How to Profit from Your Patents
By Andrea Dick
The lackluster economy and lingering credit crunch makes it hard for small companies and individual inventors to raise money for product development or growth.
Yet those with U.S. or foreign patents may be sitting on valuable assets that can generate working capital or cash for other uses. However, selling intellectual property is more complex than, say, selling furniture at a yard sale.
Patent holders need to have a realistic understanding of the strength and value of their patent or portfolio. They also need a clear understanding of the types of transactions available.
The decision for when to move ahead on a patent transaction – license, sale or loan – requires careful consideration and familiarity with the realities of the marketplace. Timing also is key.
The good news is that the market for licensing and selling patents, especially for independent inventors and small companies, has improved significantly over the past 10 years and will continue to do so. The bad news is that innovators frequently have expectations that exceed what the market will pay.
Before the patent issues
It all starts with strong patents. When an individual or small company conceives a great new innovation, they typically apply for a patent because they believe it is worthy of protection. Often, obtaining a patent is a side activity for the company to the creation of a commercial product or service.
This can result in a patent that embodies or describes the innovation, but has not been drafted in a way that the patent market would consider strong. Later, when considering a patent transaction, reality hits as the valuation is well below expectations, or the patent claims are not sufficient for licensing.
A strong patent should relate to at least one other product or service in wide use and generating significant income. And it should be possible to show that the product or service implements every step of at least one independent claim in the patent.
And because strong patents are hard to reverse engineer or design around, they make it difficult or costly for others to practice the covered invention or inventions in the future. So patents should describe the innovation in the broadest possible way. Along with a robust and thorough patent disclosure, the claims should be written by an experienced patent attorney.
Claims should describe a minimal set of steps required to implement the invention and be written so that it is easy to detect their use. Claims also should be broad, e.g. not requiring particular technologies, and short with terms defined or described in the body of the patent.
Thorough prior art checking demonstrated by patent and non-patent citations also enhance the strength of a patent.
Armed with strong patents, small companies and inventors have several options to generate a return on their inventions. Each carries different levels of risk, time requirements and different trade-offs concerning rights of ownership. But a patent can be licensed, borrowed against and even sold without necessarily giving up the right to the original owner to practice it.
In a sale, the patent owners elect to transfer ownership of their patents to another entity. Selling a patent portfolio is a way to generate cash fairly quickly. It is less risky than other transaction types. And patents can be sold with the patent owner retaining a non-exclusive license, thus maintaining the ability to practice their invention.
A patent sale avoids the messiness of potential litigation and is not a large distraction to the operations of a company. This is especially true if a third party is engaged to help with the sale. In a brokerage transaction, for instance, buyers assume all the risk in purchasing the patent.
This, of course, can heavily discount the selling price, which can disappoint patent owners whose blood, sweat and tears have gone into the invention, and who may value their patents more aggressively.
The median price for a patent sold today is still just over $120,000.
Yet arguments for selling a portfolio rather than licensing it are still strong – shorter time to money, less risk, less distraction. For small companies and individuals this may be the best way to maximize the value of their patents.
In an IP licensing transaction, patent owners grant use of the patent to someone else.
For owners of strong, well-prosecuted, litigation-quality patents with proof of usage (claims charts) in a large marketplace, there is the opportunity to seek and collect past damages in the form of a patent license.
A decision to pursue IP licensing requires an understanding of the potentially lucrative returns and of the risks involved.
IP licensing can start out as a friendly discussion, but turn into a legal battle with the potential licensee suing the patent owner. To prevent this, patent owners often start the process with – you got it – a lawsuit.
Litigation can turn into a multi-year process with significant up-front expenses and limited cash inflows for the first several years. The litigation process can last as long as seven years and incur minimal expenses of one million.
A patent suit involving say $10 million in potential damages can cost three million or more if litigated to trial. Defendants know how to test an asserter’s staying power. Some law firms will consider taking on a case as a partial contingency, defraying some of the patent owner’s cost in exchange for a third or more of the potential litigation award or settlement.
IP Licensing transactions can require a significant amount of a patent owner’s attention. They are characterized by high degrees of uncertainty including invalidation of patents. Reasons for invalidation include loss of validity at trial or as a result of a patent re-exam (a process where a potential licensee or any outside party requests that the USPTO re-examine a patent’s claims for validity).
For small companies there is also the risk of counter-assertion, where the target licensee countersues for infringement of patents. If the target is a big company with a huge portfolio, it may be fairly easy for it to identify patents that the inventor is infringing.
If patent owners are willing to accept risks and have strong patents that apply to large markets with many potential defendants, then IP licensing is the way to get the greatest returns.
In technology licensing, patent owners are able to retain ownership of their patents and offer other companies technology know-how or trade secrets, as well as a non-exclusive license to related patents.
This type of transaction is usually supported by training and technical personnel and can have significant resource requirements. The benefit of technology licensing is that it removes the risks associated with IP licensing and does not take quite as long to receive money.
However, technology licensing can generate little to no money if royalties are based on a product that does not sell well.
Technology licensing is for patent owners who want to expand into new markets or territories without investing in product development for those areas. It’s also a way for patent owners to take advantage of patents and know-how in areas that are not or were never used or were abandoned, but where there might be parties who would be interested in putting them to use.
Who to Turn to for Advice
Over the last 10 years many third-party firms have emerged to aid patent owners in monetizing their patents. These firms are an alternative to law firms, which may be more interested in litigation, especially contingency litigation.
Many of these third-party firms focus on a particular business model, be it licensing, litigation or selling (patent brokerage).
Select a third-party firm that has expertise in the field related to your patent. Don’t go to a firm that specializes in aviation if you have a patent for a kitchen gadget. And shop around. The feedback from each will provide useful information about the market for licensing, litigation or selling, as well as up-to-date information regarding legislative changes that could impact the type of transaction you pursue. You also will glean information about their opinions on the value and strength of your patents.
Patent monetization costs time and money to conduct due diligence on a patent or family of patents and to produce the claims charts necessary for a substantial sale or license.
Depending on the area of technology, costs can start at $15,000 and soar beyond $100,000. Some third-party firms will bear the costs and responsibility for this research. When speaking to third-party firms, be clear about who will bear specific costs and the time involved.
Third-party firms include:
- IP advisory firms have in-house teams of technologists, market and legal analysts who can value patents. They have experience in brokerage and licensing and are able to help owners navigate the types of transactions to pursue. For licensing, these advisory firms have access to sources with the capital needed to sustain prolonged discussions or litigation. For selling, they have access to large global networks of prospective buyers.
- Third-party licensing agents do the legwork of licensing intellectual property for patent holders. These firms often work on contingency. Sometimes they provide patent owners with some cash up front in exchange for a minority interest in profits generated from a licensing deal.
- Patent brokers are typically paid on contingency to sell patents. Brokers have large networks of contacts in companies and they can often locate buyers who would not be obvious choices for patent holders. Brokers can help maximize the selling price by generating bidding interest from multiple buyers.
- Technology exchanges, Web-based patent auctions and open innovation platforms match sellers of technologies, including patents, with buyers. Many are well suited for technology licensing, selling emerging technologies and patent applications (patent applications do not have as high a value as issued patents) or patents in areas that are not related to technology.
- Patent auctions are the Sotheby’s or Christies for intellectual property, where buyers bid openly or privately for patents.
- Contingency law firms are a good bet for small companies or individuals pursuing IP licensing, especially when legal action is needed. Contingency law firms are paid as cases settle.
Patent holders need to be realistic about the strength and value of their patents. If a patent is strong, but not yet in wide use, it may make sense to wait before moving forward with a transaction.
Usage in the marketplace is one of the ways patents gain value.
However, a decision to wait needs to be balanced with the fact technology trends change quickly and waiting too long may mean the invention is bypassed, given away for free by others or becomes obsolete. In all of these cases, the value of patents drops.
Another important consideration: expiration dates. The expiration date affects the amount of time available for potential royalty payments. Patents with less than five years left until they expire are less valuable than those with more.
In a patent sale this will impact the valuation and in this situation it may make more sense to try to license the patent.
Legislation and court rulings also affect valuation. These changes are common and should be monitored as pending changes may be a reason to execute a transaction sooner rather than later.
The good news is there are more avenues to sell and license patents than ever before. That means small companies and individual inventors with strong IP assets have more options to raise capital and protect their business interests without mortgaging their futures.
Editor’s note: This story appears in the January 2011 print edition.
Andrea Dick is a director of patent brokerage at ThinkFire Inc., an intellectual property advisory firm that conducts IP analysis, licensing and sales for high tech patent holders. She offers practical advice on how to profit from your patents from selling or licensing them. As she notes, patent transactions are more complex than selling furniture at a yard sale. But she makes the complex accessible and compelling. You can find out more about her and ThinkFire at www.thinkfire.com.
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