Chapter 2

IP Brokerage and IP Auctions

How an SME Can Benefit From These Business Models

Luca Escoffier

Introduction

Among the different business models for open innovation, IP brokerage and IP auctions have become increasingly popular. These two business models can be profitably leveraged by small and medium enterprises (SMEs) for open innovation. In this chapter,1 we explain why and offer some tips on how to use them. We use the term “IP” to mean intellectual property, which includes patents, copyrights, trademarks, trade secrets, and so forth. Usually, the most common rights being involved in brokering or auctions are those concerning registered IP.

In the IP brokerage model, an external agent, the IP broker, evaluates, values, and obtains a set of IP rights, usually from the original sources (e.g., an individual inventor or university or research center). The broker then licenses or sells these rights—either exclusively or nonexclusively—to other individuals or entities who can make use of them. What makes brokering particularly relevant for SMEs is the fact that prices for these portfolios have fallen. One reason is, the IP portfolio market has slowed in reaction to the Great Recession and the weaker global economy, especially in the software field. Another factor is more jurisdictions are questioning the validity of software-related patents. In effect, there has been a market adjustment; so the “bubble” period is over (at least for the near term) and prices in general have reached some sort of stability. Like any vendor with excess inventory, brokers have greater incentives to sell portfolios they have accumulated as they can no longer assume prices for them will continue to rise on the one hand, and they still have to pay maintenance fees on the other.

This situation can make brokered portfolios affordable for SMEs. What we provide in this chapter is a strategy based on going out and seeking relevant technologies managed by brokers rather than waiting for a broker to approach you with an offer to sell rights to technology. A switch from the “push” to the “pull” approach allows the SME to aggregate technologies immediately relevant for the SME—either by acquiring a complete portfolio or by breaking it apart and only acquiring the IP of interest.

In the IP auction model, a broker or intermediary puts IP rights to a single technology or a portfolio of technologies on the auction block. Within the conditions and methods set for the auction, potential buyers review the IP and bid for it. The highest bid wins the IP rights. IP auctions can enable an SME to limit transaction costs when performing open innovation. IP auctions are typically used in two circumstances: (1) as a way to dispose of IP with less market traction or which are unnecessary for the current owner and (2) as a way to maximize revenues for very valuable IP, as a bidding war can optimize revenues to the seller or licensor.

In this chapter, we provide the basics of the IP auction model and then go on to look at what can be considered hybrid models being implemented right now and which are likely to be increasingly used in the near future. Unlike “pure” IP auctions, the hybrids introduce flexibility. For example, an example of hybrid auction is one where the winning bid does not necessarily have to be the highest one in monetary terms but it is the one with the best combination of a pecuniary offer together with a business or industrial plan to develop the IP and bring it to market. Therefore, this chapter also provides some useful tools for knowing whether or not to participate in, or use yourself, an IP auction and what forms and approaches make the most sense from the perspective of both the IP holder and IP bidder.

Definitions

Omnis definitio periculosa in Latin means that every definition can be dangerous as it can be easily misinterpreted or outdated. This holds true especially if the term has a general definition beside a specific one. For example, the term SME. By now, we all know that SME stands for small and medium-sized enterprise, which is a phrase with a certain meaning by default in English. It refers to a business with certain dimensions. The point is that an SME has a different legal definition according to the jurisdiction where the enterprise is located. In the European Union, the conditions (in terms of employees and revenues) that a company has to meet to be defined an SME are different from those provided in Japan.

Another example relates to brokerage activities. In general, as briefly mentioned in the introduction to this chapter, the broker is an agent who acts as intermediary upon consideration to facilitate certain transactions. For the purpose of this chapter, though, a broker has to be considered any entity in the business of buying or acquiring the right to sell IP rights to others. The broker acts as intermediary between those who own a technology and the technology seekers. It is not necessary that the broker be paid to provide the service or information relevant for making buy and sell decisions by either the original owner of the rights or the seeker interested or potentially interested in buying the rights.

IP auction is the last concept that we interpret in a more flexible way in this chapter. Usually an auction is a bidding process where the highest bidder wins. As previously noted, we discuss hybrid models in which it is not necessary for the bidder offering the most money to win. We also present a model where the rights transferred at the end of the auction are not the entire set of proprietary rights protecting the technology but rather the licensing rights.

The takeaway is that the best way to approach the world of tech transfer and IP monetization is to be extremely flexible in interpreting potential solutions and to be always aware of the legal feasibility and restrictions that different business models might have in a specific jurisdiction.

IP Brokerage: From “Push” to “Pull”?

Usually IP brokerage involves private firms that provide paid services to firms and individuals. However, with universities, research hospitals, government labs, foundations, and others developing technology, brokerage may involve providing services to a not-for-profit organization, which, by definition, is not functioning to make profits but rather for the social benefit that can be achieved through its activities. In this section, we focus on the latter.

The nature of these activities is often summarized as a “pushing” exercise in which ideas and technologies are presented to potential licensees or buyers with the hope that they will generate some interest. What makes this effort more difficult in today’s global technology marketplace is the outstanding number of available technologies. There are way more inventions and technologies than there are companies interested in making and marketing them. In fact, the number of technologies actually licensed from universities and research centers constitutes just a small fraction of the portfolios of these entities. The vast majority of the available technologies end up in the file drawers of the institution, generating no real social or monetary benefit beyond the dissemination of knowledge through publications and presentations at meetings.2

Why does this happen? Usually, universities and research centers have offices called tech transfer offices, knowledge transfer offices, technology-licensing organizations, or some other term depending on the country and whether they are for a governmental or nonprofit research entity. We shall use the term technology transfer offices (TTOs) to refer to these offices.

TTOs receive notices of inventions conceived internally (called invention disclosures). Then the staff of the office evaluates the inventions, and decides whether or not to file for a patent application. What comes next is really unpredictable. The technologies now have a patent application or a granted patent associated with them, so they can be protected (assuming the patent applied for issues). They need to be licensed out or assigned to someone who could actually use them and, even better, make profits that generate royalties for the institution. For that, however, it is not sufficient for the technologies to be promising; somehow, links to the industrial world need to exist or be built in order for transactions to occur.

It is a matter of fact that the United States is the by far the most profitable country on the planet in terms of technology transfer activities performed by universities and research centers, but even in this country, most of these TTOs lose money when their costs of operation are subtracted from the revenues generated by licensing. For this reason, technology transfer is ultimately an activity, which has to be at least partially justified by its social value (the so-called third mission of universities after education and research). If only the monetary return on investment was considered, technology transfer would have a hard time justifying its existence to senior management and boards of trustees.

The end result is that most universities in the world license out or assign just a small fraction of their IP. Further, most of the technologies in these institutions are, at best, at a benchtop proof-of-concept level of maturity, which means the ones that do get licensed are seldom big money makers. The consequence is these offices are pretty far from reaching the break-even point at the end of the fiscal year.

For SMEs, this is a great opportunity. Knowing that there is an abundance of technologies that are waiting to be licensed and further developed, SMEs can switch from a push model, in which they rely on brokers or tech transfer office staff are paid to facilitate transactions, to a pull model in which they go directly to the source, to the institutions owning the technology. The SME rather than the broker can be the one “buying low” so they may later “sell high.” By monitoring the research literature relevant for their product lines and visiting relevant departments at nearby institutions, it is possible to identify interesting technologies. They can also contact the TTOs of leading universities and other research organization in the fields of interest. TTOs usually welcome enquiries, as their job is to license the technology and, as we just saw, it is not easily done. The Association of University Technology Managers (AUTM) (www.autm.net), the largest global society of technology transfer professionals runs a portal called the Global Technology Portal where its members post their offerings. It is at www.gtp.autm.net/. Other ways to find technology are presented in the following sections.

Be aware not everything an institution has may be publically offered. Disclosure usually takes place after some form of IP protection has been filed for. There also might be cases in which a technology, even if developed by a university or research center, cannot be publicized and be available to be licensed due to the funding source, legal system, existence of codevelopment agreements, and so on.

The following sections will describe unconventional brokers, that is, online intermediaries that operate at no cost for the user that can further the possibilities to switch from the push to the pull model, especially as far as SMEs are concerned.

Easy Access IP

One of the first examples of initiatives offering an opportunity to SMEs for accessing available technologies coming from universities and research centers is Easy Access IP (EAIP), which is an international consortium of universities and research institutions around the world.3 The project is based on the assumption that university-developed technologies are pretty often at an early stage of development and do require additional investment and product development efforts to reach the market. EAIP, through its licensing schemes, allows companies and individuals free nonexclusive licenses to these technologies by following a simple procedure. Although there are no up-front fees, running royalties, or other payments, easy access licenses do require the licensee to acknowledge the originator’s (i.e., university or research center) contribution and to report their progress in the development and commercialization.

The EAIP license is granted after a valuation of the business plan submitted by the applicant, and if there are several applicants, there might be a competitive process in which the most promising plan will prevail. Therefore, the EAIP scheme is a great opportunity to explore for SMEs that are eager to start a project around a novel technology, have the means to develop it, and the interest to create a potentially long-lasting relationship with the originator of the technology. The almost absence of a negotiation phase (since the contracts are extremely lean) and the royalty-free licensing model can definitely be important incentives.

The specific license agreement used may vary from institution to institution. Nonetheless, all the members share four basic principles, which shape their agreements:

• • Universities and research centers exist to create and disseminate knowledge. The wider the dissemination, the greater the benefit.
• • Universities and research centers should encourage the creation of positive societal impacts from their research.
• • Simple agreements and procedures allow the parties involved in a transaction to do deals quicker and easier.
• • Agreements between the parties formed through an easy access license should be the beginning of a long-lasting relationship.

The members of EAIP do not deal with all of their inventions using the easy access license. Inventions that are likely to be big hits or are at higher stages of maturity and thus more likely to be licensed and generate profits are marketed and licensed using traditional approaches. But for SMEs with research and development (R&D) capability, the EAIP approach can provide an excellent value proposition.

Those interested in knowing more about the process introduced by EAIP or in the technologies available should visit the EAIP website at http://easyaccessip.com or view the individual members’ dedicated pages, like the one managed by the CERN (Figure 2.1).

Figure 2.1 Easy IP Access page and available technologies

Source: The CERN website.

An additional source of information to have access to the technology listing of the consortium is the community section on the iBridge Network (see the next section for a detailed description) website.4 The site (Figure 2.2) allows a user to peruse all of the available technologies, get acquainted with potential advantages and uses of the inventions and technologies, and get in touch with the case manager directly, thanks to an internal messaging system.

iBridge Network

Another source of available technologies (briefly mentioned in the previous section) that can be consulted at no cost is the platform (Figure 2.3) called iBridge Network, which is managed by the Innovation Accelerator Foundation Inc., located in the United States. Among other purposes, the Foundation operates the iBridge to promote the transfer of technology, sharing of research, and formation of collaborative efforts to advance scientific knowledge.

Figure 2.2 Account of University of New South Wales Australia

Source: iBridge Network website.

Figure 2.3 Infographics of the iBridge Network

Source: iBridge Network website.

As of August 2015, the portal featured more than 23,000 available innovations. The sources of the technologies vary (although the majority come from the United States). The user interface allows you to create personal accounts in which your technology needs be presented to encourage future matches. Every profile shows a description of the technology in question with advantages, potential applications, and an internal messaging system that allows those interested to contact directly the technology manager for further information. Like the AUTM Global Technology Portal, the iBridge Network constitutes another valuable tool for SMEs by enabling them to examine thousands of available technologies at a single web portal simply by creating a free online account.

Enterprise Europe Network

The closest counterpart to the iBridge Network in Europe is probably the online database of the Enterprise Europe Network (EEN). The EEN, comprising over 600 partners in 52 countries, is Europe’s largest network of contact points providing information and support for SMEs interested in innovation, knowledge and technology transfer practices, and other cooperation initiatives in the European Union’s (EU’s) programs. Among the many SME-focused services, examples are targeted market intelligence and personalized support.

The EEN also contains Europe’s largest database of business and technology opportunities as the EU hopes to facilitate effective relationships between partners located in many countries and working across the innovation spectrum. As of August 2015, the EEN database claimed to contain more than 23,000 profiles, which, interestingly enough, is around the number of innovations present on the iBridge site (see Figure 2.3). There are hundreds of contact points in all of the EU countries as well as in other high-tech-oriented countries such as Israel, Japan, the United States, Korea, and the like (52 countries in all). The immediate value for technology-scouting activity by SMEs is its database of partnership opportunities. In the following (Figure 2.4) there is a screenshot showing the search panel of the database with its filtering features.

A search performed on August 30, 2015, gave the following results (Figure 2.5). On that day, the database contained 256 technology offers uploaded in the last month. The interesting fact about this result is that the database does not only contain available technologies that are protected by patents. In fact, in many instances, the offer concerns the joint development of a (patented or patent-pending) technology with a partner or the transfer of a trade secret to or its utilization with a potential partner.

Figure 2.4 EEN database—search panel

Source: EEN database.

Figure 2.5 EEN database—Technology offers

Source: EEN Database, August 30, 2015.

The database is updated with new profiles on a weekly basis, and the requests for more information are channeled to the relevant contact point, who is then able to provide additional information to those making inquiries about the technology available.

The Japan Technology Transfer Helpdesk

In July 2015, the EU-Japan Centre for industrial Cooperation5 in Japan launched its technology transfer helpdesk, called the Japan Technology Transfer Helpdesk. The portal, probably publicly available from the beginning of 2016, will provide information about available technologies from Japanese universities and research centers. Its objective is to facilitate international licensing, especially toward Europe. The portal provides additional resources that help non-Japanese SMEs understand the procedures for the granting of IP rights in Japan. These resources will include informational videos and other media. As with the other platforms, relevant contacts are found with the technologies so that the initial interaction between the technology seeker and the technology provider can be as easy and direct as possible. Professionals offering IP transaction services will be listed too in order to create a virtual “one-stop shop” for those seeking technologies stemming from Japanese universities and research entities. The portal will, at a later stage, showcase technologies originating from EU universities and research centers as well.

We emphasize these are only examples. The World Intellectual Property Organization and many others also have portals. Indeed, just as there is a surplus of technology available for acquisition in the world, it appears we are entering a period where there is also a surplus of free websites facilitating access to them. SMEs, which are widely viewed as the engines of the next phase of global economic development, are in the enviable position of being the primary targets for these sites supported by associations, governments, foundations, and nongovernmental organizations.

IP Auctions: How Do They Work?

IP auctions, in principle, work like any other sort of auction. There are bidders and sellers (which includes licensors) and an auctioneer, who may also be the seller. At the end of the auction, the IP owner parts with the IP rights in exchange for an amount of money (or money and other “good things”) bid.

Usually, the individuals or companies selling or licensing through IP auctions want nothing more than to make as much money as they can. Universities, research hospitals, government labs, or other research centers all can participate in auctions unless some specific law or regulation in their country prevents participation in those kinds of activities.

An SME participating in an auction should be aware that the sellers are normally looking to exit the technology profitably. Acquiring the IP rights to technology is not a problem. However, if the SME is looking to license a technology inexpensively in a way that includes a collaboration with, and access to the know-how of, the inventor, it may be better to work through the public (or private) intermediaries mentioned earlier in this chapter or directly go to a university or research center. Approach their TTO and explore the available portfolio. Where you see interesting technology, ask them to put you in touch with the inventor so you can gauge the interest in a potential joint development effort.

IP auctions took off in the United States in the early 2000s and spread globally. Originally, like the auctions of cattle and art you see in the movies, they were physical events in which people actually went to the auction venue to meet the owners of the IP or their representatives and “kick the tires.” After that, the auction took place. Nowadays, there are several online providers that offer virtual auctions, often on an asynchronous schedule over a period of days or weeks. Such auctioneers charge lower fees since the cost of the physical auction is replaced by the “simple” management of a website.

IP Auctions and Hybrid Models: The Best Recipe for an SME?

There are some hybrid models of IP auctions that are better for SMEs, which typically do not have as much cash as bigger firms. In any auction, the anticipated benefit to the IP is that they will make more profit out of the transaction than if they did a private negotiation with only one party, as those involved in the auction will raise the bids about what they might otherwise offer, in order to win. After all, buyers have some figure in mind for the real value of the IP. They are trying to buy it as far below as possible. The threat of others winning drives them up toward their cap.

Where the price paid by the winner is not just an up-front cash payment but also running royalties, or where the seller is interested in seeing their technology used and generating social benefits in addition to making money, a different dynamic comes into play. Now it is important that the technology actually make it to market. So the up-front price paid alone should not determine the winner. The biggest up-front payment may not generate the most net discounted cash flow or the best combination of cash and social benefit.

The bidder willing to pay the most money may not be the most likely to actually bring the technology into use. We can easily imagine a scenario where a large firm bids high to win, so a potentially superior technology to theirs never makes it to market. That the winner will develop and market cannot be taken for granted in situations where the only criterion is who pays the most at the time of the auction. An additional criterion may be that you have to take it to market. That kind of auction favors SMEs that are nimble and have a good track record at commercialization.

Auctions provide SMEs with flexibility when acquiring and exiting technologies. A start-up selling a technology through a hybrid auction with the two criteria of price and commercialization success may find the winning bid placed by another start-up. In an auction of a portfolio, a single SME may even play the role of an IP owner or seller and a bidder or licensee at the same time. The wonderful thing about auctions is this: When it is your auction, you make the rules.

We anticipate a flurry of creativity in IP auction models over the next decade as they become increasingly virtual and global. Some of the elements present in other IP marketplaces, like the one managed by the EAIP consortium, will probably show up in the structure of IP auctions involving public entities like universities (recall that the EAIP model requires the potential licensee, in order to persuade the originator of the technology to grant a license, to submit an application with a business plan that clarifies what economic and social benefits will result from the license and how they will be obtained). Where business plans are required, the rules of the auction can allow for reclaiming the IP rights when the plan is not followed or fails, as that would be a breach of contract. In the traditional auction format, that is not possible because there are no rights to the technology retained by the seller.6

Since IP rights can be parceled out in a variety of ways (field of use, activity permitted, exclusivity, time, geography, etc.), there is no reason the auction cannot sell only part of the IP rights, thereby creating a legal basis for reclaiming the technology where anticipated results are not pursued or obtained. Literally, anything permitted in a traditional licensee–licensor agreement can be made part of the rules for the auction. This way, the owner of the technology would still be the owner even after a successful auction and would indeed have the right to exercise some control over the management of the technology and be able to contractually impose on the licensee obligations to implement the business plan submitted at the time of the auction. A breach of the licensing agreement entered into at the time of the auction would always allow the technology owner to terminate the license and would make him free to dispose of the IP rights in question at his will.

Conclusions

It is a great time to be a small company. It is not infrequent to see companies with fewer than 100 employees and disruptive business models transform industrial sectors.

For SMEs using technology, it is truly a great time because there are so many available technologies out there, it is pretty much a buyer’s market. The trick is to know how to find it and acquire it. With the Internet, finding it is a lot easier. Today, a company from Italy with three employees is able to license a technology from an American university and a Japanese research center just by looking at the available portfolios online. Because IP transactions are so frequent, the legal format for agreements is now relatively form driven. Most universities, research hospitals, government labs, and nonprofit R&D institutes post their license agreements online. If the agreement is acceptable, all there is to negotiate are the economic terms. There is no need to fly over to another continent to meet executives and lawyers and have endless meetings. Companies interested in selling or licensing their technology can do the same thing.

IP auctions also make acquiring or selling technology straightforward. Auction houses are online and new forms of auction structures are being adopted to meet the needs of the parties in specific economic sectors. IP is no longer esoteric.

The result is that the spectrum of opportunities for an SME has increased exponentially. A simple query in a search engine can give an exact idea of the portals where available technologies are described at no cost other than the labor to do the search. The subsequent steps are straightforward, as has been mentioned repeatedly in this chapter. Therefore, there is no obstacle now for a small company to seek, find, and eventually license or purchase a technology from a university, individual, or other company even if it is on the other side of the planet.