Ocean Tomo Patent Auction
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NOTE: This is report on the first Ocean Tomo patent auction. You can read about other, more recent auctions here.
Ritz Carlton Hotel (San Francisco)
April 5-6, 2006
Contents |
SAN FRANCISCO -- Unfortunately, the only liquidity at the Ocean Tomo patent auction was the rain that had been drenching the Bay area for the previous three weeks. The event, touted as the first public patent auction with multiple lots, was disappointing for the majority of sellers.
Of the approximately 400 patents in offered in 77 lots, only 24 lots (about 30%) were sold. The top four lots were:
| Lot | Gavel Price | Technology | Number of Patents |
| 30a | $1.4m | Method for distributing movies | 1 |
| 19 | $950k | Flash memory module | 1 |
| 67 | $95k | Network-supported chip card transaction method | 1 |
| 32a | $90k | Method and system for filtering messages based on a user profile | 1 |
The remaining 20 lots went for $2,000 to $15,000 each, many going to absentee bidders. The total auction proceeds were about $2.7m.
Most lots went unsold because bidding failed to reach the sellerâs private minimum (the reserve). The top bids that missed the reserve were:
| Lot | Highest Bid | Technology | Number of Patents |
| 20 | $1.9m | Method for routing calls to a fulfillment center, with access codes | 5 |
| 35 | $1.6m | Optical label switching and other patents | 26 |
| 50 | $1.0m | Prepaid cell phones + various cell phone methods | 15 |
| 17 | $1.0m | Infinitely variable engine valve timing | 6 |
(NOTE: Lot 20 noted that an Ocean Tomo employee had an ownership interest and Jim Malakowski, Ocean Tomo President and CEO, is an inventor.)
A few lots got no bids. NISTAC (affiliated with Kansas State) offered 225 patents in 21 lots, and sold 8 lots for total proceeds of $78,000. William Reber offered 53 patents in 19 lots and got the highest bid of the event ($1.9m for lot 20), but sold nothing.
At the end of the 85-minute live auction, James Malakowski, President and CEO of Ocean Tomo (OT), thanked everyone for participating. He said that the hype preceding the event had raised expectations, but this outcome was more in line of what he âwas expectingâ. He then invited sellers and high bidders to continued discussions for private trading. OT's press release on the auction reports that lots "reached terms off the bidding floor with additional value of $5,600,000, bringing event sales to more than $8.5 million" and that this additional trading phase could last "one to two weeks".
All in all, it was a very interesting first experiment in finding ways to make the market for IP more liquid. Even though the outcome was disappointing, our hats must go off to Jim Malakowski and Ocean Tomo for being pioneers and putting their firmâs reputation on the line.
Attendees
There were 350 to 400 attendees. Based on a random hallway sample, the majority (>75%) were licensing officers from universities and corporations, coming to watch the show. The others were various players from the IP ecosystem: lawyers, brokers, valuation firms, etc.
OT did not report the number of bidders, but judging from the seating area, I estimate there were 30-60 bidders. There was some telephone bidding on a few lots, and there were many, many absentee bids (from patent holding companies, I suspect) in the $6,000 to $12,000 range.
Lots & Sellers
The patents offered spanned a wide range of subject areas that defied categorization (even within the auction catalog). The auction catalogs are now available for download.
Without being an expert in each area, it's difficult to assess the quality. I did notice a number of lots from institutional sellers with patents well into their 20-year lifespan. I'm sure many with a large IP inventory were waiting to see how the auction model worked out before offering up their best stuff. An OT employee involved with selecting patents for the auction told me that they selected the "best 400 out of about 1,200 submitted".
The sellers fell into three general categories: institutions (including universities and corporations), individual inventors, and speculators / patent holding companies.
The institutional sellers offered the majority of the lots and patents, led by NISTAC (Kansas State). Many institutions were looking to auctions as another path to monetize their portfolios. Many universities have an inventory of donated IP (accumulated mostly until about a year ago, when the tax rules for valuing patents were changed) that they don't know what to do with. Many of the institutional lots being offered were assigned from large corporations (donations, presumably).
In the second category, there were about 9 individual inventors or inventor groups. Doug Ballantyne (Paxon Development) got the highest sale price in the auction: $1.4m for his patent on a movie distribution method. In two other lots, bidding reached $1m but failed to clear the reserve. Three other inventor lots sold for $10,000 to $15,000 each.
The final seller category was dominated by William Reber, operating as a sort of speculator / patent holding company. He offered 19 lots, many of them acquired from Motorola (though he was an inventor or co-inventor on most of the patents he was selling). Mr. Reber's lots received many bids, but all failed to sell.
Interestingly, Mr. Reber was only auctioning about 75% of his current patent holdings, according to USPTO records. I was unable to talk to Mr. Reber, but the rumored reason for holding back other patents was "active licensing discussions".
Event Format
The two-day event was hosted at the Ritz-Carlton in San Francisco. The first day and a half was scheduled with workshop events and due diligence time slots for buyers and sellers. A display area had 10-20 seller booths with additional information on their lots. The auction itself was held starting at 2pm on the 2nd day and was very ably run by Gooding & Co. (David Gooding and Charlie Ross).
I can't comment on the workshops; the ones I tried to attend were spilling out into the hallways.
OT charged $500 for non-bidder attendees and $1,500 for bidders (for a catalog and two attendee tickets). OT also got 25% of the gavel price from buyer and seller premiums, and may have gotten additional fees from sellers. All in all, OT grossed $800-$900,000 or more from the event, plus (presumably) any premiums for lots sold in private trading.
Liquidity Challenges
This was a great first experiment, but I'm skeptical there will ever be the liquid market for IP envisioned by Ocean Tomo. The outcome here demonstrated the challenges, which are substantial:
- Patents are very, very tough to value. The value of a patent is directly related to the commercial value of the embodied idea, and assessing that value can be incredibly difficult.
A patent's breadth is fundamental. A narrow patent may give an infringer a chance to workaround, with methods that narrowly avoid the patent claims. (For example, in the BlackBerry case, RIM claimed to have worked around NTP's patents). Identifying potential workarounds requires a skilled domain expert and can be very difficult; sometimes the workarounds have yet to be invented!
Historical licensing activity can also affect value. If a previous owner successfully licensed the patent, that may establish a precedent and value comparable that could be leverage against future licensees. However, if the previous owner sold paid-up licenses, they may have gotten much of the potential revenue, leaving little or nothing for a new owner. I spoke to one seller who had already sold licenses to the 3-4 obvious licensees. Buyer beware.
To make it even more fun, there's always a lingering chance a patent is worth nothing due to previously unknown prior art. The existence of documentation establishing dates of conception and reduction to practice, as well as cooperative and available inventors can be key in getting behind prior art challenges. Consider two otherwise identical patents: one just the patent, and the other with extensive documentation establishing priority a year before the filing date. Which one is worth more? The USPTO doesn't offer partial credit.
Finally, to compound the problem, the cost of even estimating patent value is quite high. OT has a patent rating system (called "IPQ") that's based on a statistical analysis of various patent attributes (claim count, references, relationship to renewed and abandoned applications, etc.). This may be helpful for sorting through 1,000 patents and getting a rough sense of where to focus. But it's less helpful for a specific patent because it doesn't factor in the elements that really drive patent value. For example, it won't find that Dutch PhD thesis prior-art from 1988 that blows up your whole patent set. Even so, of the top 10 lot bids, about half had patents with an IPQ "A+" rating.
It's easy to spend $10,000, $50,000 or more to estimate patent value. Even then, the resulting estimate has a huge error margin (ranging all the way down to zero). Since the majority of patents have relatively limited value, few buyers are willing to make these kinds of up-front investments. As demonstrated at this auction, it's easy to spend more on assessing value than the underlying patent itself is worth.
- Patents are a wasting asset. Patents are only good for 20 years, so the clock is ticking as soon as you buy. Other auction asset types (real estate, collectibles, jewelry, etc.) are often appreciating assets and therefore offer some forgiveness for the buyer. If a buyer overpays, not all is lost; she has a chance the market appreciates over time back to her purchase point.
- Most patents lack broad buyer appeal. Patents, by their very nature, focus on narrow subject areas. A given patent or set of related patents may only be of value to a handful of people: patent holding companies with a deep understanding of the domain and license potential, a company looking to bolster an existing patent position, a company looking for material to counter-assert, or a company seeking defensibility for a new product or market. Lack of broad buyer interest limits liquidity.
I should mention the patent holding companies (aka "patent trolls"). Some have speculated (before and during this event) that an efficient market for IP will raise the cost of portfolio acquisition, and make business tougher for the holding companies. (The argument is that the holding companies take advantage market inefficiencies to acquire patents at rock bottom prices).
I think the correct analysis is a completely reversed, ironic catch-22: an efficient market will happen only if and when the patent holding companies participate at scale. We're missing the specialists and market makers that step in to provide liquidity when there's an imbalance of buyers and sellers. I suspect that those liquidity-providing holding companies were somewhat present at this auction, in the form of $6,000 to $12,000 absentee bids. We'll know more when the new owners show up in the UPSTO assignment database.
The Future
So where does this all headed?
The upcoming October auction (Oct 25 and 26 in New York City) should be at least as interesting as this one, in part to see how everyone reacts to this first attempt. Ocean Tomo's biggest challenges are lot quality and closing the bid/ask spread. If they want to make money doing this, they've got to get transactions done and gavel prices up. On the sell-side, they've got to convince sellers to offer up better quality patents, which will be a challenge given the outcome here. They've also got to work with sellers to set reasonable reserves.
On the buy-side, they've got to get more buyers, and get more buyers bidding. They may have to creatively augment or subsidize the due diligence process to help buyers assess value and make bids.
Long term (assuming Ocean Tomo continues beyond October, they're reported to have scheduled six events over the next three years), I see this evolving into lower-budget operation that looks more like a virtual bankruptcy auction and less like a high-end collectibles auction. Even then, it will largely serve the bottom end of the market with most of the patents going for bottom prices. The owners of potentially valuable patents have many options they'll want pursue first: direct commercialization, licensing, private auctions, etc. The public auction becomes the "last stop on the IP train".
See you in October?
(NOTE: If you'd like to be sent any updates on this material, including a buyer analysis after the transactions clear the USPTO assignment database, please send me an email).
Andrew Payne is an entrepreneur and inventor in the Boston area. He holds 6 patents, and has founded or co-founded several software companies, including Open Market in 1994. He was a co-inventor on Open Market's early eCommerce patents, which have been licensed to a number of companies, including Amazon.com for $40m. He's currently contemplating a number of new entrepreneurial projects, and went to the Ocean Tomo auction to check out the scene.
He can be reached on-line at www.payne.org or via e-mail at andy (AT) payne.org.