Often in litigation, the injured party seeks compensation for injury to its goodwill. In some cases, the damage is to a specific component of goodwill. For example, at Section 22(1) of the Canadian Trade-Marks Act (the “Act”) “No person shall use a trademark registered by another person in a manner that is likely to have the effect of depreciating the value of the goodwill attaching thereto.”
Definition of Goodwill
First, it is important to define “goodwill” as the definition sets parameters for the analysis. The Canadian Institute of Chartered Business Valuators defines goodwill as that intangible asset arising from the name, reputation, customer loyalty, location, products, and similar factors not separately identified.
The Supreme Court of Canada has explained goodwill in these terms: “In the ordinary commercial use, it connotes the positive association that attracts customers towards its owner’s wares or services rather than those of its competitors.“ [Veuve Clicquot 2006 1 S.C.R.]
How is Goodwill Created?
There are many variables that can create goodwill. For example, the business may have a favorable location (i.e., “Goodwill of Location”) or there may be a halo effect of the business arising from the good name/reputation of the principal of the business (“Personal Goodwill” or “Individual Goodwill”). Often, goodwill can be attributed to a reputation for quality products and services, and this may manifest to some extent in the value of the trademark.
And this value can be enormous. For example, according to Interbrand (a consultancy firm), the number one brand in the world is Apple, which it valued at over USD$300 billion in 2020.
Changes to Goodwill and Damages Quantification
Whatever the source for the goodwill value, the fact is that this value changes over time with changes in market conditions and consumer preferences.
In a damages analysis concerning diminished goodwill (or components thereof), the challenge is to identify the extent to which positive attributes exist for the subject business and then convert them into a quantifiable value – in the case of a trademark, how much is it worth and how has is it been diminished because of the alleged wrongful conduct of the defendant?
Fortunately, business valuation theory provides a quantitative approach to address this question.
The fair market value of the equity in a viable operating business is ultimately based on a measure of the present value of its anticipated future net cash inflow. All else held equal, the higher the anticipated future net cash inflow, the higher the value of the business.
To generate net cash inflow, a business assembles assets. Management invests in these assets with the expectation that the assets will realize a market rate of return on the investment (i.e., via future net cash inflows). If the business is successful, it will realize net cash inflows above this “required rate of return”. In this case, the business will have created an additional asset (being the present value of these excess net cash inflows) and that asset is often termed “Goodwill.” That goodwill value can then be subdivided based on the source of the value.
Stated another way, goodwill attaching to a trademark (for example) is an asset to the extent its attributes provide the business with a unique ability to generate incremental net cash inflow above that which the business would have generated from its other assets without those positive attributes of the trademark.
Thus, one may be able to measure the harm to a trademark, or goodwill in general (e.g., arising from the actions of the defendant) using valuation methods to calculate the decline in net cash inflow (attributable to the defendant’s actions) and resulting decline in the value of this intangible asset.
One final note – while quantitative analyses may provide ways to determine damage to a business’s goodwill, or components thereof, such is not always the case and there is no cookie cutter approach to these matters - professional judgement is always an essential component of the analysis.
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Over his 30 year career, Errol Soriano has been retained to value business interests, including goodwill, in a wide variety of cases including, for example, shareholder disputes and IP disputes.