Is Patent Licensing or Sales Part of Your IP Strategy?

There is a growing trend toward high value and highly selective transactions that involve fewer assets but that specifically meet acquiring companies’ strategic and tactical goals. This trend places even greater emphasis on the need for businesses to proactively to prepare if patent licensing or sales are part of their corporate strategy, now or in the future. The challenge for IP groups is to identify the most important patents in a portfolio and to clearly define the value of their patents. This is a crucial challenge as the face increasing demands from their CEOs and boards that are looking to realize a return on their technology investments.

Companies with a good catalogue of their own portfolio first need to know which patents should be retained to for defensive purposes. These should be eliminated from consideration when creating an IP strategy for sale or licensing. The next step is to identify those patents that are ideal for licensing and/or which can be sold as surplus. It is important to remember that patent value may include potential uses for IP and does not always equate to money except when it comes to licensing and litigation. Regardless, patent value should be defined broadly enough so that any decision supports the company’s overall patent strategy, which in turn drives value for the business as a whole.

To maximize the return on investment from a patent portfolio, patent owners must determine which is more lucrative: sales or licensing. First, let’s define what we mean when we talk about licensing. An IP licensing agreement is a contractual partnership between the owner of a specific IP and another party where the holder of IP (licensor) grants permission for the use of its IP to another person (licensee), based on the provisions of the contract. The agreement usually stipulates that the licensee can use the IP in different applications for an agreed amount of money, a royalty.

In general, patent licensing promises the highest total return on monetizing an IP portfolio because the IP owner can license the same asset or (a single patent or portfolio) to a number of different licensees. On the other hand, it may take three to five years to realize significant revenue from licensing. Additionally, licensing comes with a host of potential risks including litigation, invalidity arguments, and more. More and more frequently patent sales/transfers are part of licensing settlements to ensure there is more of a ‘win/win’ result for negotiating parties.

Licensing programs can be run internally or through contract licensing organizations. Internal programs have the advantage of retained ownership and control of the patents and strategy and are able to leverage internal knowledge of the portfolio. Increasingly, companies are coming to the conclusion that patents can be a revenue generator rather than a cost centre and are making their IP groups responsible for driving revenue internally instead of contracting with an outside party.

External programs are run by licensing agents who assist IP owners in finding licensees and sorting through the complexity surrounding patent licensing issues. They employ a wide range of processes to secure the greatest value for their clients’ patent assets. External programs, while seemingly more costly, can be combined with an internal program to ramp up royalty streams earlier.

When it comes to patent licensing and sales, there is an ongoing debate over patent quantity versus quality. While these terms are used interchangeably, they are distinct concepts. Quality typically refers to the legal aspects of a patent; high quality patents meet or exceed the statutory requirements for patentability. Value encompasses the business aspects of a patent, the market value of the technology as incorporated into products and services being sold on the market. While the trend is to focus on quality, the best strategy for technology companies is building a portfolio with both sufficient quantity and quality. When enough valuable patents are supported by ample additional patents, potential licensees or buyers will realize that it is impractical to consider invalidating the entire portfolio.

The debate over patent quantity versus patent quality is swinging towards the quality side. Many companies are instituting invention programs that offer incentives for filing more strategic patents. In addition, companies are following continuation practices that identify and highlight more useful patent applications and provide an opportunity to craft more relevant claims that increase the number of valuable patents over time in a portfolio. However, for technology companies, having both sufficient quantity and quality in a portfolio is the best strategy.

There must be enough valuable patents, which are supported by enough additional patents, to assure potential licensees that it is impractical to consider invalidating an entire portfolio. Only a small number of patents are valuable, that is they are legally valid, technically important, and actually in use in high revenue products. A general rule of thumb is that 3% — 5% of patents in a large portfolio are ‘valuable.’ In most patent portfolios a few key patents are the deal drivers for licensing, litigation and sales. These are the patents that form the basis for infringement assertions and create the damages base. A portfolio needs additional quantity to increase the FUD (fear, uncertainty and doubt) factor. The necessary bench strength of the additional patents remains mysterious. In fact, many licensors found that after the settlement has been signed, a licensee will admit to being genuinely interested in a specific patent that is not on the list of patents driving the deal. In most portfolios a few key patents with supporting documentation drive deals. Even so, it is incumbent on the IP owner to prove their value with evidence of use and often financial models showing how the value supports the asking price.

Successful sales and licensing transactions require extensive preparation before a potential licensing partner or buyer is contacted. It’s akin to preparing for litigation without the benefit of discovery. Patent owners must show they patents’ use in competitive products and link that use to revenue. They must build claim charts, anticipate validity arguments, and complete economic damages models. Clear and convincing evidence that leads to the conclusion that a license or purchase is both required and inevitable will help convince a partner or buyer to spend a large portion of their budget on the portfolio. Unfortunately this preparation can add years to the time between invention and achievement. And, it must attempt to span the chasm between prosecution teams and licensing teams.

In preparing to license or sell patents, a Patent Catalogue is an invaluable asset. This catalogue identifies the most strategic patents, measures the value of patents and includes the data needed to confidently develop successful monetization strategies. The task of developing and maintaining a well researched, organized and documented Patent Catalogue is not trivial, especially for an organization that owns hundreds, if not thousands, of patents. It is, nonetheless essential for reaping the benefits of a patent through sales or licensing. Unfortunately, there is no off-the-shelf solution for developing a Patent Catalogue.

The Patent Catalogue provides a framework for making decisions on what to do with an existing portfolio while a Patent Market Map (PMM) plots patent families against the markets and identifies potential licensing partners. Once a potential licensee is identified, a Patent Product Map (PPM) is developed through technical and legal due diligence and determines the strength of a portfolio when an assertion campaign is being considered. The Patent Market and Patent Product Maps help guide decisions about initiating a licensing program or seeking a cross license.

Thorough technical due diligence provides the proof based on a PPM recommendation and ensures that a patent has value. Technical due diligence ranges from a basic and quick patent review through online literature reviews to full infringement analysis that helps identify and map claim elements to applicable products/devices. In all cases, if a true market value is being sought for patents the potential buyer/licensee will require that the value of the patents to their own company be demonstrated. More evidence and more patents equal more coverage and higher value. A license or sale value will be related to the size of the market that the technology covers and the breadth and significance of the technology offered. Technical due diligence can be performed by in-house experts working with external specialists like Chipworks who provide specific market knowledge and / or technical expertise a company may not have internally.

On the sell side, there has been minimal need for due diligence, but this changes in a buyer’s market where the supply of patents exceeds demand, but demonstrated valuable patents are still in short supply. To separate the 3 -5% of valuable patents from the rest, buyers require sellers to provide evidence of a patent’s value with expectations rising in lockstep with price.
Intellectual property strategy has emerged as a key component driving business strategies in an increasing number of companies. The proliferation of patents and of patent owners who are interested in leveraging their patents have been a catalyst generating a more competitive and difficult sales and licensing environment. Despite these pressures, with the right preparation patent portfolios can be successfully sold or licensed.