Guide to Patent Brokers
Patents are assets that are regularly bought and sold on a marketplace that operates under a veil of secrecy. Patent brokers play an important role in facilitating trades. This page is intended to shed some light on the world of patent brokers.
WHAT DO PATENT BROKERS DO?
Patent brokers act as intermediaries facilitating patent sale transactions representing buyers or sellers.
WHAT ARE THE SIMILARITIES WITH REAL ESTATE BROKERS?
Like real-estate agents, patent brokers represent buyers and sellers of assets and help their clients through all stages of the patent assignment transaction.
WHAT ARE THE DIFFERENCES FROM REAL ESTATE BROKERS?
The market for real estate is much more active than the market for patents and this has a significant impact on the way patent brokers work, as compared to real-estate brokers. Given sufficient time, and flexibility on price, virtually all real-estate is sellable. A buyer can usually be found and even undesirable real-estate property can usually be sold if the price is consistently reduced and the broker conducts an effective marketing activity. However, when it comes to patents, buyers are only interested in patents they can use in litigation, and this eliminates something in the region of 99% of the patents that have been granted.
Where at least 99% of the properties in the real-estate market are sellable, the opposite is true of the properties in the patent market—around 99% of patents are not sellable at any price (the reason for this can be found elsewhere on this site, but essentially, buyers are looking for patents that are heavily infringed and built to withstand the rigors of litigation, and this eliminates 99% of the patents granted by the patent office).
WHAT IS A SELL-SIDE PATENT BROKER?
A sell-side patent broker represents a patent seller. The sell-side broker engages with patent holders, packages up patents for sale, prepares marketing materials, runs a sales process and markets the patents to potential buyers.
WHAT IS BUY-SIDE PATENT BROKER?
A buy-side patent broker represents a patent buyer. The buy-side broker helps identify patents matching the buyers’ interests, reaches out to potential sellers, evaluates patents and helps the buyer negotiate the purchase.
HOW ARE SELL-SIDE PATENT BROKERS COMPENSATED?
Generally, sell-side patent brokers work on a purely contingent, commission-only, basis where they earn a commission upon the closing of a patent sale transaction. Of course, some brokers request up-front engagement fees and retainers, and the arrangement can be customized by the broker and the selling client.
HOW ARE BUY-SIDE PATENT BROKERS COMPENSATED?
Some buy-side patent brokers work on a commission-only basis, some work on an hourly rate like lawyers and some work on a hybrid hourly rate plus commission. It is more common for buy-side brokers to earn an hourly rate or a hybrid arrangement than it is for sell-side brokers who usually work on a purely contingent basis.
DO PATENT BROKERS COMPETE OR COLLABORATE WITH EACH OTHER?
Like real-estate brokers, patent brokers compete to engage clients, but when two brokers are working on a transaction, they collaborate as their interest are aligned–they both want to close the transaction.
DO PATENT BROKERS SHARE COMMISSION PAYMENTS WITH EACH OTHER?
When two brokers are cobrokering, working for the same client (usually the seller), those brokers may work under a revenue sharing arrangement where they agree to share the commissions. When one broker is representing a buyer, and one broker is representing a seller, then each of these brokers is usually compensated by his/her client. Under this situation, it may be a conflict of interests for the brokers to share commissions–each broker is representing his/her client and is compensated by that client.
DO PATENT BROKERS SELL VIA PATENT AUCTIONS?
Yes, and no. Because of the thin trading in patents, it is unusual to find a situation where multiple buyers are bidding on the same patents at the same time, so patent auctions have not proved very effective methods of selling patents. Patent auctions have been conducted, but the majority of the patents put up for auction received no bids.
ARE PATENT BROKERING COMMISSIONS HIGHER THAN OTHER BROKERS, LIKE REAL-ESTATE BROKERS?
Yes. In a market when buyers and transactions are so difficult to find, completed transactions are elusive and brokering commissions are higher than those customary in real-estate and other markets. Sell-side commissions have traditionally reflected the compensation models familiar to contingent litigation cases where lawyers represent clients on a purely contingent basis, and often earn 33-38% of the sums collected by their clients. In contingent litigation, it’s not unusual for the attorneys to earn 50% of the proceeds when the case goes to appeal. Similarly, it’s not unusual for patent brokers to earn 50% of the proceeds of a patent licensing program, especially when claims charts are prepared and the whole monetization program is conducted by the broker.
DO PATENT BROKERS ACT AS TRADERS—BUYING AND SELLING PATENTS ON THEIR OWN ACCOUNTS?
Generally, patent brokers represent buyers and sellers and do not take ownership of the patents themselves.
ARMS DEALERS TO THE PATENT WARS?
As patents are considered by buyers to be weapons of litigation, patent brokers have been referred to as “arms dealers to the patent wars”.
CAN A PATENT BROKER REPRESENT BOTH BUYER AND SELLER IN THE SAME TRANSACTION?
A broker representing a seller has a duty to its client maximize the price, and a broker representing a buyer has a duty to its client to minimize the price and it’s not usually possible for a broker to satisfy both buyer and seller in the same transaction. However, where the role of the broker is limited and the buyer and seller each negotiate the terms of the transaction with their own counsel, it is possible for a patent broker to represent both buyer and seller in the same transaction.
HOW DO PATENT BROKERS PROTECT SELLING CLIENTS FROM LEGAL THREATS?
As patents are weapons of litigation, and a patent seller and buyer could become plaintiff and defendant in a patent infringement lawsuit, the role of the broker can be instrumental in protecting both buyer and seller from legal threats. The concerns of the seller include the threat of the buyer submitting the patent for inter-parte review, and the threat of the buyer initiating litigation in the form of a claim for declaratory judgment. The patent broker representing the seller can mitigate these threats through agreement with the buyer and seller, and by characterizing the approach to the buyer as a patent sale opportunity rather than an accusation of infringement and demand for royalties.
HOW DO PATENT BROKERS PROTECT BUYING CLIENTS FROM LEGAL THREATS?
Unsuccessful patent purchase negotiations have often resulted in patent litigation suits and buyers are concerned that they might be accused of infringing a patent when they approach a patent holder. Buy-side patent brokers often keep the identities of their buying clients confidential from the seller. Buyer are also concerned that their consideration of patents provide evidence that the buyer is aware of the patented inventions, and is therefore willfully infringing and potentially subject to punitive as well as compensatory damages. The buy-side broker can act as a buffer with the seller and protect the buyer from such threats.
ARE PATENT BROKERS REGULATED AND LICENSED?
No. There are no regulations specifically covering the sale of patents, and patent brokers are not regulated or licensed in the U.S.
HOW MANY PATENT BROKERS ARE THERE?
There are relatively few full-time patent brokers, and some law firms and consultants that broker patents on an ad-hoc basis. The total number of full-time patent brokers fluctuates between 50 and 100 firms worldwide.
HOW LARGE DO PATENT BROKERS GROW?
Typically, patent brokers operate like small consulting companies and it’s unusual for a patent broker to grow larger than ten members of staff.
WHAT ARE THE PRO’S AND CON’S OF A CAREER AS A PATENT BROKER?
On the plus-side, successful patent brokers can earn a healthy income. However, like real-estate agents, the revenue streams collected (mainly from transaction commissions) by brokers are “lumpy”. It’s not unusual for a patent broker to close only a couple or a handful of transactions a year. Patent brokers don’t earn a regular monthly income, and the feast-famine revenue cycles can be a challenge.
WHAT SKILLS REQUIRED TO BECOME A SUCCESSFUL PATENT BROKER?
The skills necessary to become a successful patent broker include:
- Legal–patent sales are a legal minefield and it’s important to understand how to navigate safely to a successful result.
- Marketing–sell side brokers are in the business of marketing their client’s patents and this involves digital, online, marketing skills today.
- Sales–engaging clients and closing transactions is a sales skill.
- Negotiation–the broker negotiates the deal terms and works to bring both sides to a mutually agreeable position.
- Technical–the broker has to understand the technology comprising the patented invention.
- Business development–a broker is constantly building his/her network of buyers, sellers and industry contacts.
- Research–skills are required to match buyers with patents and gather evidence of use.
- Patent Analysis–the broker has to be able to identify quality patents and evaluate patents for purposes of valuation, etc.
Many patent brokers are qualified attorneys as the job requires knowledge of patent prosecution, patent litigation, confidentiality agreements and expertise negotiating complex patent sale transactions. Other than that, a broker needs to effective at identifying sellable assets, connecting with potential buyers, marketing and negotiation. As there’s no licensing or regulatory control of brokers, there are no special skills mandated by law, but successful patent brokers are usually highly experienced and have worked in the brokering field for many years
DO LAWYERS ACT AS PATENT BROKERS?
Yes. Attorneys representing patent holders sometimes undertake patent brokering activities for their clients.
WHY DO PATENT BROKERS OPERATE UNDER A CLOUD OF SECRECY?
To protect buyers from litigation, buy-side brokers often keen the identities of their buyers confidential from the seller. Sell-side brokers want to keep the evidence of infringement confidential so that it is not used against the client in a subsequent lawsuit. Due to the role of patents as weapons of litigation, the patent brokering business operates under a cloud of secrecy in order to protect both buying and selling clients.
WHAT PUBLICATOINS, INDUSTRY ASSOCIATIONS AND ORGANIZATIONS SERVICE PATENT BROKERS?
Traditionally, the Licensing Executive Society has been an industry association frequented by patent brokers. The International Asset Management (IAM) magazine and its associated IP Business Congress conferences and events have grown increasingly popular.
HOW HAVE PATENT REFORMS AFFECTED PATENT BROKERS?
Patent trading has dropped significantly as a result of the recent patent reforms, and business for patent brokers has seen a decline since 2014. Patent trading grows with litigation activity. When patent wars break out in an industry, patent trading takes place as competitors look to acquire weapons. When litigation is curtailed, the brokering activity experiences a decline.
WHEN AND HOW DO PATENT BROKERS PREPARE CLAIMS CHARTS?
A patent broker representing a seller on an exclusive arrangement might undertake infringement research and prepare claims charts evidencing how the patented inventions are used in the marketplace. Some brokers hire experts and experienced patent attorneys to research and prepare the charts. Other brokers outsource the charts to overseas research organizations.
WHAT ARE THE KEY ELEMENTS OF A PATENT BROKERING ENGAGEMENT AGREEMENT?
A brokering agreement essentially states that the broker will market the patents and in exchange the client agrees to pay the broker a commission if the broker’s marketing efforts are successful and a patent sale transaction results from the brokering activities. Under a commission-only sell-side brokering agreement, the interests of the seller and the broker are aligned–the broker earns no commission until the buyer accepts an offer from a buyer and closes a patent sale tranaction, so the agreement can resemble a unilateral contract where the client agrees to pay the broker for the act of bringing a compelling offer from an interested buyer.
Although this should be simple, there are some aspects of the agreement that often require negotiation. One area for negotiation is exclusivity. A broker that’s investing in researching evidence of use and preparing claims charts is going to want an exclusive arrangement. Another area for negotiation is the “tail”. As patent sale transactions often take 6 months, 9 months and even longer for the lawyers representing buyer and seller to complete their contract negotiations and due diligence, the broker wants to negotiate a post-termination tail on the engagement agreement whereby the broker is not denied its commission as a result of a delayed closing.
DO PATENT BROKERS WORK UNDER EXCLUSIVE ENGAGEMENTS?
Generally, sell-side brokers do work under an exclusive arrangement with the seller. Buy-side brokers sometimes work on an exclusive basis, but some buyers offer finders-fee arrangements to a number of buy-side brokers.
ARE TWO PATENT BROKERS MORE EFFECTIVE THAN ONE?
No. A seller engaging a single patent broker under an exclusive arrangement is likely to find that broker is prepared to invest in researching claims charts, preparing sales materials and active marketing of the patents because the broker can see that his/her efforts will be rewarded if the patents are sold. A seller engaging two or more brokers often finds that none of the brokers are prepared to invest in researching claims charts, preparing sales materials and active marketing. A seller engaging multiple brokers simultaneously can find that the patents are not actively marketed by any of them.
On the other hand, a buyer can often engage multiple brokers, so long as the brokers do not call on the same sellers and the activities are separated. Otherwise, the buyer can find that she is competing with herself when bidding on the same patents through different, uncoordinated brokers.
WHAT ARE THE AGENCY POWERS OF PATENT BROKERS?
It’s very unusual for a broker to be provided with agency powers such that the broker has the authority to make or accept offers on behalf of a client. The sell-side broker markets the patents and solicits offers from buyers. The broker presents the offers to the selling client, and the client makes the decision as to whether the offer is to be accepted, rejected or whether to instruct the broker to present a counter-offer to the buyer. The broker acts as advisor to the selling client and relays messages between the parties.
The same is true of the buy-side broker. The broker representing a buyer does not usually have authority to make offers or agree terms that are binding on the buying client. The buyer’s broker advises the buyer and relays messages from the buyer to the seller.
DO PATENT BROKERS PERFORM PATENT VALUATIONS & APPRAISALS?
Yes. Some brokers have developed valuation methodologies and offer appraisal services to patent holders. Brokers are dealing with buyers and sellers on a daily basis, negotiating prices and they have a real-world perspective on the value of patent assets.
DO SELL-SIDE PATENT BROKERS SET AN ASKING PRICE WHEN SELLING A PATENT?
Sometimes. Patent buyers do not want to waste time evaluating patents only to find that the seller’s price expectations are unreasonable. To encourage buyers to invest in the evaluation process, brokers have to assure the buyers that their selling clients are reasonable on price. This is usually achieved by providing the buyer with an asking price that is aligned with the market, or providing the buyer with assurances that the evaluation efforts will not prove to be a waste of time.
DO SELL-SIDE PATENT BROKERS SET BID DEADLINES FOR BUYERS?
Yes, sometimes sell-side brokers set deadlines to encourage bidders to commit to evaluating the patents, and drive the process as quickly as possible. The bid deadlines are not always effective though. If the deadline is reached, and there are no compelling bids on the table, the broker has to extend the deadline, and this is a signal to the buyers that there are no competing bidders and weakens the seller’s position. Bid deadlines work best when the patents are highly desirable and are sure to attract multiple competing bidders. However, having multiple buyers bidding on the same patents at the same time is quite rare. Buyers work at different speeds and getting them synchronized around a deadline is sometimes like herding cats.
WHAT CAN A PATENT BROKER DO TO MAXIMIZE THE PRICE WHEN REPRESENTING A PATENT SELLER?
When marketing patents for a seller, a broker can maximize the price by preparing compelling sales materials, usually these include detailed claims charts providing evidence of use of the patents, reaching out to all the likely interested buyers, encouraging buyers to invest in evaluation of the portfolio, justifying the asking price and helping the buyer and seller agree mutually agreeable terms. The fundamental laws of economics apply to patents, as they do to all forms of assets for sale. The price will tend to increase if the broker is able to attract multiple competing bidders.
WHAT CAN A PATENT BROKER DO TO MINIMIZE THE PRICE WHEN REPRESENTING A PATENT BUYER?
A broker that’s tuned in to the market conditions is able to justify the price offered by a buyer. A seller is likely to increase the price if the seller is aware that the buyer is a large corporation with deep pockets. A broker representing an anonymous client is often able to buy patents at prices that would not be available to a high-profile buyer directly.
ABOUT THE AUTHOR, DAVID SMITH
David authored several books: Patents, Cloaks & Daggers, Dollar Value, Zero-to-IPO, now published in Japanese as well as English language. He presents a the Silicon Valley Trends Podcast, has presented and appeared in a number of videos, lectured in business schools and universities in the U.S., Europe and Latin America, addressed U.S. government congressional hearings and appeared on several radio and TV shows. David is recognized as one of the “World’s Leading IP Strategists” in the IAM Strategy 300, published by International Asset Magazine.
He holds a BSc.(Hons.) Computer Science & Economics from the University of Leeds (U.K.), a Postgraduate Diploma in Marketing from the University of Westminster (U.K.) and a J.D. from Santa Clara University School of Law (U.S.).
More information is available on David’s LinkedIn profile.