Kodak’s Patent Auction: Over-Licensed IP? (analysis)

Written by Tom Ewing

A small selection of Kodak’s exiting patent licenses; source: Kodak bankruptcy proceedings

Kodak CEO Laura G. Quatela

Big Yellow and the Over-Licensed Patent

Now that Kodak has received permission to auction 1,100 of its 14,000 active patents attention will inevitably shift to the anticipated sale price for those patents.

The auction proposal was hard fought by more than 20 tech companies who had already licensed the patents and worried that a new owner would undo or ignore the existing licenses, but Kodak seems to have generally calmed this fear as part of winning the court’s permission for the sale.

At first glance, Kodak’s patents resemble government-issued golden eggs. But patent licenses are dishes that only need to be served once in a lifetime. No matter how valuable a patent might be, if “everyone” already has a license, then the new owner may find itself like the Girl Scout peddling thin mints in a neighborhood whose trashcans already overflow with empty cookie boxes.

Kodak’s auction plan reveals that the company previously received some $3 billion in licensing royalties for the patents to be auctioned. The plan also identifies by party the existing licensees for these patents – some 41 patent licenses with the world’s largest tech companies and another 80 agreements that touch upon some aspect of the patent portfolio.

Last summer’s successful auction of the Nortel portfolio was taken as a sign that patent prices were going nowhere but up. The recent sale of AOL’s patent portfolio to Microsoft for $1 million per patent was taken as another sign of a nothing-but-upward trend. However, this is not always the case.

InterDigital spent more than a year trying to sell its wireless patent portfolio before Intel finally bought it in June at a fairly reasonable price of $375 million due in part because the portfolio has already been heavily licensed to various wireless manufacturers.

Underexploited patent portfolios tend to be worth significantly more than heavily licensed portfolios. Patents can be licensed under a nearly infinite number of terms. If the licensor asks for only a one-time fee with no running royalty, then there’s no ongoing relationship between the parties.

A future purchaser of the patent can only license it to someone who is not presently licensed, and if “everyone” is licensed, then there’s little for a new owner to do. The situation is only slightly different for licenses having a recurring or running royalty obligation. The new owner will receive the future royalty income, but the value of this income is often fairly easy to calculate and express in the form of a net present value.

Kodak is taking the patent auction very seriously. The company appointed Laura G. Quatela as its president and chief executive officer in January. Ms. Quatela was previously the company’s general counsel, and is one of the few Fortune 100 CEOs to have previously served as a chief intellectual property officer.

The terms for all of Kodak’s existing licenses are not necessarily publicly available – but the licenses will all be available through the due diligence room associated with Kodak’s auction. In any event, the licenses will all likely have either a one-time licensing fee or a running royalty that should be relatively easy to assess. So, who would buy a portfolio that perhaps has already been licensed to the world’s tech giants?

We’ll likely know in just a few months.