Going... Going... Gone?: The Rises and Falls of Patent Auctions

This article was included in our Summer 2010 edition of Inside IP magazine.

It seems that just about anything and everything from single cornflakes to Picasso paintings can be sold at auction, and this certainly extends to intellectual property (IP) assets.  This article summarises the auction process for IP assets, and the recent trends in this area.

The name best associated with IP auctions is Ocean Tomo.  It was Ocean Tomo LLC that held what is described as the world’s first ever live multi-lot IP auction in April 2006.  Since then the transactions division of Ocean Tomo was bought by ICAP in June 2009, and continues under the name of ICAP Ocean Tomo.  There have been eleven live patent auctions in total, with the most recent taking place in March 2010.

IP auctions are similar to other live auctions, with an auctioneer taking bids for each auction lot, which may comprise an individual or bundle of IP assets.  The auction lots are sold to the highest bidder, assuming that the highest bid exceeds the reserve price placed on the lot.

Ocean Tomo obtains a fee from both the seller and the buyer of IP.  The sellers are charged a listing fee, which varies for different types of IP assets.  Bidders are required to pre-register, pay registration fees and provide a bank letter of credit as proof that they are able to make purchases.  In some auctions, Ocean Tomo also received a 10 percent buyer’s premium and a 15 percent seller’s premium for auctions lots that were successfully transferred.

Buyers typically perform their own due diligence before bidding at a patent auction.  Ocean Tomo facilitates the provision of certain basic representations as to ownership of the IP assets, and any encumbrances on those assets.  However, independent advice is advisable to assess the value of any IP assists of interest, particularly in terms of likely validity.  For this reason, it is advisable for sellers to ensure that they provide as much information as possible in relation to chain of title information, knowledge of infringement, and any involvement in litigation.  Conducting due diligence takes time and is an additional expense which needs to be factored into the auction process.  In addition, any conditions placed on the sale, for example undertakings to perform tasks like registering assignments or changes of name, to ensure the chain of title is correct, could hold up closing the transaction, and the transfer of funds from the sale.

Since the first auction in 2006, Ocean Tomo has facilitated the transfer of nearly 300 lots of patent, trade mark, copyright and domain name rights.  NASA, IBM, Agere, 3Com, and the University of California are among the many names that have put IP rights up for auction.  IP assets do not need to be sold outright, and licences can also be put up for auction.  In one case, NASA successfully sold exclusive licenses of patent rights while retaining ownership of the patents.

The results from Ocean Tomo show that IP auctions can be successful, with potential benefits to both buyers and sellers.  From a seller perspective, auctions shift some of the burden of purchasing to the buyer.  Also, the structure and format of the auction enable a seller to offer preset terms and conditions including a minimum reserve price.  Furthermore, there is a set timeline for completing transactions, which helps keep momentum, while other, more conventional, transactions can drag on for several months.  There is also a buzz created by auctions which may increase the awareness of the auction lots, bringing forward multiple interested parties to drive up the bidding.

However, selling IP rights in live auctions may not be the best option when selling IP, and auctions may be more suitable for certain technologies or IP types than others.  The latest auction in March 2010 is perhaps too recent to include in any analysis statistics as transactions may still be under negotiation, but for the first ten auctions only 38% of the lots offered were sold, either during the auction or through post-auction activities.  Furthermore, the number of lots sold in the most recent auctions has been particularly low.  For example, only 6 of the 85 lots offered at the Spring 2009 auction were sold during the auction, with many of the lots failing to receive any bids.  The Summer 2009 auction was not much better.  The auction due to take place in November 2009 in Paris was cancelled, among much speculation that IP auctions were not sustainable during a downturn in the economy.

The poor results in 2009 may have been attributed to the demand for patents being down, inline with the global economy, and to the remaining buyers being more selective.  In addition, the number of bids may have been reduced after the reserve prices were published for the first time before bidding commenced.  It has been reported that only 4 of the 29 lots in the Summer 2009 auction were sold, with bidding starting at the reserve price, while the remaining 25 lots received no bids at all.  Starting bidding at the reserve price may provide transparency for the parties involved, but it also has the knock-on effect of diluting any useful information which could be gathered from the auction process in terms of the number of parties interested or the number of bids received.  Also, for those lots not receiving a single bid, there is no further information regarding what the lot may be considered to be worth.

Unfortunately, the trend in the most recent auctions is for far more lots to remain unsold than those being sold.  This may well have the effect of deterring people from attempting to sell their IP assets at auction, in preference of more conventional transaction types.  Ocean Tomo, in trying to enhance the attractiveness of the auction process, have introduced a ‘Buy it Now’ feature, where buyers can decide to buy a lot for a fixed, known price ahead of the auction.

Initial reports suggest that 10 lots, amounting to $11.2 million, were sold before the March 2010 auction with only 9 lots, amounting to $1.8 million, being sold during the auction.  This suggests that auctions may still be used to generating the ‘buzz’ and interests in IP assets for sale, but transactions may be facilitated by Ocean Tomo, openly, throughout the year without having to wait until the next auction.  There is a risk though for parties planning to bid that the lot has already been sold before the auction comes around.

After a tumultuous 2009, it is perhaps too early to say what the future is for IP auctions: whether they will grow in popularity or whether the ‘Buy it Now’ option will take Ocean Tomo in the direction of other patent and technology exchanges.  However, for those thinking about buying or selling any IP at auction, and in light of the relative successes and failings of the auction process, our recommendation is to seek independent advice regarding the value of your IP and to fully understand your options for monetising those assets as it may be that other, more conventional transfer mechanisms are more appropriate for your circumstances.

Michelle Jamieson 14 Jun 2010

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