Patent Broker Fees: Everything You Need to Know
The patent brokerage industry is not heavily regulated and there is a wide range of service approaches and fee structures.8 min read
What are Patent Broker Fees?
Patent broker fees can range from a few thousand dollars upfront to a “success fee” of as much as 35 percent of the transaction depending on the specific broker and the deal. The patent brokerage industry is not heavily regulated and there is a wide range of service approaches and fee structures. Knowing what your broker will and will not be doing and ensuring you have the same understanding of the goals and terms of the sale upfront is critical to success in working with your patent broker.
Know When to Sell
Many patent holders overlook their patents as a salable asset. But if you have a patent with sales value that your business is not using, it is a good idea to evaluate whether or not to sell it. Patents lose their value over time and sometimes reach a point where it is not worth paying the fees to keep them valid.
Many factors will play into whether it is time to sell. If there is a business infringing on a patent you are not using, it might make sense to consider trying to sell them the patent. Or if you see a new business entering a market for which you have a patent that might be useful to them, this might also present an opportunity. If your business is ceasing operations you might have competitors who would want to buy your patents.
The Role of the Patent Broker
Patent brokers match buyers of patents with sellers, negotiate between them, and assist to close the deal. Some patent brokerage firms also perform patent valuations and can help you to determine your patent’s market value and licensing potential.
One of the main values that the patent broker brings to the transaction is relationships. By knowing who is active in the marketplace, the patent broker can filter the transaction, matching sellers and buyers more effectively than they could on their own.
Most patent brokers represent sellers. In a sale scenario, the seller’s broker analyzes the patent(s) to be sold, prepares marketing material, contact prospective buyers and facilitates the sale. The broker’s knowledge and expertise should, in an ideal world, help the buyer to get a sales price that more than justifies the broker’s fees.
Some brokers represent buyers. Often this is because the buyer wishes to remain anonymous. Additionally, many buyers rely on a broker to save them time by bringing them only the best potential purchases.
There is no regulation that prevents patent brokers from representing both sides of the transaction, and it does happen but is generally frowned upon due to the high potential for conflicts of interest.
Finding A Patent Broker
Unlike real estate brokers, who aggressively market themselves and for whom consumer reviews are easy to find, tracking down a patent broker can be challenging. There is little regulation or transparency in the patent broker market. The range of fees varies widely, as do broker success rates, but it is hard to find this out.
Interview Several Brokers Before Choosing One
Do not trust your choice of a broker to the sales copy on his or her website. Run searches for brokers who specialize in your industry. Speak to your patent attorney, who may have referrals to provide. Assemble a list of at least 3-5 brokers and schedule time to meet with each for an in-person or phone interview to get a detailed sense of their background and their approach.
Getting a Comfort Level
In your interviews, get as much information as you can about your broker’s experience. Ask about success rates and about past deals they have handled that are similar to yours. Understand their years of experience and any professional licenses or certifications they may hold.
Most patent brokers are not lawyers and can broker a deal but will not serve as your legal representative. Understand from the brokers they interview how they work with the attorney in the transaction (or if they are one).
Ask for Examples of Old Packages and Closed Deals
Ask the brokers you interview to share examples of old packages. This will show you how much work they put into marketing the patents and presenting them in their best possible light. If the package looks amateurish or sloppy, move on. Put yourself in the shoes of a buyer and ask yourself if you would be tempted to buy if this package was presented to you.
Also ask for examples of closed deals, ideally from your industry. Ask about the offer price, eventual sale price, and time it took to close the deal.
Get an Estimate of Sales Price and Time to Sell
Once you have narrowed it down to one or two brokers you feel comfortable with, get a sense of how they evaluate your specific deal before proceeding. There are a lot of factors that affect patent value and different ways of viewing them. You need to feel comfortable with the price the broker thinks your patent will sell for, and with the reasoning they use to get there.
You’ll need to share some information with the broker at this point to get a valid assessment of price. In addition to knowing about your patented invention they’ll need to know things like:
- Claims of infringement or evidence of use by others. If someone is infringing your patent today and you can show it, this will affect the value. For some buyers, this is attractive because they will go after the infringer for damages after purchasing the patent. For other buyers, this may be a negative if they plan to use the patent themselves and know that competition is already active in the market. And sometimes the infringer themselves may be a prospective buyer. In any event if infringement is a factor your broker needs to know.
- Age of patent. Most buyers focus on patents with at least five to ten years of remaining life
- Industry. Is the patent in a hot technology area? Is the pace of development likely to render the patented technology obsolete before the patent expires?
Make sure also to read up as much as you can and try to form your own realistic opinion of a sales price so that when the broker tells you his or her opinion you can see how far apart the two of you are, and discuss the reasons.
Also ask about how long the broker thinks the deal will take from offer through close and make sure you can live with that timetable.
Understand the Commission and Fee Structure
It’s very important to understand how commissions are calculated. In many cases, a broker will earn more money if they sell your patents for more (just like selling a home). However, you should be aware of what the broker is spending and whether there is a cap to that spending. As a seller, you should also understand how long a time must pass after a broker’s representation ends in order to avoid paying him or her commission. Many brokers may ask for their fees, or a percentage of them, upfront in order to cover their costs. It is not uncommon for fees to be in the range of $5,000 to $15,000 for smaller patent portfolios.
Be Prepared to Sell Yourself
As a patent owner, nothing is more important than being prepared to sell not only yourself, but your portfolio to a prospective broker. While it may sound odd as you would think they would welcome everyone’s business, brokers who lead in the industry can often be quite choosy as they tend to have sales rates that are double than others in the market.
Understand Buyer Types
There are generally two types of entities who buy patents, operating companies and non-practicing entities (NPEs). Here’s how each works:
- Operating companies. Operating companies generally have strong patent portfolios and strategically review third party assets to either complement their existing assets or use them as a litigation avoidance tactic when there is the possibility of patent infringement. Most operating companies have more flexibility, deeper pockets and rarely purchase patents simply to make money. They are generally more secretive about transactions and the sale process and are more concerned about license grant-backs. As such, it generally takes longer to complete a deal with operating companies as buying patents is simply not their core business function.
- NPEs. NPEs are generally in the business of holding patents. They tend to be large aggregators who buy them to create licensing programs. Some defensive patent funds purchase patents to license their own members and seek to circumvent the assertion of patents. Others are more aggressive patent assertion entities (commonly referred to as patent trolls). Their aim is to make money on patents through licensing and litigation.
Operating companies generally pay cash for patents, while NPEs tend to be more flexible and may offer a “hybrid” model where each party shares in some of the risk.
What Makes a Patent Sell?
There are many factors which may affect the valuation of a patent portfolio and the likelihood of attracting solid offers, including the:
- Number of assets in the portfolio family (note that single patents are harder to sell)
- Priority dates
- Overall drafting quality of the claims and specifications
- Prosecution history
- Number of citations (both forward and backward)
Pricing a patent portfolio is always a challenge. Unlike selling a house, most patent transactions (sales) are not publicly reported, so there is no way to obtain valid “comparisons” or “comps” on your portfolio to see if the pricing lines up.
Every patent is unique and similar patents often significantly fluctuate in value depending upon whether the patent is infringed (and whom infringed it) and whether relevant prior art is found. These can cast shadows on a patent’s validity.
The Sale Process
Selling a patent is similar to selling a home in some respects, at least when it comes to the process itself. A broker will analyze the portfolio and prepare the materials needed for the sale. Then, he or she will find prospective buyers, let them know the patents are for sale and provide them with any and all details regarding encumbrances, infringement and pricing guidelines.
Although it may take several weeks to receive bids, once the parties have agreed to a price for the patent, they will enter into a formal patent purchase agreement (PPA). While many PPA contracts contain standard language, they also contain a great deal of technical and legal details that should be reviewed by a patent attorney or other professional. Brokers can certainly provide sellers with guidance regarding the PPA language, but an independent legal review of the provisional language is always your best option. In addition, just like selling a house, it’s fairly common for specifics of the agreement to hold up the process or halt it completely. Having proper legal representation can save you a lot of hassle, especially when it comes to the complex language of the PPA document.
Patent Auctions: The Final Option
The final option, and most common vehicle, for selling the rights to a patent is done at a public auction. The firm of Ocean Tomo is the most prevalent patent auction company and holds two such auctions annually. The company receives a fee from both the buyer and the seller which can be as much as 25 percent. Alternatively, there are several services available online, such as PatentAuction.com which provide a vehicle in which to buy, sell and list patents.
If you need advice about selling a patent, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top five percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe and Twilio.