Last year, Dean Becker, an avid collector of classic cars, was thumbing through a catalog for an automobile auction. Why not sell patents the same way, he thought. This April, Ocean Tomo, a firm where Becker is a managing director, will do just that. It has lined up a British auctioneer to take the podium at The Ritz-Carlton San Francisco (MAR) and sell off rights to everything from earth-imaging technology to shrink-wrap.
Think of what eBay Inc. (EBAY) did for the junk in people's garages, and you get an idea of what Becker's idea could mean for intellectual property. "Right now what you've got is a marketplace where nobody knows what the asset is worth," says David Kappos, an assistant general counsel at IBM (IBM) who manages patents.
Chicago-based Ocean Tomo is part of a cottage industry of firms that want to cash in on patents. Traditionally, patent deals have been shrouded in secrecy and burdened by steep transaction costs. The primary method of extracting value, beyond selling a product based on an invention, has been licensing patent rights. But licensing negotiations are often arduous and need to be backed up by a willingness to litigate, which is expensive.
Auctions could help foster "the emergence of a liquid market" for buying and selling patents, says Kappos. So far more than 1,200 patents have been submitted to Ocean Tomo for sale from such companies as AT&T (T), BellSouth (BLS), American Express (AXP), and Kimberly-Clark (KMB).
If auctions become a regular feature of the patent world, they would help establish prices and a marketplace. "I see this as a great opportunity [as] an independent inventor to really get exposure to a large base of companies that could commercialize my patents," says William L. Reber. Now on his own after working as an engineer for Walt Disney Co. (DIS) and Motorola Inc. (MOT), Reber is the creator of 48 patents he's putting up for sale at the auction, which takes place on April 5 and 6.
Kimberly-Clark Corp. will sell patents on a new shrink-wrap that it has decided not to commercialize, and BellSouth Corp. will auction off 20 patents in areas no longer part of its core business, such as search-engine technology. "We think this is a good avenue to explore," says Bill Hartselle, a managing director in BellSouth's patent marketing unit.
Patents from each seller will be grouped into lots when they relate to a common area. Some lots will include additional material such as prototypes of products, inventor notebooks, and, in one case, 80 hours with the inventor to aid in transferring expertise. Ocean Tomo -- a name combining a legal acronym with the Japanese word for friend -- will get 25% of the sale price.
It's the ambition of Ocean Tomo's cofounder and CEO, James E. Malackowski, to turn his firm into an "intellectual-capital merchant bank" offering a range of products and services, including strategic advice for mergers and acquisitions of patent-rich companies, patent appraisal, and insurance against infringement claims. The auction is integral to that vision. It is, he says, the "foundation for establishing patents as an investment asset class." In his view, patents are in the same spot as real estate was decades ago, before it was connected to the Wall Street spigot by such things as real estate investment trusts and mortgage-backed securities.
Some see the upcoming auction as little more than a marketing stunt. And Malackowski certainly has a propensity for promotion. Two firms he was affiliated with before founding Ocean Tomo in 2003 raised questions about items in his Web site résumé that describe investment work he had done with them. Malackowski says the résumé was accurate, but modified it following questions from BusinessWeek.
Still, many see Malackowski as a visionary. "We've been talking about things like new ways of monetizing patents, new ways of leveraging [intellectual property]," says Kappos of IBM. "Ocean Tomo is right there inventing the future."
By Michael Orey