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December 18, 2000

Patents: How Do You Put a Price on Intellectual Property?

By SABRA CHARTRAND

n the last few years, patents, copyrights, trademarks and trade secrets have assumed an enormous role in the economy, where value consists of the assets that companies carry on their books. Until recently, that largely meant land, equipment and manufactured goods. Now, increasingly, those assets are information and ideas.

But how will such intellectual property be appraised impartially and calculated on a company's balance sheet?

For now, these intangible assets can be accounted for just about any way a company chooses. There are no rules for evaluating or reporting intellectual property, and that unnerves many business owners and corporate leaders, especially after the plunge since April in the stock values of so many companies built on precisely such intangible assets. Few people doubt that companies that rely on patents, trademarks and copyrighted ideas will continue to fuel the Information Age. So executives, economists and policy makers are eager to find ways to assign realistic worth to such property.

"Our capacity for tracking, measuring and reporting intangible assets is falling way behind where the economy is moving," said Margaret Blair, who recently was co-chairwoman of a Brookings Institution task force on intangible sources of value. "The economy has moved dramatically in the last five years, and intangible assets have taken on vastly more importance and now exceed tangible assets in terms of value."

Private businesses have already begun making their own internal policies for evaluating intangible assets — including reputation, brands and customer loyalty as well as patents and copyrights.

In 1970, the Financial Accounting Standards Board said that costs and expenses associated with intangible assets should be recorded and amortized. But it offered no guideline on how to value intangible assets and it added this caveat: "Solving the problem is complicated by the characteristics of an intangible asset: its lack of physical qualities makes evidence of its existence elusive, its value is often difficult to estimate, and its useful life may be indeterminable."

So private companies have not developed universal standards, and all face a lack of information about what others are doing. The Brookings task force learned that businesses felt unable to approach the problem because there were no statistics.

In a report published in September, the task force recommended that the Bureau of Economic Analysis, a government agency that measures gross domestic product and other economic standards, should collect that information. But she said that last year Congress denied the bureau's request for money to collect information on e-commerce.

The task force also said that Congress should review American intellectual property laws so they match regulations in other countries.

Much of the patent system has been revamped recently to harmonize with laws in Europe and Japan, but the United States has failed for more than a decade to join an international treaty on trademarks, for example.

The task force also suggested that the Securities and Exchange Commission make it easier for companies to document investments in intangible assets. Most companies supported these ideas, though it was not always so.

"When we started, the corporate sector was split," she said. "The old- economy companies who felt they were undervalued by the market loved what we were doing because they wanted to be able to tell investors that they had intangible assets. But the high-tech sector wasn't as enthusiastic; they probably suspected they were overvalued by the market and didn't want to open that Pandora's box."

The split closed after the NASDAQ stock market began a significant decline last spring, she said. Now, she added, high-technology companies are eager to let investors know what they are doing.

"In this country, there are a lot of companies trying to develop ways of managing their intellectual property portfolios," Ms. Blair said. "It's going on big time in the corporate sector, there's tremendous money being thrown at consultants and Big Five accounting firms to help solve this problem."

The stakes are considerable. Combined, copyright industries like movies, television, books, music and home entertainment software now make up a larger share of the economy than manufacturing, chemical making, electronics or any other traditional industry does individually, according to the International Intellectual Property Alliance.

"Intellectual property is perhaps the hottest financial sector of the new economy," said Nir Kossovsky, co-founder of the Patent and License Exchange (www.pl-x.com), an online intellectual property brokerage firm.

"Monopolistic rights," he added, "are the only remaining form of sustainable competitive advantage. So from the point of view of business, intellectual property rights are the ultimate key success factor."

Still, putting a price on a patent can be tricky. One way is to measure the value of transactions that a property owner completes by using a patent or trademark, but that can understate the explosive growth of new markets and new technologies.

At the Patent and License Exchange, Mr. Kossovsky and his partners have developed a formula for appraising patents, a method they say is similar to a stock-market technique known as a call option.

But Mr. Kossovsky's method does not create the universal standards for assessing intellectual property that many business leaders would like and that Ms. Blair says may be necessary to prevent the economic turbulence that can result when companies are incorrectly valued.

. "Nobody wants to mess with a successful economy," she said, "but some of us are nervous about the increasing volatility of the stock market and the potential that what we are calling success is a bubble that could pop on us." As soon as possible, she added, executives, regulators and others need to cooperate on developing a standard acceptable to all.

"This report is our effort to get the policy-making community focused on this problem," Ms. Blair said of the Brookings task force's analysis. "Solving the problem will require significant rethinking at all levels. It's not a problem that business or government can solve alone."

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Re: [ga-tm] International Treaty on TMs

December 18, 2000

Patents: How Do You Put a Price on Intellectual Property?

By SABRA CHARTRAND