Economic Frictions Applied to Intellectual Property

What are the impediments to the purchase and sale of patents? To what extent do they prevent patent buyers and sellers from finding one another to transfer patents and patent rights? Are there existing or contemplated mechanisms that can reduce or eliminate these impediments? Answers to these questions are rooted in the advancements behind the 2010 Nobel Prize in economics.

On October 11, 2010, the Nobel Prize in Economics was awarded to Peter A. Diamond, Dale T. Mortensen, and Chris A. Pissarides for their contribution to theory related to the process of matching buyers and sellers in economic transactions. These 2010 laureates recognize that although the supply and demand of any good or service determines the appropriate price of that good or service in a given market, in many cases , certain "frictions" in a market will prevent this balance from being established. These frictions include regulation and economic policy, and restrict the ability of buyers and sellers in a market from quickly meeting to complete their transactions. The results of these frictions are delays in market transactions, the inability of parties to sell products and services despite significant demand, and improper pricing.

The fundamentals of economic frictions upon which the 2010 Nobel Prize laureates based much of their work apply equally to the realm of patents. As is well known in this field, the process of buying and selling patents is extremely difficult, and occurs in very rare instances. The primary economic frictions that are the subject of the 2010 Nobel Prize are different than those relevant to patents, since governmental regulation and economic policy are only tangentially related to patent sales. However, their impact is the same. Identification of these frictions in the field of patents is an important first step in identifying how they can be addressed.

Historically, a primary friction preventing or slowing the purchase and sale of patents is the lack of a readily accessible marketplace for such transactions. Until recently, the marketplace for patents was essentially non-existent. Patent buyers and sellers relied primarily upon four vehicles for identifying each other in patent transactions: direct contact between sellers and buyers, individual patent brokers, large-scale in-person patent auctions, and web-based announcements by patent owners (e.g., on patent owners' websites). However, in each case, significant frictions remain, with the result that patents remain one of the most valuable but illiquid type of asset a party can own.

Few solutions to this dichotomy have been proposed. Without a well-organized and recognized marketplace in which to offer and sell patents, the ability of buyers and sellers to identify assets that can be transferred between parties will remain largely impaired.

One relatively recent solution is the use of live in-person patent auctions. These auctions exist in public and private form, and are organized and hosted by auction companies and by patent holders alike. In comparison to patents sales by direct contact by the seller and/or broker, these auctions can be a much more efficient way of engaging multiple potential buyers in the selling process. Also, rather than engage individual prospective buyers in several separate rounds of communication regarding price and terms, live in-person patent auctions typically truncate the sales process to less than one day.

Live in-person patent auctions can also provide a significant expansion of potential buyers participating in a single patent transaction, thereby resulting in a closer approximation of the true value of the patent being sold. In addition, live in-person patent auctions are often conducted in a series of consecutive auctions. In this manner, several patents from diverse technologies are auctioned in the course of one or more days, and may therefore be attended by a large number of equally diverse potential buyers.

Another recently-proposed solution to the frictions in the purchase and sale of patents is on-line patent marketplaces. One such marketplace is operated by TerraCaptus LLC. Websites with similar structures exist worldwide, but do not appear to be fully functional or have not attracted mainstream patent owners at the time of this article. These on-line patent marketplaces rely upon web-based auction systems to address the frictions of conventional patent transactions, and hold significant promise to address many of the frictions to patent sales.

In the auction model utilized by TerraCaptus, potential buyers of each patent listed for sale are identified by TerraCaptus using proprietary software and (optionally) recommendations from the patent owner. These potential buyers are contacted by TerraCaptus, and are invited to a scheduled auction hosted on TerraCaptus' website. Each auction is public, utilizes an interface on TerraCaptus' website for registered parties to bid, and is open for viewing by parties who are not registered to bid.

Frictions in connecting patent buyers and sellers are reduced by use of TerraCaptus' web-based auction platform. Traditional patent auctions are conducted in-person, which presents market frictions relating to travel, lodging, and other logistical issues for participants. In this manner, TerraCaptus' web-based auction platform has the ability to increase the number of potential bidders for any given patent.

The TerraCaptus patent auction model also eliminates patent selling frictions associated with traditional up-front patent auction costs. These up-front costs typically include identification of and communication with potential buyers, advertisement of the patent for sale, preparation of the auction, and conducting of the auction. TerraCaptus charges nothing for these services, and instead is compensated from the proceeds of sale of the patent. To further reduce traditional frictions, TerraCaptus is only compensated from auctions that result in a sold patent, and receives compensation only when the patent seller receives payment for the patent sold.

Significant advancements have been made to date in reducing frictions that prevent the connection of patent buyers and sellers. However, these parties can expect continued innovations in the patent transaction marketplace as technologies and communication systems develop.