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IP, IP Asset, Patent, Risk Mangement

Ocean Tomo ‘Freedom To Operate’ Auction Helps Patent Owners Build Value

The business of patent licensing is startlingly counter-intuitive, and likely frustrating for new entrants to the market.  In essence, patent owners are in the business of licensing rights to use technology to operators that either want to, or are already practicing that technology in ways consistent with the rights defined in the patent. But patent licensing is an expensive endeavor that potentially carries high returns.  Naturally, the business attracts investors, including companies like Ocean Tomo, trying to capitalize on their own specialized niche in the market.

Ocean Tomo’s first efforts in the IP transactional space showed promise, and laid a groundwork for showing what’s possible.  But its new auction format looks to generate significant value, rather than a bunch of angry clients who received no bids.  But to understand the value Ocean Tomo brings to the table, its important to understand how patent licensing actually works in that most scariest of places I was told I’d encounter after college–the real world.

You might think that decisions about when to make deals (and how much to spend) would be driven by some understanding of the value that technology brings to the company.  You might think that.  But you would be wrong.  Patent Attorney Gerald Hosier probably summed it up best:

“This business is not based on what’s right or what’s wrong,” Hosier said. “It’s based on fear. Nobody would pay you for a patent unless they feared that the consequences of not paying you vastly exceeded the consequences of paying.”

(Quoted in both LA Times and USA Today).

The “consequences of not paying” Hosier refers to is the drawn-out legal battle known as litigation, an ugly, inefficient and counterproductive tool for those trying to make business decisions.  Although we now use words as our weapons, it is sad to think of rights to use advances in technology being allocated on the basis of figuring out whether my lawyer can beat up your lawyer.

Perhaps based on the belief that, one day, the situation will improve investment in IP has gained interest, spawning a number of new business models, including Ocean Tomo.  For years, Ocean Tomo tried to make their mark on the IP transactional marketplace by creating an auction house where IP assets can be bought and sold just like art, antiques or office furniture after a business bites the dust. For a while, this model showed promise, but, in recent years, the returns were not as good as expected.

Unfortunately for Ocean Tomo, buyers quickly realized that IP licensing is hard work.  To compound matters, the quality of the patents being acquired essentially takes a back seat in licensing discussions until operating companies become satisfied that the patent owner contenders can hold their own against the company’s own gladiators.  Building up a reputation as a “fighter” in the barbaric world of IP licensing takes time.  And time is money.

Balancing all of the risks and expenses of a lengthy IP licensing campaign, and reducing everything to a single number is also pretty hard (unless that number is really small).  In addition, the number of people interested in buying in to this business venture is still pretty small.  However, balancing risks and expenses of patent litigation, and reducing that amount to a single number is much, much easier. Also, the number of companies that want, or need, to operate without interruption from patents is much larger, relatively speaking.  When you think about it, the math is pretty simple.

Ocean Tomo’s recent attempts to auction covenants not to sue received a warm reception by the IP licensing community.  One company, likely a PC or cellphone handset maker, acquired freedom to operate under Round Rock Research’s IP portfolio (inherited from Micron) for $38.5 Million, and other companies bid several million to get similar protection from specific portfolios owned by Walker Digital.

Based on this, Ocean Tomo will be testing the waters in September in a new auction format that will specifically offer covenants not to sue.  Walker Digital is also using a similar format to offer freedom to operate squarely at its litigation targets.  From the announcement:

These new agreements are specifically designed for companies currently in litigation with Walker Digital and provide the purchaser with the ability to eliminate the uncertainty inherent in litigation and to effectively manage their corporate risk.

There’s no shortage of potentially interested buyers, as Walker Digital has already named over 100 companies in a series of lawsuits currently pending in Delaware.  (For background, see the post Behind Walker Digital’s Velvet Glove Lies An Iron Fist).

Some reader have asked why Walker Digital would go through Ocean Tomo, adding an additional layer of compensation (to go along with IP Nav and the litigation counsel).  The truth is, the presence of Ocean Tomo adds significant value to the process.  By using their auction and sale format, bidders can expect privacy and anonymity. They can express interest without Walker or IP Nav knowing exactly which of its opponents is making the inquiry until getting favorable terms is assured.

Companies can send anonymous representatives to attend an auction, and observe bidding activity.  Co-defendants can bid against one-another without revealing their identities, resulting in a more honest expression of value.   Walker Digital can get a truer picture of how much (or how little) operating companies actually value access to the various patent portfolios, which can help guide its decision to allocate resources in the future.

By using Ocean Tomo to market covenants specifically at Walker’s litigation targets, the company is effectively giving each of them one more opportunity to come to the bargaining table and avoid the barbaric ritual of litigation. In other words, Jay Walker is serious.

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Discussion

12 thoughts on “Ocean Tomo ‘Freedom To Operate’ Auction Helps Patent Owners Build Value

  1. A patent is referred to a set of rights granted to an individual or business by the state that gives them public disclosure of a new invention for a specific amount of time. This grant does not actually give the holder the exclusive right to practice the invention, but simply the right to preclude other outside parties from using or imitating it. Patent Litigation is a controversy or disagreement between two independent parties regarding a dispute of intellectual or physical property.

    Posted by Jared | May 17, 2011, 12:18 pm
    • In response to Jared’s comment. Wrong! Wrong Wrong. It is amazing how many people don’t know what patents are. Patents are basically a transaction between the public and the inventor. The exchange goes like this. If you disclose your killer invention to all of us in the public domain and teach us how to build or do it. The government will grant you the right to prevent others from making using or selling said invention for said period of time. Period. no more no less.
      Patents are not granted to business in the US. Only Individuals may apply and receive Patents. They can license them to a business.
      Mark Boys

      Posted by Mark Boys | October 27, 2011, 10:50 pm

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