What has a Patent in common with a Rembrandt?

When Rembrandts painting “Portrait of a Lady” was auctioned in London for U$28.7 million, many believed it was actually the auction fever that made prices reach incredible levels, driven up by eager art buyers and sellers looking for scarce supply of high quality art. Everything has been auctioned, from art, old cars, vintage Cartier watches to emission rights. However patents – monopoly rights granted by the state in exchange for publication of the invention - have not, so far.

On April 6 the first ever public auction of patents was held in San Francisco where over 400 inventions were being auctioned. The eagerly awaited auction attracted a large crowd of people from all over the US and Asia. Major absentee was Europe, with just a few German and Dutch IP investment ventures present. The auction was organized by Ocean Tomo of Chicago, and sponsored by various companies. Representatives of several large companies attended the auction, including GE, Microsoft, DuPont, and AT&T. A seasoned London based auctioneer, Charles Ross, mastered the auction.

Many believe the creation of an open, transparent market for intellectual property will cause a rippling in the way companies, universities as well as individual patent owners will trade their technologies, making valuation more visible and, as a consequence, will ultimately attract Wall Street type of investment funds and will eventually make similarly smart financing of intellectual property rights possible.

Sellers, ranging from individuals to richly awarded inventors with their own access portfolios eager to make some money to large companies like Kimberly-Clark, Motorola, Ford Motor Company and Allied Signal offered their patents on this first public auction. Patents covered a wide variety of technologies: video-on-demand technology, a suite of patents for varying the valve timing in car engines, as well as a solution for online sales of fashion goods were among the intellectual property rights sold. Lot 30A, a movie compression patent by Douglas Ballantyne, for moving a film to TV through cable, shot to $650,000, stalled, rose to $1 million with two bidders left, closing at $1.4 million. The catalogue-listed value for the patent was $2 to $5 million. The price values set by the auction organizers ranged from below 100.000 to 5,000,000. The most expensive lot, more than 35 patents from Ford Motor Company, was withdrawn at the auction for lacking to reach the reserve.

So what does a Rembrandt art piece has in common with a patent when it comes to auction it? Not much we have to conclude after last week’s experiment. The result is at best mixed. Patents have not yet reached celebrity status. More than 400 patents went on the block in 74 lots, of which around 22 lots were sold. Total sales at the auction reached US$ 3 million. From the 52 lots that did not reach the seller’s minimum, some were offered in post-auction private trading, reaching terms off the bidding floor with an additional value of U$ 5,6 million. Many patents sold, however, did not reach more than US$ 10-12,000.

Frequently the auctioneer had to cheer up the crowd as bidding became dreary, except for some action from patent trolls, or IP fund managers as they would rather like to call themselves. “Tire-kickers”, not actual buyers dominated the scene. Actual sales were all from absentee bidders. The auctioneer occasionally mentioned “interest” or even “large interest”, only backed by absentee bidders. Much of the bidding from those absentee bidders did not result in an actual successful sale of most of the patents. Most of the sellers as it turned out during the auction process set minimum prices, or “reserves” in auction speak. The valuations – as were published in the glossy prospectus - were high, much too high as it turned out. Together with the unrealistic reserves set by patent owners, many lots had to be withdrawn from the auction as the bids – either from absentee bidders or buyers in the auction crowd - were not high enough to reach the minimum price the seller told the auctioneers they were prepared to sell their patents for.

Success can be measured by different standards. If one looks at the lots sold, the patent auction was disappointing. Judged which patent caused the highest bid, the US$ 1.4 million was far less than the US$ 15.5 million Commerce One patents reached in a bankruptcy auction in 2004. As an experiment it is surely trendsetting in that it is the first event where the market agreed on prices for a wide variety of technology and gave many spectators a flavor of value of technologies offered. The organizers will most probably change to outside valuators rather than using their own valuation methods. A further auction is planned for New York in autumn 2006. Europe will no doubt follow, but it requires a different approach if it wants to be a success, given the different patent culture in Europe.