Patents Purchased and not Used
Patented devices are sometimes purchased with no intent to use them. This may be for the purpose of eliminating competition, of forestalling obsolescence or supersession, and so of postponing the necessity of making expensive alterations that would be required to meet threatened competition, even to the point of scrapping a valuable organization. The ethics of such practice is not under review here. Correct accounting practice justifies the addition of the purchase price of such devices to the value of the asset, patents, and its periodic depreciation in regular course.
Elements of Depreciation on Patents
Patents are subject to depreciation. At the time of their purchase or acquisition, they should be valued at full cost, as stated above. At any subsequent time, value should be calculated on the basis of full cost less depreciation. The elements of depreciation as applied to patents are (1) time lapse, (2) supersession, and (3) obsolescence.
1. Time Lapse. There is no such thing as wear and tear on a patent itself, but since the grant by the government is for a definitely prescribed term of years, as each of those years goes by there passes with it some portion of the value attaching to the exclusive enjoyment of the right for the prescribed period. In this country a mechanical patent is granted for a term of seventeen years, after which the patented device or process becomes common or public property. The period allowed for patents covering designs is three and one-half, seven, or fourteen years, depending on the application. Thus, simply through the lapse of time the value of the right diminishes.
2. Supersession. If no other causes than time lapse were operative, the problem of depreciation would be a simple one, consisting of spreading the value of the patent over its life. In addition to lapse of time and operating simultaneously with it is the possibility of supersession. Supersession as an element of depreciation is the attempt to measure the probability of the patent’s being superseded before the expiration of its term by a better machine, device, or method. The measure of this element of depreciation is always speculative but should be attempted with the best judgment possible.
3. Obsolescence. Akin to the element of supersession is that of obsolescence. Obsolescence is particularly operative in cases where the patent covers a product the life of which depends on the whims of fashion. Obviously, when the market for the product ceases, the value of the patent is gone.
From the above it is seen that the three elements of depreciation are usually operative concurrently and the rate of depreciation must take cognizance of them all.
Service Life of Patents
While the vast majority of patents become valueless before their expiration, some few may have a value beyond their protected term. It may happen that the concern using the patent has built up such an organization that competitors cannot with profit enter the field after the patent has expired; or it may have acquired the good-will of the purchasing public to such a degree that buyers come to it rather than to a competitor. In these and other ways the value of the patent may extend beyond its life. This is exceptional, however, and cannot with conservatism form the basis for estimating the service life of the average patent.