Overview of patent sales and transfers
Selling and transferring patents is the easiest way for a company to make a profit from its patents. If a company decides not to commercialize a particular research and development, it can recoup some of its investment by selling and transferring the patent rights to another company. However, this approach is limited to patents that the company does not need to protect for its own products or other strategic reasons, and those patents that other companies think are worth purchasing.
Risk management in patent transactions
Although patent sale and purchase agreements are relatively simple, there are various risks involved in buying and selling patents. For the seller, these risks are mitigated by selling the patents “as is” – no guarantees are made as to the validity or applicability of the patents. In addition, most sellers insist on receiving a license back from the buyer – the right to use the patent after the sale.
Because patents are sold “as is,” buyers should conduct careful legal and technical due diligence. Technical due diligence focuses on the scope of the patent rights from a technical perspective. Legal due diligence typically focuses on the scope of the patent rights from a legal perspective, and the validity of the patents, including a search for prior art and ensuring that the patent application complies with relevant laws and regulations. Buyers should also ascertain whether there are any existing licenses or other encumbrances. Buyers should require sellers to disclose licenses and encumbrances in patent sale and purchase agreements and ensure that this disclosure is truthful. Sellers should therefore keep detailed records of all patent license agreements and have that information readily available.
A strategic patent assignment approach
The first step in a strategic transfer approach is to identify patents in the company’s patent portfolio that are not directly related to the company’s business strategy or that are not used extensively by the company. The second step is to evaluate whether these patents can be sold. This involves understanding which products in the market fall within the scope of the patent’s claims, the market size of those products, their growth rate, and the level of patent competition in that market as evidenced by patent litigation and/or licensing activity. This evaluation should also provide an estimate of the selling price of the patents. Finally, evaluate whether to sell or license the patents identified for monetization. Selling patents is quicker and easier than licensing; however, licensing may generate more revenue in the long run.
Maximizing value through licensing
A license agreement is an agreement that allows a third party to use a patent. The license agreement determines the scope of use, the duration, and the terms of license fee payment. Through this agreement, the licensor can earn revenue from the patent and the licensee can use it to develop and sell new technologies and products. While patent owners can earn revenue from licensing, they can create even more value for their business by cross-licensing their patents or by granting licenses in exchange for some business benefit, such as distribution rights for products, the right to use another company’s manufacturing facilities, or the right to enter into joint ventures.
Cross-licensing as a strategy
Cross licensing is a strategy in which companies with intellectual property rights such as patents and design rights grant each other a license. Each company has more freedom to operate their business because they can use the technology of the other company. On the other hand, the disadvantage is that the company loses the exclusive right to use the technology protected by the intellectual property rights, reducing the future sales value and licensing possibility of the intellectual property rights. Therefore, cross licensing agreements must be very carefully drafted to define “which intellectual property rights are licensed”, “which fields of use”, and “to which organizations (only the other party to the license agreement or its affiliates)”. If the cross license is too broad (e.g. the entire portfolio of patents and designs of the company, all fields of use, etc.), it can be a mistake.
Licensing monetization methods
Monetization through licensing is a method of earning revenue in the form of license fees. An agreement is signed between the licensor and the licensee, granting usage rights for a fixed period of time. Revenues can be in the form of a one-time payment (lump sum), royalties on sales, or a combination of both. Licensing a portfolio of patents can generate significantly higher revenues than selling a portfolio. However, licensing can be difficult, time-consuming, and risky. If the target licensee does not comply with the license, the patent owner must resort to legal action, usually a lawsuit for patent infringement. In that case, the target company will almost certainly challenge the validity of the patent and may file a counterclaim for patent infringement. For these reasons, some companies outsource licensing, selling patents to non-manufacturing and non-selling companies (NPEs) and asking the NPEs to license the patents. Typically, the NPE shares a portion of the revenues from the licensing program with the original patent owner.
Other business models utilizing patents
There are other business models that use patents besides selling, licensing, or cross-licensing. A company can transfer or license its patents in exchange for another company entering into a joint venture or business alliance, conducting collaborative research and development, purchasing or distributing the patent owner’s products, or even providing manufacturing capacity. In these types of business models, patent strategy and business strategy go hand in hand.
