Intellectual Asset Management January/February 2013 11www.iam-magazine.com

Turning the spotlighton the brokeredpatent market

Corporations regularly evaluate patentpurchases and sales to address strategicbusiness problems – typically buyingpatents to counter assert and selling to raiserevenue. However, a lack of informationabout the market makes any evaluationextraordinarily difficult. A simple exampleillustrates the problem.

Looking at the headline numbers alonefrom the roughly 20 public patent salessince 2010, a distorted picture emerges.Analysis of those deals suggests a purchaseprice of nearly US$970,000 per patentasset. However, this is significantly higherthan the asking price per patent asset formost deals we have seen – US$344,000 –so any analysis using the public marketcould be seriously flawed. In addition,public information also fails to explain:• How many packages are on the market

in a year (276).• The chances of selling a patent (about

16%).• How long it takes to sell a patent

(between six and nine months).• The technologies that are available and

which technologies sell (visible andhigh-tech).

We look at the public – yet notparticularly well understood – market for

Although sales of brokered patentpackages reach an estimatedUS$153 million a year, lack of datamakes this a tricky market toevaluate. A review of 186 patentpackages attempts to illuminate thisinformation void

By Kent Richardson and Erik Oliver

bare patent transactions created primarily bypatent brokers and regular patent sellers. Weconsider a sample of 186 total packagescontaining a total of 5,394 issued US patentsand 7,595 total patent assets worldwide fromthe past three years to provide a richer, morecomplete view of this marketplace.

Our analysis is based on a sample of themarket, not the entire market. We estimatethat while running buying programmes, wesaw somewhere between 35% and 75% of theavailable packages, depending on the timeand the particular project. Also, because ofour clients’ locations, we tended to see moreUS-focused transactions. We have excludedsome very large deals that had over 200patents or were not widely distributed, eventhough brokers may have been involved fromour analysis, in order to provide decisionmakers with clear insights about thecharacteristics of the pool of packages thatare readily available. Even with these notes,we believe that our data is sufficient to drawconclusions about the market.

Patent brokersWhen a patent buyer is trying to findpatents to counter assert, a large pool ofpotentially available patent assets must bereviewed. Many patents will fail to meet abuyer’s business needs, so a large pool isnecessary. The patent broker communityprovides access to such a pool with specificassets that are known to be available for sale.This broker-supplied pool reduces a buyer’sdiligence costs substantially. Also, brokersbring useful skills, including the following:• Selecting viable sellers, including some

certainty that the seller is willing to sell. • Filtering patents and identifying

important patents and claims. • Providing pricing guidance. • Providing guidance as to reasonable sale

terms and timelines.

Market movers

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Market movers

• Defining the process for diligence,bidding and sale.

For a list of brokers and contactinformation, see www.richardsonoliver.com/brokers.

Patent broker dataSince 2009, we have interacted with morethan 50 different patent brokers and sellers.The majority of brokers are relativelyinactive and some no longer exist. However,some brokers have actively participated inthe patent brokerage market for years. In thelast 12 months, we saw 14 brokers that hadat least three packages on the market. Theyare listed in Table 1.

AST, HP, IBM, Intellectual Ventures,OIN and RPX are some of the repeat sellersof patents that we have observed. RPX’spresence is particularly notable since itsselling programme began only in late 2011.

When we reviewed our broker and sellerdata, we did not find correlations that wehad anticipated. For example, there was nogeneral correlation between the brokers anddeal price (except at the extreme ends), thepackage sizes or the specific technologyarea. Anecdotally, we have found thatbrokers prefer technology areas that appearto sell better rather than because the brokerhas a specific technology capability. Forexample, user-interface patents and long-term evolution (LTE) related patents tend tosell better than semiconductor patents andbrokers select packages accordingly. Otherareas that appeared to be uncorrelatedinclude the number of offerings relative tothe higher perceived quality of the offerings– some of the better-quality packages camefrom brokers that put fewer packages on themarket. Quality here is defined as how wellthe patents match the target marketidentified by the broker’s materialscompared to our analysis of the market,technology and patents. We use a process ofsuccessive refinement in each area toidentify quickly patents that will meet ourclients’ needs and eliminate those that donot. Accurate identification of the targetmarket by the brokers improves our processby lowering diligence costs and acceleratingthe time to a decision.

However, we did find one importantcorrelation: brokers that provide thehighest-quality packages include evidenceof use (EOU) with their packages more than80% of the time.

Key diligence dataUpon receipt of a package from a broker, the prospective buyer is faced with some

important questions: how much time andeffort should I spend determining whetherto bid? Knowing that very few of thepackages are going to be relevant to mybusiness, how do I best allocate myresources? The following section addressessome of those initial resource allocationquestions in the context of actual data.

Pricing data – disconnect from the public dataFor any package, the first and simplestquestion to answer is whether it is within thebuyer’s budget. The broker’s pricing guidanceis critical to determine whether any resourcesshould be spent analysing the package.Consider how difficult the absence of pricinginformation is for the buyer: are the seller’sprice expectations exceeding market prices?Does the broker have a good sense of themarket? Is the seller just testing the waters?Is there a serious flaw in the patents? To saveresources, buyers do not start diligence onpackages with pricing guidance higher thantheir limit or well outside market prices.

We see a significant improvement inpricing and price expectations informationin the market. Even three years ago, we feltthat prices were often unclear or unstated,and that the price of a particular package hadlittle anchoring to market prices. We now seepricing guidance provided more regularly,and that guidance typically falls withinmarket price ranges of other packages.Nonetheless, lack of pricing guidancecontinues to be a significant factor for thedecision as to whether to bid on a package.For example, nearly half of the packages lackpricing guidance – this remains true for eventhe most recent 50 packages that we have

Table 1. Broker list

Table 2. Summary of data

Brokers with at least three packages inlast 12 months (listed alphabetically)

Acorn TechnologiesBlue SageEpicenter IPGTT GroupHoffman Law FirmICAPIceberg Innovation CapitalIntellectual ProfitIP Investments GroupIP OfferingsIPVALUEMarqeraPatent ProfitTAEUS

Packages included in the study 186Number of issued US patents 5,394Total assets 7,595Packages old enough to have sold 96Sold 15Percentage sold 16%Asking price per US issued patent US$577,000Asking price per listed patent asset US$344,000Average number of US issued patents per package 8(excluding packages with over 200 assets)Median number of US-issued patents per package 4(excluding packages with over 200 assets)Percentage of packages with 10 or fewer issued US patents 78%Average days from receipt to bid due 51Average days from receipt to disposition by ROL group 21Annual sales US$153 millionReceipt of package to assignment record (days) 173

Num

ber

of

pac

kag

es

Broker pricing guide

<US$500k19

US$500k-1M29

US$20M+7

US$10-20M4

US$4-10M11

US$2-4M14

US$1-2M28

# of packages

0

5

10

15

20

25

30

35

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Market movers

evaluated. Generally, the more frequentlythat brokers offer packages, the more likelythey are to provide pricing guidance.

Pricing guidance is typicallycommunicated as a somewhat broad range,rather than in precise terms – for example,“We think this package will sell in the lowseven figures.” We therefore use pricingbuckets that correspond to these ranges.Often the range information iscommunicated solely over the phone,adding some complexity to obtaining theinformation.

For 112 deals where pricing wasavailable, there was a clear preference fordeals under US$2 million.

To enable comparison with publiclyreported deals, we computed a price perissued US patent, as well as a price per listedpatent asset. In doing so, we used themidpoint of the price bucket as the estimateddeal price (eg, for the US$1 million to US$2million range, US$1.5 million is used). Twoexceptions were made: one for the US$20million-plus range, where US$20 million isused as the price; and the other for the US$4million to US$10 million range, wheredetailed analysis of the deal data indicatesthat US$5.7 million, as opposed to US$7million, provides a better indication ofaverage pricing guidance.

The pricing guidance is much lowerthan what publicly reported deals mightsuggest. For public deals between 2010 and2012, the average price per sold asset wascloser to US$970,000 per patent.Interestingly, the latest attempt to sellKodak’s portfolio suggests that publicmarkets may be coming back into line withthe broker market. Looking across all deal

sizes, we computed an average asking priceper listed patent asset of US$344,000, withan average asking price per issued US patentof US$577,000 (we removed the top andbottom 5% of the data to reduce distortionsfrom a handful of outliers). We alsoanalysed the data within each pricingbucket.

A note of caution: these prices are basedon the broker’s pricing guidance, not onactual closed transactions. We hadinsufficient data to analyse the asking priceper patent asset for sold packages.

Number of assets per packageLooking at package size, 78% of all packageshave 10 or fewer US patents. The averagepackage size (excluding packages with greaterthan 200 US patents or patent assets) haseight US patents or 14 total patent assets.Based on our data, once a package has morethan 10 US issued patents, it is consideredunusual. We find that smaller package sizeshelp buyers to focus their diligence resources.

It is also helpful to consider the totalnumber of patent assets in a typical package(all packages analysed). This information isset out in Table 3, and as can be seen mostpackages have a handful of US patents –often only a single patent family. Our datasuggests that higher-priced packagesgenerally have multiple families with agreater number of foreign counterparts andoften with pending continuations.

Returning to the point on pricingguidance, and considering whether EOU isincluded in the package, pricing generallyaligns with one of three groups:• No EOU or EOU on an insignificant

market leads to below market pricingguidance (for package size).

• EOU on a significant but untestedmarket leads to market pricing.

• EOU that has been tested (eg, throughlitigation or licensing) or is on anexceptional market (eg, LTE essential)leads to above market pricing.

Thus, a seller or broker looking tomaximise price should not add morepatents to a package. Rather, brokers andsellers should spend time better developingEOU for the select assets. A 200 patentpackage with no EOU will be assignedcommodity pricing (approximatelyUS$50,000 per asset).

Put another way, packages larger than 20US patents with a wide array of families areoften removed from consideration early inthe diligence process. This is because thediligence costs, in light of all the otherpackages and budget constraints, make

Figure 1. Package pricing histogram (n=112)

Pri

ce p

er p

aten

t

Broker pricing guide

<US$500k US$500k-1M US$20M+US$10-20MUS$4-10MUS$2-4MUS$1-2M$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

Per US issued patent Per asset Public sold deals Avg per US issued Avg per patent asset

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Market movers

these packages undesirable and thereforethey often fail early in the diligence process.A buyer might infer that if the seller doesnot know where the value is, it is going tobe expensive for the buyer to find it.

Package technologyThe packages that we reviewed fell intodiverse technology areas representing thedesires of various clients to address specificproblems. Unsurprisingly, communicationsequipment, wireless technology andcommunication services were morecommon. Semiconductors tend to be lesscommon, primarily because of the difficultypreparing and conducting diligence on EOU.

Diligence and bid timing – longer thanyou thought?Buyers need to know when they are expectedto have their diligence complete and bidsready. Our data shows that packages are sentout with an average of 51 days available tobid. However, many corporate clients needapproximately 60 days from first seeing apackage to placing a bid. This seeminginconsistency is reconciled by noting thatthe dates are target due dates. Rarely dobrokers set a hard date when the package isinitially distributed. Even after initialextensions, it is still common to have thefinal bid due date slide, which creates adisincentive to get bids in early.

Most packages are received via an email,which provides a summary of the offering.Many brokers include a link to a websitewhere additional data can be downloaded,

such as PDF copies of the file historiesand/or EOU. The most commonly missingitem in packages is an easy-to-usespreadsheet listing of all the patent assets.The better brokers provide the list in anormalised form that is suitable for directcopy-and-paste input into patent analysistools, such as IPVision, ThomsonInnovation or Innography.

The review process from when we firstreceive a package until we close the reviewof that package – including negotiating andsigning a patent purchase agreement –averages 21 days. However, the average timepresents a misleading picture. Drilling downfurther, four groupings of review timebecome apparent (see Table 4).

Nearly 40% of packages are closed outin less than a week. These are packages thatdo not meet buying criteria. To runefficiently, we work with our clients toestablish buying criteria early. Examplesinclude: • Minimum review time – for example,

the due date for bids allows for aminimum of 60 days before bids are duein order to accommodate diligence andcorporate approval processes.

• Target price for packages – if thebroker’s guidance is outside of the targetprice, there is no need to performdiligence on the package.

• Remaining patent life is sufficient (eg, atleast five years remaining required).

• Too many patents for meaningfulanalysis – for example, the client islooking for a handful of patents to

Number of assets

12 to 56 to 1011 to 2526 to 5051 to 100> 100

Percentage ofpackages(counting US –issued only)

29%29%20%14%4%1%3%

Percentageof packages(counting allassets)

23%27%17%18%6%4%5%

Table 3. Sales package sizeFigure 2. Asking price per asset (US$K) (n=112)

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Market movers

address a specific threat. Anundifferentiated package of 200 patentsis not useful, especially as package sizeis often related to total price.

• Technology area (eg, mobile handsetpatents only).

• Encumbrances cleared – a list ofcompanies to which the patents can belicensed is available.

• Sufficient impact – for example, evenassuming that the patents are valid andinfringed, is there evidence for asufficiently large market in the coveredcountries for the technology?

• EOU minimum requirement – somebuyers require that EOU exist beforebeginning diligence.

• Other criteria – for example, somebuyers will not buy from specificbrokers or sellers.

Bidding and buying – how many sold?Once purchasing starts, our data suggeststhat between 30 and 60 days to close isreasonable for a pure-patent transaction.We have closed patent purchases in a fewdays, but most take longer. Often, the delaysstem from missing deliverables, such as acorrected assignment.

We also often saw a number ofassignments recorded close to the purchaserecordation. For example, assignmentsreleasing previous security interests werefrequently recorded in proximity to thepurchase assignment. We have experiencedand heard from others that correctedassignments continue to be a significant

source of delay to closing deals.We sub-sampled our data, looking at

packages that had more than enough time toclose (at least nine months from receipt). Of96 packages separately analysed, only 15 hadany registered assignments that were afterthe receipt date of the package and to anentity other than that selling the package.Thus, 16% of packages that we saw sold.Most of the purchases were to non-practising entities (NPEs) or defensivepatent aggregators.

The following are the definitions usedto categorise purchasers: • ‘Operating company’ is a known

operating company (eg, publicly traded).• ‘Defensive aggregator’ or just

‘aggregator’ is a known defensiveaggregator such as AST, RPX or OIN.

• ‘NPE’ is all other purchasers.

Two of the 15 packages that sold (or 13%of the sales) had at least one subsequentonward transfer (after the brokeredpurchase), all to an operating entity aspurchaser.

When we looked at how many of thepatents ended up in litigation, we weresurprised that it was so few. Two of the 15packages that sold (or 13% of the sales) hadpatents asserted in litigation, one by anoperating company and the other by an NPE.More significantly, the operating companyhad been sued by a large corporation knownfor both products and patent assertion. It isclear that the purchaser used the patents tocounter assert – a technique that has

The leading brokers make evidence of use(EOU) readily available to interested partieswithout a non-disclosure agreement (NDA).Other brokers that prepare EOU requireNDAs for access to EOU. Because the NDAwill often include additional, specific patentpurchasing language, the NDA negotiationcan distract from the review process.

While the emerging best practice is forbrokers to make EOU available to interestedparties without NDAs, common provisions tonegotiate when NDAs are required includeremoving treble damages (35 USC 287),treating discussions as settlementdiscussions (eg, FRE 408), and treating thevery fact you are a potential buyer asconfidential information. Less common, butsometimes present is a standstill for a shortnumber of days prohibiting filing adeclaratory judgment action.

Non-disclosure agreements

350 5 10 15 20 25 30

Communication services

Application SW

System infrastructure SW

Wireless

Communication equipment

Components

Development SW

Cloud computing

Miscellaneous

Semiconductor

Consumer electronics

Imaging

Computing equipment

Number of packages

Figure 3. Package by technology area (n=186)

Table 4. Receipt to package disposition

Days from receipt of package todisposition(includes purchase)

≤78 to 3031 to 60> 60

Percentage ofpackages

39%35%19%7%

Aggregator Operating company NPE

Figure 4. Purchaser types (n=15)

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worked often for those finding themselveson the wrong end of a corporate patentassertion. The companies settled soonthereafter. Although the data does nothighlight this as a common practice, webelieve that the market for brokered patentsis an important resource to countercorporate patent assertions.

For the 15 packages that sold, the timingfrom the bid due date to the date on whichthe assignment was recorded averaged 108days. Looking at all the steps, the processtook, on average, 173 days (distribution ofpackage as measured by our receipt toassignment recordation). Some soldpackages moved much faster – fewer than90 days from our receipt of the package toassignment; but a longer process matchesboth the data and our rule of thumbprovided to potential sellers – it takesabout six to nine months from start tofinish to sell your patents.

Interestingly, out of the 96 packages wereviewed for assignments, we found at leastseven containing patents for which noassignment had ever been recorded. To beclear, the original assignment from theinventor had never been recorded.Surprised? So were we.

How big is this market?We extrapolated our data on pricing, salesand packages to determine the size of thismarket. Bear in mind that we are sizing themarket for deals with fewer than 200 assetsin the package, sold by brokers, to the openmarket. We estimate US$153 million inannual sales with broker fees of aboutUS$34 million. To derive the market size,we first estimated the number of newpackages brought to the market in a year.Based on our most recent quarter and anestimate of the percentage of the entiremarket we see, we extrapolated the total

number of new packages brought to themarket generally. We also adjusted thenumber of packages because we do not seeall brokered packages. We then used ourprevious sales rate and what we think thepatents really sold for (75% of the askingprice). We believe that the actual sales priceis one of the more difficult areas to estimatebecause so few transactions are reported.We believe that the price could be 50%below or above this number. Using ouraverage number of issued US patents perpackage brings us to a total market ofUS$153 million per year.

Using an average commission rate of22%, the revenue from this market forbrokers is US$34 million per year.

For this model, we did not account forgrowth or decline in the market from theprevious year, so the time to close thetransactions and collect the money does notaffect the estimate. Clearly, this model canbe refined, but we believe that it provides agood first approximation.

Robust and chaoticUltimately, we find the marketplace to be arobust, somewhat chaotic, arena in which tofind interesting patent assets. With morethan 100 packages on the market at any onetime, there is always the opportunity to findsomething to fit your needs. Nearly 70% ofthe packages have a target price below US$2million, allowing companies to purchaseassets to address specific problems at arelatively low cost.

The low percentage of sold packages –16% – tells us that brokering patents can bea tough business. Also, with nearly 180 daysfrom distribution to a sale, quick moneyseems unlikely. We are not surprised to seepatent aggregators and NPEs buying themajority of patents. However, we also seethat corporate buyers are willing to buy and

Table 5. Brokered patent market (over 200 assets)

276

16%44US$433,000

8

US$3,462,000

US$152,882,000US$33,634,000

Number of packages per yearSales rateSold packages/yearPrice per US issuedpatentNumber US issued per packageAverage sales price per packageTotal marketTotal commission

• Evidence of use – An evidence of use(EOU) is a mapping of the elements ofa claim to a potentially impactedproduct or service together withreasoned assumptions, including anidentification of any additionalinformation needed to complete theanalysis. In contrast, a claim chartincludes further supporting details,such as definitions, support in thespecification identified for each term,reverse engineering concluded anddocumented, and/or references toterminology used in the prosecution.

• Patent assets – We define a ‘patentasset’ as a single, unexpired pendingor issued patent asset somewhere inthe world. We have also found that thenumber of issued US patents is anadditional relevant factor for evaluatingpackages, so we have included bothmetrics in many cases. Note thatpending applications are not includedin the US-issued count. Generally,pending applications do not affect themetrics unless there are very fewassets. Of course, there are situationswhere a pending application is themost important patent in the package.

Terminology

Action planWhen buying patents: • State the case for buying – what

problem are you solving? • Model a return for your buying

programme. • Recognise that most patents will not fit

your needs – eliminating those patentsfrom consideration early greatlyreduces your costs.

Programme parameters include:• Timeline. • Budget.• Buying team authority and

responsibilities.• Buying criteria.• Listing of acceptable sources of patent

packages.• Special requirements such as a

whitelist of unlicensed companies.

Fail-fast triage process for eliminating

undesirable packages quickly: • Extract criteria from the business case

to identify interesting markets andtechnologies, and to define thediligence needs.

• This is a multi-part analysis of markets,technical knowledge, and legal analysiswhere a failure in any one area eliminatesthe package from further review.

Bidding and buying: • Your model determines a maximum bid

price.• Wait to place your bid unless there is a

special circumstance. • Assume that diligence will take longer

and that there will be at least somesubstantive work required to close thetransaction.

• Consider adding a consultingagreement with the inventors if they areavailable.

A

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Market movers

counter assert patents.We continue to evaluate, bid and buy

patents for our clients, and will continue totrack the data and refine our database. Likeall similar projects, as soon as the datastarted answering questions, additionaldetailed and in-depth questions presentedthemselves. We look forward to answeringthese.

Further details and caveatsWhen we started pulling this data together,we recognised not only the power of havingthis information for pricing and settingtimelines and expectations, but alsoadditional questions that we would likeanswered. Some of these could not beanswered because we did not have theinformation in our database. We haveremoved these packages from our analysis.Similarly, we have removed packages where aproject was stopped, meaning that the datafor that package was incomplete and thuswas not representative. In other cases,clients had a specific purpose for purchasingpatents, which resulted in data that was

skewed towards a particular technology area,price point or timeframe (we have removedor normalised data where needed).

Additionally, our approach to thediligence process (‘fail fast’) meant thatsome data was never obtained. For example,where a package did not meet the initialbuying criteria, no further diligence wasperformed. In that case, we did not testwhether there was EOU for that package.Also, time to bid could not be meaningfullycorrelated with technology, price guidanceor portfolio size.

Other questions that we would like toanswer but do not feel we have sufficientdata to do so include:• How many packages fail with an open

continuation versus without an opencontinuation? Our experience has beenthat we are much more willing to bidwhere we believe that we can address aclaim problem in an open continuation.

• How many packages fail on priceexpectations alone? Our sense is that thisis less of a problem than even three yearsago, but we did not track this data.

Kent Richardson and Erik Oliver arepartners in the Richardson Oliver Law Groupkent@richardsonoliver.comerik@richardsonoliver.com

The authors gratefully acknowledge LexMachina’s assistance in this analysis.www.lexmachina.com