Patent buying is an effective way to solve a patent deficiency challenge. In many technology areas (e.g. high-tech, solar, automotive), you can buy patents on the open market that can substantially improve your patent position. With over $7B worth of patents brought to market in the past five years, the opportunities to purchase patents far exceeds any one company’s needs.
By adopting a few best practices, you can design and execute a successful patent buying program for your company. The first step is to recognize that you will have far too many potential purchases, your expenses can rise quickly, and your ability to manage can become overwhelmed. Creating buying criteria, setting diligence limits and tracking potential purchases all greatly reduce your buying spend and increase your chances of success.
The Challenge of Too Much Potential
Scenario: Your company is entering the US smartphone market and wants to buy patents to help reduce the risk of being sued by large patent holders or having a very negative outcome if you are sued. You are tasked with the job of solving this problem. Already you receive unsolicited patent purchase opportunities that are piling up in your inbox. You have the goal to buy patents, but how do you do this efficiently? You start to look at the problem and investigate the market further (maybe you have read one of our papers on the patent market). You come to a few conclusions quickly:
- Too many patent sales packages are coming in – more than 1 a day.
- The vast majority of the packages contain assets that are not of interest.
- Sellers’ claim charts, when they are available, do not meet your expectations of claim charts.
- You have seen some of these packages before.
- Not all the information about the package is readily available, like pricing.
You also may be thinking longer term with these questions:
- What happens if we pass on a package, and then someone else buys it?
- Our law firm bills are starting to get very expensive, and it may be a while before we buy something. What are the expectations of my executive team?
The challenges are considerable, but most are easily addressed through the adoption of a few best practices we have developed. We have run, and helped run, corporate buying programs for more than a dozen large corporations and currently run seven buying programs. Also, we regularly consult on corporate buying and selling programs. We review over 500 patent packages a year and have filtered more than 68,000 patent assets. By adopting these best practices, our clients have efficiently purchased more than $60M in patents.
Patent Buying Best Practices
1. Establish Business Related Buying Criteria First
Establishing business related buying criteria for purchasing will eliminate over 75% of your diligence costs. To establish the criteria, first assume that patents in any patent sales package are perfect: the claims are perfect; the prior art has been fully vetted; the prosecution was perfect; and the specification is perfect. The most important question you can ask yourself is, “Do these ‘perfect’ patents fit my company’s need?” Surprisingly, the answer is often no. This may seem counterintuitive, but consider that even if the patents are perfect, they are not necessarily ones you want to buy for your company (e.g., the patents cover the wrong technology, you already have enough patents in that area, the companies you care about do not make products).
This leads to our first best practice: define your business need and define what kinds of patents will work best for that need. We help our clients define a set of buying criteria that reflect their business needs by defining the patent challenge they face, identifying the threats (e.g. companies A, B and C are the greatest threats) and where the best patent purchases would be (e.g. middleware is better than LTE).
Example buying criteria:
- Patent age – the patents are at least eight years from priority and have a minimum of 5 years of life left.
- Technology – the patents fall into the specific technology area of interest. If the general technology is smartphones, is the specific area standards-based LTE, manufacturing, semiconductors, applications, or OS? Note, the list of specific technologies can be quite long, and we recommend revisiting the list regularly in your buying program.
- Price – the asking price is no more than 5X the market price. An asking price much greater than 3X may indicate an unsophisticated seller, making the transaction too difficult to close. Alternatively, the buyer may be able to find assets for a much better price somewhere else.
- Countries – are the countries where you need the assets? EU, Chinese, other countries?
- Continuations need to be available – do you need to have continuations available to make the purchase?
- Other criteria – additional criteria can be established. For example, encumbrances, minimum deal size, and other situation-specific criteria.
These example criteria can immediately eliminate 75% of the packages from further diligence resulting in substantial savings in time and resources.
Here are some important factors to consider to ensure the criteria are effective:
- Easily testable – the criteria are simple to understand and apply. Patent purchasing opportunities either fall into or outside of these criteria very quickly. Examples include pricing and age of the patents.
- Relate directly to your expected use of the patents – if you plan to use the patents to counter-assert against XYZCo, then you need to buy patents that are not already licensed to XYZCo. So, add a criterion to check whether XYZCo is licensed.
- Lend themselves to automation – can a computer test the criteria or are easily tested by someone with little patent knowledge?
- Reflect corporate culture biases of the buyer – are there some technologies that you know will be too difficult to convince your executive team to buy? For example, for companies just starting patent buying, we recommend purchasing patents in their own technology fields first. These patents can be used to remove NPE risk and also for counter-assertion, but they may not be the perfect patents in the long run. However, we know it is much easier to convince an executive team to buy patents in their own technology space first.
2. Obtain Buy-In From Your Finance Department
Early on, ask your finance department to help you build a financial model for the purchasing of patents. The model includes assumptions about when you might need the patents, how effective they could be in given litigations or competitor licensing, and what alternatives you have to buying patents. With the financial model, you can plan your spending, ask for sufficient resources from the company and have a good sense of when you have been successful.
An example financial plan can be found in Kent Richardson and Erik Oliver, “The Strategic Counter-Assertion Model for Patent Portfolio ROI,” IAM Magazine, July/August 2015, Issue #72, downloadable here.
3. Sell Your Buying Program to Your Exec Team
Using the financial model you developed with your finance department, present your plan, goals, financial results to all of the executives and obtain buy-in for the program. Then revisit the program quarterly. Setting realistic expectations about timing, costs, success will ensure that the money for the purchases will be available when you find the patent you want to buy.
4. Ask Your Corporate Development Department to Send You Potential Deals
A great source of potential patent purchases may be right down the hall from you. Your corporate development department regularly evaluates other companies for potential purchase. If they pass on buying a company, the patents may soon be available for purchase. Establish a communications channel where your corporate development is providing you with the names of companies they have evaluated and whether there might be some interesting patents there. Importantly, this source of buying opportunities is typically not available to other buyers, and you will have an inside track on making a purchase.
5. Build Relationships with the Brokers/Sellers
There is a vibrant community of regular patent sellers and patent brokers. Establishing good relations with this community helps ensure that you receive packages on a timely basis. Specific actions you can take to facilitate your package analysis processes include establishing NDAs with the brokers, contacting brokers with general buying criteria (we would like patents generally in this technology area, these countries, this age), and establishing agreements that prevent damages clocks and willfulness arguments to be used against you by you simply reviewing any patents for purchase. You can find a list of patent brokers and regular sellers on our website at http://richardsonoliver.com/brokers/.
6. Tag and Track Patent Packages
With more than a potential deal a day hitting your desk, multiple deals in diligence, questions out to brokers about other deals, and managing the package flow can be challenging, patent buying can quickly turn into an operational mess. We recommend that you tag and track basic information about patent packages you receive. You will know which packages are of interest, passed packages, and be able to determine efficiencies.
Here is a short list of some of the information that we track.
- Asset list
- Representative patent
- Asking price
- Technology summary
- EOU or claim charts available?
- Open continuations available?
- Has it sold?
- Diligence stage
7. Set Limits on Diligence by Stage
Limit the amount you commit to diligence on a particular package. Set capped or fixed price diligence projects for multiple defined diligence stages. This allows you to effectively budget how much you spend on diligencing packages by considering the fact that just a few packages will make it through the complete diligence process. For example, we recommend a $3-5K initial diligence cap for a typical patent package. Then a $10-25K cap for the next set of diligence steps. After that, we recommend package specific diligence, if any more is needed.
8. Do Not Eliminate Patents Because an Issue Was Found – Seek Responses to Patent Challenges
One challenge that we find when working with new buyers is a something that we all face – we can always find problems with any patents. After more than 20 years of writing and reviewing patents, we do not remember finding a patent that did not have some issues. To help with buying patents, we recommend adopting a slightly different perspective; one that you likely take with your own patents. Were the issue to be spotted by an opposing party, what response would you give and how well do you believe the response addresses the issue? For example, assume the most important claim has an indefiniteness issue. A reasonable response to that issue is, “We have an open continuation and are addressing that concern.” If a prior art issue is found, a reasonable response would be, “We reviewed the reference, prosecution and cited references. We believe that the reference is duplicative of reference XYZ.” In both instances, a real issue is being raised and a reasonable response has been developed. If no reasonable response can be found to the issue raised, then pass on the patent package.
Also remember that by the time you have reached these types of diligence questions, you have successfully eliminated many patents that will not satisfy your business needs. The patents you are currently reviewing are ones that if reasonable responses can be found to issues, then the patents should fit your business needs.
9. Accept That You Will Miss Some Patents
You will not win them all and you miss some patents. The program you are setting up is focused on finding the best patents at the lowest cost. This means that some patents will slip through the net but that you will have an optimized program.
10. Analyze Your Results and Spending – Revisit Your Buying Criteria and Plan
Analyzing how you are doing allows you to improve your program. Keeping track of the number of deals you have reviewed, how much money you are spending, and what successes you have had allows you to tune your buying program and adjust to market and business strategy changes.
The best practices above do not focus on pricing and closing patent purchases. There are significant challenges and opportunities in those areas; however, we find that clients are often more challenged with the overwhelming number of potential deals, executive buy-in, and diligence efficiency. That said, there are ways to help yourself. Reviewing market reports will help guide you with pricing, see Kent Richardson, Erik Oliver and Michael Costa, “The Brokered Patent Market in 2015 – Driving Off a Cliff or Just a Detour?”, Intellectual Asset Magazine, Issue #75. Bidding and closing best practices can be determined from your lawyers and patent brokers (for help with patent brokers, see Kent Richardson, Erik Oliver, “There Is No Yelp for Patent Brokers – 10 Best Practices for Picking a Patent Broker”, Richardson Oliver Law Group LLP News, December 21, 2015).
Corporate patent buying benefits from the adoption of a few best practices. By gaining internal support for your program, eliminating patents that do not fit your business needs, and implementing diligence management practices, you can efficiently find and buy patents.