Patents Go To Gavel

A ritzy hotel in San Francisco was the setting on April 6 for what was billed as the first live public auction of patents. Chicago-based Ocean Tomo organized the event, hoping to become for the intellectual property world what Christie's and Sotheby's are for art connoisseurs.

A little more than 400 people came to the event. Out of 78 lots consisting of more than 400 patents, 26 lots were sold, raising in excess of $3 million. Including five other lots that sold in negotiations following the public auction, the total take came to $8.5 million, according to Andrew T. Ramer, an Ocean Tomo director. "Our goal was to prove that patents and technology could be sold this way," he says.

The San Francisco event was what Ramer refers to as the beta version for six more public auctions Ocean Tomo plans over three years. The next auction, in October, will take place in New York City, and the firm is searching for lots to list now.

Chemical companies such as DuPont, Air Products & Chemicals, and Dow Chemical say they are intrigued. A representative from DuPont's intellectual assets and licensing team attended the auction in person. Air Products and Dow say their representatives were not at the auction but that they are nonetheless keeping an eye on Ocean Tomo's efforts.

Up for sale were patents covering such things as water-shrinkable films, enzyme-based laundry soil and stain removers, a technology for embedding semiconductor sensors in medical instruments and cutting tools, and an apparatus providing gas-phase film lubrication for an uncooled internal combustion engine.

The sale included patents originally held by DuPont, Clorox, and Ford. The seller of these particular patents, though, was the National Institute for Strategic Technology Acquisition & Commercialization, a not-for-profit entity of the University of Kansas to which the three firms had donated patents. NISTAC sold nine patent lots at the auction. All buyers remained anonymous.

Representatives of Fortune 500 firms attended the April auction, as did venture capitalists and patent-holding firms. The three largest sales on the auction floor were a video-on-demand patent lot that went for $1.5 million, patents covering a flash memory module for $1 million, and patents covering the use of a "smart card" for commerce for $104,000. Most others sold for $2,000 to $15,000.

Dow, DuPont, Air Products, and their cohorts in the chemical and pharmaceutical industries invest millions of dollars annually in R&D, and they patent a significant number of technology advances that they never put to use. "Firms need to monetize their intellectual property to help defray the costs of supporting those they elect to use," points out David Hurwitz, president of Garnett Consulting, a firm that advises chemical industry clients.

For instance, Yet2.com, an Internet-based service, provides a way for companies to list patents that they are willing to license for royalty payments. Firms have had some success in using the service to attract licensees, Hurwitz says. Yet2.com tried a public Internet auction of patents two-and-a-half years ago but had little success.

Brokers offer another avenue through which firms can find others willing to buy or pay for licenses of unused patents. Invitation-only private auctions occur from time to time, say industry observers, as do public auctions of intellectual property as part of bankruptcy procedures.

But Hurwitz, a corporate strategy consultant, says many firms still find that the tasks of managing their intellectual property and actively marketing unused patents are difficult and time-consuming. Like the firms he consults with, Hurwitz is intrigued by the idea of multilot public patent auctions open to all comers.

Ocean Tomo's Ramer says public auctions offer a quick and inexpensive way to get value from patents. Negotiated patent licenses or sales typically stretch out for months as buyers undertake "due diligence" investigations. These negotiations often include a "no-shop" agreement during which the seller is unable to strike a deal with others. Negotiated deals also have drawbacks for buyers, especially if they are large, well-known corporations. "The price goes up as soon as the seller knows who you are," Ramer says.

"An auction creates a sense of urgency and closure," explains Ramer, an attorney who worked for Motorola's venture capital arm before joining Ocean Tomo. For the seller, "it takes the negotiating out of the equation." For the buyer, an auction offers anonymity. Well-known bidders can place their bids by phone or have their lawyers bid for them.

Ocean Tomo, which calls itself a merchant bank, appraises patents, operates a fund to invest in companies on the basis of their intellectual property, and provides expert testimony in patent litigation. The firm's appraisal system was used to help set a range of values for patents on auction.

Howard L. Hertzberg, a licensing director for DuPont, attended the San Francisco auction and says that, for a first-time auction, it was handled well. In his view, auctions that focus on one area, such as electronics or chemicals, would likely draw more interested buyers. DuPont might sell some patents at such an auction in the future, he says, rather than let them lapse. "If you drop a patent you get nothing. But if you auction it off, at least you get something," Hertzberg notes.

Lindsay S. Adams, an intellectual property lawyer with the firm of Pitney Hardin, whose clients include biotech and chemical firms, took away from the auction the lesson that sellers have to temper their expectations. Add up the valuations included in the auction catalog, he notes, and the patent lots for sale were collectively valued at $100 million.

Many patents did not sell because bids did not exceed the price that sellers set as a minimum. "Lots sold without reserve went for bargain-bin prices," Adams observes.

Adams expects to attend the October auction in New York City, where Ocean Tomo promises to put up a large number of pharmaceutical and biotech patents. He doesn't have high hopes, however. "I'm not sure that pharmaceutical executives would buy patents in such a forum," he says. The barriers to commercializing chemical and life sciences inventions are much more difficult than those for e-commerce and electronics innovations, Adams asserts.

Willy Manfroy is the immediate past-president of the Licensing Executive Society International and a technology licensing executive with experience at Dow and Eastman Chemical. Now principal of Bornival LLC, Manfroy says that "no one expects public auctions to be the only way to sell patents." Rather, he expects auctions will become just another tool that industry adopts in an effort to get some return from unused intellectual property.