Patent Perishables

The effects on a company's patent portfolio when it goes bust

What have canisters of milk and patents in common? Guess you figured, not much. Wrong. Like a date stamped on a can of milk after which it should not be sold, patents have their similar “pull dates” as, like milk, patents are perishable goods.

Take the recent demise of yet another European “gem” in the semiconductor industry, Qimonda AG, Germany’s DRAM maker, an Infineon subsidiary. You were, for years among the most important and well known semiconductor companies in Europe.

Due to increasing costs of production, ever lowering market prices, a deteriorating investment climate and a German government (or an EU Commission) not willing to bail you out or give the same support Korea gives it’s Samsung, you go under. What are in a (sort of) Chapter 11 your assets left to sell so as to cover (part of) your debts? A large chunk of patents, no doubt as your main intangibles assets. No longer protecting parts of the business after bankruptcy, an important function of the patents, to cover own production, is lost, so is a large part of the portfolio value (“value in use”). Selling the portfolio as a company under bankruptcy protection is like asking the wolf whether he wants to eat the deadly injured deer. So time is of the essence here, as value is most likely to decrease rapidly.

This shows an important aspect of patent portfolios building and valuation that not many companies face (or even want to face). As intangibles are written off over their useful lives, where the assets have determinable useful lives, the value dramatically decreases in case of company or market failure (not technology failure). The current thinking in accountancy is that patents should (or can) be amortized over the shorter of their  legal life (20 years) or their useful lives. But that sees only on how long a “technical live” will be of the technology covered by the patent(s). Companies accumulating patents should therefore regularly do an “impairment” test[1]. However this is just a cost measure to know what costs should be involved in impaired assets while in operation. It does not give any indication how a strategic built up of patents in a “vulnerable” industry like the semiconductor industry would be affected in an insolvency or bankruptcy situation.

It adds up to the tough position of a CIPO (Chief Intellectual Property Office) in any management to have a “plan B” in place for any such occurrence. Not always the most rewarding task (who wants to think of a situation where the company goes bust?) . However as reality shows better done so while still in existence than being confronted with a insolvency and seeing your assets decrease in value rapidly while costs of maintenance and prosecution are continuing, putting pressure on management or the administrator to fire sale the assets way below their potential value.

See also this blog on the right side under “Monetization & IP Investments”  “Impairments, the Recoverablitiy Test” (source:  Bonnie Harrison, College of Southern Maryland, LaPlata, MA)

[1] Wikianswers: Impairment test: An operational asset is impaired when it suffers a permanent loss of benefits due to casualty, lack of demand for the asset or obsolescence. If a write-down due to impairment is required by determining whether the value of an asset has fallen below its book value. The asset will be reduced on the balance sheet and the loss is normally reported in the income statement as a separate item included in operating expenses.

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