The first financial exchange to sell patent-licensing rights, poised to launch early next year, is being greeted by both optimism and concern.

Many in the patent industry are skeptical of the still nascent Intellectual Property Exchange International, worried that its transactions will generate ripples of litigation. But others said the new Chicago-based exchange could provide the transparency and liquidity the patent licensing market has been missing.

On the electronic exchange, patent owners would essentially rent out their licensing rights. In return for a share of the revenues, the exchange's staff will promote the patent and sell the license rights in individual units issued like stocks. It will also enforce its protections with litigation when necessary. All sales and price data will be published online.

"It's like an initial public offering for a patent," said Jim Malackowski, chief executive of Ocean Tomo, the Chicago-based merchant bank backing the exchange. Gerard Pannekoek, president of the Chicago Climate Exchange until 2005, was named CEO of the patent exchange on Friday.

The exchange has soft commitments from four or five companies interested in formally joining and expects to have between 10 and 15 "industry leaders" pledged by February, Pannekoek said. Spokesmen from Microsoft Corp. (MSFT), International Business Machines Corp. (IBM) and Hewlett-Packard Co. (HPQ) declined to comment.

The exchange could provide great insight into the often murky world of patents, one leading expert said. "People will be following it very closely," said Q. Todd Dickinson, former chief intellectual property counsel at General Electric Co. (GE) and director of the U.S. Patent and Trademark Office during the Clinton administration.

Executives at Ocean Tomo, who value companies based on their intellectual property, said their goal is to create an efficient and transparent patent licensing marketplace. In time the exchange may expand to sell the license rights as securities that could be traded on a secondary market.

Traditionally, companies hoping to license out patents do so in secret, labor-intensive and expensive deals that can be hard to value properly.

"Any time that you are in a bilateral agreement with another party you never know whether you got a great deal," Pannekoek said. "An exchange will offer that price transparency to the market and ultimately establish the real value of a patent."

Many in the patent industry are nervous that the exchange could abuse its right to enforce patents against infringements. They worry the exchange would use lawsuits to pursue profit off its accumulated portfolio.

"Whenever anybody aggregates patents, there's always that suspicion," said Patrick Thomas, principal at 1790 Capital, a hedge fund that invests in companies based on their intellectual property. But Thomas said Ocean Tomo's current business based on valuing companies' patent assets lends credence to the new venture.

David Silverman, the exchange's chief operating officer, stressed that the company planned to make its money off transaction fees, not through windfall lawsuit profits.

"What we're interested in doing with enforcement is making sure everyone using the technology is paying their fair share," Silverman said.

Industry insiders said that while the idea of brokering patent licensing rights is not new, standardizing a method of valuing intellectual property would be a major breakthrough.

Determining the real value of a patent is notoriously difficult, not least because major corporations typically use customized contracts and are often reluctant to disclose the terms of any deals made. Some predicted the exchange may end up most useful for small companies or universities without the means to promote or enforce patents on their own.

"It's really a very interesting and creative model," said Ron Laurie, managing director of Inflexion Point, an IP-oriented investment bank in Palo Alto, Calif. But he didn't know if the exchange would be able to make standardized contracts the new norm.

"It's too early to tell," he said.

-By Kristina Peterson, Dow Jones Newswires; 212-416-2917; kristina.peterson@dowjones.com

 
 
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