Patent Auctions, Where Are the Buyers?

When the first patent auction by Ocean Tomo was held in San Francisco, it caused a huge media hype in the US. It looks that the next one, in London on June 1, will receive the same attention from European media (if by then, we do not have an overdose of hype already because of the Michael Jackson auction on Wednesday and Thursday). The reason it will is, no doubt, because of the esoteric nature of the goods being auctioned. We can imagine old cars, antique books, art, wines and other “tangible” goods being sold on an auction. Even 3G wireless licenses. But patents?

Trading products of the mind, like an invention embedded in a patent, or “intellectual assets” (or “intangible assets”) are much harder to imagine when it comes to putting value on it. “Value” makes most intangible assets indeterminate. But how come we can value 3G wireless licenses (be it too high) but we have trouble valuing patents? There are over 100 methods of putting a value on patents[1]. What is the “value” of a patent, or more broadly, value of intangible assets? In case of the 3G the value must have been driven by market (and profit) expectations. But what profit can be made from patents?

These and other problematic issues make the auction of a patent a daring event. Or are we too much of an iconoclast to take issue with conventional wisdom that a patent is by itself and stripped from its application of the patented invention has no value at all?

Intangibles represent “immaterial” value, such as relationships of companies with its business partners, and its ability to innovate (R&D capital). Stripped from its context, however, the “value” of a patent is nothing but a assertion of a right to an invention, a monopoly right granted by the government for an innovation that is both new, inventive and contributes to the “art”. It is a long way from a “right” to “value”. For some the sole right to exclude others to use the same invention for which a patent has been obtained is what the real value of a patent is. Contrary to this view, licensing officers, business development and financial people interested in monetizing IP, see the real value of patent in its potential to add value to the organization (e.g. by shorten its own R&D time), or by establishing relationships in open innovation projects or by using it to realize financial value (e.g. lowering the cost of capital by securitization the license income stream that (some) patents generate.

So a smart buyer will ask himself some tough questions. Am I really interested in buying a right without the product that is the result of the patented invention, or the certainty that what is being described in the patent actually works for you? What is the value of that (paper) right that is being auctioned? Is it the right it conveys to exclude others and how sure can you be of that (have you not misread the claim, do you have a full overview on the closest prior art and did you do your due diligence on validity of what is being claimed? Or, do I buy to enlarge my own portfolio and to what extent? Does the offered patent grant me access to other players in the market by leveraging this new patent against the rights other companies have whose cooperation I seek? Although patents are meant to be useful, studies show that almost 95% of all patents have never been used in any product and have created no economic value. They are being filed as a guarantee (actually rather an expectation) that it deters competitors from copying the invention. Patent as a “freedom to operate” mechanism. But how does that confer value to any other party than the originator of the invention?

So, one wonders, who is interested in a patent without some proof attached to it that the invention has potential applications or is capable of rendering a commercially viable product? Yes surely patents are being traded, actually in quite large numbers. These patents are being traded (either sold or exclusively licensed) after detailed negotiations and careful due diligence on behalf of the buyer, in private dealing rooms.

But how about auctions? Tim Harford, in the Financial Times Magazine (“Under the hammer”) cites economist Paul Klemperer, Europe’s best known auction expert, who showed that trivial seeming features of an auction can have big (and sometimes disastrous) effects by repelling bidders. Take the question whether there should be an open or secret reserve. Auction theory offers an argument that a secret reserve price is better (IPA did that during the Munich patent auction, however, no bidders). The idea behind it is that bidders, confronted with gradually ascending bids will draw confidence that a bidder is not alone in valuing the item, even if the bids are too low to reach the reserve. In 2001 Katkar and Reily put this theory to the test by selling 50 matched pairs of collectible cards, 50% open and 50% secret reserve of the same level. They concluded that secret reserve is counterproductive. Far from stimulating interest they seem to put off bidders, fearing that a secret reserve is secret because it is far too high.

A further misconception is that small inventors or SMEs when seeing the figures for which patents in total have been auctioned (as Ocean Tomo did), might be lured into thinking that having a patent will make them rich. As we wrote earlier, there is a lot more needed to make money out of a patent than selling it on an auction.

In that respect IP auctions will not be the value driver of IP that some will make you belief it is.

[1] Relief from royalty, Excess profits or notional maximum royalty payable, Capitalization of earnings, Net present value of incremental cash flows, Gross profit differential, Premium sales price , Comparable market transactions, Cost based, etc. etc

Patent auction in Munich, success or failure?

Was the first IP auction in Munich, yesterday at Kempinski hotel, a success? Well, it depends how you define “success”. Certainly the German organizers, Intellectual Property Auctions GmbH (IPA) did a great job. You must be courageous to organize an auction in Europe, where the notion of selling and buying patents is still in its infancy and general IP awareness is at minimal levels. So yes, it was a success in the sense that IPA has been the first one to create greater awareness that patents are more than rights you acquire to then shelve them.

In terms of proceeds, no, the auction was a washout. Out of the 81 lots of patent(families) covering 12 fields of technology as well as one (!) trademark, the highest bid – 50K euros, by an absentee bidder – was for a patent on a reduced light scattering ultra phobic material, owned by a German company. Most sellers were, by the way German companies and institutions, among which Fraunhofer. Fraunhofer did relatively the best business, out of 11 patents auctioned, 10 were sold, be it for an average of an abysmal 17K euros, for a total of 188K euros. The lowest amount for which a patent was sold was for 5K (can you imagine, that’s not even 1/100th of the costs for an average European patent application covering 5 countries).

There were some exotic patents as well. A patent for making leather out of fish skin, wouldn’t that be great to support Europe’s fishing industry’s competitive edge? No bids however, an inevitable fate for most lots as it was clear from the start that, again, more tyre kickers than buyers frequented the auction. Or a patent offered for sale by a German patent attorneys firm for wound treatment, asking price 80K, no bids.

The only trademark auctioned was NUTRI-CARE of BASF, sold for 14K, after a (telephone) bidding with increments of 1,000 euro. Not a bad result though for a trademark if you compare it to the results for patents were (almost exclusively telephone) bidders did not want to pay more for any patent than a paltry 15k-17K euros. The only bid that was made on a certain patent from the audience was - guess what – from Ocean Tomo, the US auction organizer, who will have its first European action on June 1 in London. The bid failed as it was overturned by a telephone bid. How sad can it be?

What can we learn from this first auction?
First and foremost that a successful sale of patents is still the terrain of the patent brokers and IP merchant bankers, rather than the auction houses. Secondly, that the big issue that need to be overcome is: where are the buyers? In that respect it does not help that the organizers have waited too long before making the auction catalogue available on the internet free of charge (only after filling in forms, paying entry fees, etc). How else would a potential buyer know about what is being offered, leaving sufficient time for due diligence? Instead, IPA was much too secretive and restrictive about who is selling what, for what price and what details could be provided for any interested party to get him to bid. Thirdly, crucial details in the catalogue were missing, price indication, value estimators, valuation analysis that IPA must have done before accepting the lots, etc.

Let us wait how Ocean Tomo does the London auction before giving the final verdict.

Europe's First IP auction in Munich

If a newly identified work of Vincent van Gogh would be auctioned, would it be noticed by the bloggers, the press, any attention at all? Probably only when a new record is being set by the auctioned price. No the picture for this blog does not represent the proceeds of one of the patents auctioned today in Munich. The auction is organized by IP Auctions GmbH, a German IP valuation group. It is very much modeled after the Ocean Tomo auction, held in San Francisco, Chicago and New York. It was announced that next to patents, also trademarks and licenses would be auctioned. The appetite for trademarks seems to be low, as only trademark, “Nutri-Care” will be under the hammer. The auction, held today at 2:00 p.m in Kempinski hotel, will be both an English and a Dutch auction, the latter known from the first auction of flowers, whereby the auctioneer starts to call the object at the highest price, slowly lowering it until the first bidder raises it hand.
What is striking about the auction is that the sellers are predominantly German companies, including Fraunhofer, Germany’s top technological research institute, comparable to TNO in the Netherlands, ABB Group, Merck Patent GmbH, the German Rolls Royce company, some German academics and the University of Saarland (also Germany). Volkswagen AG offers one non-exclusive license under a European patent for the manufacturing of a plastic autopart. One of the few non-German sellers is (I presume) a Spaniard, Salvador Perez, offering a patent “Pay-as-you-drive” as it is described, filed in 1994 (so with a limited lifetime left) “for evaluating the risk of a motor vehicle”. No details of the patent are being given, expect a link to a website where some unclear references are made in a rather clumsy way, to anything to do with car insurance. Hardly the sort of patents, one would expect to raise great interest for.

The other non-German sellers include an interesting Dutch invention of a Netherlands based electro technical company, Wolters Engineering, for a reuse of paper waste. And belief it or not, who thought Chinese only copy are mistaken, a real Chinese patent is being sold for pharmaceutical wastewater treatment. Sounds like something the Chinese seller could license in China quite successfully (aren’t we hearing about massive pollution issues in China?). Why buying, if even the Chinese patent owner rather sells his patent than to enforce its own invention nationwide?

To be continued after the actual auctions has taken place

On the Munich auction, see also Frontrunner, a technology blog by Bert van Dijk, editor for Het Financieele Dagblad, Netherlands largest financial daily.

IPEG –European Merchant banking, now also in Korean & Japanese

Europe’s first Intellectual Property merchant banking, delivering services to monetize IP, whether it are patents, trademarks or copyrights, has its corporate website now in Korean and Japanese, see http://www.ipeg.com/

특허, 상표, 저작권을 막론한 지적재산의 경제적 효용을 위한 서비스를 제공하는 유럽 최초의 지적 재산 상업 은행, IPEG가 한국어와 일본어 웹사이트를 개설하였습니다. http://www.ipeg.com/을 방문해 보세요.

特許、商標、著作権を問わず、知的財産の経済的効用のためのサービスを提供するヨーロッパ初の知的財産商業銀行、IPEGが韓国語と日本語のウェブサイトを開設しました。http://www.ipeg.com/　を訪問してみて下さい。

Obviousness in the US and what patents do for innovation

“We build and create by bringing to the tangible and palpable reality around us new works based on instinct, simple logic, ordinary inferences, extraordinary ideas, and sometimes even genius.” A citation from the opinion of the US Supreme Court in KSR vs. Teleflex of April 30, 2007. The court gave its opinion in a closely watched case on “obviousness”. It is the fifth patent case in the past two years in which the Supreme Court has reversed the Federal Circuit, all of them unanimous or near unanimous decisions. The Supreme Court not only rejected the Federal Circuit’s test for obviousness, it proceeded to apply the correct test that it had just enunciated to the facts of the case before it and rule for the defendant below rather than remanding to the Federal Circuit and allowing it to apply the Supreme Court’s test to the case. The Court’s opinion suggests that patents which are based on new combinations of elements or components already known in a technical field are quite likely to be found obvious under its view of the correct analysis – a development that will likely lead to many more patents being found obvious in the electronics field but should have less impact in the life sciences field. The Court explicitly rejected the Federal Circuit’s longstanding view that a patent cannot be proved obvious merely by showing that the combination of elements was “obvious to try.” Again, this holding may have more impact on patents in the electronics field than in the life sciences technologies.

Many comments have already been published on patent blogs. See for Hal Wegner’s comments on the case his column on the right side of this blog.

For European practice the decision may not be very important other than that it gives additional ammunition in the current debate in Europe whether patents are granted too easily leading to low quality and stifling of innovation. The Supreme Court uses the word “innovation” eight times in its opinion:

“These advances, once part of our shared knowledge, define a new threshold from
which innovation starts once more. And as progress beginning from higher levels
of achievement is expected in the nor-mal course, the results of ordinary
innovation are not the subject of exclusive rights under the patent laws. Were
it otherwise patents might stifle, rather than promote, the progress of useful
arts.”

(…)

“Granting patent protection to advances that would occur in the ordinary course
without real innovation retards progress and may, for patents combining
previously known elements, deprive prior inventions of their value or utility.
Since the TSM test was devised, the Federal Circuit doubtless has applied it in
accord with these principles in many cases. There is no necessary inconsistency
between the test and the Graham analysis. But a court errs where, as here, it
transforms general principle into a rigid rule limiting the obviousness
inquiry.”

(…)

“When there is a design need or market pressure to solve a problem and there are
a finite number of identified, predictable solutions, a person of ordinary skill
in the art has good reason to pursue the known options within his or her
technical grasp. If this leads to the anticipated success, it is likely the
product not of innovation but of ordinary skill and common sense.”

(…)

“Although common sense directs one to look with care at a patent application
that claims as innovation the combination of two known devices according to
their established functions, it can be important to identify a reason that would
have prompted a person of ordinary skill in the relevant field to combine the
elements in the way the claimed new invention does. This is so because
inventions in most, if not all, instances rely upon building blocks long since
uncovered, and claimed discoveries almost of necessity will be combinations of
what, in some sense, is already known.”

(…)

“If this leads to the anticipated success, it is likely the product not of
innovation but of ordinary skill and common sense. In that instance the fact
that a combination was obvious to try might show that it was obvious under
§103.”

(…)

“These advances, once part of our shared knowledge, define a new threshold from
which innovation starts once more. And as progress beginning from higher levels
of achievement is expected in the normal course, the results of ordinary
innovation are not the subject of exclusive rights under the patent laws.”

and by far the best:

"A person of ordinary skill is also a person of ordinary creativity, not an automaton. [page 17]