IP as an Asset: Really?

IP, like most everything else, has been prone to changes in public fashion. This Kat is (sadly) able to remember the status of IP prior before the 1980s, during which it was treated as a backwater legal field and was often viewed with hostility by the courts and academics. But I am bit of an octogenarian exception. For most of us, the dominant popular fashion of IP since the 1980s has been all to the positive—IP can do virtually no wrong. One by-product of this fashion is the extent to which IP has become a proxy for various commercial interests. Thus, in 1994, we witnessed the adoption of the TRIPS agreement, which placed IP squarely within the purview of international trade. Later in that decade, we began to encounter IP in a more MBA sense, namely IP as an “asset”. Indeed, it is reasonable to argue that, only when IP could be couched in terms of an asset, could a corporate commitment to IP begin to take place. Even more than IP as an instrument of trade, the growth of IP as an “asset” marked the acceptance of IP as a handmaiden of the high octane economy of the time, where everything could be traded (and maybe even securitized and bundled into a financial instrument), only to come crashing down in 2008.

Despite the economic woes that have beset us since the onset of the Great Recession, the development of the notion of IP as an “asset” seems to continue unabated. Entire cottage industries have grown up to evaluate the monetary worth of IP (think of the November 2011 estimate of the Kodak patent portfolio at 2.5 billion US dollars, only to be sold later at a fraction of that amount); to auction IP (think Ocean Tomo, here); and to aggregate IP for the sole purpose of commercializing the right per se (think Intellectual Ventures, here). Indeed, lying at heart of the public debate about patent trolls is the notion that patents are viewed as an asset, ripe for commercialization via litigation. Whereas 20 years ago, to the best of this Kat’s recollection, no one spoke of IP as an asset, today it is treated as a given, a natural by-product of the intellectual property rights system.

Truth be told, this Kat has never been comfortable with the simple importation into mainstream IP discourse of the notion of IP as an asset. In my view, the use of the asset lexicon has served to distort a proper understanding of IP rights. Permit me to identify several reasons for my discomfort.

Consider this definition of 'asset' as set out in Investopedia:

 “1. A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

2. A balance sheet item representing what a firm owns.”

Investopedia goes to explain that

“[a]ssets are bought to increase the value of a firm or benefit the firm's operations. You can think of an asset as something that can generate cash flow, regardless of whether it's a company's manufacturing equipment or an individual's rental apartment.”

So how does IP stack up against this definition? Permit me to suggest five problems.

The problem of direct intention—A company acquires an asset because it is believed that the asset will contribute to the company’s revenues. However, IP rights are not really acquired but rather are created by the company, subject to the legal metes and bounds of the right. Moreover, not all such rights are created with the direct intention that they are meant to potentially contribute to the company’s income stream. While it is presumed that (most) patents are obtained for this purpose, other IP rights (such as copyright) are often created during the day-by-day course of business, and their connection with the income stream of the company is far more tenuous.

The problem of recognition on the company’s books—If one indicium of an asset is that it is carried on the books, then goodwill may pose a problem, because it is this Kat’s understanding that the accounting principles in some countries do not provide for goodwill. Thus, to the extent that goodwill is considered an IP asset, it may not meet this requirement in all jurisdictions.

The problem of valuation—The challenge of giving a valid and reliable valuation for IP rights is a particularly thorny one. The wild fluctuations in the purported value of the Kodak patent portfolio is only one such example. This is not to say that competent, earnest professionals do not make good-faith efforts to value IP rights. It is simply the case that the task may be too daunting for even the most skilled. If one recalls how fatally off the mark investment banks, accountants and rating agencies were in valuing financial instruments based on a bundle of sub-prime mortgages, the Sisyphus-like difficulty of assigning a meaningful value for patents, trade marks, or copyright works (unless there is a recognizable royalty stream) is palpable. Without the ability to provide a valid and reliable valuation, the notion of IP as an asset seems hollow indeed.

The problem of markets—Presumably, for an asset “to have value”, there must be some type of market by which the asset can in principle be exchanged (preferably for money), even if that asset is unique (think of a piece of art). Attempts at creating public markets for patents (and, on occasion, even trade marks) have in the main not been successful, at least to the extent that would enable one to say that there is a regularized public market of exchange for patents or trade marks. When one moves further afield to trade secrets and copyright, the notion of a market of exchange for these types of IP rights appears simply far-fetched.

The problem of identification—It would seem axiomatic that, for an asset to have value, it must be able to be discretely identified. This requirement is met on the whole by a registered patent, subject to the provisional nature of even a registered patent, which still can face a challenge to its validity or scope. To a similar degree, registered trade mark rights can be identified, but unregistered trade mark rights are far less certain. Copyright provides a high degree of certainty in identification, but the sheer number of copyright works within any organization makes it well-nigh impossible to provide a complete list. The issue is most acute with respect to trade secrets, for which identification is often impossible (akin to describing galactic dark matter) because of the confidential nature of the right. Simply think about the last time that one tried to prepare a schedule to a corporate acquisition that purports to describe the trade secrets that are involved. The upshot here is that the current reliance on the notion of IP as an asset may well be distorting the way that we understand the nature of IP rights. IP may well have some asset-like qualities, but that does not make IP an asset in the traditional sense. Perhaps it is time to begin to develop the contours of what is meant by these asset-like qualities.