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Aurigin on the Verge of Bankruptcy
Posted On January 28, 2002
Speculation is high that Aurigin Systems, Inc., an intellectual property analysis company, may soon declare bankruptcy.

You'd never know from the company's Web site just how much trouble Aurigin is in. The most recent press release on the site (, dated December 18, 2001, describes the Cupertino, California-based company as the leader in Innovation Asset Management (IAM) technology solutions. It also announces enhancements that Aurigin has just added to its product.

In an upbeat interview in the December 2001 issue of Information Today (p. 1), Kevin Rivette, founder and CEO of Aurigin Systems, talked about Aurigin's products and described how the company provides patent-analysis tools to customer companies' management that help them to do "lateral thinking" to find trends in competitors' patenting activities between areas of technology not normally connected. And in early December, Reuters, a major Aurigin investor, had set out terms to lead Aurigin through a final round of funding that was to guide the company to profitability. Rivette sent out an e-mail to employees on December 6 saying that funding was no longer a problem.

In other words, as of December 2001 the company was conducting business as usual and making plans to expand and enhance its products. But there had been warning signs. About 2 months earlier, Aurigin had announced another round of layoffs, its third, reducing employee count to 64, down from 150 the previous year.

Then on January 4, Rivette sent a memo to Aurigin employees announcing that "Due to circumstances, I have resigned as CEO and chairman." The memo also stated that before he resigned he had accepted the resignations of five members of the management team. He ended his memo by saying, "It is my belief that the investors will create an operating board and install new management." Employees also learned on January 3 that they had been put on minimum wage since the beginning of January 2002. The company was close to being out of cash, and bridge funding to see it through to a final funding round was unavailable. It hoped to attract new investments before the end of January, at which point it planned to pay its employees' back salaries and return to business as usual.

On January 18, another intra-company memo from Brent Larson, Aurigin's controller, told employees that the shareholders "could not come to an agreement on terms of funding. Therefore, they have instructed me to obtain bankruptcy counsel and proceed with an orderly shutdown of Aurigin." He went on to say that employees no longer had access to the building (their badges having been deactivated), and they should arrange times to come in and collect their personal belongings. This shortly changed, leading to speculation that such an act might be grounds for employees' filing for unemployment since they had effectively been "locked out." Currently the building is open during normal business hours, and employees may continue to work if they wish to. Employees have maintained a fair amount of dedication throughout all this and continue to come to work, even though they realize this may turn out to be a waste of their time.

Why did all this happen? Speculation is rife, but no one in Aurigin's (former) management team is commenting. In an article in the January 23, 2002 eWeek, Rivette was quoted as saying that he and the board had resigned over "something pretty upsetting," and that it was a "long, involved story" and "really a tangled web." Apparently Aurigin management could not agree with Reuters on the terms Reuters had set out in its bridge loan proposal. At least 66 percent of the shareholders had to agree to the bridge loan terms, and if opposing sides each controlled over 33 percent of Aurigin stock, the situation would be deadlocked.

It's hard to say what will happen next. Because the company no longer has a board of directors or an executive management team, no one is left at Aurigin to run the ship. The stockholders will have to decide whether to file for bankruptcy. If they do, they will have to decide whether to file for Chapter 7 (total liquidation) or Chapter 11 (reorganization). Which way they decide to go will impact Aurigin customers considerably.

Aurigin has two kinds of customers. Those who choose the Client/Server model buy the software and patent indexes and install them behind a firewall on their own servers. Customers who choose the Hosted model, an ASP (application service provider), tap into Aurigin's host computers. In an earlier (October 25, 2001) interview in eWeek, Rivette mentioned an upcoming third option, a hybrid between the Client/Server and Hosted models that would let customers access the database indexes on the ASP host but keep data and functions on their own servers.

Recent customers have increasingly opted for the Hosted model, because Aurigin's recent systems enhancements and data expansions (including the addition of U.S. pre-grant patent publications) go to the ASP but do not go out to Client/Server customers. But a number of legacy Client/Server customers still exist.

If Aurigin declares Chapter 7 bankruptcy, no one would be left to maintain the ASP host. It would shut down, and Hosted model customers would find themselves with nothing. All they could do is to replicate patent groupings they have already created, take Adobe PDF snapshots of citation trees, run reports, and take other measures to preserve their information before the host goes away. But they would have no further access to any of the analytic software.

Client/Server customers would still have the data and software they had accumulated and mounted in-house, but they would of course receive no further updates. The cessation of updates would create a real problem, since no practical replacement source exists. Aurigin accumulated its data from multiple sources: the U.S. Patent and Trademark Office, the European Patent Office, the PCT (Patent Cooperation Treaty) office, and JAPIO. The company had to convert the PCT (non-electronic) publications into machine-readable and -searchable form by OCRing them.

Incidentally, under Chapter 7 bankruptcy, all Aurigin customers who paid their full subscriptions for 2002 would have little chance of receiving refunds. They will stand in line behind secured and nonsecured creditors when the time comes to divide up Aurigin's (former) assets.

If Aurigin declares Chapter 11 bankruptcy, the company would have a respite from its creditors but would continue to operate. The court would appoint a trustee to oversee the company's reorganization. Current and potential investors would be able to submit new management plans, and the trustee and judge would decide which plan to accept. In the meantime, customer companies should see little difference in their access to Aurigin products. The ASP host would remain in service, and both Hosted and Client/Server customers should receive updates. At least some Aurigin employees would stay on to keep things running. As more funding is secured and an acceptable business model put together, the company should be able to return to full operations and repay its creditors.

Aurigin currently has over 90 companies as customers, some paying annual subscriptions that run at least in the high five figures—and a few of them considerably more than that. Aurigin customers hope that the service will not go away. As Rivette pointed out in his Information Today interview, many companies claim to be competitors, but none provides both patent search and patent analysis tools at Aurigin's level. On the one hand, Delphion, the Chicago-based Internet patent search service that evolved from the IBM Patent Server, offers international patent databases but not yet the high-end analytical tools. On the other hand, PatentCafe provides analysis but not the search tools; customers have to find their own needles in the huge haystack of international patents for the CafeDoors tool to analyze. Even Derwent, despite its broad international coverage and the quality of its patent indexing and abstracting, still doesn't help with lateral thinking; it simply divides patents into pre-established categories.

So Aurigin provided a unique service. And, the company holds at least 12 U.S. patents, five in its current name and seven in its former company name of SmartPatents, covering the novelty of what it does. Time will tell if the company will survive to continue doing it, or if someone else will take up the reins. Time will also tell if anyone can turn patent analysis into a profitable business with sustainable growth.

Nancy Lambert is a senior information analyst at the ChevronTexaco Business and Real Estate Services Technical Library.

Email Nancy Lambert
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