Patents Get Horse-Traded On A Sophisticated Secondary Market
This is a reproduction of Investing in Patents by Russ Krajec. For the complete book, get it on Amazon.
A very sophisticated and extremely well financed secondary market for patents lies behind a thick veil of secrecy. Most entrepreneurs and investors (and even most patent attorneys) are unaware of this market and how it works.
The secondary patent market is usually where so-called patent trolls come out from under their bridges to launch lawsuits to assert patents.
The secondary patent market is much more advanced than people realize, and this market is yet one more of the many audiences for patents.
The Secondary Patent Market Has Exploded In The Last Two Decades.
The secondary patent market now includes patent aggregators, patent assertion companies, “catch-and-release” syndications, auction-based sales, a big group of independent patent brokers, and many others. There are sophisticated insurance policies that protect against many different patent-related business scenarios. There is even a professional society for the industry, the Licensing Executives Society, which has nearly 3,000 members in the US and Canada.
Most of the companies in the secondary patent market are privately held, although some are publicly listed. At last count, there were 20 or more public companies whose primary business was patent enforcement or licensing.
Often, these companies get started with a lucky win early on, which they try to duplicate over and over. Some get stronger, some fail, but they all quickly morph over time. Although these companies get bad press, they tend to do business in the hundreds of millions-and sometimes billions-of dollars.
The secondary patent market is rarely the first thought of an inventor when the lightbulb goes off, but it is a very good mechanism for unloading patent assets that a company might not be using. Take for example a venture backed company that has – to use a polite term – “pivoted” at some stage in the game.
There may be patents that the company is no longer using but still owned. These patents can be liquidated, either through a one-time sale or through ongoing licensing, to other people in the market. Sometimes, the startup will keep a license to the technology; sometimes not.
The secondary market for patents is notoriously secretive and has a cloak and dagger feel to it. This is because there are lots of veiled (and not-so-veiled) threats being made, and lots of very hard negotiations. Almost all of the deals are signed with strict confidentiality agreements, and we only get a glimpse when publically traded companies reveal these deals in SEC or other mandatory disclosure filings.
Why All The Secrecy?
The cloak-and-dagger aspects to this market are an artifact of the legal system. If someone formally accuses a company of patent infringement, the company can use the accusation to run to court and get a declaratory judgment to invalidate the patent. This is known in the industry as getting “DJ-ed”. To avoid the declaratory judgment, the patent owner has to make the veiled threat without actually being threatening – or – the patent owner must file the lawsuit first in their own jurisdiction, then tell the infringer afterwards, which comes across as aggressive.
Consequently, people on the receiving end often get notice of the lawsuit completely out of the blue, which causes them to angrily complain about “patent trolls”. It is ironic that the declaratory judgment law was put in place to help alleged infringers ward off lawsuits, but in practice actually makes it much more difficult for the alleged infringers.
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