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THE CUTTING EDGE

Intellectual Capital Suits Proliferating

Litigation: The shift toward ideas as assets is placing a strain on the courts as well as raising questions in corporate accounting.

June 23, 1997|MICHAEL A. HILTZIK | TIMES STAFF WRITER

PALO ALTO — For an organism that can't be seen with the naked eye, Bacillus thuringiensis has spent an awful lot of time in court.

Since 1991, nine major chemical and biotechnology firms have filed 14 separate lawsuits against each other over the bioengineered bacterium. At issue in the 14 separate lawsuits are patents covering often trivial distinctions in how the microbe, which secretes an insecticidal toxin valued by farmers, is designed, bred and used.

"Every major actor [in agro-technology] may be violating a patent held by every other major actor," says John H. Barton, a Stanford University law professor who has examined the web of litigation in that industry.

Yet only one thing that has become clear from the tens of millions of dollars spent so far on these inconclusive lawsuits and counter lawsuits: how totally outmatched the country's legal system has been by the complex science and rapid pace of innovation of high technology today.

This is only one example of the chaos in legal and commercial institutions being wrought by what is coming to be known as "intellectual capital." At its heart is the perception that industries in all sectors and all parts of the globe are becoming less dependent on brick-and-mortar assets--such as factories and labor-intensive product lines--and more dependent on ideas.

That shift is placing an unprecedented strain on more than the courts, as several speakers noted last week during a two-day conference at Stanford University's Hoover Institution. The rise of intellectual capital as a productive asset in industry also raises important questions in corporate accounting and for regulators like the Securities and Exchange Commission.

That agency, SEC Commissioner Steven M.H. Wallman told the Stanford conferees, is beginning to examine whether a company's intellectual capital should even be disclosed to investors as part of its financial reports.

"We need to be able to measure this and present it," he said.

The question is how to measure something that still remains ill-defined. Some companies define their intellectual capital as the value of their patents, others as their workers' and customers' satisfaction, others as the creativity of their founders.

Many in the investment community are unnerved by the very idea that the SEC might try to put a number to such inchoate qualities, much less mandate it as part of a corporation's reporting obligations.

"How can you propose to value the thoughts in a founder's head?" complained Timothy C. Draper, a Boston-based venture capital investor attending the Stanford conference.

He and his partners often try to appraise such things by crediting the education or previous success of entrepreneurs seeking capital from them, "and we're completely wrong one-third of the time and disappointed one-half of the time," he said. "No real investor would give the value assigned to intellectual capital any credence at all. It's misleading at best and consistently very wrong."

By most proposed measures, he said, established computer companies like Novell or Digital Equipment Corp. would rank higher than new but more promising companies like Yahoo, the Internet search firm.

Still, it is in the legal arena that intellectual capital is causing the most problems.

Many experts fear that the rapid pace of technological innovation--which often depends on one company's making incremental improvements on the ideas and products of several others--is rendering traditional systems of copyright and patent protection obsolete.

One problem lies in balancing the need to reward inventors with a monopoly on the rights to their invention for a fixed period of time--which gives people an incentive to invent--without making that right so long term or powerful that it would sap the incentive of others to improve on it.

"What if AT&T had a 200-year patent on the transistor" which was developed at Bell Laboratories? asked Stanford economist Paul Romer. "Think what would be the costs of that" if anyone contemplating improvements to the transistor had to pay AT&T a license fee, he said.

On the other hand, it is now so easy to make minor, but patentable, improvements to innovative technology that the inventors of the original innovation may be getting cheated of their own fair share.

That's the threat in biotechnology, according to Sean Johnston, senior patent counsel at Genentech Inc. That industry often patents gene sequences used to bioengineer organisms.

"It's within the skill of a graduate student to take a sequence disclosed in a patent and make a new sequence that can produce a second-generation product," he said. However, recent court rulings hold that the second-generation product doesn't violate the original discoverer's patent.

The courts have proved to be inadequate to the task of mediating between conflicting patent claims or, more generally, to keep up with the implications of new technology.

For one thing, they move so slowly that an infringement case can outlast by years the commercial life of the patent at issue. For another, they lag badly behind industry in understanding the value of new forms of property.

"We knew you were a criminal if you stole a chip," said Douglas Fairbairn, president of the Virtual Socket Interface Alliance, a consortium of 120 semiconductor companies working on joint standards for elements of chip designs.

"We don't have that same criminality if you steal a piece of software that goes into the making of chip," he said. "There's a total lack of faith that the legal system can offer any aid in this process. The best you can hope for is to avoid the legal system altogether."

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