Joff Wild

ICAP Ocean Tomo made history yesterday by successfully auctioning a covenant not to sue that had been put up for sale by Round Rock Research, the NPE that owns a portfolio of 4,200 patents and related rights it bought from Micron in 2009. The unnamed bidder will pay $35 million for the CNS, which is only valid if held by a company not in the semi-conductor industry. Patrick Anderson at the Gametime IP blog carries a report of the event, and provides fascinating analysis of why the auction could be a game-changer:

... What today’s auction proved is that operating entities will, under the right conditions, seek out patent owners and submit offers for patents they determine to be relevant to their business.

If this process can be replicated and repeated in future auctions, the “traditional” methods are simply archaic. What are those traditional methods? They included paying attorneys thousands of dollars to track down infringers, and relying on archaic, anachronistic and expensive court procedures to ascertain the value a given patent has to a given company or product. 

Whether couched in terms of licensing, freedom to operate, or covenants not to sue, the goal of the monetization driven patent owner is to get compensation from others that want to use the technology in practice. The methods pioneered today allow business people to come together, make a deal, and then quickly get back to doing whatever it is they do best. Innovators are free to innovate, and implementors are free to design and build products, and the legal drama (so much of which is generated by the lawyers in the first place) can be left for those situations where there really is something to fight about.

While comparing a patent auction to earth-changing events might, in itself, seem overly dramatic, consider the amount of money wasted on literally thousands of lawsuits each year that typically end in the same type of agreement that could have been purchased today, in a matter of minutes, not years … and with the cost of a few transactional lawyers, not dozens of high-priced litigators… So, no, I don’t think the significance of today’s events are capable of overstatement.

The only remaining question is, can patent litigators evolve? 

I have also had a short note from Rich Ehrlickman (Vice President) and Alex Poltorak (CEO) of General Patent Corporation, who were at the auction, about the Round Rock CNS sale. It makes a similar point to Anderson's:

The covenant not to sue excluded semiconductor manufacturers, which sparked speculation that the anonymous buyers seated in the front row represented a handset manufacturer. On the other hand, this may have been not a single company but, more likely, a patent aggregator, such as RPX, representing a consortium of several buyers. Be that as it may, this is a first. It is very significant because it illustrated the fact that a patent is nothing but a licence to sue. In fact, courts have said all along that a non-exclusive licence under a patent is synonymous with a covenant not to sue. Patents are instruments of litigation. Instead of waiting to be sued for infringing some of Round Rock’s patents, an infringer (or a group of infringers) bought peace. The calculation was simple: pay $35 million now; or pay much more later in damages, defence costs, time and aggravation. Smart move indeed. 

If it did not know before, Round Rock now knows for sure that there are quite a few companies out there which believe they may have infringement issues with the portfolio. If Gametime IP is correct and there was a $200 million reserve on one of the unlimited CNS's, just think about how much that ex-Micron portfolio is probably worth altogether. It must be in the billions of dollars. Assuming that Micron was not calamitously negligent and sold the portfolio for a pittance, the fact that the company never made an 8-K filing to inform shareholders of the sale must mean that it is getting a huge share of the licensing money that Round Rock is currently generating. If that is the case, it looks like a smart piece of business: outsourcing to a privateer, no costs and good chunks of cash regularly going more or less straight to the bottom line. What's not to like?  

As for ICAP Ocean Tomo, it got $3.5 million from the Round Rock CNS sale (the buyer's premium). That's a very handy sum and could well be more than it has ever made previously from an auction going back to before Ocean Tomo sold its transactions business to ICAP in 2009. There's a lesson in there somewhere about what kind of lots the company should offer at its auctions in future. 

UPDATE: I have had the following note from ICAP Ocean Tomo's Dean Becker, clarifying a couple of the points raised in the blog above:

Aggregators like RPX cannot purchase Covenants Not to Sue, unless they are purchasing for an anonymous single operating company, as I designed the Covenant for single operating companies only. The Covenants only cover one operating company and are not transferable.

And, we have always charged both sellers (consigners) and buyers (bidders). We charge 15% to sellers and 10% to buyers, as per our auction documents that have never changed our fees since I created this industry in 2006.

We are in very active negotiations to sell several more of the Covenants Not to Sue, in the next few days.