Avoiding Suboptimal Behavior in Intellectual Asset Transactions: Economic and Organizational Perspectives on the Sale of Knowledge

Abstract

Although some of the most important elements of a knowledge-based economy in the coming century will be intellectual asset transactions, the current marketplace for intellectual asset transactions is murky at best. With patent litigation costs skyrocketing, most organizations have only recently begun licensing and cross-licensing their intellectual asset portfolios. Because robust valuation metrics for intellectual assets have not been fully developed, most licensing negotiations are based on rules of thumb rather than quantitative methods, rules of thumb that can often be economically disadvantageous to either the licensee or the licensor. With only two percent of the millions of innovations created in this country utilized under license, billions of dollars worth of intellectual assets are underutilized. Economic theory might suggest that the information necessary for quantitative analysis is too costly to acquire (i.e., difficult to obtain or not available at all), resulting in a relatively small number of market transactions involving intellectual assets, with valuations generally covered by rules of thumb. Different organizational behavior theories would probably suggest that some forms of bounded rationality are responsible for the use of these rules of thumb. The true answer probably lies somewhere in the middle of the spectrum between those perspectives. This article explores the nature of intellectual assets and the dynamics of intellectual asset transactions. After examining various organizational behavior and economic perspectives in search of an explanation for the current state of the marketplace for intellectual asset transactions, the article concludes by proposing valuation metrics that might better inform the negotiations surrounding an intellectual asset transaction.