Tuesday, May 01, 2007

How Will Sarbanes-Oxley Reporting Be Affected by KSR?

Good question.

If you believe the headlines of most major newspapers, the value of patents have officially "weakened" as a result of the KSR decision:

  • "2 Decisions Seen Weakening Value of Patents" (Washington Times)
  • "High Court Puts Limit on Patents" (New York Times)
  • "Ruling Weakens Patent Power" (Washington Post)
  • "Experts Say High Court Ruling Weakens Patent Law" (Houston Chronicle)
  • "The value of patents has dropped again following a decision by the US Supreme Court" (quote from "The Deal" Blog)
Putting patent law issues aside, a point was raised regarding the reporting obligations for IP-centric companies in light of SOX. Will CPA's be dispatched en masse to recalculate the values of individual corporate IP holdings? What is the valuation standard for recalculating portfolios based on the KSR decision?

Although SOX sets no specific requirements for CPA's valuation of intellectual property, it does put greater emphasis on accurate valuation of all assets, and imposes punishments on CEOs and CFOs for failure to do so. Three sections of Sarbanes-Oxley, while not directed specifically at intellectual property, particularly affect public companies with IP that is material to their business:

Section 302 - requires CEOs and CFOs to certify the financial information presented in their annual and quarterly reports is accurate—fairly presenting “in all material respects” the company’s financial condition.

Section 404 - companies must document and certify their internal financial reporting procedures and controls.

Section 409 - requires companies to deliver real-time reports of “material changes” affecting the company to shareholders or other “stakeholders.”
Additionally, the Financial Accounting Standards Board has provided statements that require companies to measure and report on the financial performance of acquired intangible assets:

Statement No. 141 - specifies intangible asset identification upon acquisition.

Statement No. 142 - specifies annual intangible asset fair value measurement.
It will be worthwhile to watch what companies do over the next reporting cycle.

Another interesting rub is that a fair number of patent holding companies are publicly traded. The list includes:
Just a thought: is it possible for a business to protect itself from publicly-traded holding companies by purchasing their stock? Presumably, there is a difference between being a mere defendant, and a defendant who also happens to be a shareholder.

If you are sued for infringement on a patent of questionable validity, could SOX provide any leverage for a shareholder-based counter-suit?

See IPBiz: "Is there Sarbanes-Oxley fallout from KSR v. Teleflex?"

1 Comentário:

CoryS said...

As someone with accounting background, I can say that making assessments of the value of IP given the new obviousness guidance in the KSR ruling may make it as hard as pegging a reliable estimate of expense for options upon issuance. No easy task.


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