"Bid card No. 006, 1.2 million Yuan. Next bid is 1.3 million Yuan, anyone? 1.2 million Yuan, going once, twice, third time. Sold!” The hammer fell and the auction was a success. Seemingly, it was not much different from other auctions, but when it came to the objects of the auction – patents – it was certainly a historic auction.

Main Auctioneer for the First Patent Auction

“On that day, I stood on the stage and said to the audience that everyone here was a creator and witness of history and I felt very much honored. After all, it was a great honor for me to officiate over the first patent auction in Beijing,” recalled Nalan Yixiu, whose memories were still fresh when interviewed three days after the historic event. Most people concerned about the first patent auction will remember the unforgettable name of Nalan. “Ha ha, many people asked me. I am a Manchu with ancestors under the yellow banner system. We had a family prodigy named Nalan Xingde. However, the honor does not go to me, and the same banner and family surname do not mean anything.” Nalan laughed. Ever since her admission as an auctioneer in 2004, Nalan has presided over several large auctions projects, such as the charity auction of the movie A World Without Thieves at the premiere party, an auction of limited edition Rolls-Royce cars, and some large real estate auctions. It has been estimated that cumulatively she has officiated over one billion Yuan worth of auction sales. Though she was well-experienced, the patent auction was still a great challenge to her.

Different from auctions of general assets, the patent auction had its own peculiarities. This was the first large-scale disposal of IT patents by auction in Beijing. It was also the first patent auction for Nalan. Though there had been patent auctions abroad, there were basically no references to make due to institutional and market differences. Therefore, innovation was a must and there were many difficulties in the patent auction.

“At patent auctions buyers are almost exclusively enterprises. Unlike investment in works of art, which has tens of millions of art collectors and enjoys a wide audience base in China, the patent auction was only for IP-related items. Therefore, at the initial stages of solicitation we chose to market by telephone, through face-to-face contacts with key enterprises in the industry and published announcements in newspapers. We also sought support from some public funds, private equity funds and other partners. It can be said that the success of the auction was at least partially attributable to the joint efforts of these partners.” Nalan herself made some big achievements and learned a lot from the patent auction.

Who Shall Have the Final Say in Pricing?

The first eight patent portfolios failed to receive bids, which was a big surprise for Nalan. The objectives of enterprises could be seen from different colors of cards they held at the auction, for different colors of cards delineated the items they intended to purchase. Holders of different colors of cards need to pay different deposits. For example, a red card holder is required to deposit 100,000 Yuan beforehand if he has interest in a certain patent portfolio. Green and black cards respectively mean a deposit of 50,000 Yuan for a single patent and a deposit of 20,000 Yuan for a non-reserve patent. “Many of our clients paid 100,000 Yuan in deposit, obviously with the purpose of purchasing patent portfolios. Therefore, it was a great surprise to see the auctions failed. But it did have reasons. Inventors always want a good price. I remember a patent portfolio was priced at 6 million Yuan, and it caused an up-roar in the audience. The price was seemingly too high. But this step can't be avoided.” Nalan came to understand how difficult it was to price intangible assets.

Auction of assets is faced with the same problem, and sometimes the same item will be up for auction many times. But such a process truly reflects the “value discovery” feature of auction, with the auction item being over highly priced at first and then readjusted to an acceptable level. The first failure to receive a bid is a process of contact, adaptation and exploration, and the true value will be discovered during the process. Patented intellectual results, as intangible assets, are difficult to price, and therefore it is the market that has the final say.

All the Behind-the-scene Efforts

The patent auction, for its large scale, attracted many interested buyers. Even if no deal was reached, given the pricing gaps between buyers and sellers, the auction can still be deemed a success. Taking into account would-be buyers’ feedback, sellers can reasonably price their auction items.

“We made a wide range of solicitation across China by taking advantage of our peculiar resources, and made regular recommendations to the database resources. To this end, we even made over 5,000 phone calls to target enterprises’ decision-makers. In the meanwhile, taking into account the needs of investors, we made regular analyses and adjustments. But after all, it was the first time and we had a tight schedule. Though many enterprises had expressed their interest in the auction, they expected to have some time to make a decision. Next time, we need to have a longer period of time for preparations. Primarily we planned to hold the auction in mid year to leave investors sufficient time to make researches, analyses and selections.” Nalan not only presided over the auction, but also participated in the auction throughout the process, so she had mixed feelings.

“We were initially given a list of more than 300 patents, and on the basis of their application scopes we were asked to make a preliminary analysis as to which types of enterprises would be interested. Then we classified the patents with some key words, such as “software’, “communication’, “electronic’, “animation’, and indexed our client database for contact information of enterprise managers, and used other channels to find out the relevant information of industries. All this was done at the solicitation stage.

Nalan and her team also contacted, through their branches and the bidding website at www.chinabidding.com.cn, industrial authoritative organs and would-be partners, such as PE unions, associations of China’s high-tech enterprises, for possible cooperation. The stage of solicitation involved initial preparations, targeting, and preparing promotional materials, which took about two months. Through their work, especially the special press conference in October with many media that were present and later wrote reports, the public received thorough notice of the patent auction. Based on feedback from enterprises, they sorted out about 90 enterprises on a list and launched one-to-one promotions. They also prepared bidding documents, published announcements, and held exhibitions for clients. In light of the spirit of thinking for the clients and better serving the bidders, the auction house specially required project managers to work at the auction site to help clients whom had paid the deposits go through formalities and obtain bid cards. A special team was set up to engage in organization and coordination.

United to Make History

The patent auction was sponsored by ICT, and co-organized by CTEX, Beijing Haidian Technology Transfer Center of ICT, Guoxin Xingye and Unitalen. “The whole working group was like a family after the auction. It is precisely because of this tacit agreement that lead to the success of the auction. To be quite frank, if there were disagreements or barriers among us, the auction would not have succeeded.” Nalan commented. She got much satisfaction and pleasure from the hectic work experience. As ICT put it, the smooth sailing and final success of the project was due to formation of an advanced joint working mechanism.

In the patent auction, Guoxin Xingye signed contracts with transferors under which no fees should be charged in the event of a failure and promised to bear all the upfront costs. From the perspective of profitability, the patent auction was not good business when compared with auctions of artworks. An auction house may get 10% commission from buyers and sellers respectively from auctions of artworks, about 20% commission if deals concluded are valued at one million Yuan in turnover, and 24% commission plus service fees. Besides, it is relatively easy to make a deal in artworks, and it is very common for an outstanding artwork to sell at a price of several million, bringing about a relatively stable flow of income for auction organizers.

Nalan said, “We did not aim for profitability when we started with the auction. The Group’s leaders were very supportive mainly because of its significance. After contacts and communications, we were deeply impressed by the sponsor ICT and co-organizer CT EX for their pioneering courage and felt strongly about their great spirit of innovation. It is relatively easy to get caught in a rut and do things according to existing rules, but it will not be easy to make breakthroughs and blaze a new trail. We felt that both ICT and CTEX leaders were open-minded and far-sighted, and they even could sacrifice their temporary gains for the new undertaking. With this understanding in mind, we were determined to actively accept the job. And we proceeded as a whole, because all the parties involved aimed not at profitability so much as hosting a successful auction.”

Promising Prospect for the Patent Auction Market

Nalan has known about transfer of patents for a long time. “For many years patent inventors have contacted our auction house one after another and expected to engage us to auction off a patented invention, or a design, or a utility model. But as an auction house, we have plans and priorities; in other words, one individual request from a holder seeking to transfer a single patent was not enough to cause us to accept the engagement and hold an auction. Therefore, regrettably we had to deny the requests at that time. Generally, we had four to five such patent auction requests each year, basically individual inventors expecting to engage us to hold auctions.

“We have been concerned about the founding of CTEX for a long time, as after all, it is the first “Chinese” exchange and has a high starting point. On this platform, there are many things to do in connection with technology transfer services, so we joined CTEX as a member immediately after its founding. With the assistance from CTEX, we have conducted many studies and discussions about technology transfer. Then we came up with the idea of holding a patent auction. The success rate of the patent auction was 40%, about 15 percentage points higher than that of mature auction markets in the developed countries.”

It is not difficult to see that domestic enterprises attached great importance to technology, and actively participated in the auction. Some people said a patent was not suitable for an auction. Nalan responded, a patent is still very suitable for auctions. The reason behind the failure was the pricing. The patent is an intangible assets and is difficult to price. There are market demands, as may be seen from the red bid cards off the stage. In future auctions, we shall price the patents lower during our solicitation and engagement, and sell them at reasonable prices. We worked out a good theme during the solicitation, such as specialized auctions of cloud computing, Internet-related issues, because it is not easy to bid if the items are too broad. We are able to make such designs and it is inaccurate to bluntly state that patents are not suitable for auctions.

Auctions are an open, just and fair pricing method. According to rules of the state-owned Assets Supervision and Administration Commission of the state Council, transfer of state-owned assets should use three methods, namely, bidding, auctioning and listing. Nowadays, enterprises’ equities are basically listed in exchanges, but in respect of intangible assets, we have not done enough, or they are rarely transferable. Public auction are more equitable to all because we apply the same rules to individuals, IT enterprises, or research institutes. They are required to pay the same service fees, deposits, go through formalities and obtain bid cards. However, auctions have the advantage of transferring in an effective manner and in bulks, and are suitable for rapid transfers by research institutes.

(Translated by Wang Hongjun)