The New York Times ran a recent article on the advantages of patent auctions to inventors. A patent auction is exactly as it sounds: companies and investment groups get together to buy, sell, broker, license, and auction patents.
The article cites the vagaries of judges, juries, and defense attorneys as devaluing the hard earned patent of the inventor. Court judgments are simply too unpredictable and litigation is too expensive when it comes to patents. Auctions can permit patent experts and economists to create a vibrant marketplace for patents. The author of the article believes that business-minded people can do a better job valuating patents than judges and juries. Auctions are also much faster than litigation, accelerating the pace of innovation by getting ideas into the marketplace.
Several experts quoted in the article envision an auction system similar to eBay for auctioning patents, or a clearinghouse similar to that of ASCAP for copyrighted music. This should minimize transaction costs while increasing the prospects of collecting fees and distributing payments to inventors.
The article does note, but does not really address, the issue that patents are very difficult assets to value. There is no set market for trading, as there is for stocks and bonds. There will still be a lot of work for patent experts and economists to determine a patent’s value, which could change over time as the technology and market evolves. A recently-issued patent may have a completely different value from one that issued 5 years ago and has withstood that time.
The other issue that is not addressed by the article is that in order to have an adequate market for patent auctions, non-practicing entities, such as investors and financial institutions, must be allowed to participate. Such non-practicing entities are pejoratively known as “trolls” by patent infringers. Recent patent reform efforts have sought to reduce or eliminate their influence in the marketplace. Without their presence, however, buyers at an auction would be limited in number, often only competitors in the field. Such buyers would have little incentive to pay a large sum of money for a patent if they are the only bidders. By increasing the market of potential buyers, patent trolls can increase a patent’s value. This seems to be basic economic theory: increased demand equals higher prices and more incentive to increase the supply.