Is Cost Accounting To Blame For Patent Hoarding?

from the one-possibility dept

Michael F. Martin is a lawyer/investor who is always good for some interesting debates in the comments here on the question of patents. He's a supporter of the patent system, with some fixes. Suffice it to say that he and I disagree on an awful lot, though I appreciate his willingness to try to really dig into the questions being discussed and to dig through all sorts of ideas and research. It's just that we usually come to almost the exactly opposite conclusions.

I'm not sure where I come down on his latest thought piece, suggesting that part of the reason why companies have been hoarding so many patents is because of cost accounting. His assertion is that cost accounting treats patents as an asset, rather than as equity. That causes companies to overvalue the patent itself, rather than the investment and effort that need to go into making a useful, marketable product. His feeling is that as companies move away from static cost accounting, the problems related to patent hoarding will hopefully decrease.

It's an interesting theory that I have not heard of before. I agree that cost accounting creates all sorts of problems with accurately valuing company assets. I also agree that companies overvalue patents compared to the effort of actually bringing a product to market. However, it's not clear that it's cost accounting that's leading to the problem. He presents no evidence to show that the two things are connected. It seems that there's a much more straightforward explanation: numerous high publicity patent lawsuits with extreme awards combined with loosening of the restrictions on what can be patented has created a mad rush for patents. And, to make matters worse, companies feel they need to build up a stockpile of their own patents to fend off others with their own patent portfolios. The cost accounting angle is an interesting one, but it seems like a stretch to think the impact is that big compared to those other factors.


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  1.  
    identicon
    Dave Thewlis, Jul 10th, 2008 @ 6:26pm

    Cost Accounting

    IBM considers its patent organization a profit center and has done so for years. They are not alone. I don't think that they overvalue the patent - they simply view the revenues that can come from licensing as a legitimate revenue stream, and so do many others. It's true the "stockpile in defence" scenario exists in many tech companies, but you can't overlook the fact that companies do realize revenues from the license fees.

     

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  2.  
    identicon
    Anonymous Coward, Jul 10th, 2008 @ 7:07pm

    Re: Cost Accounting

    Actually, I think other companies saw IBM do that (since day 1) and copied.

    On the bright side for them, IBM didn't have a patent on a strategy to use patents as assets instead of equity....

     

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  3.  
    identicon
    Dohn Joe, Jul 10th, 2008 @ 7:15pm

    This is Ridiculous

    This man's assertion is insane and provably wrong. Cost accounting has been around longer than accrual methods and has been diminishing over time. This does not correlate to the practice of patent hoarding which has been on a very sharp rise over the last 20 years...

     

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  4.  
    identicon
    Michael F. Martin, Jul 10th, 2008 @ 9:33pm

    Thanks

    Thanks for the post, Mike. It's very gracious of you.

    You're right to point out that there isn't much evidence for this yet. I'm working on pulling that evidence together now. The biggest problem with collecting it is that you need to have access to the journal entries at lots of high-technology companies to be able to do a study. According to my theory, their financial statements don't tell you what you need to know. Naturally, very few high-tech companies are willing to open up their books to outsiders for inspection.

    The bottom line is that the cost and comparables methods of valuing IP are fundamentally flawed, and that the revenue based valuation methodologies used now are fine when it's an entirely new product or process, but that we need a revenue-based valuation methodology that looks at changes in the frequency of turnover in inventory, cash, &c. in order to see how most inventions add value within the firm. Most inventions just make incremental improvements to existing products or processes, and these improvements are difficult to measure without looking at a time-series for the various balance sheet accounts.

     

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  5.  
    icon
    Allen (profile), Jul 10th, 2008 @ 10:40pm

    I cant see it

    I dont think that the accounting treatment of the value of a patent has much if anything to do with patent hoarding. The patent system and the culture that has grown up around it have done that. It's valuable to hold patents for defensive and offensive reasons and I cant see where the valuation method would change this.

    If however you wanted to talk about the current valuation practice as being a barrier to meaningful change of the system, then sure. Any meaningful reform is likely to result in some serious write downs in the book value of a lot of patents and no doubt vested interests will apply some serious money to lobbying to preserve the status quo.

     

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  6.  
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    stv, Jul 11th, 2008 @ 7:32am

    stop the shilling!!!

    Cost accounting???? Mike, pull your head out of you’re a–. You’re making all this far too complicated. I can imagine you trying to do something really complicated ...like painting a door. It’s real simple. If you want to spur innovation, you reward inventors with patents.

    Call it what you will...patent hoarder, patent troll, etc. It all means one thing: “we’re using your patent and we’re not going to pay.

    When corporate America agrees to not use our inventions without consent, American inventors and small entities will agree to stop suing them.

     

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  7.  
    identicon
    Actual Inventor, Jul 11th, 2008 @ 10:22am

    Re: Thanks

    Micheal Martin...you seem like a smart guy. Would like your comments on this. Imagine sort of the converse of this discussion...where a large company instructs its engineers to ignore existing patents owned by other companies when creating new products. (this is policy at most large tech companies, Nathan Myhrvold, past CTO of Microsoft testified to the Supreme Court last year). In this way, since potential liabilities against their balance sheets are being ignored, (patent infringement and potential lawsuits) they are purposely understating liabilities and overstating profits at the bottom line. Does this seem like a valid accounting practice?

     

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  8.  
    identicon
    Anonymous Coward, Jul 11th, 2008 @ 10:55am

    Inflatable Assets

    I don't think it's accounting per se that's the problem, it's that patents are a great asset for a company with a clever (read shady) accountant to own. Their value is very hard to determine, so it's very tempting to over-value them, thereby creating paper profits that the management can then use to fool investors and justify their stock options. After the collapse the creditors find out that the portfolio of patents is not worth the paper that it's printed on, but by then the CEO and friends have already retired to their Cayman Island retreats.

     

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  9.  
    icon
    Mike (profile), Jul 11th, 2008 @ 11:03am

    Re: stop the shilling!!!

    Cost accounting???? Mike, pull your head out of you’re a–. You’re making all this far too complicated. I can imagine you trying to do something really complicated ...like painting a door.

    Stv, you're amazing. Did you note the part where I point out that it's probably *not* a cost accounting issue. Before trashing me, you might want to make sure you read what I wrote.

    It’s real simple. If you want to spur innovation, you reward inventors with patents.

    Except for all the evidence that suggests that's not true. Why? Because invention is not the key factor in innovation. It is one part of it, but in locking up that invention it actually makes real innovation harder -- because innovation is a procss of trail and error until someone figures out what the market really wants. When you limit that process to only the inventor, you get less innovation.

    When corporate America agrees to not use our inventions without consent, American inventors and small entities will agree to stop suing them.

    Stv, I've also pointed this out to you as well, but you seem to ignore it: this has nothing to do with small inventors. Big companies (the ones you falsely accuse me of "shilling for") are bigger abusers of the legal system than the small entities in many cases -- and I'm equally against that. I don't like anything that blocks innovation.

    I've pointed all this out to you before, but you don't respond. Instead, you show up, make some totally unsubstantiated claims about me shilling followed by a false assessment of the situation as being about big companies using inventions without consent.

    Each time you do that without responding to the points I raise, the lower and lower your credibility sinks.

     

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  10.  
    identicon
    LTDLP, Jul 11th, 2008 @ 7:13pm

    stv is a bot

    seriously, I think that stv is a bot.
    This bot posts the same comments every time

     

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  11.  
    identicon
    angry dude, Jul 13th, 2008 @ 7:22pm

    Re: stv is a bot

    Hey little techdirt lemming punk

    stv doesn't want to waste his valuable time writing new comments for this shitty blog
    There are other patent-related blogs with more educated readership (like "Patently O") for posting thoughtful comments on the subject
    This blog is for shitting

     

    reply to this | link to this | view in thread ]

  12.  
    identicon
    DanC, Jul 14th, 2008 @ 7:18am

    Re: Re: stv is a bot

    stv doesn't want to waste his valuable time writing new comments for this shitty blog

    stv doesn't actually have anything intelligent to say, which is why all his posts are copy & paste.

    Of course, with your complete inability to actually provide any reasoning or rationale beyond "I'm right, you're wrong", it's hardly surprising to see you defending someone who emulates the same sophomoric behavior.

     

    reply to this | link to this | view in thread ]

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    rendom, Dec 27th, 2008 @ 2:22pm

    megaupoad downloading

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    rendom, Dec 27th, 2008 @ 2:35pm

    megaupoad downloading

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  15.  
    identicon
    jhon, Feb 12th, 2009 @ 2:24am

    Accounting

    Great article about the accounting it's that patents are a great asset for a company with a clever (read shady) accountant to own. Their value is very hard to determine, the accounting required required great knowledge and experience to implement,
    http://www.avicennaaccounting.com/
    you can get more information about accounting from this.

     

    reply to this | link to this | view in thread ]


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