The NY Times is Wrong: Patent Auctions Do Not Provide Indendent Inventors with “Protection”

Patent auctions will do little to help independent inventors sell their patents
Patent auctions will do little to help independent inventors sell their patents

Those seeking ways to generate revenue from their patentable ideas will find the recent NY Times article entitled “Patent Auctions Provide Protections for Inventors,” written by Steve Lohr, to be an interesting read.  However, as someone who works with entrepreneurs and corporations wishing to monetize their patent rights, I find it necessary to comment on the assertion that patent auctions can operate to “provide protections” for independent inventors, as well as the underlying premise that these it is generally possible for non-corporate inventors to generate value from their patent rights irrespective of the underlying subject matter of the patents.* 

As an initial matter, the NY Times article states that “[independent inventors] can often find themselves in court, battling big corporations, spending piles of money on lawyers and leaving it up to judges and juries to determine the value of their hard-won patents.”  This makes me wonder if the fact-checkers took a break when this article was presented for publication.  The story of the lone “David” inventor battling in court against the evil “Goliath” corporation that steals a patented idea not only does not occur “often,” relative to the number of patents issued each year, it almost never occurs–a fact that may be lost in view of the Hollywood vision of the down-trodden inventor.

Contrary to the assertions in Mr. Lohr’s article, very few patents are ever litigated (in 2007  fewer than 3000 patent suits were filed vs. about 157,000 total issued) and, of those less than about 2% that do make it to court, only a very small number make it to the trial stage where “judges and juries determine the value.”   Even fewer of the litigated patents can be attributed to independent inventors, who rarely will have the financial ability to participate fully in litigation.   

While there are many misconceptions about patents in the news media, I am surprised that the NY Times would substitute facts for the (admittedly more romantic) urban myth that independent inventors must always view corporations as potential idea thieves.  This perception is rampant with independent inventors and, unfortunately, serves as an significant impediment to patent monetization because inventors have been educated (for example, by articles such as Mr. Lohr’s) not to trust anyone who represents a corporation.  This lack of trust makes it exceedingly difficult to develop the necessary relationship with a corporation that can result in a successful patent transaction.  Moreover, the reticence typically shown by independent inventors in dealing with corporations is a primary reason why corporations often dislike dealing with them.  Put simply, the typically unfounded lack of trust exhibited by independent inventors makes it less probable that they will be successful in getting a corporation to express interest in their patent rights. 

 Next, the NY Times article implies that patent auctions are a new phenomenon with unknown, but promising, potential.  This is not true.  The patent auction model was introduced by Ocean Tomo in 2006, from which there are several years of data to gauge the value of patent auctions to independent inventors.  While there have been some significant sales of patent rights at these auctions, no one who works in the patent monetization space would say that this transaction model has served to markedly increase the number of sale opportunities for any patent owner, whether independent inventors or otherwise. 

As a substitute for the credulous conclusions in Mr. Lohr’s article, we can look at real numbers that validate whether patent auctions can “protect” or even measurably help independent inventors.  Marcus Malek of the Intangitopia Blog has compiled all sale results as reported by Ocean Tomo.  To summarize Marcus’ data, in the first 8 auctions, 243 sets (or “lots”) of patents were sold, but only 90 of these were sold by individuals.  (Of all lots offered for sale, only 41% of actually sold.) 

While there is no recent data on how many patents issue yearly in the US to independent inventors, let us assume for the sake of argument that a relatively low 20% of patents are not assigned to corporations upon issuance.  In 2008, approximately 158,000 patents issued, making about 31,600 patents owned by individual inventors (when 20% is used as the baseline measure for non-corporate patent oweners).  When, as shown by Marcus’ data, only 90 individual inventors were involved in the 8 Ocean Tomo auctions, it becomes clear that patent auctions have assisted only a very small number of independent inventors who wish to sell their patents.  (And, if these 31,600 patent owners “often” were faced with litigation, we would likely would not need the NY Times to tell us about the problem because the Federal Courts would be screaming for relief from such massive amounts of litigation.)   So, notwithstanding Mr. Lohr’s boosterism about the value of patent auctions, the data show that this model offers very little “protection” to independent inventors.

Perhaps more significant than the above-discussed misleading characterizations about independent inventors and the supposed “protections” afforded to them by patent auctions, Mr. Lohr’s article serves to reinforce the notion that one can get rich by getting a patent on a unique idea.  This belief, which forms the grounds upon which a majority of independent inventors spend many $1000’s on patent rights and often years of effort, is all-too-frequently misguided.  Frankly, if all it took was a patent to make money, there would be a lot more rich people in the US.   No shortage of good ideas and patents covering them exist, but, unfortunately, there are few outlets exist for independent inventors to sell their inventions.  This means that the probability that an independent inventor will be able to sell his or her patent rights to a third party are exceedingly slim today. 

To make the odds of successful monetization even longer for most independent inventors, any patent rights that have been successfully transacted in recent years have primarily comprised “high tech” inventions, which represent only a small percentage of the categories of patent technologies.  (For an overview of technologies successfully sold at auction, Marcus Malek’s data is again instructive.)   This means that whatever marketplace has emerged for patent rights in recent years has developed primarily to facilitate sale of this specific type of invention.  Certainly, all patents cannot be suitably transacted using a one-size fits all approach.  Some inventions, such as those involving chemistry or materials science, do not lend themselves to being readily transacted, whether in an auction format or otherwise. 

To this end, one can imagine what the art market would be like if, say, only Impressionist art works could readily be bought and sold.  Would this mean that someone owning art that did not fall into this specific category had no value other than held its owner?  Perhaps not, but as the current US real estate market illustrates, the absence of a willing buyer no doubt greatly influences the price obtainable for property. 

This is the position that independent inventors find themselves today: some patents are worth lots of money because one or more willing buyers exist, others have no current transactional value due to the fact that no buyer can be identified.  Put simply, there are far more inventors who wish to sell their patented ideas than there are entities that wish to buy them.  This fundamental disconnect must be addressed before any significant and consistent market for patent rights emerges, whether in the form of patent auctions or otherwise. 

Fortunately, I believe that we will see the market for patent rights evolve somewhat in the near future as Open Innovation becomes a more prevalent product development model for US and foreign corporations.  That is, when more corporations look outside their own organizations for innovations, more opportunities will exist for IP owners in a wide variety of technology areas. 

Significantly, however, these additional opportunities to sell patent rights will not help those IP owners with patents that are simply not wanted.  Any patent that does not cover an existing or emerging business model is effectively worthless.  No matter how much is spent to obtain it, a patent that covers a widget that no company wants will never have any transactional value, whether at offered at auction or otherwise. 

The primary reason that most independent inventors find it difficult to make money from their patented ideas is that they are selling something that no one is interested in buying, either because their patent does not cover anything of commercial relevance or there is no company who sees it necessary to buy those rights.  Rather than than place their hopes on patent auctioneers, independent inventors would be better served by seeking to patent ideas relating to commercializable products or technology in areas where corporate buyers are likely to exist.

* Some might also find Mr. Lohr’s article curiously in alignment with this press release

10 thoughts on “The NY Times is Wrong: Patent Auctions Do Not Provide Indendent Inventors with “Protection”

  1. Jackie your observations are spot-on. It saddens me that many small inventors waste hard cash and a lot of their time fruitlessly on useless inventions. The inventor in the NY Times article is the exception to the rule.

    In the patent arena quality is a vital constituent of a successful system. We are seeing more of a desire in Europe to move to quality given the level of resources in the system and some suggestions that patent costs should increase to deter resource wasting punts on commercially useless inventions (perhaps the USPTO should junk the small entity package). In the press all we get is the “romantic” notion of the down trodden inventor metered out time and time again. The press are not doing these people any service at all. We could do with some honesty here from all stakeholders. We need to get away from the notion that ideas are sacrosanct and that all inventors are entitled to reward. Patents per se are pointless but commercially relevant patents can be priceless.

    As I see it the problem is that many of these individuals do not receive good advice when seeking to protect their ideas. Frankly, the chances of a small inventor, with only the assistance of an attorney, achieving a commercially valuable patent are almost zero. The only commercial value is likely to be for the attorney. I am often completely aghast at the subject matter of many US patents issued to small inventors. Many are just completely junk. What is even more perturbing is that often a US patent attorney has taken good money to draft, file and prosecute these patents. We expect the US PTO to mindlessly grant these patents so who is to advise small inventors on how to wisely spend their money or if spent how to extract value?

    Unfortunately, many of these small inventors end up in the arms of invention exploitation companies after they have already spent and wasted their money on filing for patents. Some of these exploitation companies are good but some are very bad indeed if not bordering on the criminal given my experience in Europe. So this avenue has its limitations.

    Auctions have their place as do NPE’s (which I broadly support) in enabling some small inventors to get their patents to the money. They are a rough filter on commercial value that is sadly only available to the few and again after significant amounts of money has been spent and probably wasted on getting to the assessment.

    Open innovation will be an interesting avenue for some (see P&G, Nesta programme in the UK but not all as only a few corporations and even smaller numbers of mid-sized companies are embracing the open innovation model. It also has its downsides.

    Patents on e-bay? Now that’s a thought. If someone can get thousands of dollars on e-bay for a piece of food in the form of a deity then perhaps there is hope for junk patents.

  2. Nick

    Great comment! I am wondering if you think that there is a significant difference in the independent inventor culture outside of the US. Here, there seems to be a deeply ingrained entrepreneurial paradigm that many think can only be successful if one gets a patent. My sense is that in The States independent inventors tend to “fetishize” patents in that they are perceived to provide some sort of “permission to profit.” As you and I know, patents are more often than not irrelevant to business success, but this is a message that many American would-be entrepreneurs do not want to hear (and are not told by their patent attorneys).

  3. “As I see it the problem is that many of these individuals do not receive good advice when seeking to protect their ideas.”

    That strikes me as the key sentence in Nick’s post. It is up to the IP (patent) profession to manage the expectations of lone inventors, SMEs and larger corporations. Sometimes, even often, this may mean advising against a patent filing and not taking easy cash when it is available. As Nick implies, this may not happen nearly as much as it should do.

    The NYT article merely points the way to a more sophisticated patent monetisation marketplace, one that is clearly developing, and uses auctions as but one example of this. Any inventor reading it may get excited, but will still have to visit an attorney or another adviser to do anything more. That is where the serious conversations need to begin. And if they are not happening, that is an issue the profession itself needs to deal with.

    Oh and if the NYT journalist has used the press release as a hook for his article, then kudos to the people that put the release together, put it in front of the writer and persuaded him that there was a story there. If only more people inside the IP world could do something similar!

  4. Joff:

    Thanks for weighing in! Great to see you here.

    While it is makes sense that the IP profession should manage lone inventor’s expectations, truth be told, there are few incentive for IP lawyers in private practice to say no. To the contrary, in the current US IP practice model, one does not get paid if they advise against moving forward with a patent application. Further, it is not unethical to move forward with a patent application if the inventor wants one and the invention meets the requirements of patentability. A sad, but true, state of affairs–but in my role as an outside IP lawyer, it was my job to make legal recommendations, not give business advice. Those of us giving advice certainly need to act more as strategic in-house IP counsel (“CIPO’s”), but a model has yet to develop to allow us to be properly compensated for such advice.

    And, I think we can disagree about the quality of the NY Times piece. But, we definitely agree that Pluritas’ PR person deserves a raise!

  5. Jackie – I imagine the same business model exists for all patent attorneys everywhere. I am not sure how it can change unless attorneys themselves seek to do it by setting themselves up as business advisers. If they can demonstrate the value they create in doing this, then they can charge for it. I know that is simplistic, but it sounds like the alternative is to keep things very much as they are – and that means a continued disconnect between the business and patent worlds, increasing backlogs as more pointless applications are filed, greater uncertainty and growing disillusion with the patent system in general; leading to ever louder calls for major reform or even abolition, which one day may just be heeded. Maybe the solution is for there to be more patent attorneys in the first place, leading to far greater competition and many more creative ways of offering services to clients. In Europe at least it is pretty much a closed shop. I think there are something like 15,000 patent attorneys registered to practise before an EPO which can grant rights in area with a population of more than 500 million. As you imply, there is no incentive for peple earning a comfortable living to change; even though change is desperately needed.

    You should write an article on this for IAM!

  6. Jackie said:

    “…very few patents are ever litigated (in 2007 fewer than 3000 patent suits were filed vs. about 157,000 total issued) and, of those less than about 2% that do make it to court…”

    This seems awfully low. Surely if faced with the death of their patent or business a small inventor would resort to hiring firms with contingency fees. Even if at 50% something is better than nothing.

  7. Great analysis, Jackie. I had a similar reaction to the piece. But I did like the quote from Josh Lerner at the end, which I think hints at how the IP marketplace will have to evolve to stay relevant to businesses. Most (but not all!) independent inventors underestimate the importance of being connected in to a network of other engineers and scientists. There are plenty of “dependent” inventors in that sense, and these are the folks who will drive value creation in the IP marketplace.

  8. Jackie, very interesting post (as always), but I think we disagree on the angle. I will repost here, in part, a response I wrote to your post on IP Prospective.

    As [you] correctly point[] out, “[t]he story of the lone ‘David’ inventor battling in court against the evil ‘Goliath’ corporation that steals a patented idea not only does not occur “often,” relative to the number of patents issued each year, it almost never occurs . . .” However, this is the only “credulous conclusion” that I can find in the article. Instead, it sheds light on a burgeoning marketplace for intellectual property that, ever since and as a result of the first Ocean Tomo IP auction, has experienced an influx of what I call “IP Market Players”, including, as the article points out, “a flurry of new companies and investment groups . . . to buy, sell, broker, license and auction patents.” The NY Times article goes on to add that, “[t]he arrival of these new business-minded players . . . could lead to a robust marketplace for patents, where value is determined not so much by court judgments but by buyers and sellers, perhaps, someday, like eBay.” This statement is not so far-fetched. It is not a myth that the market for buying, selling, investing, and strategic management of intellectual property has been born in the last decade. I will go out on a limb and add that this marketplace, with all of its new market players, owes part of its inception to the initial success of the patent auction platform. I agree with [you] that “this transaction model has [not] served to markedly increase the number of sale opportunities for any patent owner,” at least not directly. The dismal statistics from the last 3 Ocean Tomo auctions highlights that. However, it was this model that opened eyes to other market players that there is opportunity in this marketplace to lend transparency to potential sellers and buyers. As the article points out, as a result we now have IP market players providing these opportunities, such as Intellectual Ventures, Rational Patent Exchange, Allied Security Trust, Acacia Technologies, Altitude Capital Partners, Intertrust, IPotential, Ocean Tomo, Rembrandt IP Management and Thinkfire.

    While the NYT article may assume a little much regarding the “one-size fits all” approach for patent auctions, I don’t think the article was making any credulous conclusions about patent auctions providing automatic protections for inventors (after all, the term “protection for inventors” was really only used in the title.) Instead, I think it was a nice general comment on the recent growth of the IP marketplace, and where it might be headed. The last three paragraphs warn of the problems with valuation that the market needs to face, and it offers not that patent auctions are here to stay and provide liquidity for all inventors alike, but only that the market “could be changing” – a true statement.

    The statistics of recent patent auctions have sparked a somber mood with many IP professionals regarding the status of this platform, while just 3 years ago the mood was optimistic as the sales generated by these auctions surprised a few people. I submit that, while the patent auction platform may not be the answer for a robust marketplace, it provided a push for those ready to get involved, and there are more opportunities for inventors and patent holders now than there were a decade ago. The fact that ICAP, one of the largest brokers in the world, has now opened a patent brokerage group is a testament to this fact. There is no reason to believe the market won’t continue to take shape, especially with intiatives like Open Innovation, patent pools, and defensive aggregators. I know [you] share this optimism with me, as [you] add[] that [you] “believe that we will see the market for patent rights evolve somewhat in the near future as Open Innovation becomes a more prevalent product development model for US and foreign corporations. That is, when more corporations look outside their own organizations for innovations, more opportunities will exist for IP owners in a wide variety of technology areas.”

  9. Michael and Ian:

    Thanks for the comments.

    We are all in agreement about the need for a better mechanism(s) for patent sales. As in relation to independent inventors, my view is that it is not actually the marketplace at all. Rather, it is a critical lack of alignment of potential buyers (that is, for example corporations) and those with good ideas. Until Open Innovation takes hold, there will be few opportunities for independent inventors to sell their patent rights. Certainly, better tools–which can include auctions–will improve the efficiency of those transactions that do happen, there will still be fairly few patents sold. Also, it will be necessary for those seeking to sell their ideas to be better able to predict/understand what might actually sell to a corporation.

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