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.

Filed Under: cost accounting, patent hoarding, patents, stockpiling

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


    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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