How patent sellers can maximise their chances of success
This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight
When filing for a patent, the applicant should consider how it can increase the likelihood of the patent being of value in the future. Patent applicants cannot predict future case law or the results of an inter partes review; however, they can do certain things to increase the likelihood of creating patent value.
Plan from the start
Patent value is based on many factors, such as validity, enforceability, likely infringement, priority date, remaining term, ease of detectability, adoption of the invention, importance of related products, potential size of damages and injunction potential.
A patent owner may wish to use its patent in cross-licensing with or to assert against a third party. In addition, a patent owner may wish to prevent others from using its invention by obtaining an injunction. Otherwise, a patent owner may wish to sell its patent in order to get cash. In all cases timely filing, correct drafting and prosecution of the patent application and accurate, up-to-date record keeping are vital.
File in a timely manner
Timely filing relates to when the invention is captured in a patent application and filed with a patent office. There are rules for filing patent applications and missing a filing date is often catastrophic. In particular, with the novelty provisions of the Leahy-Smith America Invents Act 2011, the United States moved to a first-to-file system. Consequently, it is important to file a patent application early with the US Patent and Trademark Office (USPTO) (whether provisional or utility non-provisional) in order to avoid another party independently inventing and filing a patent application first. Since it may take months to develop an invention fully, many practitioners now recommend filing serial provisional patent applications (ie, one or more provisional patent applications as the invention is being developed), which culminate in the filing of a utility non-provisional patent application within 12 months of when the earliest filed provisional patent application was filed.
Patent drafting and prosecuting
When drafting a patent application, the applicant must fully describe the invention. For example, the invention must be described in enough detail so that a person with skill in the technological area can build the invention. After the patent application has been filed, many issues must be considered when prosecuting it.
Keep accurate and up-to-date records
After the USPTO has issued a patent, the patent owner should:
- determine which of its products practise the patent;
- mark those products with the correct patent numbers;
- document which companies have licences to its patent;
- document whether the patent was homegrown or acquired;
- make sure the chain of title for the patent is up to date;
- note whether any acquired patent came without rights for past damages;
- document whether any patents have been declared to a standard-setting organisation; and
- document which patents are subject to a government purpose licence (ie, where government funds were used to create the invention and as such the government can license the related patent).
Each of the above factors affects patent value and must be considered before the patent is used in litigation, licensed or sold.
Use a patent broker
Good or bad?
A patent owner can do various things with its patent – it can assert the patent offensively, use the patent defensively or sell the patent. If it chooses to sell, the patent owner should consider using a patent broker.
There are many schools of thought regarding patent brokers. Some regard them as valued intermediaries, while others see them as unnecessary. One of the questions that a patent owner should ask is whether it has the tools to maximise the value of its patents successfully. Some patent owners believe that their internal resources are adequate to sell their patents, when in fact, the nuances of such sale and transaction can be complex and are best handled by an experienced intermediary.
Although a patent owner knows (or should know) its patent, a patent broker can help the patent owner to analyse its patent with a broader market view. In order to maximise the sale price of a patent, the patent must be carefully researched (eg, the remaining life of the patent, file history, chain of title, inventor assignments and continuations). Further, while backdated damages may be captured for method claims and apparatus claims (with correct marking), if the patent has limited years remaining, it may not be worth monetising (especially if the patent owner acquired the patent without rights to back damages). In addition, if adverse admissions were made during prosecution of the patent application, the patent broker must determine the degree of harm to the patent value. If detrimental to the patent value, it is possible that the patent broker will reject (ie, decline trying to sell) the patent. In addition, if the chain of title is incomplete (eg, a missing assignment), the patent owner will likely have to fix this issue before the patent broker can move forward with trying to sell the patent. Further, in order to sell a patent, the whole patent family – including all continuations, divisionals and abandoned patents – should be included. Careful attention should be paid to terminal disclaimers. Continuations of the patent can increase the value of a patent since the continuation could allow a potential buyer to draft particular claims to protect a product and/or capture a competitor’s product. If a patent was acquired by the patent owner, the patent owner should have ensured that ownership to all family members (including abandoned patents) was included, along with the rights for backdated damages. Consequently, a patent’s value will depend on many factors.
To the surprise of some patent owners, a patent broker may reject certain patents due to unfavourable case law. For example, it is sometimes difficult to sell software patents that were issued before the America Invents Act and/or Alice Corporation Pty Ltd v CLS Bank International (134 S Ct 2347 (2014)). Alice was argued and is pending decision in the Ninth Circuit (where the district court decision may not stand). In Alice the court held that a group of software patents related to mitigating settlement risk were not drawn to patent-eligible subject matter under 35 USC § 101 because the claims were directed toward a patent-ineligible abstract idea.
Also to the surprise of some patent owners, the patent broker may reject standard-essential patents since the royalty rate in the United States will likely be low. In particular, due to Microsoft Corp v Motorola, Inc (696 F 3d 872, 877–78 (9th Cir 2012)) and In re Innovatio IP Ventures, LLC Patent Litig (MDL 2303, 2013 US Dist LEXIS 144061 (ND Ill October 3 2013)), reasonable and non-discriminatory royalty rates have decreased significantly. Consequently, standard-essential patent values in the United States have decreased accordingly.
Encumbrances and/or previously advertised patents
In addition, a patent broker will ask the patent owner who holds a licence to the patent, whether through sales agreements, licensing contracts or otherwise. If the patent is heavily licensed and/or was previously advertised for sale by the patent owner or another patent broker, the patent broker may reject the patent since the value has likely been captured through prior licences or the patent has likely been seen by many potential buyers (ie, ‘shopped’ and rejected). The likelihood that a potential buyer will change its position on purchasing is remote unless something substantial has changed within the portfolio since its last review (eg, evidence of use is now provided and/or more patents were added).
Evidence of use
If the patent has not been licensed or previously shopped to potential buyers, the patent broker will perform a technical analysis to determine who is using the patent and how much of the market the patent captures. For this analysis, there are many factors to take into account – for example, the Georgia-Pacific factors (see Georgia-Pacific Corp v United States Plywood Corp, 318 F Supp 1116, 1119-20 (SDNY 1970), modified and aff’d, 446 F 2d 295 (2d Cir); Unisplay, SA v American Electronic Sign Co, Inc, 69 F 3d 512, 517 n 7 (Fed Cir 1995)), the importance of the patented technology to a product, revenue of the product, prior licences and non-infringing alternatives. Nevertheless, as a rough gauge, the larger the potential damages (ie, the wider the use of the patent and the larger the market), the more valuable the patent may be. Critical at this point are evidence of use charts. Developing these charts takes a significant investment of time and effort, and sometimes expensive reverse engineering. For example, reverse engineering in the semiconductor technology space can take hundreds or thousands of hours, require particular expertise and depend on very specialised equipment. Most patent owners are unlikely to invest the time or have the expertise and access to the specialised equipment necessary to do this. In fact, few patent brokers have the expertise and specialised equipment to perform reverse engineering in the semiconductor and hardware technology areas. In order to sell a patent and maximise its selling price, the patent broker must clearly document the evidence of use. As a part of this evaluation, the patent broker will determine whether the patent captures the only way to practise the invention or whether there are many ways to practise the invention that have not been captured in the claims. Where claims capture the only way to practise the invention in an active market by a large market share company, the patent valuation will likely increase. Where the claims do not capture all practical ways to practise the invention (ie, there are many practical alternative approaches to practise the invention and a third party can work around the claims), the patent valuation will likely decrease. If the patent captures the only way to practise the invention in an active market by a large market share company, a well-reasoned discounted cash-flow chart will be created in order to show potential patent value. Whether for internal use, executive management or the board, or for a law firm considering a contingency fee arrangement, an accurate picture of the patent’s worth will have to be developed. While a patent broker is likely to have access to certain databases, precedent royalties and past valuations, patent owners are unlikely to have such access without hiring a financial forensics firm (which is expensive). As part of the patent broker service, the patent broker will likely include the evidence of use, discounted cash-flow and analysis charts to support the ultimate value of the patent.
Connections equal leverage
Another advantage of using a patent broker is that the broker will have well-established connections, can maximise value and will already have non-disclosure agreements in place with most potential buyers. Consequently, once a well-defined evidence of use chart has been developed and a discounted cash-flow chart, supported by precedent, has been created, the patent broker will be ready to contact potential buyers. Often the potential buyer and the patent broker will have formed a favourable working relationship from past deals. Consequently, future deals between the patent broker and potential buyer are facilitated. Despite this favourable working relationship, potential buyers sometimes prefer not to deal with patent brokers when buying patents (even if the potential buyer prefers to deal with a patent broker when selling its patents). If a potential buyer can get the patent owner to interface directly with the potential buyer, it is likely that a lower price can be achieved (even taking the broker’s commission into account). Many potential buyers know the patent purchasing game well and know the pressure points. For example, the patent seller may need money and, if it is a public company, the potential buyer will know the patent seller’s financial situation. In this scenario, desperation from the patent seller’s side will be apparent and the potential buyer will capitalise on its knowledge. For example, the offer price for the patent may start at a certain point; however, it will fall quickly as the potential buyer uses argument after argument, valid or not, to reduce the price. Patent brokers, as an outside intermediary, using tried-and-tested methods (eg, creating tension among multiple potential buyers) can apply strategic pressure on the potential buyer.
Once the patent broker has contacted the potential buyer, the potential buyer is likely to want additional information. For example, the potential buyer may want to know who the patent owner has licensed to. Where the patent owner directly approaches the potential buyer, other issues will often arise. For instance, the potential buyer may mistake the patent owner’s offer to sell as an offer to license. If this occurs, the potential buyer could file for a declaratory judgment in court (see In re Seagate Technology LLC, 83 USPQ 2d 1865 (Fed Cir 2007) (en banc)). Even if there is no misunderstanding between sale and licence, the potential buyer could demand a standstill agreement while the parties are negotiating to prevent the patent owner from suing the potential buyer. Further, the potential buyer could demand that termination of the standstill agreement occur at different times for each party, thus allowing the potential buyer to file a declaratory judgment in its jurisdiction of choice (which may not be good for the patent seller). In addition, the potential buyer could demand that the patent owner declare in writing that the potential buyer is not on notice by reviewing the patents and negotiating with the patent owner, which may damage the value of the patent when sold or licensed. Further, the potential buyer could demand a release, capturing all of the patent owner’s patents. Because of the aforementioned issues, along with other issues, it will likely take an extended period of time for the patent owner and potential buyer to agree on terms for any agreements (eg, a non-disclosure agreement or a patent purchase agreement). Unfortunately, while the parties are negotiating, the clock is ticking and the patent term is running.
Using a patent broker has the added benefit of circumventing many or all of the above pitfalls and selling the patents at a higher price (since the patent broker’s commission will likely be less than the value realised by the patent owner as a result of using a patent broker). In the end, patent sellers need to remember that their core business is selling products, not selling patents.
Patent sellers can increase their chances of success by planning from the start when an invention disclosure is received and using a patent broker. Planning from the start takes a little more time and money; however, the added benefit of creating valuable patents weighs in favour of spending the added time and money. Using a qualified patent broker with the requisite experience, connections and specialised equipment makes business and financial sense – it is likely a no-cost option that leads to a more successful patent sale.
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Vice president, commercial transactions
David Cordeiro is vice president, commercial transactions at TechInsights. He holds a BS in electrical engineering from the Rochester Institute of Technology, an MS in electrical engineering from Syracuse University and a JD from Syracuse University. He also attended the City University of Hong Kong, where he specialised in technology licensing to and from China. His current specialties include the strategic monetisation of patent assets and he has led transactions for clients in the United States, Taiwan, Korea and Europe. While Mr Cordeiro has been a lawyer for nearly 20 years, he is also the founder of Unwired Planet, one of the most successful non-practising entities in the United States.