Creating Markets For Patents

Patent Drawing of Eli Whitney's Cotton Gin

The New York Times recently reported on the emerging patent market. The idea is that a market where patents can be bought and sold would reduce the costs of litigation and promote innovation. What are the prospects for success of a patent marketplace?

Patents As Commodities?

For a patent marketplace to operate efficiently, it would certainly help if patents can be traded as commodities. However, patents can be difficult to price and value because they exist in technological spaces that are differ greatly in competitiveness and market size. A patent may have multiple product applications that are difficult to foresee, and thus the value can be difficult to reliably estimate.

Further, the value depends on who owns it. A small inventor with limited resources may not be able to commercialize a patent as easily as a large corporation.

For these reasons, among others, Harvard Business School professor Josh Lerner explains:

Yes, you can move in the direction of trading markets for patents, but these are complicated assets that are individualized and hard to value. [Patents] are more like works of art than stocks.

Like auctions for art, the market for patents will be fragmented, with buyers possessing specialized information about markets. The number of potential buyers and sellers will be limited compared to the number of buyers and sellers of stocks. This may limit the efficiency of these markets.

Ocean Tomo's Patent Auction Problems

Patent auctions have attempted to create patent markets. The demise earlier this year of Ocean Tomo's patent auction unit demonstrates the challenges facing suchauctions. After several successful years, Ocean Tomo ran into problems when key personnel left and the recession left buyers reluctant to spend cash.

Ocean Tomo had unique problems. Because of its live auction format, buyers had little opportunity to conduct due diligence on the patents. In addition, Ocean Tomo focused on lower value patents, for which the market is less robust than for higher value ones.

Future auction formats might model art auctions, where buyers have information far in advance of the auction. Similarly, auctions of higher value patents should contribute to a more stable and predictable market making process.

The New Market Makers

A new set of players is hoping to become patent brokers. The New York Times reports:

Other players in the emerging patent marketplace are specialized investment banks, brokers and licensing companies including Acacia Technologies, Altitude Capital Partners, Intertrust, IPotential, Ocean Tomo, Rembrandt IP Management and Thinkfire. Venture capitalists are also interested in this field — Kleiner Perkins Caufield & Byers, for example, is backing Rational Patent Exchange, a company that buys reservoirs of patents in crucial fields and charges fees to corporate “members,” who participate as a defensive tactic to limit potential patent litigation costs.

(emphasis added).

Implications For Patent Trolls, Patent Litigation, and Innovation

If attempts to create patent markets succeed, patent trolls may find it more profitable to become market participants rather than litigants. If this happens, patents could more often end up in the hands of companies who want to commercialize and use technology in products.

The dead weight loss atttributable to patent litigation would be reduced. Innovation should increase because it will become less expensive and risky for all the parties.

Patent litigation is costly and risky. But as I wrote in a previous post, patent trolls are rational in deciding when to bring suit.

While theoretically a patent marketplace should reduce patent litigation, one investor is starting to encourage such litigation. Intellectual Ventures, the largest patent investor, has long raised concerns that it will become a "super" patent troll, though it has not filed suits itself. The company has begun selling patents to investors and companies who want to monetize the patents. With Intellectual Ventures taking a stake in the litigation outcome, buyers have already initiated patent litigation as they try to monetize the patents.

If the market grows and patents are more freely bought and sold, Intellectual Ventures may become an active participant in the market. And the need for owners to engage litigation in order to monetize patents may slowly disappear.

Douglas Y. Park
Twitter: @DougYPark