Canada’s Intellectual Property Law Firm

Patent middlemen: Helping owners make cents of their patents

Securing patent protection for innovations has become an essential part of doing business in the knowledge-based economy. In the case of a start-up company, patent protection may initially be sought to help secure financing or in conjunction with an initial product release. The number of patents may initially be small, with each granted patent being an important victory. As the company grows and new technology and product lines emerge, the number of patents and patent applications in the company's portfolio can grow quickly.

As a patent portfolio grows, so too do the associated costs. A periodic review of the portfolio by qualified patent counsel is generally advisable to ensure that the company's patent procurement and maintenance budget is being wisely allocated in the face of changing business goals and realities. In some cases, the review may identify a subset of "non-core" patent assets that is no longer central to the company's business. This may for example occur when a company changes its product lineup. For instance, if a publishing company decides to phase out paperbacks in favour of electronic publishing, the value of the company's patents for a paperback book-binding method may be significantly diminished. Alternatively, if a primary market for a company's products shifts from one country to another, any patents held by the company in the former primary market country may be considered to have lost much of their worth. In a further example, economic hardship may force a company to keep only its core assets, whether tangible or intangible, and to sell the rest to raise much-needed capital.

In each of the above examples, a company may wish to extract the maximum financial benefit from its "non-core" patent assets. Indeed, given the dramatic increase in patent valuations of late (in some cases approaching seven figures per patent or more — see, e.g., "The smartphone patent frenzy" in the September/October 2011 issue of IP Connections), the opportunity cost for failing to capitalize on such patent assets has never been higher. Yet the company may be uncertain of the best way to go about turning its patent assets into income.

In recent years, a variety of players specializing in intermediating patent transactions has emerged. Generally, these players help match patent asset holders to potential buyers and sometimes intervene to establish the terms of the transactions. A brief survey of these players and the type of services they may offer to assist in monetizing patent assets is presented below.

Patent brokers. A patent broker is an agent who connects patent buyers and sellers, much in the same way that a mortgage broker connects prospective mortgagors with lenders. Patent brokers typically search the marketplace for patents that might be for sale and offer them to prospective buyers who may be interested in the patents, e.g. as a complement to their existing products, to avoid potential patent litigation, or for other reasons. Some patent brokers require an up-front fee or retainer for services in connection with the advertising of a patent, identifying and contacting prospective buyers, and negotiating sales terms. Other brokers do not require such up-front fees, relying solely upon a percentage of the patent sale price, which is typically in the range of 25% to 35%, for their compensation.

An interesting patent broker trend in the past few years has been the emergence of an alternative monetization mechanism: the "covenant not to sue." A covenant not to sue is a promise by a patent owner not to sue a named party for patent infringement. Such covenants have traditionally formed part of larger patent licensing deals or settlements negotiated with potential or actual infringers. In that context, covenants are typically agreed to only after hard-fought negotiation between the parties, with licensing fees being based largely on the relative bargaining power of the parties. A difference of the new approach is that the covenants are standalone agreements in which purchasers can remain anonymous. The anonymity is beneficial for purchasers who suspect they are likely infringing the patent(s), in that monetary offers can be made without revealing the nature of the suspected infringement or the depth of the purchaser's pockets. The anonymity is beneficial for the seller because it encourages buyers to come to them, thereby relieving the seller of the sometimes challenging task of identifying potential infringers.

Patent auction firms. A patent auction firm is an entity that sells patents using an auction format that is similar to the format used for auctioning tangible assets such as artwork or motor vehicles. Live auctions are typically conducted at regular intervals, such as twice a year, and are presided over by a human auctioneer. Before the auction, sellers identify patents to be auctioned and, together with the firm, set a reserve price, i.e. a minimum sales price, for the lot. The auction house may provide prospective bidders with high-level technology descriptions or other information about the patents. However, the onus for analyzing the value of the patents lies primarily with bidders. Some auction firms provide online auctions without a human auctioneer, using a web-based format that may be referred to colloquially as "EBAY for patents." The auction firm typically receives 10% to 25% of the final sale price for auctioning the patents, either from the seller alone or partly from the seller and partly from the buyer. In addition, a listing fee may be charged for lots whose reserve prices exceed a predetermined threshold (e.g. $150,000 U.S.).

Boutique intellectual property (IP) law firms. Boutique IP law firms use a variety of approaches for monetizing patents. The litigate-first model is commonly used. In this approach, a suspected infringer is sued for patent infringement early, so that the pending lawsuit may be used as leverage for securing a settlement or licensing arrangement. The fact that many such lawsuits conclude with a settlement or licensing agreement between the parties suggests that this approach can be quite effective. Nevertheless, some patent holders who are uncomfortable with the adversarial nature of litigation may be reluctant to take such an approach. Perhaps in response to these concerns, a new breed of boutique IP law firms that specialize in patent monetization is now emerging, primarily in the United States. Rather than necessarily litigating first, such firms may tailor their approach to the circumstances of each case. For example, in-house patent valuation may initially be performed to estimate the value of a set of patents to be monetized. Thereafter, potential purchasers, such as patent aggregators (companies that amass patents for use in generating returns for investors), licensing companies or prospective infringers, may be identified and approached. If no buyers can be found, lawsuits may be commenced against prospective infringers at that stage. Law firms of this type may operate on a retainer, contingency fee or monthly flat fee basis for example.

Patent assets are increasingly being bought, sold and hedged against, much like other types of assets. Although the brief survey presented here provides a snapshot of players currently specializing in intermediating patent transactions, it is likely that other ways of monetizing or trading patents will emerge in coming years. For patent holders, these may provide new ways of conveniently accessing prospective buyers and generating revenue.

Peter A. Elyjiw, Toronto

The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.