Making Sense of Intellectual Property

It's been decades since Jimi Hendrix revolutionized the way electric guitars are played, but Hendrix recently played a major a role in an auction that could transform the way electronic patents are viewed.

In October, an unidentified buyer paid $15 million for Hendrix's songs at an auction. Though the organizing company, Ocean Tomo, got plenty of publicity for the huge Hendrix sale, the auction was more about intellectual property in electronics and other fields. "Seventy percent of our sales activity is in patents, and about a third of them are in semiconductors and circuitry," says James E. Malackowski, CEO of Ocean Tomo LLC of Chicago. Copyrights and trademarks are the other main IP groups auctioned to date.

Malackowski, who's been working with patent management for more than two decades, is among those trying to make inventions as marketable as the products built from them. The company has held two IP auctions, seeing increased success in both the amount of IP put up for sale and the amount bidders pay. In New York in October, sales exceeded $23 million, marking a fair evening's business, even without the Hendrix tunes.

The very notion of selling IP has changed since the start of the decade. "Five years ago, when we asked companies to sell off their patent rights, they looked at us like we were crazy," Malackowski says. Patents are the primary IP component for technology companies.

A growing number of startups are focusing on IP development. "We're not a contract designer, we're an IP developer," says Gary Burlak, president of Smart Automotive Systems Engineering Inc. of Lake Orion, MI.

SASE's founders spun out from DaimlerChrysler to develop technologies for automotive companies. They quickly garnered an exclusive contract with STMicroelectronics, which produces and markets semiconductor technology SASE develops. The two are currently ramping up production of a trailer hitch circuit that reduces the amount of wiring OEMs need to put on trucks.

This evolution is an outgrowth of many factors, including downsizing, rising costs and shorter development times. "OEMs are pushing responsibility down the supply chain, but semiconductor makers don't necessarily know what to develop. With the exorbitant cost of silicon development today, they find it safer to turn to companies that understand the technology from both the car level and the chip level," Burlak says.

As startups focus on patents, contract design houses are focusing as much on their ability to develop IP as on their skills at finishing product designs. "Our contract design generally includes developing IP. It's rare that we do any development that doesn't include an expansion of our patent portfolio," says Geoff Waite, vice president at Sagentia Inc., a British company with U.S. headquarters in Boston.

Companies are also turning to outsiders for IP development, following the trends that occurred in contract manufacturing and later in contract design. As in those fields, cost- cutting is the key driver. "Outsourcing development saves the tier-ones a lot of R&D effort. Only two of 10 projects ever make it to full-blown production," Burlak says.

The willingness to purchase IP may turn out to be a positive development for the many engineers who patent their own inventions. Often, they find it difficult to get large companies interested. Opening the IP market up with auctions may help these creative developers, who are already included in Ocean Tomo's offerings.

"We've got a healthy mix of individual inventors, but they're still in the minority," Malackowski says.

Not Just Small Companies

Major corporations that used to gain value with patents by cross-licensing to gain more technology are also changing the way they treat their portfolios. Many are beginning to follow through on some of the unused portions of advanced projects, if it appears others can benefit from alternatives the research team didn't select. "Instead of throwing these by-products away, they're asking what it would take to develop them to the point someone else might want to buy it," Malackowski says.

Corporations are also developing and patenting these secondary technologies to keep their contenders from moving into their markets.

"Today, there are four to five levels of IP, and only one is directly related to the company's product. The rest are about protecting your space from competitors," Waite says.

He notes that one of those levels includes looking at startups or new entrants into related markets, thinking of inventions they may need in the future. These can then be leveraged for trading or sale. Conversely, Burlak notes that more companies are buying up startups to gain their IP, generally paying less for the company than an internal project might cost.

In an era when enterprises outsource much of their work, observers note that IP has become the mainstay of most companies. "Today, 80 percent of a corporation's value is intangible. Manufacturing's gone to China, what's left is proprietary innovation," Malackowski says.