11 April 2006

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 The most expensive lot, more than 35 patents from Ford Motor Company, was withdrawn at the auction for lacking to reach the reserve.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.

01 April 2006

Will the eBay debate in the US has a similar impact in Europe?

Corporate America celebrated when the international agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) went into effect Jan. 1, 1995. Many companies believed TRIPS would go a long way toward protecting their IP rights overseas. Patent owners were especially happy with a provision that requires countries to grant patent injunctions when requested. Many high-tech companies soon wished that provision had never made it into the treaty. Such a company is eBay.

Last week the US Supreme Court heard a case between eBay and MercExchange on an important question: should patent-owners in patent infringement cases be entitled, virtually “automatically” as eBay lawyers put it, to an injunction? Or should judges have discretion to decide what remedies fits the infringement, taking into account the harm caused and the larger public interest? Ebay was found by lower courts to have infringed two e-commerce patents owned by MercExchange, a small technology company. They concern the "buy it now" feature on its site, which allows users who do not want to take part in an auction to buy an item at a fixed price. A US District Court declined to issue an injunction and awarded MercExchange damages instead. The Federal Court of Appeals (CAFC, Washington) overturned this decision and ruled that patent holders had the right to an injunction barring exceptional circumstances.

The case has dramatically divided the patent community. Technology companies have supported Ebay's case before the Supreme Court arguing that patent cases are stifling innovation. Pharmaceutical companies however have been arguing the opposite. In a brief to the court, they say limiting injunctions and weakening patent laws would drive up the cost of innovation.

The case has attracted large media attention not least because eBay spared no effort nor money to make its case. A record number of 37 amicus briefs were filed, ranging from IP practitioner groups, industry associations, numerous law professors (on either side of the arguments), IT and pharma & biotech companies and even representatives of what some would call “patent trolls”.

Financial Times editorial comments called upon the Supreme Court to “restore some sanity to the system” referring to the Blackberry case where an owner of a single patent, with no business of himself, almost shut down the successful Blackberry wireless email handheld business. Financial Times went as far as saying that the case could be “crucial to the future of US innovation: the near-automatic right to an injunction creates a severe imbalance of power within the patent system” by referring to patent trolls as a major problem in the US patent system (owners of patents that do not have any business other than to assert it against users of the patent to extract royalties). This is nothing but short of gross exaggeration and is certainly not true for all industries. In the pharmaceutical and biotech industry a patent protects the vast sums of that went into innovative R&D . New therapies are not introduced to patients until the often several hundred million dollar regulatory process has confirmed that a new chemotherapy or antibiotic is both effective and will not harm the patient. Absent an iron-clad exclusive right guaranteed by the patent, new drug development by the private sector would wither as the grant of a compulsory license would destroy the profit incentive so vital to induce pharmaceutical concerns to invest the vast sums needed for regulatory approval.

One would argue how come this is not a similar big issue in Europe? Most European patent laws are based on the understanding that the right to exclude others is the fundamental right of a patentee. An patent right provides its owner an exclusive right to an invention he made. If this invention for which a patent has been granted is being infringed, an injunction against the party infringing the patent owner’s exclusive right to manufacture and dispose of a patent is the only effective remedy to restore exclusivity. Exclusivity is what the party who innovated requires to earn back his R&D investment. An exclusive right would be meaningless without the right to exclude. Injunction and exclusivity go therefore hand in hand.

In most patent countries of the EU a court ordered injunction is granted unless specific circumstances are shown that do not justify an injunction, like public health. Many EU countries give the patent owner the choice either to go for an injunction per se, an injunction as well as an order to pay damages, or, alternatively, only for damages. Refusal to injunction amounts to a compulsory license, which can only be granted in exceptional circumstances, according to most current European patent laws. But that may chance. The current stream of hostilities to Intellectual property rights may spark a similar debate as in the US in the eBay case.
It is fair to say that the fierce eBay debate in the US will soon be mirrored in Europe where patent quality has been a recent issue as well (“trivial patents”). The consultation round initiated by the European Commission and closed on March 31 will show whether the current debate in the US will be followed by an equally fierce debate on patent quality and the effects of patents on innovation in Europe.