Rembrandts in the Rear View Mirror: The Demise of Intellectual Capital

By Joseph E. Root

For all our otherwise stellar attributes, we patent lawyers are not a very charismatic lot.  The author speaks from within the fraternity, so that statement is a rueful admission, not an accusation.  The fact is, while our college classmates were doing pharmaceuticals, close interpersonal contact and loud, rhythmic music, we spent weekends with differential equations, biochemistry and number theory.  In truth, we interact better with machines and molecules than we do with people, as our long-suffering significant others often remind us.

For a moment in the recent past, however, patent lawyers had their fifteen minutes in the spotlight, thanks to Intellectual Capital, an idea developed in the late ‘80’s.  IC caught on in the early to mid-‘90’s and made the transition to a full-fledged movement in mid-decade.  The association with the information economy and the Internet is not coincidental, as IC stems from the notion that the shift from bricks to clicks makes information the currency that matters.  Intellectual property (patents, trademarks, copyrights, know-how) will replace tangible property as the measure of success, the Movement said.  As the engineers on this locomotive of progress, patent lawyers would lead the way to the future.  Overnight, patent lawyers started appearing on the covers of trade magazines – indeed, suddenly there were entire magazines devoted to patent lawyers alone!

As Y2K approached and the internet boom went into late-stage frenzy, a miracle appeared, never seen before or since:  The Intellectual Capital movement turned a patent lawyer into a rock star.  The changeling was Kevin Rivette, and the instrument was his 1999 book, Rembrandts in the Attic.[1]   Rivette and Rembrandts rapidly became emblematic of the IC movement as a whole, each inexplicable without the other.

This article tells overall story of IC and Rembrandts, that moment when patent lawyers became celebrities.

Rise

The Intellectual Capital movement springs from the now-commonsense notion that the assets of modern companies are largely tied up in ideas – software, know-how and the like – and so companies should focus on managing them.  The shift in asset base, from factories, inventory and raw materials, to knowledge, patents and licenses, calls for a corresponding shift in management philosophy.  Nothing less than a revolution was contemplated – stop thinking about buildings, start thinking about people; drop machines, pick up ideas.

Starting in the late 1980’s Patrick H. Sullivan, a managerial consultant with roots in academia, and a few others from both the academy and business, started discussing these concepts.  Somewhere along the line, someone coined the term “Intellectual Capital,” and then in early ‘90’s the concept emerged into public view via a series of articles in Fortune magazine, by Thomas Stewart.  The vision unhesitatingly encompassed “the sum of everything everybody in your company knows that gives you a competitive edge in the marketplace.”  That knowledge is collective, they said, hard to identify and harder still to deploy.  But once you find it and exploit it, you win.[2]

The business environment was accustomed to the appearance of ideas that became popular and then grew into movements, and Intellectual Capital quickly followed the paths blazed by Tom Peters and his In Search of Excellence series, and the Re-Engineering books.  By 1994, Fortune could note progression from a “Grail quest” to a source of  useful, robust management and evaluation tools.[3]   Articles and books followed, combining the thinking of academia, patent lawyers and research managers, with an inflow from advocates of Knowledge Management, a stream primarily from Europe.[4]

Two points dominated early IC discussions, led by the threshold question, “Just what is Intellectual Capital?” followed by, “What are we supposed to do with it?”  Answers to the former were on the fuzzy side, ranging from, “knowledge that can be converted into profits”[5]  to “skill, knowledge, and information.” [6]  The second issue was very clear:  Companies use IC in two ways, the thinking went, creating value and extracting value; Intellectual Capital was about extracting value.[7]    Innovation and knowledge creation are necessary, the reasoning went, but not sufficient.  More importantly, companies need mechanisms that convert IC into shareholder profit.[8]

Intellectual Capital had arrived as a movement, but it often sounded more like a crusade.  One of the Fortune articles included this description:  “Intellectual capital can be as ephemeral as the Holy Grail. In Arthurian legend, when Sir Galahad was allowed to gaze directly into the Grail’s divine mysteries, he renounced the material world and was borne aloft on angels’ wings.”[9]  A Lucent Technologies manager evangelized, saying, “We turn ideas into inventions, inventions into patents, and patents into profits.”[10]  The Millennium was drawing nigh, and a whiff of fervor was clearly apparent.

Until 1999, Intellectual Capital was a successful business idea but certainly not a household word.  That changed overnight with the publication of Rembrandts in the Attic.  The author, Kevin Rivette, had been on a successful, if not unique, trajectory, as patent lawyer turned entrepreneur, a co-founder of SmartPatents, a Silicon Valley company offering high-end patent portfolio management software.[11]  SmartPatents shortly morphed into Aurigin Systems, offering even higher-end software for mapping and analyzing patent portfolios.  The companies had attracted some buyers, but more important they had secured funding, including Reuters’ prestigious Greenhouse Fund.[12]

Rembrandts boosted Rivette into instant celebrity.  Calling it the most successful patent book in history doesn’t do the book justice.  To measure its impact, pass by the predictable reviews in the trade press, or even the likes of the Wall Street Journal or New York Times, to the absolutely gushing piece in Whole Earth, where the reviewer professed a mind-altering experience as a result of the book.[13]  Without doubt, this was not your father’s patent treatise.  Interviews, speaking engagements and articles came as fast as Rivette could respond, from the World Economic Forum in Davos, Switzerland, the International Patent Licensing conference in London, Patent & Strategy Management in Washington, D.C., and The National Post Automotive Conference in Toronto[14].  His opinion was sought on issues ranging from the Doctrine of Equivalents[15] to research by non-profit institutions,[16] and by business schools (starting with Harvard and Stanford[17]) and by the US Congress.[18]  Short of making the cover of the JPOS,[19] Rivette had definitively arrived.

The still-cresting Internet wave propelled Aurigin and Rembrandts, along with IC as a whole, and the resulting atmosphere can only be termed Consultant Heaven.  Patent lawyers and managers flocked to consulting firms, [20] and hitherto staid law firms spun off their own consultancy ventures.  Howrey Simon, which had moved into the IP space by merging with Arnold, White & Durkee, launched Maxiam, which sought “to become the premier global provider of Intellectual Asset Management services and to drive superior shareholder value for its clients globally,” for which the firm had assembled “unprecedented” leadership.[21] INTX, the Foley & Lardner entry, assembled a consortium of independent service providers, offering “holistic and cross-functional expertise”[22] so that teams could be tailored to specific client tasks.  As one observer put it, “intellectual property lawyers [had] become the profession’s ‘it’ boys and girls.”[23]

The founders of IC scrambled from academia to the bandwagon.  Patrick Sullivan reworked his first book into a more market-oriented package,[24] followed shortly by a Rembrandts competitor, authored by Sullivan’s colleagues in the ICM Group, called Edison in the Boardroom.[25]

Fall

Kevin Rivette and his company, Aurigin, perfectly mirrored the high-flying peak of the dot-com era during 2000 and 2001, and they just as perfectly exemplified the meteoric plunge of 2002.  During those first two years, Aurigin seemed on a roll, anointed by Forbes magazine, as “among the likely winners on the battlefield of intellectual property.” Apocalyptically, the article went on, “Today companies have only two choices: Create their own software (as IBM did) or implement Aurigin’s IPAM system.”[26]  Sales were expected to triple in 2000, and Rivette looked forward to going public.[27]  Other articles discussed Aurigin in terms of “Getting Your Buck’s Worth from Intellectual Property.”[28]  Ignored at the time was a note by a Forrester analyst opining that “the entire sector is overhyped,” and forecasting that SmartPatents would be subsumed by document management systems like Lotus Notes.[29]

Within Augirin itself, December 2001 saw more of the same,[30]with reassurances about funding,[31]  which made the January 4, 2002 internal email a shocker: “Due to circumstances, I have resigned as CEO and chairman” along with the rest of the management team.  Further, Rivette announced, the company was out of cash, bridge funding was not available, and salaries were immediately reduced to minimum wage.  One salvo followed another over the next few weeks:  No funding possible; bankruptcy counsel hired; employees locked out of the building.[32]  By May 2002, Aurigin had filed for protection under Chapter 11, and its assets were bought out of bankruptcy by Information Holdings, to be folded into IHI’s MicroPatent subsidiary.  Both Reuters and Thomson Corp. bid in the bankruptcy auction, running the price up to a total of about $16 million in cash and assumed debt.  MicroPatent CEO Steve Wolfson characterized the result as “a win-win for customers of both companies.”  The investors, who had poured some $65 million into the company, presumably felt otherwise.[33]

Clear explanations for Aurigin’s collapse have never been forthcoming.  Rivette described the situation only as “something pretty upsetting,”  “a long, involved story,” and “a tangled web,”[34] though he later added, “Some investors drove [financing] terms that were so harsh, the board could not sign up for them and perform its duties at the same time.”[35]  MicroPatent’s Wolfson blamed both management and the investors:  “It is clear that the company was managed poorly, and the various venture capitalists that funded it throughout its life probably should have been much more diligent with their analysis before continuing to fund management excesses.”[36]

Apart from the occasional reference dubbing him “the O.J. Simpson of the patent world”,[37] Kevin Rivette escaped from Aurigin completely unscathed.  He stepped right into a position as “Executive Adviser” at Boston Consulting Group’s San Francisco office.  The BCG bio mentioned his position at Aurigin, but tastefully omitted the ensuing unpleasantness.[38]    He ascended another rung in May 2005, becoming IBM’s Vice-President, Intellectual Property Strategy.  The news release announcing that appointment treated his Aurigin years in the same manner.[39]  As this is written, he remains a sought-after speaker,[40] and he is a member of the USPTO Advisory Committee.[41]  A profile in IAM Magazine following the IBM appointment did go so far as to mention the events at Aurigin, but only to note that he had “neither survived nor thrived” at Aurigin, which “went under” after being “abandoned by its funders.”[42]

The Intellectual Capital movement followed Aurigin beneath the waves.  Patrick Sullivan’s ICM Group website showed eight conferences held in 2002, two in 2003, one in 2004, and none in 2005; by 2007, the website as not active.[43]  Of the two law firm consultancies, INTX (affiliated with Foley & Lardner) was quietly folded back into the firm,[44] and Maxiam, the Howrey offering, was sold to CapAnalysis, a litigation support company.[45]  Companies based expressly on Intellectual Capital foundations suffered the same fate.  The story of Knexa, “the world’s first knowledge exchange and auction software solutions company,”[46] is told on the press release page of its website:  1999, 7 releases; 2000, 21; 2001, 27; 2002, 10; 2003, 8; 2004 through 2006, 0.[47]

Reasons Why

Written explanations for the demise of Intellectual Capital are practically non-existent.  Just as the general business press never runs retrospectives about Quality Circles or TQM, the intellectual property trade press concentrates on “law-review lite” legal analysis, trend du jour overviews, and celebrity profiles.  There being no sources, the analyst must start with a blank slate.

A first-level explanation, and one that will appeal to many, is that Intellectual Capital was a fad, a fashion, the flavor of last month.  Business management in general has been characterized by a succession of new techniques and ideas, constantly emerging and disappearing, such as Re-engineering, TQM. Change Management, and Quality Circles, which all took their turns on the stage and then faded from view.[48]  It will surely come as no surprise that this phenomenon has been widely studied in academia, concluding that the primary indicator of a fad is the rapid rise and almost equally rapid tapering off of publications,[49]  abetted by consultant-based seminars often accelerated when driven by a best-selling book.[50]  The Process Reengineering movement, centered on Re-engineering the Corporation by Michael Hammer and James Champy, offers a good example.[51]

IC’s rise and fall, set out above, fits the fad / fashion pattern, particularly looking to the number of publications.[52]  The real line between fads and revolutions, however, is not a matter of literature but whether the ideas work.  Apple’s Newton was a fad, its iPod a revolution.  By that standard, Intellectual Capital failed, and at least three explanations can be advanced.  First, the fundamental premise of the movement (and the central idea of Rembrandts), that companies had valuable, unused IP sitting around waiting to be licensed, turned out to be wrong.  Second, the ideas advanced in all those books, articles and seminars may have been straightforward for big companies like Dow Chemical, but in the mainstream world they proved too difficult, expensive and ambiguous to implement.  And finally, even where it was tried, there is simply no evidence that Intellectual Capital produced results that came close to matching the hype.

Crucially, the notion that corporate attics are full of unused, valuable patents evaporated under scrutiny of both academics and practitioners.  Mark Lemley, the prolific and respected StanfordUniversity professor, working with colleagues John Allison, Kimberly Moore and Derek Trunkey, conducted perhaps the most extensive study of patent quality yet attempted, investigating why 99% of all issued patents disappear from view.  They noted the popular explanations, leading with the Rembrandts theory, but they concluded that such explanations “are asking the wrong question.”[53]

The best explanation for why some patents are used and others are not is simple: some patents are intrinsically more valuable than others. Many patents are not worth enforcing – either because the inventions they cover turn out to be worthless, or because even if the invention has economic value the patent doesn’t.[54]

A key finding of their research was that the value of patents is known early in a patent’s life, and that value is likewise exploited early.[55]  Far from the notion of unidentified value, they found that patent owners have a good idea about the value of their IP.  Virtually all of the characteristics of patent value, they concluded are either within the control of, or at least  known to the owner by the time the patent issues[56]

That result comports with the experience of practitioners who have analyzed numbers of patent portfolios, and who conclude that patents in the attic are there for good reason.  Russell Barron, recently retired from Foley & Lardner, and a veteran of almost forty years working with patent portfolios, squarely attributes the failure of Intellectual Capital to the fact that most unused patent portfolios just don’t contain very many good patents.[57]  That explanation was echoed by Larry O’Rourke, of Finnegan, Henderson’s Palo Alto office, another veteran of portfolio creation and management.  Hidden value, he expanded, was probably not a good idea to begin with.  “It’s illusionary to believe that people have good IP on the shelf,” he said.  Rather than jewels, most portfolios are full of patents that don’t really address important technology, or if they do, their claim coverage is not quite on target.  Having shopped for patents on behalf of various clients, O’Rourke described such projects as “looking for a needle in a haystack.”[58]

As Peter Detkin, former Intel IP chief and now managing partner of Intellectual Ventures, summed up, “There are very few companies that can pull off what the companies cited in Kevin’s book have pulled off.”[59]  In one study of the 1600 patents held by the Wisconsin Alumni Research Foundation, only 65 were actually licensed, and of those, only 36 generated sufficient cash to cover the Foundation’s costs.[60]  While there are certainly anecdotes of individual treasure troves,[61] just as there actually are real discoveries of buried pirate gold, both notions turn out to be pipe dreams, not business models.

A second major problem with the ideas of Intellectual Capital is that the suggestions offered to mainstream patent counsel proved too difficult, expensive and ambiguous.  Part of that problem stems from the disconnect between the companies held out as shining examples and the real-life organizations where real-life patent lawyers work.  IC presentations always talk of IBM, and its billion dollars a year in licensing revenue, in superlative voice, as in “a phenomenal $1 billion per year….  That’s one ninth of its yearly pretax profit!”[62]  Never suggested is the idea that a portfolio of 40,000 patents provides, politely put, leverage.  Certainly none of these presentations recounts Gary Reback’s legendary story of IBM’s alleged ultimatum to Sun Microsystems,

[W]e have 10,000 U.S. patents. Do you really want us to go back to Armonk [IBM headquarters in New York] and find seven patents you do infringe? Or do you want to make this easy and just pay us $20 million?[63]

However one views that story, the fact remains that Sun wrote a check.

The other universal example is Texas Instruments, where presentations usually elide the first step in TI’s program:  Invent the technology that drives your industry.[64]  Another frequent example is Microsoft’s licensing program, dismissing speculation that Microsoft’s licensing success has anything to do with the fact that world’s desktops are Made in Redmond.  No matter the size or market position of one’s company, the seminars say, you too can be just like IBM, TI and Microsoft.

Also, advocates of Intellectual Capital had to fudge their way around the inconvenient fact that many large, impressive high-tech companies have not boarded the IC bandwagon.  There should be at least some quiet embarrassment, for example, that Edison in Boardroom does not seem to have been applied at General Electric.  To date, GE has not adopted an active licensing model or other IP monetization measures so beloved by IC, and in a recent interview, newly installed GE patent VP Todd Dickinson did not seem anxious to remedy that situation.[65]  There also remains the nagging point that those avid patent filers, Japanese companies, have yet to buy into the IC framework.

Actual attempts to implement a model Intellectual Capital program quickly run up against the fact that such programs are difficult, time-consuming and expensive, with little in the way of tangible return.  In the real world, a patent manager needs budget allocation.  A typical plan begins with a patent audit, followed by an analysis of competitive patents, and if in-house resources aren’t available, those programs will average some $500 per patent.[66]  Gordon Petrash set out the details of Dow Chemical’s efforts to design and implement an comprehensive IP program,[67]  and that account clearly demonstrates that wide-ranging IP management is not an exercise for the faint of heart or tight of budget.

Of course, if Intellectual Capital could demonstrate a return on that investment, management would back it enthusiastically.  Unfortunately, the promise of converting ideas to patents and patents to profits, noted above, has not been fulfilled.  To put that promise in perspective, the speaker was a manager at Lucent, made just before one of the more spectacular collapses in the telecom business.[68]

Sadly, no matter how important and earth-shaking the ideas of Intellectual Capital sounded, they never penetrated to the level of management consciousness.  Step outside the world of seminars and IC literature and one finds no recognition of its significance.  Take, for example, a study conducted at MIT,  examining the employment of Intellectual Capital in the aerospace industry.  The conclusion:  “Unfortunately, the intellectual capital movement to date has had only a modest impact on the way firms do business.” [69]  Intellectual Capital was an important concept, the author concluded, but it often failed to live up to its hype.[70]  Similarly, Harvard Business School professor Rosabeth Moss Kanter reviewed the recurring waves of innovative activity over the last quarter-century, along with the concepts that drove that innovation.[71]  Intellectual Capital is never mentioned; IBM draws praise for its collaborative approach to innovation, not for its licensing program.[72]  The keys to innovation, she summarizes, are leadership, flexibility, and organization, all timeless verities.

The failure to establish IP at the forefront of corporate strategy becomes painfully clear when looking at the most highly touted success story for Intellectual Capital, Dow Chemical.  The IC literature portrays an unbroken string of success, including slashing $40 million from portfolio costs by trimming unneeded patents.[73]  The question, however, is whether that activity is viewed by top management as a factor in the company’s success.  The answer, one must conclude, is a solid “No.”  Searching the Dow Chemical website for the term “intellectual capital” failed to turn up a single example of management noting or crediting this IP program.  No mentions in SEC filings or annual reports, no special webpages, no articles in the company magazine.[74]  CEO Andrew Liveris, speaking about Dow strategy for 2006, never mentions IP as contributing to that strategy.[75]

The Intellectual Capital movement was supposed to revolutionize the way CEO’s managed their companies, and it was supposed to catapult its acolytes past their sluggard competitors.  It just didn’t happen.

Endnotes