Auctioning patents

This coming Thursday, April 6, 2006, a Chicago-based Intellectual Property company, Ocean Tomo, will proceed to auction several patents lots in a San Francisco hotel.
What makes this information newsworthy is that it is the very first public patent auction worldwide. This may sound surprising: after all, patents are a well-known economic asset, whose importance is widely recognised. It is an essential component of Intellectual Property (IP), which in the modern economy is becoming more important than the traditional Physical (Material) Property. Indeed for leading-edge sectors such as biotechnology and information technology, patent management is a critical skill and the validity of a patent is often a matter of sheer business survival. Accountants have developed various methods of evaluating the economic and financial value of patents. These methods have been codified in the new accounting standards (particularly IAS). Their validity is periodically tested in courts, which have been become ultimate adjudicators of both the ownership and the value of the patents. This was for instance the case in a highly publicized patent dispute between Blackberry owner, Research in Motion, and a small company NTP, which resulted in a settlement of over $600 million in favour of NTP.
Another trend, which should favour patent trading, is the emergence of markets for intangible assets such as telecom licences or pollution rights.
So why, outside the convoluted and ponderous legal apparatus, and despite numerous attempts, no formal market for patents has been successfully established to date?  I believe that the difficulty is due to three interrelated factors:

• Value chain integration: Owners of patents want to fully benefit from their inventions. The traditional approach to achieve this goal is exclusive ownership of patents and related licensing rights. This is particularly relevant for academic patent holders, who want to avoid a reputation risk of being associated with unethical use f their inventions.


• Information asymmetry: Patents embody only a part of knowledge used to create the invention. Thus, from a technological perspective, the owner of the patent has a sizeable information advantage over potential buyers. However, once a patent is sold, it can open a door into the related knowledge domain. As some of the buyers are existing or potential competitors, inventors often seek to minimize prior disclosure in order to preserve their advantage. In a symmetrical fashion, potential buyers may have an information advantage over inventors in terms of market potential knowledge. This is particularly the case if the patent is detained by an academic or a research entity. In order to acquire the patent cheaply, buyer may be reluctant to fully disclose his appreciation of market potential prior to its acquisition.


• Disincentive to share information: Conflicting motivation of buyers and sellers prevent them from fully sharing information, prior to the transaction. Thus, while patent trade is actually quite active, it is carried on a bilateral basis, quietly, often secretively. For instance, an ambitious patent acquisition venture, Intellectual Ventures, launched by Nathan Myhwold, ex-chief scientist of Microsoft, makes a point of not disclosing its patent portfolio.  

Ocean Tomo is apparently well-aware of those difficulties and its initial approach is quite cautious, actually old-fashioned. This will be a live auction, on a traditional Christie’s or Sotheby’s model, with a printed catalogue and social events. If successful, it will be replicated every few months. So far, no announcements were made to set up a sophisticated electronic market or to link with an existing (physical or virtual) auction site. This may be the next step.
Patent trading is a timely idea. I will monitor the results of Ocean Tomo initiative and follow its future developments. It will be interesting to see whether it triggers a trend of open, multilateral trading in patents.