those of the remaining lower courts such as the Local, Shire, Baronial, Manorial that were governed by local or untrained authorities, or the developing County Courts that would replace them with its justices of the peace to sit in judgment.[43] The trained judges were loyal to the king and were well-educated scholars generally from a religious background.

With the highly technical procedure, required initially by the writ system, and additionally because of the centralization of the Court of the Common Pleas to Westminster, began the development of, and the requirement for, the barrister. The barrister, grew to become a specialist legal professional from a generalist type attorney,[44] skilled in the law and its procedures including the argumentation in the courts, and were located in London. This group of professionals also started to appear in the twelfth century, as a direct financial consequence to clients wanting to have their cases heard in the Court of the Common Pleas, but not wanting to personally travel to London or wait for the inconsistent visits of the itinerate justices to travel with the Kings Bench to a local circuit.[45] In this way the barrister became the clients legal representative in court and would argue the merits of the case, in front of a judge.

Around this group of legal professionals grew a voluntary association that would develop the group of legal professionals, from students to barristers, where the best barristers would be selected to join the judges on the bench.[46] These associations were known as the Inns of Court of which there were four related to the common law courts; Lincoln’s Inn, Inner Temple, Middle Temple and Gray’s Inn. A prospective student was from an exclusive background, generally a son of a ‘gentry’ or ‘bourgeoisie’ and is said to have been able to choose between any of the Inns.[47] The Inns provided the training ground for the specialist legal professionals who grew through the mutually exclusive requirement of the centralized court and procedural system of the common law, and up until the nineteenth century it was still rare that a student would pass through a formal university education.[48] A student of the Inns would follow a set path of study and legal assistance to a barrister, before being ready to be accepted to the bar himself, and possibly eventually becoming a judge. Today the English Inns of Court still exist and these Inns retain jurisdiction over the behavior of its legal professionals.

Another important legal professional that developed during fifteenth century was that of the solicitor. This grew out of the requirements for more generalist advice to be locally available to legal clients, and these solicitors would, as they do today, offer advice prior to the requirement for a barrister and assist barristers when required.[49]

One of the important aspects of the common law was that for many years the record keeping of the ratio decidendi were not routinely recorded. Even so it was said by Glanville that even though the laws were not recorded they were still laws.[50] As the ratio decidendi was omitted by the courts, and stare decisis being required, it became necessary for the legal professionals to maintain private records, or log books, which retained the information of the judges decisions. A number of these private records are still seen as so instructive that they have been used as reference in cases. For example those of Glanville and Bracton advising on writ procedure in the twelfth and thirteenth century, and those of Sir Edward Coke, and Sir William Blackstone who’s commentaries on the laws of England are very detailed. From 1865, following from a supposedly self-interest of the bar, the system of the courts reporting the reasons for their decisions became the standard.[51] The reporting process was through officially appointed reporters who would complete the reports subject to the approval and edit of the residing judge.[52] This enabled the legal profession to access significant data from which to build arguments from precedent and to and rule in future cases.

This system of legal professionalism, produced from the historical development of the common law, is still operational in Australia today, where barristers are accepted to the bar and reside in ‘professional chambers’. The barrister offers his or her specialist services to clients, normally through referral from the client’s solicitor. The barristers continue to argue matters in front of judges on the behalf of their clients and are assisted by their readers and solicitors, whether the client appears at the court or otherwise.

Through history this group of legal professionals is said, perhaps through its conservatism, to have protected the common law system from being replaced by other systems of law such as a civil code, statutes or revolutions.[53] Others have suggested that it is more a case that these groups and the crown have protected the institutions so dearly as a requirement for financial prosperity.[54] Either way there can be no argument that the common law has sustained longer than any other western system of law, and that this group of professionals has been, and remain, imperative to its function.


History is of fundamental importance to the understanding of the common law, as it is a body of law that has developed over time, and is still highly relevant today. This essay has shown three mutually exclusive requirements of the common law that have developed to become its pillars through its history, and have in turn ensured the continuing relevance of the common law over time. These three pillars of platform, procedure and professionals are akin to three legs on a chair, if any were to be removed then the whole system would be unstable. This is not to suggest that there are not other important historically borne aspects of the common law, such as the jury and constitutional freedoms, but it is to suggest that those aspects fall within the necessities and functionality of the three pillars.

It has been shown that critical to the development of the common law was the creation of the centralized and hierarchical courts which created a legitimate platform to make, adjudicate and uphold laws. From this platform how a procedure developed to adjudicate on those laws and also how to ensure that those laws remained in balance with society through the ages, and how the strict procedural nature of those laws and the centralization of the courts developed a close knit community of legal professionals who assisted in developing and protecting the common law institution.

[1] R C van Caenegem, Judges, Legislators and Professors: Chapters in European Legal History (Cambridge University Press, 1987) 44 (‘Judges, Legislators and Professors’).

[2] Ibid.

[3] C Cooke, R Creyke, R Geddes, D Hamer with T Taylor, Laying Down the Law (8th edition, LexisNexis, 2011) 546 (‘Laying Down the Law’).

[4] P Parkinson, Tradition and Change in Australian Law (4th edition, Lawbook Company, 2008) 84 (‘Tradition and Change’), 66.

[5] Ibid.

[6] Laying Down the Law, above n 3, 16.

[7] R C van Caenegem, The Birth of the English Common Law (2nd ed, Cambridge University Press, 1992) 5-7 (‘Birth of the English Common Law’).

[8] Laying Down the Law, above n 3, 16.

[9] It is perhaps important to note that during the period up seventeenth/eighteenth century the old local Shire and Hundred courts became less important, and the feudal courts declined into insignificance. These were replaced by courts of justices of the peace, which were supervised by the coram rege.

[10] Laying Down the Law, above n 3, 18.

[11] Birth of the English Common Law, above n 7, 22.

[12] Ibid.

[13] Ibid 19, 21.

[14] Laying down the law, above n 3, 26-27.

[15] Ibid 28-29.

[16] Ibid 22-23.

[17] Ibid 30.

[18] Tradition and Change, above n 4, 3.

[19] Ibid 132-133.

[20] Australian Constitution s 71.

[21] See B Sully, ‘The Common Law: whither or wither?’ (Occasional address to Australian lawyers alliance, ACT branch conference, 24th June 2011).

[22] Birth of the English Common Law, above n 7, 8.

[23] Ibid 30-31.

[24] Ibid 29.

[25] Ibid 5-7.

[26] Ibid 54, citing Bracton, fol. 413b.

[27] see A, Ounapuu, ‘Abolition or Reform: The Future for Directness as a Requirement of Trespass in Australia’ (2008) 34(1) Monash University Law Review 103.

[28] Judges, Legislators and Professors, above n 1, 5.

[29] M Kirby, ‘Precedent Law: Practice and Trends in Australia’ (2007) 28 Australian Bar Review 243, 245 (‘Precedent Law: Practice and Trends’), 245.

[30] J Carvan, Understanding the Australian legal system (6th edition, Thomson Reuters, 2010).

[31] The doctrine of precedent as we know it today was a later development in law, since 1865, but the general founding principles date back to the begging of the common law. The development period of precedent were: (a) circa 1290-1535, the Year Book Period, (b) 1535-1765, the period of Plowden and Coke, (c) 1765-1865, the period of the Authorised reports, (d) 1865 onwards, the Modern period, The History of Judicial Precedent (1930), Lewis, T. Ellis.

[32] Laying Down the Law, above n 3, 19.

[33] E P Stringham and T J Zywicki, ‘Rivalry and superior dispatch: an analysis of competing courts in medieval and early modern England’ (2011) 147 Public Choice 497-524.

[34] Laying down the law, above n 3, 118-119.

[35] [1932] AC 562.

[36] Ibid 580.

[37] Ibid 599.

[38] (1837) 2 M & W 519; 150 ER 863.

[39] In this case the manufacturer had warranted that a gun sold to the father was in good working order, which was the bases for the court to rule that a fraud had occurred.

[40] (1842) 10 M & W 109; 152 ER 402.

[41] (1869) LR 5 Ex 1.

[42] (1883) 11 QBD 503.

[43] Judges, Legislators and Professors, above n 1, 133-134.

[44] Laying Down the Law, above n 3, 31.

[45] Ibid 30-31.

[46] Judges, Legislators and Professors, above n 1, 48, 60.

[47] Ibid 48.

[48] Ibid 60-61.

[49] Laying down the law, above n 3, 31.

[50] Birth of the English Common Law, above n 7, 2.

[51] J P Dawson, The Oracles of the Law (University of Michigan Law School, Ann Arbor, 1968) 80, 81-83.

[52] Ibid.

[53] Judges, Legislators and Professors, above n 1, 6-7.

[54] E P Stringham and T J Zywicki, ‘Rivalry and superior dispatch: an analysis of competing courts in medieval and early modern England’ (2011) 147 Public Choice 497-524.