Patent auctions: Lawyer's dream or way of the future?

By Michael Kanellos, CNET News.com
Published on ZDNet News: March 3, 2006, 4:00 AM PT
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On April 5, guests of Ocean Tomo will gather for a $500-per- person cocktail reception and awards dinner at the Palace of Fine Arts in San Francisco.

The next morning, the same people will gather for a patent auction that could lead to some really nasty lawsuits.

Chicago-based Ocean Tomo, a patent consulting firm that includes Ross Perot as an investor, will put on the auction block approximately 400 patents applicable to semiconductors, RFID (radio frequency identification), wireless communications, automotive technology, food, energy and the Internet. The patents will be grouped in 68 blocks ranging in estimated value from $100,000 to more than $5 million.

The offerings include patents for Motorola bar code technologies and biochip technology, which is commonly used in the medical field. They'll also be offering patents for a Clorox bleach activator and a Ford four-wheel steering system.

A 310-page glossy catalog lists complete summaries of the patents.

Patent auctions are the kind of thing that fuel the current anxiety over intellectual property. Companies large and small say they are fending off an increasing number of demands for royalty payments. They are also fending off lawsuits, like the one that threatens to shut down the BlackBerry network.

Some fear that intellectual property companies such as Acacia Research and Intellectual Ventures, which has amassed more than 3,000 third-party patents, will build portfolios just to extract settlements from others.

The Ocean Tomo patent consulting firm plans to hold auctions twice a year.

CEO Jim Malackowsky said the critics' fears are both exaggerated and misplaced. Intellectual property--embodied in patents, copyrights and trademarks--has become an indispensable asset to most companies.

The problem, he said, is that we haven't evolved mechanisms--other than expensive lawsuits and tortured licensing negotiations--for making money off of it.

"IP is the largest asset class today and it is the most inefficient," he said. "It is illiquid and it is challenging to value."

This is where Ocean Tomo comes in. Like other patent consultants, the company conducts intellectual property inventories and consults on transactions. But the company also claims it has devised a more comprehensive way to put a dollar figure on a patent. AT&T has hired the company to help it sell the intellectual property behind Internet pioneer Prodigy. (In 2004, Ocean Tomo auctioned off 39 patents from CommerceOne for $15.5 million.)

The firm has come up with more than 50 metrics--including the number of citations in other patents, the area of technology and the number of claims--to attempt to give intellectual property owners and potential licensees a more accurate value on the patent.

Malackowsky likens Ocean Tomo's work to the work conducted by the early merchant banks such as Morgan Grenfell. These banks started out as merchants and morphed into financiers, issuing credit and guaranteeing payments for fellow traders.

"Everything that they are doing today is what they did for their own assets 150 years ago," he said.

The analogy might be somewhat stretched. Unlike commodities, such as wheat or iron, the quality and value of patents differ drastically. Nonetheless, a more efficient marketplace for intellectual property could dovetail with the strategies of companies like IBM, Microsoft, Hewlett-Packard and other giants. These companies are mining their portfolios for royalties. IBM gains about $1 billion a year in IP licensing while HP has seen royalty revenue nearly quadruple in the past few years.

Ocean Tomo, Malackowsky added, doesn't shop in the bargain bin. The firm examined more than 1,200 patents and selected what it believed were the most marketable for the auction. The firm also invests in start-ups with intellectual property it finds interesting. The investments are in the form of loans: If the firm goes under, Ocean Tomo reclaims the patents under a mortgage.

"This is not a liquidation where people are selling as a last resort," he said. The gala dinner is a way of "giving (the patents) the dignity they deserve."

Still, the number of patents going on the block is quite large, which means bidders may not have an accurate picture of what they are bidding on.

"If there are some gems in there, it would be tough to find them and expensive to evaluate them," said Lee Van Pelt, a partner at the Silicon Valley intellectual-property law firm Van Pelt and Yi. "This sort of event appeals to potential plaintiffs. It also appeals to companies that want to take things off the market."

Like other patent consultants, Malackowsky bristles at the notion that his company is a so-called patent troll--an organization that seeks to exploit the loopholes in intellectual property for gain. Contrary to public perception, most intellectual-property lawsuits tend to be grounded in legitimate disputes, he asserted. The financial risks are also high for the plaintiffs.

"Everyone is always in angst about patent trolls, but (try to) name 10 of them," he said. "There are some junk patents and lawsuits, but by the time a patent gets through the patent office, gets through the pretrial phase, gets through the Markman hearing (to determine the scope of a patent), the trial and the appeal process, it is a pretty good patent."

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