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Sunday, September 10, 2006

The Value of Patents

Technology patents have huge potential value - but how do you turn them into cash? As Keith Rodgers reports, San Francisco's first large-scale patent auction may provide a model for the future.

Despised by the conservative right and revered elsewhere as one of the centres of liberal thinking in the US, San Francisco has long had a reputation for breaking new ground. Home to the Beat Generation in the '50s, a stop-off for hippies in the '60s and the centre of the gay liberation movement from the '70s, the city has never been afraid of fighting the status quo. From the lawlessness of the Gold Rush years to Silicon Valley's heyday during the technology boom years, it's a place where the entrepreneurial spirit thrives, and where the experience of two devastating earthquakes in the last century gives everything an extra edge.

All in all, then, not the kind of place where you'd expect people to get too excited about technology patents.

That, however, is exactly what seems to be stirring among those who care about these things in the run up to what's billed as the world's 'first-ever live, large scale auction of technology patents'. Hosted by Ocean Tomo, a merchant bank based in Chicago that specialises in intellectual property, the auction is an attempt to bring greater liquidity to a class of assets that until now have been frustratingly hard to monetise. Sure, on the Richter scale of life-transforming events in San Francisco, it barely registers a murmur - but for tech entrepreneurs who want to extract some value out of their inventions, it's a model that's definitely worth keeping an eye on.

In their own right, technology patent auctions are nothing new. Along with physical assets, patents occasionally come under the hammer after company bankruptcies - most famously in December 2004, when a mystery bidder sent shivers down the spines of leading industry players by spending millions of dollars securing a clutch of significant e-commerce patents owned by Commerce One. (Rather than being an aggressive patent asserter, the purchaser later turned out to be Novell, which has put the patents to benign use in the open source community).

What's different about the Ocean Tomo event, however, is that it's an attempt to create an institutionalised marketplace where inventors of any description can put their patents up for sale. The event, due to be hosted at the San Francisco Ritz Carlton in April and broadcast over the Internet, is expected to bring together large corporations, early-stage companies, academics, and investors, all looking either to buy or sell. Qualified bidders will be able to carry out some degree of due diligence before the event and to contact sellers anonymously via the bank, while sellers can protect the value that they perceive in their inventions by setting a minimum sale price.

While it will be important to see how closely reality matches the hype, the event has been generating some positive feedback. Although unwilling to comment on the specific event, Dan McCurdy, chief executive of IP licensing and advisory firm Thinkfire, likes the concept, arguing that investors and inventors need new, convenient mechanisms to extract value from their IP. Too many companies, he says, are falling victim to patent 'trolls', the independent assertors who buy patents and then aggressively enforce them. The best way to see them off is by cutting off their source of supply - and patent auctions might be one way of doing that.

That said, McCurdy warns would-be sellers to bear a few salient points in mind. While it's great to be able to flag the fact that you've invented or possess something unique, the real purpose of a patent is to exclude others from using your invention without your permission. Whether you put it to offensive use by pursuing others, or secure the patent for defensive purposes to guarantee your own freedom to operate, its ultimate value is economic - so buyers will want to know:

� Is the patent valid? Are there any issues now, or during the prosecution of the patent, that could invalidate it?

� What's the current or future impact of the patent - or in other words, who's infringing the patent today, and who's likely to do so in the future?

� Assuming it's valid and infringed, who's already licensed it and on what terms? If the bulk of the potential population has already paid for a licence - or if licenses have been given away cheaply in the past - it's a less attractive option for those looking to assert it

If you can answer those three concerns, it'll be worth keeping an eye on how the institutionalised auction model pans out. The Ocean Tomo event may not be to everyone's taste - this is San Francisco, after all - but what's pioneered in Silicon Valley has a habit of being replicated elsewhere.