Kodak Goes Naked to Patent Auction
Eastman Kodak, the latest in a string of struggling tech companies to auction its patents in the face of bankruptcy, has been having trouble generating interest in the sale of its 1,100 digital photography and imaging patents.
This could prove problematic for the 132-year-old film company, which filed for bankruptcy earlier this year. To remain in compliance with a $950m bankruptcy loan, Kodak needs to file details of its patent auction with the bankruptcy trustee by June 30th.
Yet, with so much riding on the company securing a good price for its portfolio — including the ability to pay its debts and fund a new business direction — the bidding landscape is looking decidedly barren. Earlier this month, the company failed to find a “stalking horse” bidder for its digital capture and imaging patents. Typically, a “stalking horse” sets the minimum bid for the auction and drives up the final sale price. In return, they receive a “breakup fee” of about 5% if another suitor outbids them.
In a recent example, Google placed a $900m stalking horse bid on Nortel’s portfolio of technology patents last summer. This spurred a number of Google’s competitors (Apple, EMC, Ericsson, Microsoft, RIM and Sony) to pool their resources and buy the portfolio for a record $4.5b bid. In this case, the stalking horse generated enthusiasm among competitors not only to acquire the patent, but also to keep Google from buying it.
This strategy proved unsuccessful in Kodak’s previous auction of customer accounts and images of Kodak Gallery online photo services, which took place in March. Shutterfly provided a $23.8m stalking horse bid, and ultimately emerged as the only bidder.
Now, Kodak’s failure to secure a stalking horse for its digital capture and imaging patents has the company preparing to hold a “naked” auction, in which no suitor makes an opening bid prior to the start of the auction. This exposes the company to the risk of receiving no bids for the portfolio, or selling for a low price; in filings to the bankruptcy court earlier this month, the company said that the lack of a stalking horse bidder had subdued the competitive bidding landscape.
Some experts have placed a value of $2.6b on the patents, which creditors believe are Kodak’s greatest asset. Since 2001, the patents have generated roughly $3 billion in licensing fees for the company and are still heavily licensed through lawsuits.
This estimate would value the patents at $2.4m each, a high water mark for patent sales in the U.S. Other benchmarks include the Nortel portfolio purchase, in which Google’s competitors paid a record $750k per patent, and Google’s acquisition of Motorola in which the search engine giant paid $510k per patent.
Still, both of those headline-making purchases represent extreme outliers from the norm. In the Nortel sale, the patents in question were believed to be essential to build phones compatible with the latest 4G/LTE high speed data network. In the Motorola case, Google didn’t acquire just Motorola’s patent portfolio— it also got a cell phone company thrown into the deal.
While valuing patents is an inexact science at best, recent sales indicate that marketable patents selling at auction appears to have hovered around $150k over the last few years.
For Kodak, the unwillingness of any suitors to throw a hat into the bidding ring early on, as well as uncertainty surrounding the real value of its portfolio, have created a perilous selling environment just weeks before the August auction. I have to believe, however, that given the breadth of the Kodak portfolio, and the ubiquity of digital cameras connected to all kinds of portable electronics, a much-needed buyer will wind up getting a terrific deal on a library of important patents.
The company plans to auction off the patents in a confidential process, without disclosure of unsuccessful bidders to other bidders or the public. At the end of the auction (expected on August 13th), only the winning bidder and the amount of the successful bid will be announced.
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John Ferrell is a founding partner of Carr & Ferrell LLP, one of Silicon Valley's foremost technology law firms, and specializes in patent and intellectual property law matters. He is the Chair of the firm's Intellectual Property Practice Group.