Here is an interesting story in the New York Times — “Washington Considers Sale of Spare Properties to Raise Revenue.” The story is mostly about selling of tangibles assets — but:
It involves selling an island, courthouses, maybe an airstrip, generally idle or underused vehicles, roads, buildings, land — even the airwaves used to broadcast television. [Emphasis added]
So intangible assets are in play as well.
However, before we start going off on this, I suggest that we first figure out what intangible assets the government has, and craft a policy for better managing and where appropriate monetizing them. As I’ve written many time before in this blog, we don’t have any sort of coherent policy. Our policy on government information is made up of various moving parts. We have a psedo-policy on government brands and trademarks. By law the government granted asset of FCC licenses cannot be used as collateral for loans. A few years ago, GAO ruled that airport landing rights were not assets that the government could auction off (in fact the NY Times story points out that auctioning off the airwaves requires passing a new law). And don’t even get me started with the technology transfer system that deals with government patents and government-funded outside research.
There are bills in Congress to create a base-closing type of commission to make recommendations on which pieces of government property should be sold off. For intangible asset, why don’t we create a commission to first figure out what we have — and how best to manage it. Then, and only then, we can start talking about sale, license and/or retain.
Earlier in September Congress finally passed and the President signed the patent bill (America Invests Act). This of course does not mean that all the fights are over. Companies will continue to pursue IP legal actions as part of their strategies. And there are left over public policy issues. For example, the issue of patent fee diversion will continue to linger. In addition, people will continue to argue whether the bill is a good thing or a bad thing.
But as one commentator said, the bill closes out a policy agenda from 10 years ago. So now it is time to start thinking about the next set of issues. As was noted at our intangibles and economic growth conference (see earlier posting and Athena white paper New Building Blocks), the innovation ecosystem has moved to a collaboration model. It was also noted that the patent system, designed for the industrial era, is not necessarily up to the task of an open innovation/collaboration driven model.
A report from the Federal Trade Commission from March (The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition) takes direct aim at this shift to greater collaboration, in all its forms — open innovation, technology transfer and the issue of ex post patent transactions.
The report lays out a fundamental intersection between patent and competition:
Competition among patented technologies at every stage of the innovation process helps generate lower prices, more choices and higher quality products for consumers. Products compete to be purchased by consumers. Developed technologies compete in technology markets to be chosen for incorporation into products. Early-stage technologies compete for development funding. By aligning the patentee’s market reward with consumer preferences, competition in product and technology markets encourages investment in those inventions that are more likely to be valued by consumers. When patent law facilitates and does not distort this competition, it aligns with competition policy to the benefit of consumers.
The report focuses on two issues: notice (what I would call the transparency of the patent claims) and enforcement remedies. The report notes a number of problems with notice, including difficulty interpreting the boundaries of issued claims, dealing with claims that may issue from pending applications and difficulty of identifying and reviewing published patents.
As the report notes:
Trade-offs between notice and scope pose particularly thorny issues, and it is vital that they be approached with a full understanding of the notice implications. Divergence in the extent and nature of notice problems among industries also poses challenges. We look for ways to improve notice in problem areas without impairing the patent system elsewhere and without sacrificing the benefits of a unitary patent system, with doctrines applicable across technologies.
On enforcement remedies, the report states:
Effective patent remedies are critical to the patent system’s incentives to innovate. Patent infringement interferes with a patentee’s ability to realize its patent’s value in the marketplace. Remedies protect the ability of patentees to earn returns in the market by stopping and deterring infringement in the case of injunctions, and by making patentees whole through damage awards when infringement has occurred. As explained in Chapter 4 [of the report], to perform that role, patent remedies should seek to replicate the market reward that the patent holder would have earned absent infringement.
I won’t go into all the recommendations — it makes a lot of technical suggestions. Most of them are aimed at the PTO and the courts. But if you want to understand the next wave of patent reform (if there is one), this report provides a good guideline to the issues and possible solutions.
Back ages ago when I worked for the Senate, I was at one time a staffer of the subcommittee dealing with government information policy [note: many subcommittee changes later, I’m not sure which subcommittee this would even be anymore]. It became very clear to me from that experience that dealing with the intangible asset of information is very tricky. For example, there is the recent case of Border’s customer lists and privacy rights (see earlier posting).
Here is an example of the complexity of the issue — a story from Federal Computer Week a couple of weeks ago — “Census bureau clarifies its position on Title 13 confidentiality for addresses.” Under Title 13 of the US Code, certain census data cannot be disclosed or shared with others, including state and local government. This includes addresses. A few weeks ago comments were made that this might be changing. Now the Census Bureau has clarified that this isn’t really happening.
The issue is one of confidentiality of the government data (which is critical to the accurate collection of that data) versus the need to share the data for it to be useful. This issue is not unique to the census data. It cuts across much of government collected data (think “tax records”) and private-sector collected data (think “customer information”). Yet our policies seem to be ad-hoc. As I’ve noted in at least 3 previous posts, we need a consistent policy that treats personal data as an intangible assets. An asset based approach would help both sides benefit from strong protection of the data – with the protection tied to the value. By looking at the use and value of the data as an intangible asset, a more nuanced and appropriate level of protection could be crafted. Current government policy — such as Title 13 does not seem to allow that. We need to re-think that policy.
Of course, when I was involved in a re-thinking of government information policy 25 years ago, we ran into a buzz-saw. Maybe the thinking process has evolved somewhat. Once can hope.
Here is an little item from BVR’s IP Management & Valuation Wire — “Trade secrets protections continue to flourish”. Bottom line, they wonder if under the new patent system, trade secrets might become more important in protecting intellectual property. I think that is unclear. Trade secrets require a high level of vigilance, and once opened up are hard to put back in the bottle. Nor can they be stockpiled as easily as patents.
The ultimate test of the two might be if someone used a trade secret defense against a patent infringement. “You violated my patent. No your patent steals my trade secret.” Could be an interesting fight.
In an earlier posting on the sale of Borders’ intangible assets, I noted that a key intangibles was the retailer’s customer information, such as contact information and purchasing history. Now comes word that the sales of this assets has hit a snag. According to a story in the Detroit Free Press (“Borders intellectual property sale delayed“), the judge in the case is concerned about whether the sale violates privacy laws. A hearing on the specifics is scheduled for today.
According to the story, when the judge asked the question (centering on email op-out provisions) “Borders’ lawyers said they hadn’t considered the option.” Clearly here is a case of the blind-men and the elephant, as we discussed at our New Building Blocks for Jobs and Economic Growth conference (see earlier posting). Someone was not talking to someone who they should have been talking to. And no one apparently understood the entire issue of the company’s intangible assets.
Lesson learned — I hope.
PS — Just to refresh your memories, here is the story about the blind men and the elephant, from our report New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value — Conference Observations:
In that parable, a number of blind men try to describe an elephant–each believing that the small part of the elephant that he can feel constitutes the whole. Like the blind men, people experience intangibles from different points of view depending on their role and expertise, whether they are business managers, accountants, lawyers, risk managers, investors, or public policymakers.
For more on this issue, see our background paper “Emerging Measures for Strategic Management”.
I was at an event this morning featuring Treasury Secretary Geithner speaking about the global economy. I was please to hear him use the phrase “innovation” a number of times. To paraphrase, he basically said that the goal was to have an economy where we made and crate things here in the US. I applaud that goal. However, I was more concerned about his emphasis on the types of policy used to get there. Maybe this is a case of “where you sit determines where you stand” (i.e. you’re role limits your policy position). But Secretary Geithner could not break out of the narrow box of the role of government: education; infrastructure; basic science; using tax reform to boost investment in the US. He did not that there were exceptions to this generic governmental role for energy and defense (which implies the national security argument). So it was a little disheartening to hear the goal of “innovation” being thrown about without a full understanding of how to promote that goal.
One another note, he succinctly summarized the Chinese strategy: if you want to sell here, you have to produce here; if you want to produce here you have to give us your technology; and if you want to produce here you have to export from here. I was a little concerned about the narrowness of his policy response: get the exchange rate right and protect intellectual property. While both of those are important, they miss the point that he articulated so well. For example, the issue is not just about “stealing our IP” as is often phrased. That implies if they just pay us for our DVDs and patents, everything will be fine. The problem is not simply “stealing” but the broader issue of their policy of a forced technology transfer. This is the “if you want to sell here, you have to give us your technology”.
Part of the problem I see is the difficulty in moving beyond a vision of intangibles & technology as IP. The issue with Chinese policy is one of transferring know-how. This is a very complex process. The simply way this process gets translated into policy-speak is “protect IP.” And then the action item is patent enforcement. Such a narrow focus will not end up addressing any of the underlying problems.
One final note. Secretary Geithner mention the political situation in passing a couple of time. He noted that one of our strengthens has always been our ability to respond forcefully and creatively to economic challenges. The implication was that we are losing that ability. I would agree. The political dysfunctionality, where you have Congressional leaders asking (telling?) the Federal Reserve not to act to help strengthen the economy, is a major concern. I fear that we are losing an major national intangible asset: our ability to act pragmatically and practically on issue of public policy.
Tuesday morning the Senate Finance Committee held a hearing on tax incentives for innovation. The kick off of the hearing were statements by Senators Baucus and Hatch that they were introducing legislation to make the R&D tax credit permanent (S.1577). It is good to see bipartisan support for making the tax credit permanent, but we have been down this road many times before. Everyone seems to agree that the credit should be permanent, but then baulk when it come to finding the out year money to pay for it. It is earlier to do a short term extension that looks less expensive when it comes time to totaling up the bill.
The budgetary politics of the issue are unfortunate. They limit the effectiveness of the program. They also focus the debate on the time extension — rather than on any improvements. We should be on version 4.0 of the tax credit by now. For example, there is the problem of applying the credit to cooperative research. As was noted at our intangibles and economic growth conference (see earlier posting and Athena white paper New Building Blocks), the innovation ecosystem has moved to a collaboration model. But it is not clear that our tax system has caught up.
At the hearing, the witness (such as Scott Wallsten and Dirk Pilat from the OECD) spoke about the need for an R&D tax credit because of spillover’s generated that produce a public good from research that goes beyond what the private companies capture. Thus, companies will tend to under invest in research compared to what would be social optimal. I would note that this was the core message of Fed Chairman Ben Bernanke at our intangibles conference (see earlier postings).
However, I was especially interested in the testimony by Michael Rashkin and Annette Nellen. Rashkin talked about how to create an incentive system that keeps research, IP and jobs in the US — as opposed to the system he says encourages companies to move their research and “park the resulting intellectual property in tax havens”. Nellen talk about other provisions in the tax code beyond the R&D tax credit, such as Section 179 which allows expensing of depreciable equipment (including R&D equipment) and Section 1235 that treats sales of certain patents as long term capital gains rather than income.
Specifically with respect to Section 179, she notes the following:
Section 179 expensing ignores intangible assets: Section 179 helps small and medium size businesses by allowing a specified dollar amount of tangible personal property to be expensed rather than depreciated. The benefit is simpler recordkeeping and a lower after-tax cost for the equipment. On a temporary basis, Section 179 also applies to off-the-shelf software purchases. Both tangible and intangible assets are crucial to businesses operating in today’s information age. Section 179 is out-dated for only applying to tangible personal property.
Possible solution: Expand Section 179 to apply to both tangible and intangible personal property.
[emphasis in original]
She also has a number of other suggestions that I won’t get into here, but all sound like they should be seriously considered in order to bring the tax code, as she says, from the industrial age to the information age.
I would note one other item. As the hearings pointed out, expensing of R&D investments for tax purposes is an incentive in and of itself. Allowing companies to immediately write off the cost of R&D goes back to 1954 — and is a way for companies to lower their tax bills (thereby providing an incentive). We often talk about accounting measure that call for R&D investments to be treated as an investment and depreciated over time. We should not lose sight of the tax implications of that proposed change — and not inadvertently remove a current innovation incentive.
I’ve written a number of times before on the use (or non-use) of non-compete agreements. But here is an interesting twist: J&J is using a non-compete agreement to prevent the new CEO of Boston Scientific from begin a full-time CEO. As the Wall Street Journal (“J&J Put Squeeze on Rival’s Hiring”) explains:
Johnson & Johnson’s insistence on enforcing a non-compete agreement to keep senior executive Michael Mahoney from joining archrival Boston Scientific Corp. as chief executive led to unusual employment terms at the medical device maker, according to people familiar with the matter.
J&J agreed to allow Mr. Mahoney to join Boston Scientific only after the company promised the 46-year-old won’t supervise competing businesses or become its chief executive until late 2012 and agreed to have its general counsel personally monitor compliance, those people said.
The Journal story goes on to note:
“This whole scenario is more than a tad unusual,” said Larry Drapkin, a partner at Mitchell, Silberberg & Knupp LLP in Los Angeles who co-heads its labor and employment department. “Everybody wants to choose a CEO and have him up and running [immediately] rather than sit on the sideline,” Mr. Drapkin added.
A tab unusual to say the least. Interestingly, the story does mention that non-compete agreements are less of a factor in fights between companies in Silicon Valley because of the difficulty of enforcing such agreements under California law (as I’ve noted before). I wonder if it was “Stanford Scientific” rather than “Boston Scientific” would we even be reading this story?
On May 16 and 17, 2011, Athena Alliance organized a conference on the role of intangible assets in job creation and economic growth (see earlier postings). Co-sponsored by the OECD, The Conference Board, Kauffman Foundation, and US National Academies and hosted by the Georgetown Center for Business and Public Policy, the conference drew a diverse group of academics, business leaders, and policymakers. The purpose of the conference was to raise public awareness about the growing importance of intangibles in driving economic growth and job creation and to identify key research and policy areas that can help governments and businesses develop growth strategies that better utilize intangible assets. As with many such gatherings, the conference yielded a richness of conversations and insights that are impossible to completely convey. However, a white paper we are publishing today — New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value — Conference Observations — aims to highlight some of those discussions based on my personal observations. (A one-page summary of the paper is also available.)
From the beginning, the conference discussions highlighted the importance of intangibles. As Chairman Bernanke said in his opening remarks, the topics of innovation and intangible capital “are central to understanding how we can best promote robust economic growth in the long run.” The conference embraced a broad perspective of intangibles–from worker skills, reputation, organizational structures, and relations with suppliers and customers to patents, copyrights, and trademarks.
Another key insight was the acknowledgment of the need to view intangibles from multiple perspectives and frameworks. Great progress is being made on macroeconomic measurement, such as the inclusion of intangibles in gross domestic product (GDP) measurements. Yet, as was said at the end of the conference, the intangible framework is “too important to be left in the hands of macroeconomists.” There is a need to integrate the macroeconomic analysis, based on available data on corporate spending, with the business strategy and corporate reporting view. This, in turn, is driven by the imperative to understand the resulting assets created by corporate investment and how these assets can help finance innovation and economic growth.
But we must move beyond issues of measurement. As one participant explained, our task is to help “managers organize information on intangibles” and then learn how intangibles “lead to innovation, service improvements, reputation, and improved business performance.” To accomplish these tasks, both the public and private sectors need to see how the intangibles framework links to business outcomes and economic growth. Business needs better tools to understand and manage intangibles. Financiers and investors need better valuation standards so the financial system can treat intangibles as a recognized asset class. Public policy analysis needs to better identify market failures and understand the microeconomics of intangibles (e.g., the social return on investment) and the complementarities among intangible assets.
With respect to innovation, the conference conversations highlighted the shifting ecosystem, especially the move to a collaboration model. Crafting policy in this new ecosystem will require a better understanding of the flows of knowledge, including the tacit knowledge of workers. Greater study is needed of institutions and framework conditions that are supposed to foster collaboration. In addition, case studies that detail successes and failures must be generated. The intersection of large firms and startups should be looked at more closely, especially how innovation can be facilitated through information exchange, supplier relations, and other interactions. Finally, in this era of collaboration, the patent system can and should work better.
Also today we are publishing the final report documenting the conference: Intangibles Conference Report September 2011. This report, and other conference documents are available at the New Building Blocks Forum.
According to BusinessWire, there was a vigorous auction for Border’s intangible assets last week:
Ten bidders participated in the robust proceedings, including booksellers, major publishing companies and internet only retailers. The auction included more than 50 rounds of bidding before the winning bidders emerged.
The news stories are all about Border’s trademark, internet domain and website — which apparently went to Barnes & Noble for $13.9 million. However, as Publishers Weekly points out:
Earlier court documents also listed Borders’s membership lists, customer information, including contact information and e-mail addresses and other purchasing history and related information, as among the assets to be auctioned.
Interestingly, Publishers Weekly also notes that the brand was sold off in geographical bits and pieces:
Other assets went to overseas parties that had operated Borders stores in different parts of the world: Pearson Australia Group Pty Ltd. paid $450,000 for Borders trademarks in Australia and New Zealand; Popular Holdings Ltd. paid $100,000 for the Singapore trademarks; Berjaya Books paid $825,000 for trademarks in Malaysia; and Al Maya International paid $500,000 for trademarks in “certain Gulf countries including the United Arab Emirates.”
I wonder how that is going to work in an globally integrated market.
Details of exactly who bought what will be revealed at a court hearing on Sept. 20. And then we will have to wait for the Barnes & Noble’s SEC filings to see how they book those intangibles – and for how much.