Who Determines the Value of Patents?

Kodak thought it had a reliable way to estimate what its IP was worth. It was sadly mistaken

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Phil Ross: Hi. This is Phil Ross for IEEE Spectrum’s “Techwise Conversations,” and today I’m talking to Mark Harris. He has an article in this month’s magazine on Kodak, the photography giant. The company tried to buy its way out of bankruptcy by selling patents that experts had valued at up to $4.5 billion. It got just 5 percent as much. How did that happen? Mark Harris, welcome to New York.

Mark Harris: Hi, Phil.

Phil Ross: I’ve been looking at your story, and the first question that arises is: How did you get it? Or, more accurately, how come no one else got it first?

Mark Harris: Well, I can’t speak for other people, but like many who write about digital camera technology, I’ve been following Kodak for over 20 years. I watched the slow train wreck of their business—as they failed to adjust to digital—with a bit of sadness. They’re a company that did have a lot of innovation, that had a lot of exciting products over the years. So I was watching as they tried to divest themselves of one of their biggest assets—their patents, their intellectual property—and they failed to do so in a market that everyone considered to be really strong at the time. I returned to the story six months later, after all the dust had settled down, while working on a story on patents for a different publication. At that point, I reached out to Intellectual Ventures, which is one of the companies that organized the purchase of the patents from what was left of Kodak while it was in Chapter 11.

Phil Ross: Just to be clear, Intellectual Ventures is sometimes called a “patent troll.” Other times it’s called an investment company. How do they refer to themselves? What they do is they buy patents and then they sell the rights to them.

Mark Harris: That’s right. They really claim to be behind the inventor, so they say it’s all about creating a market.

Phil Ross: The champion of the little guy.

Mark Harris: Well, to a certain extent, yes. They say they’re trying to free up a lot of activity—innovation that has been locked into a company that perhaps can’t exploit it, or an inventor who can’t afford to develop it, by buying the patent, then selling it to other people who can develop it. Now, what they have been accused of is “trolling.” That means monetizing those patents in other ways, particularly through litigation—finding companies that may be infringing on the patents they’ve acquired and either extracting license fees from them or eventually pursuing legal action in the courts. What’s unique about Intellectual Ventures is that they’ve done it on a much larger scale than anyone else.

Phil Ross: You said Kodak found from expert advice that they could expect billions from the patents they wanted to sell. In fact, they got 5 percent of the estimated value. How did that happen?

Mark Harris: Well, you would say, wisely, they approached intellectual property consultants—the same people who had consulted on the deal from Nortel, which was a communications technology company that had done very well in the sale of patents the previous year, in 2011. Its patents had been valued at $1 billion and eventually sold for $4.5 billion. Now, Kodak used the same consultants, and the consultants worked in the same way and came up with what they considered to be a very reasonable estimate, around $2.5 billion. In the end, as you say, they only realized 5 percent of that, less than $100 million. And there are many reasons for that, and we go through a lot of them in the article.

Phil Ross: As I gathered from your article, all the buyers who might be interested in the Kodak patents got together and formed a single unit that could say “take it or leave it.”

Mark Harris: That’s right. That’s certainly the way it looks. When Kodak first went to auction its patents, they had over 20 buyers from different competing companies in different product areas. By the end of the process, there was one buyer, a consortium that included 12 of the biggest technology companies in the world, with a combined market capitalization of over $1.5 trillion. They include Microsoft, Apple, Google, and Samsung.

Phil Ross: Has something like this ever happened before?

Mark Harris: It has happened before; consortiums do happen. The Nortel patent sale we talked about was bought out by a smaller consortium. But to have so many companies, to have such market dominance, that’s never happened before.

Phil Ross: And why didn’t the courts intervene? Or is there nothing wrong with this arrangement?

Mark Harris: There is, I mean, there certainly could be a case under antitrust legislation. I’m not a lawyer. It’s interesting now that the Federal Trade Commission is starting to look into cases of patent aggregation and patent monetization on a much wider scale. The reason why this particular transaction wasn’t flagged? You know, I just couldn’t tell you.

Phil Ross: Didn’t Kodak squawk? Didn’t they want to look at the legal side? Or was it too late for them?

Mark Harris: Kodak has now emerged from bankruptcy. They’ve achieved their stated aim. They have a viable business model going forward in commercial and printing business, not so much in the consumer side of things anymore. They’ve survived. They really were at the very end of their tether. If they didn’t take this offer, there was simply no one else out there to buy them, and Kodak very likely would have been split up or simply shut down.

Phil Ross: And having taken the offer, and having come out of bankruptcy, it’s too late for them to litigate?

Mark Harris: Oh, yes, the deal is done. They went into it with their eyes open. What is interesting, of course, is that like in most patent transactions, there is a wall of secrecy around this. There are nondisclosure agreements by most of the major players. The only reason I can get a certain amount of access here, as compared to most patent deals, is because it went through the bankruptcy courts. There is a certain amount of legal filing that the company had to make, and from there you can start to unravel some threads, talk to some people, and get a little more information than you would get previously. Normally when I write a story about a market area that people aren’t familiar with, you know, patents, I would start with “buying and selling patents is an industry worth...” and I would say a big number. You just can’t do that with patents, because there is no public record about what these patents are bought and sold for, for the vast majority of patents that are sold. It’s a very murky business, and I’m glad to see it getting more attention these days from regulators.

Phil Ross: So how will this patent deal affect the consumer—people like me who might want to buy a camera, say?

Mark Harris: Yeah, or a camera phone. That’s a lot of the reason why these patents were bought. Even though the deal itself might have been a little bit murky, the consumer is actually likely to benefit from this. Companies that may have had to pay a high price for patents got them quite cheaply. There is unlikely to be any litigation around these patents now, because so many of the big players have licenses to them as a result of this deal, so in a result, actually, the consumer probably does quite well. But in the longer term, people who are innovative, people in startup companies, if they see that patent values can be squeezed this way, there is a possibility to damage long-term innovation.

Phil Ross: What about the possibility of patent holders getting together into consortiums? Is that a doable thing? Or are they just too cantankerous to work together?

Mark Harris: Part of the reason why this is a nuanced industry is that patent holders do cross-license with each other, and that is to their advantage. And a certain amount of aggregation is really beneficial to the industry, because it reduces litigation, and it enables people to move forward with a certain amount of security that their patents are going to be respected and that they will respect the patents of others. It’s when aggregators start to dominate the market, when big players start to dominate, that’s where the danger lies.

Phil Ross: Thanks for joining us, Mark Harris.

Mark Harris: Thanks a lot, Phil. I really enjoyed it.

Phil Ross: We’ve been talking to Mark Harris about his article on the sale of Kodak’s patents. For IEEE Spectrum’s “Techwise Conversations,” I’m Phil Ross.

This interview was recorded 8 January 2014.

Photos: Left: Brady Dillsworth/Bloomberg/Getty Images; Right: Mark Montgomery

Audio engineer: Francesco Ferorelli

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