No Picassos, Lots of Patents
October / November 07
Volume 5 Number 5
Prasanna Chitturi invented and patented a methodology to tell time across different zones and a technology that connects a hand-held computing device to a larger display screen. But he had neither the time nor money to bring his creations to market.
To profit from the inventions, Chitturi hired Ocean Tomo Auctions to sell the patents in a live intellectual property auction. Six months after contacting the firm, the computing device patents sold for $225,000, and the other two patents sold for $10,000.
"Going through Ocean Tomo was not cheap, but it was worth it," says Chitturi. The firm took a 15 percent cut of the final selling price, and charged a listing fee. But Chiturri says the sale gave him the capital needed to work on developing and patenting two more inventions.
IP auctions are becoming a popular way of buying and selling patents, copyrights, trademarks and domain names. Some are old-fashioned events where an auctioneer rallies a roomful of buyers. Others are done on the internet.
Regardless, IP auction companies and their clients say the events are a way of marketing IP to a large network of buyers and sellers and fetching a good selling price. But some in the industry say the auctions make IP a little too accessible to companies looking to hoard patents and sue innovators.
Andrew Ramer, president of Ocean Tomo Auctions, says his company provides hype and exposure that's difficult to generate elsewhere. This is especially helpful to small companies and inventors looking to buy or sell their IP.
"What the auction has become is the closest thing to a public market for IP," says Ramer, "because the transfer of IP is not considered a liquid market."
Ocean Tomo started doing auctions about 18 months ago. It has completed four to date, selling patents—€”which make up the largest percentage of business—€”brands, music catalogs, domain names and 800 numbers with their related assets, according to Ramer.
After conducting due diligence, the firm breaks salesworthy IP into groupings of one or more patents based on their relationship to each other. Only one seller owns each grouping. The company then prints a 300-page catalog three months in advance of the event that is sent to potential buyers and made available on the internet.
Gooding & Company, known for conducting high-brow car auctions, runs the live event. Several hundred bidders may show up, telephone bids are accepted and an online secure data room is provided for attendees. Ocean Tomo charges a listing fee of $1,000 to $6,000, a 15 percent seller's commission and a 10 percent buyer's commission.
Ocean Tomo's most recent Pan-European auction sold $8.1 million in IP. The average sale price per grouping was $578,678. An internet shopping patent, invented by a native of New Zealand and mother of three, sold for $4.8 million.
Ramer says some IP is not suitable for auction. For example, patents related to the medical industry often require extensive FDA approval. The cost of gaining approval versus the patent's value is often not worth it. However, IP related to information technology, telecommunications and alternative energy is very popular right now, he says.
Joseph Popolo, president and CEO of ipAuctions, Inc., began organizing auctions two years ago. His are all done online via ipauctions.com. The company sends an announcement to potential buyers one or two weeks before the sale. Interested parties register online to bid and the auctions may last two to seven days with a deadline. The highest bidder then pays for the IP through wire transfer or certified check. The company charges a listing fee of $250 to $1,000 and a seller's commission of 10 to 20 percent.
Popolo says the ability to market the sale to a large network of venture capitalists, corporations, entrepreneurs, IP attorneys and the like is the company's selling point. Historically, sellers might go through a brokerage firm with limited market reach or run an advertisement in places like The Wall Street Journal, he says.
"We're selling the ability to market it and get the best price for it," says Popolo. "And some of my best clients for buying often turn out to be some of the best clients to sell for." Some buyers flip the IP, he says.
About one third of the IP that Popolo sells comes from bankruptcies where trustees are trying to recoup losses. Corporate disposals account for about 20 percent, venture capital firms 30 percent and individual sellers make up 10 to 15 percent. On the low end, the company may sell a trademark for $1,500. But Popolo has sold clusters of patents for as much as $400,000.
Dennis Fernandez, managing partner at Fernandez & Associates, a patent law firm in Menlo Park, Calif., used Ocean Tomo to auction patents for a cell phone technology and a global positioning system technology. The firm manages a portfolio of approximately 5,000 patents.
"Strategically, we view Ocean Tomo as one channel to monetize," says Fernandez. "Ocean Tomo is able to create value if you need it immediately. The real value is you have access to generally accepted buyers willing to look at things in a shielded context (a reference to both buyers and sellers being able to maintain a certain level of anonymity during the transaction)."
IP that is in the "pre-infringement" stage is the most appropriate for auction, says Fernandez. However, he says while Ocean Tomo hosts pretty elaborate live auctions, they don't always generate as much of an emotional frenzy as some patent sales on eBay. Another potential drawback is that it's unlikely that auction companies know all of the legal intricacies of each piece of IP.
Vicki Norton, partner at the San Diego office of Wilson, Sonsini, Goodrich & Rosati law firm, is an IP lawyer who works with companies developing life sciences and biotechnology inventions. She has mixed feelings about the auctions.
"I can see both sides," says Norton. The auctions help the commercialization process of IP that might otherwise lie dormant, she says. But innovators are concerned that "patent trolls" will use the auctions to acquire large quantities of IP. The term "patent trolls" refers to companies that have no intention of making products, but instead generate money by asserting patents and/or suing innovators, she says. This can hurt innovators because of the high cost of patent litigation.
Congress is currently working to reform patent laws and cut down on the amount of litigation clogging the courts. One key provision of the Patent Reform Act of 2007 would grant patents to the "first-to-file" versus the current system of granting patents to the first inventor. Another key provision would change how patents can be challenged and enforced.
Ramer believes IP auctions reduce the chances of companies getting blind-sided by patent infringement lawsuits.
"Companies that are out there buying patents for licensing and enforcement are going to buy IP regardless of auctions," he says. "The auction provides market intelligence and transparency for assets that are available for purchase. Buyers can then make an assessment well in advance."
Eric Billingsley is a freelance writer based in Albuquerque.
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