How James Malackowski's ('85) Chicago startup aims to take the guesswork out of valuing intellectual property.
When summa cum laude accounting major James Malackowski ('85) was interviewing for a job after graduation, he did something that so impressed his professor, Bill Nichols, that Nichols decided to make a special effort to follow Malackowski's career.
“Back then, 99 percent of accounting graduates entered public accounting,” says Nichols, now associate dean of the Mendoza College of Business. “He said he wasn't going that route. He said public accounting firms are bureaucratic, and he would not be able to progress fast enough.”
“I had never heard this from a top student before,” Nichols continues. “Most preferred the stability, the certainty [that] public accounting careers offered, and there also was considerable peer pressure to go the Big-8 firm route. I thought, ‘This guy is really different. I'm going to follow his career.'”
Nichols hasn't been disappointed.
The “kid with a great eye for business opportunities, a born entrepreneur, unusual among accountants,” according to Nichols, is the catalyst behind Ocean Tomo, LLC. That's a three-year-old, Chicago-based patent valuation, license management, merchant banc and intellectual property consultancy.
Under Malackowski's leadership, Ocean Tomo is revolutionizing how four million U.S. patents are valued as assets, say industry experts.
“Today most corporate value is derived from a company's intangible assets, notably patents,” explains Malackowski. “We are changing the paradigm by creating new opportunities for businesses looking to their intellectual property as core to their strategic plans to drive value. We're creating common ratings metrics and opening access to markets such as public auctions, which is allowing companies to monetize their IP portfolios in ways never before possible.”
For a small manufacturing company with revenues of $10 million to $20 million, which owns three to 10 patents and is looking to expand, “this could be very big,” claims Timothy Malloy (ND '66, JD '69), a Chicago intellectual property attorney. Three years ago, Malloy, a partner in McAndrews, Held and Malloy, won a $166 million judgment, among the top 10 damage awards ever given for an intellectual property case, according to IP Today magazine.
“Many times, small companies don't have the cash to price their patent portfolio realistically,” Malloy elaborates. “They don't have the money to hire attorneys, accounting or finance IP experts. Anything that makes patents easier to value so that smaller companies can sell or lease intellectual property rights could help these companies tap into more capital to grow.”
Here's how Ocean Tomo, Malackowski's firm, is changing the way companies worldwide use and value intellectual property.
Earlier this year, it hosted the first-ever live auction involving patents—like a car or art auction—which established the value of 233 patents owned by entrepreneurs or major corporations. Think of the two-day event as the first time companies and institutional investors could visit an IP supermarket to see all of the different patents and property licensing agreements that they could buy—a convenient way to browse and shop.
The idea came from Malackowski's partner, Dean Becker. At a strategy meeting, Becker, an avid car collector, passed around an auto auction magazine. He suggested the same paradigm be used for intellectual property.
“It sounded preposterous,” recalls Malackowski, who at 43 is Ocean Tomo's president and CEO. “When we explored it, we realized it would work. In the past, companies viewed themselves as patent collectors. Now each discovery is viewed as a potential product in and of itself, which, if patented, can be sold to the market.”
Ocean Tomo bet big on the auction's success, and it wasn't disappointed. The company spent close to $1 million on the event—about $500,000 to reserve hotel rooms and ballrooms at the San Francisco Ritz Carlton and Imaginarium Museum —as well as $500,000 in people costs.
Forty-four percent of the patents, “a very high number,” claims Malackowski, sold for $8.5 million. OceanTomo received a small listing fee, 15 percent sellers' commission and 10 percent buyers' premium in line with other auction house transactions.
“The auction attracted a ‘Who's Who' of the intellectual property industry, as well as a lot of brokers new to the industry,” reports Kevin Rivette, IBM's intellectual property strategy vice-president, who keynoted the event. Participants included “small inventors, who can't seem to get their patents valued or sold and larger companies, like us, with patents no longer in use.”
At Ocean Tomo's second auction in New York City in October of this year, 275 patents were accepted for bid from more than 3,000 patents submitted. “We only offered half as many patents as we had in San Francisco , but the values were significantly higher because we learned from the first auction what sells,” says Malackowski.
Around Nov. 1, 2006, Ocean Tomo plans to launch another innovative project: an intellectual property index that Malackowski describes as “a market basket of 300 stocks, representing a cross-section of industries with the highest relative patent value to market value.”
After its launch, the American Stock Exchange will list the index, patterned after the Standard & Poor's and Dow Jones 30 Industrials, using the stock symbol: OTPAT. “It wasn't difficult to sell,” Malackowski discloses. “ASE understood immediately the impact—the first time investors could see the value of an intangible asset driving the American economy.”
Innovations such as the stock index and auction are “significant,” says Dwight Olson, president of the USA and Canadian chapter of the Licensing Executives Society, an international licensing trade association.
“Up to now, securities firms haven't had a way to value patents as an asset of a publicly traded company, even though they're considered company property,” Olson says. “It's guesswork. Jim's taking the guesswork out of the valuation. In doing so, he's changing the balance sheets of these companies.”
Malloy, the Chicago intellectual property attorney, expects that Ocean Tomo's efforts, particularly the auction, may help companies rectify two mistakes they make in dealing with patents. “Frequently companies overvalue what they have,” says Malloy. “They read more into what the patents cover than the patents actually represent. As a result, they think they're more valuable than they actually are. Secondly, many times the patents may be written so broadly—as broad as a barn door—to insure they're valuable. But this broad wording all too often renders them practically worthless.”
That Malackowski is a groundbreaker isn't surprising, given his track record at Notre Dame.
In 1985, he earned summa cum laude degrees in Business Administration (accounting) and Arts (philosophy). In his senior year, he had 42 job interviews, “possibly the campus record,” he confesses, motivated by the realization that he would “never have another opportunity to be courted by corporations, accounting and financial firms.” Malackowski chose a small commercial litigation consultancy. His first project was to provide accounting support on an intellectual property case. Three years later, having become the firm's go-to guy on IP, Malackowski got a big shock when his firm was acquired.
“For the partners in the firm, that was a glorious day,” he recalls. ”Even though I'd been fast-tracked and was very well regarded, all I was offered as a bonus to sign a non-compete clause was cash not even equal to the price of a new sofa.”
So, he convinced three colleagues to leave with him to establish their own intellectual property firm, IPC Group.
“Jim was in his 20s, looked like a kid, but didn't talk like a kid,” says Rene Torrado (ND '69), a Chicago attorney who helped set up the firm. “He knew what he wanted to do and was prepared to pursue his dream. That was really gutsy.”
Ten years later, after IPC Group had grown to 70 professionals, was advising blue chip clients and was a solid success, Malackowski wanted to grow the business in new directions. “We were passing up great opportunities to invest in new inventions or income streams as we saw them,” he says.
Against Malackowski's wishes, the other principals voted to sell the firm. During the next year, Malackowski read up on the development and success of merchant banks, while also spending considerable time listening to his former clients and discovering what services they wanted that weren't being provided anywhere. “All good ideas repeat themselves,” he says. “I realized the merchant bank might be perfect for IP.”
The day after his IPC Group non-compete expired, Malackowski established Ocean Tomo, whose name derives from the global connotation of “ocean” and the Japanese word tomo for “intelligent.” He expects revenues to reach $20 million this year.
But that's not the only yardstick he's using to measure Ocean Tomo's success.
“When small business owners can easily decide, using intangible assets, whether to make-or-buy, we'll have succeeded,” Malackowski says. “When middle managers can capitalize on intangible assets better, we'll have done well. And, when independent directors of public companies are able to implement process and control procedures to monitor and control IP assets on behalf of shareholders, we'll have done our job.
“You can kick the equipment, the assets, in a plant, to assess their value and insure them,” he concludes. “But, with intellectual property assets, those safeguards evaporate. There's no hedge. Any way to maximize the value of intellectual property is a step in the right direction. The future of our industry is in the investment sector.”
—Ann Therese Darin Palmer (ND '73, MBA '75), a non-practicing Chicago attorney, is a freelance business reporter whose articles regularly are published in BusinessWeek magazine and the Chicago Tribune Business Section.