The recent high profile patent transaction deals are causing many CEOs and CFOs to ask the question “what am I getting out of my patents?” Large companies with patent portfolios from 1000 to 30,000 are asking themselves “why do we need all the patents in our portfolio? How many of them are we really using and what should we do with the remaining ones? If others are making money by selling patents, how come we are not doing the same thing?”
Over the past few years, patent buying/selling has become very common in USA. In other countries, particularly in Asia, patent owners are still coming to terms with this monetizing strategy and they are trying to understand how selling of core assets impacts their business, what are the consequences of pursuing this strategy, the what is process of selling patents, what would be the impact on their corporate image (does selling patents mean that you are in desperate need of cash?), etc. Many foreign companies still consider selling patents as selling their first born and it will take time. However, in USA this has become common place and patent portfolios, large and small from thousands to a single patent are being made available on the market today. [Of course for every seller, there needs to be a corresponding buyer. The question of how buying patents can help ones monetization strategy will be discussed in a later post…]
So how does patent selling support monetizing strategy? The answer is not as simple as transferring ownership of patents to somebody else in exchange of monetary consideration…because there could be several hidden repercussions that must be thought through carefully. For example,
Deciding what patents to sell: This is a critical first step of identifying essential vs. non-essential patents within the portfolio. Essential patents in this context mean those patents that may be needed to protect the company’s product line. This question itself is much easier asked than answered. The company’s products may be protected by several patents…then the question becomes to what degree is a patent essential vs. slightly less essential vs. non-essential.
Deciding to whom to sell: Many companies have policies of selling only to “practicing entities”. They refuse to sell their patents to trolls or to NPEs for multiple considerations. For example, a troll or a NPE may use the patents against one of their key customers or suppliers. If used against a customer the customer may pull their business and if used against a supplier he may increase the price of their goods or refuse to sell to them. The entire strategy of monetizing could backfire.
Deciding grant back rights: This is a very serious consideration in terms of protecting future product lines, product improvements, etc. Should there be a limitation on the quantity of “licensed” product(s)? This is particularly true for industries such as semiconductors.
Deciding “flow through” rights in the case of an acquisition: The seller must consider what happens to their retained rights if it becomes an acquisition target. Would the retained rights flow through to the acquirer of the business? If not then it may affect the valuation of the company.
Warranties and Representations: The seller must be extremely careful about what warranties and representations are being sought in the Patent Assignment Agreement (PAA). If these are not carefully thought through or researched then the buyer could potentially come back and sue for breach of contract.
Payment considerations: This includes not just the total price for the patents but also payment milestones, if any. Depending on the business needs, one might take a smaller upfront payment in lieu of a “long tail” or one may want it all up front with no tail.
The business of patent selling (or buying for that matter) is not just a matter of negotiating price. It could become very tricky if not executed properly and thought through. Having said that, if one knows what they are doing they can extract significant value from their so called “unused” assets that can improve not just the top line but also the bottom line! One can reduce patent maintenance expenses and raise revenues at almost 100% profit margin.
 According to the 2016 Patent Market Report by IP Watch Dog, about $2B to $3B in new potential patent packages available for sale enter the market every year.