It's no secret that profits from live auctions correspond to the level of "auction fever" created by the auctioneer. Following tried and true auction strategies, auctioneers generate high-profile hype (create emotion), impart strict, not flexible deadlines to end the auction (force time-pressured impulse bidding), and make sure bidders are visible to each other (agitate a competitive environment). Simply, auctions capitalize on predictable human behavior. Knowing the warning signs can help you avoid catching the fever.

In a recent study of over 100 internet and live auctions, Harvard Business School professor Deepak Malhotra[a] found that, depending on auction structure and the auctioneer's skill and cunning, winning bids can top seven times the market value estimate. Malhorta, and co-author, Murnighan, developed a "competitive arousal" model of decision-making that correlated decision-making impairment with such diverse factors as rivalry, social facilitation, time pressure, and a first-mover advantage.

Sophisticated business executives and intellectual property professionals who bid on patents are not immune to auction fever, and should use objective patent evaluation methods[b] to help avert falling victim to dangerous decision-making influences.

Why bid on patents at an auction? There are many methods of identifying - and acquiring patents outside of an auction environment, but when the "right" patents are being auctioned, that's where you need to be. Your answers will no-doubt reflect the reasons to acquire any patent, and might include: to broaden a portfolio in your product area; to keep the patents away from patent trolls; or to make a patent investment for later resale at a nice ROI.

Noble objectives that would make any shareholder smile. But human behavior at live auctions, along with the auction results, can tell a very different story – a story of auction fever.

The same human behavior factors that fuel litigation seem similar to those that drive auction overbidding.

The recent Blackberry patent infringement litigation (NTP v. Research In Motion) was driven by similar human behavior. Emotion, greed, egos, escalation of commitment ("I've invested so much time and money already, I can't possibly back out"), and competition all contributed to what was arguably one of the more contentious and expensive patent infringements in the past decade.

On a more objective note, having now witnessed the invalidation of NTP patents following discovery of new prior art, patent quality, or more precisely POOR patent quality, had it been identified earlier, could have brought decisive closure to the case years earlier, for millions less.

Applied to auctions, Malhorta and Murnighan found that escalation and competitive arousal, the stuff that drives litigation, can result in auction overbidding.

Interestingly, many bidders switch to a self-justification mode after winning, telling themselves; "I started low, but I couldn't let my competitor win"; or "All of my colleagues were winning patents, so I had to follow through on one as well". It's unlikely that you'll ever hear those sentiments voiced out loud – but you can bet they will resonate with some of the winning bidders.

The same drivers in the NTP – RIM litigation will be at work at your next live patent auction as well – emotion, greed, egos, escalation, time pressures, and competition. The scary part is that most bidders won't realize they caught auction fever until after the gavel sounds.

How to Avoid Patent Auction Over-bidding

There's no single "magic pill" to prevent overbidding, but you can take some precautions.

Successful managers are skilled at making important business decisions with imperfect information. However, given the powerful behavioral influences at work during live auctions, the best executives must diligently prepare for an auction:

1. Set your spending limits beforehand - based on sound business objectives. Your auction strategy will then focus on "when to start, and when to stop" bidding – not "how much to bid".
2. Perform thorough pre-auction "inspection"– or in the case with patents, evaluate, quality and analyze. Successful bidders perform thorough due diligence, are information-saturated before the opening bid, and continually balance patent quality factors against price until the gavel slams.

A thorough qualitative patent analysis expands the scope of traditional due diligence, and can drastically reduce the amount of imperfect information upon which you will base your bids. Remaining focused on you core BUSINESS OBJECTIVES will help you correlate each of the qualitative patent attributes to the level of contribution to reaching your objectives.

Patent quality drives value – and "quality" has many components divided across Legal, Technological and Commercial factors. Here is an example of a short due diligence check list that will keep you on track during your patent "inspection":

Using a statistical model for patent evaluation is an excellent way to maintain objectivity. No single computerized patent model is exact - and in fact, different models may evaluate qualitative components completely differently. Auctions favor the informed, so the more objective data you can compile, the more informed you'll be at the height of the emotion.

Qualitative attributes vitally important to one bidder (let's say, patent validity), may be entirely different from another's focus (the newest generation technology).

One analysis tool, PatentCafe's Patent Factor Index Report, was developed to statistically analyze and report three distinct areas of patent quality - Legal, Commercial and Technology. The report's 20 interrelated quality factors help business managers can make better-informed decisions, and help them determine the strengths and weaknesses of a patent as applied to their intended use.

Other statistical reports are available online, or thorough various providers of patent analysis services. Given the investment you are about to make - or "over-investment" as suggested by Malhorta, the cost of obtaining reports that present multiple perspectives is nothing short of smart, cost-effective patent due diligence.

After completing due diligence using statistical models, you can more objectively identify the patents warranting second-level due diligence, including detailed review of each patent's file wrapper, and litigation or licensing history.

Armed with information, data, clear business objectives and pre-set spending limits, you may win the bid while avoiding the headaches of auction fever.
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References:
a. Patent Factor Index Report
b. Ku, G., Malhotra, D., and Murnighan, J. K. (2005). Towards a competitive arousal model of decision-making: a study of auction fever in live and internet auctions. Organizational Behavior and Human Decision Processes.