Jim Malackowski is arguably one of the foremost authorities on intellectual property (IP) strategy, patent valuation and IP transactions. With more than 30 years in the industry, he is co-founder, Chairman and CEO of Ocean Tomo LLC, an international professional merchant banc firm launched in 2003 employing 70 professionals offering opinion, management, and advisory services centered on intellectual property assets.
Malackowski has innovated like no one before – creating large-scale patent auctions across the globe and popularizing the first patent based stock index, the Ocean Tomo 300® Patent Index.
When it comes to global competition, Malackowski predicts big trouble on the horizon for the US marketplace when it comes to IP rights needed to protect innovation. He predicts accounting standards will have to radically change to account for the power and value of IP. I recently interviewed Jim:
Q: How is it that right out of college you knew that your life's direction was in intellectual property?
Jim: Happenstance and luck compliment good intuition leading to success. The US patent system created more than 200 years ago began with a well-defined agenda. Starting in the 1960s and extending to the early ‘80s, the US patent system had broken down. Congress sought to right the ship by creating a single appellate court in 1982 with noticeable effect just a few years later, coincident with my graduation. After my studies at the University of Notre Dame, I joined a consulting firm where I could work on computing the value of patent claims. The small group I was working with were the only ones concentrating on such cases. Three years later I saw an opportunity to value patents outside of litigation and I decided to stake out IP valuation as territory we would try to own. I started my first company one week after my 25th birthday.
Q: Stake out how?
Jim: Along with four of my peers, we created the first-ever IP appraisal firm which grew from five of us to nearly 300. That business was ultimately sold to a public company where it still thrives more than 15 years later.
Q: Congratulations. Then came Ocean Tomo?
Jim: There was growing recognition of IP as an asset class. After building the first IP centric professional services business, I realized there was a market need that extended beyond the work of an IP advisor, appraiser or strategist. There was a need for an IP savvy investment banking firm. I started Ocean Tomo with several partners to combine the IP advisory practice with elements unique to a merchant banc firm.
Q: One of the things I find revolutionary about Ocean Tomo is that you launched live patent auctions. Were you the first?
Jim: I can't say we were first to ever auction a patent but we were clearly the first to create a large public market for the sale of meaningful patent assets. Ocean Tomo was engaged to sell in bankruptcy a portfolio of patents from Commerce One. Our involvement was triggered by the failure of traditional investment banking efforts to liquidate the assets sufficient to satisfy the creditors. By separating and auctioning the patents we were able to unlock value and satisfy creditors in a way that couldn't otherwise be done. That experience led to plans to scale the IP auction experience. A short time later we were the first to hold large multi-lot auctions of patents. When we announced our plans we were not given much chance of success by the industry.
Q: Well sure, everyone’s a critic. How did it go?
Jim: A few years later and with 9-figure transactional volume it was regarded as a game changer.
Q: How had it changed the game?
Jim: The volume had become meaningful but more importantly the transparency that the public auction provided was real and valuable insight into what intellectual property was worth to third parties. Otherwise these transactions weren't published or disclosed.
Q: Did volume go up?
Jim: We were running up to three public auctions a year. Our publicly announced volume target for each auction was $25 million. And the public auction became a catalyst for private deals that were offered but not sold on the auction floor.
Q: What was the original criticism – what were the naysayers naysaying?
Jim: Each patent is unique by definition. There are often very detailed legal parameters or encumbrances surrounding the sale of a patent requiring attorney or technical review. The market just didn't believe that we could standardize the documents and diligence process in a way that would make it efficient.
Q: How did you solve that?
Jim: We were able to push through new standards.
Q: What else was predicted to go wrong?
Jim: The buyers in a patent auction tend not to want the public to know who they are. If they are not the highest bid, participants are often concerned the acquirer may look to them as a potential infringer. We had to master the whole process of being able to hold a transparent auction yet protect the identity of the bidder and the buyer until the sale was complete.
Q: How long did it take to pull off the first auction?
Jim: A shockingly short period of time. We realized early on that we could analyze a challenge to death but that we would learn far more from setting a short-term target, executing it and judging the results. We announced that we were going to do live patent auctions and within 6 months we held our first auction in San Francisco.
Q: How many people showed up?
Jim: A lot! We had over 400 people in attendance including former US patent office commissioners, senior patent executives, media brokers, and valuation experts. When the auction started it continued uninterrupted for 2.5 hours -- no one got up, no one moved. It was eerily quiet. It was price discovery in action and the note taking was furious.
Q: How much sold?
Jim: Our first auction had just over 80 lots of patents for sale. Our sales were modest: $3 million - as we sold about 15% of the lots. But within 3 weeks the volume tripled in aftermarket sales. Sales closure rates increased as we continued to run auctions.
Q: Did bidders know there was kind of a reserve price, or what happened when there was no bidding?
Jim: The auction environment is very effective. The reserve price itself is not published but for those who are experienced, once the reserve is met the auctioneer will make clear that the lot will sell. Our audience spent the first few auctions really understanding that nuance and in many cases they held back on their bids until they knew the lot would sell. Unlike a piece of art or a fine automobile, many of these buyers were just as happy to see the patent not be put into the open market than to buy it themselves.
Q: Had you been to Christie's or Sotheby's – how did you know auctions?
Jim: We learned it all.
Q: On your own?
Jim: Our model was Gooding & Company, a high-end automotive auction house. One of our early fortuitous decisions was reaching out to David Gooding and asking if he had ever sold a patent. It turned out he knew as much about patents as we did about auctions and so we made a good team.
Q: What about stage fright: you hold the auction and nothing moves?
Jim: Oh, believe me it could be terrifying, especially if either the early rounds don't sell or one or two lots that you were counting on as being your homerun don't sell.
Q: You also printed a big, chunky auction catalog - why?
Jim: Having a traditional auction catalog turned out to be a great marketing strategy. We of course also had online catalogs and data rooms, but we thought there was value in printing a three-quarter inch thick heavy colorful book. We wanted people to get a sense of the weight of the auction, the import of the assets. The auction books were sent to buyers and IP industry influences; one of the unexpected highlights is they were used often as coffee table books within the lobby of leading companies or their law firms.
Q: That’s remarkable.
Jim: One of the great stories of the business is we were told by Microsoft as a buyer that Bill Gates personally went through the catalog circling things he found of interest. I am not sure I can prove that one but we like to believe it was true.
Q: That is important for all of us who produce intangibles like software and content: you made the intangible tangible by putting up a catalog?
Jim: That's right. I think that would be a good slogan.
Q: One of your other innovations has recently concluded a ten-year term and is not going to be extended – what happened to the stock index?
Jim: We created the Ocean Tomo 300 Patent Index and related products as an investible index of the 300 companies that own the most valuable patents. Everyone's very familiar with trading stocks. If you can demonstrate an edge from those companies that own valuable patents it should be relatively easy to convince investors to pay attention.
Q: What went wrong?
Jim: We faced two hurdles, first the great recession resulted in termination of a large number of “niche” ETFs, including those based on the OT 300, in spite of strong performance. Second, our enthusiasm met the challenges of reality when we moved to convert IP into an exchange traded instrument as a commodity. Meaning we were going to trade the asset, not the company that owned it. That has not succeeded. At least not yet.
Q: Are you considering a relaunch?
Jim: Yes, however those conversations are being driven out of Asia, no longer the US.
Q: Why Asia?
Jim: If you compare the US economy from an IP innovation point of view to the rest of the world, 5 years ago, certainly 10 years ago, the US was 90% of the weight of the industry.
Q: And now?
Jim: The US has undertaken numerous legislative and judicial changes that have had the effect of devaluing IP and patents. Especially in comparison to China where there are aggressive governmental driven mandates to create an intellectual property economy.
Q: What’s the balance now?
Jim: Although hard to measure, in my view it's now evenly balanced between the US, Asia, and Europe. If we're not careful, the US is going to wake up in another 5 years and find that we are a relatively small portion of the IP mindshare and no longer a center of the global IP marketplace.
Q: The action in terms of the true creation of new ideas or in the way that it is filed and protected?
Jim: They go hand in hand. The US still maintains a dominant lead but if those ideas cannot be protected predictably over time that will begin to erode the investment capital that drives innovation.
Q: Why would that erode capital?
Jim: Because those ideas will be quickly copied by others and to the extent they are protected by Chinese or German patents in a way that is predictably enforceable, investment dollars are going to flow in that direction.
Q: That would be a radical shift worldwide.
Jim: Investment dollars will flow outside the US not just to develop the quick me-too slightly improved version, but to develop the core technology from the beginning because the protection is much more viable there.
Q: Can you talk about the changing concept of valuing IP assets?
Jim: We're still at the relative beginning of IP as an asset class. Thirty years ago, if you were CEO of a publicly traded company worth say $100 million in market cap, you would find $80 million of tangible assets on your balance sheet - property, plant, equipment, cash. That is the way it has been for more than a century. The average $100 million public company today only has $20 million worth of tangible property on the balance sheet.
Q: It’s a complete inversion.
Jim: It is a once in a lifetime intellectual revolution that is no less significant than the industrial revolution.