Patent Purchase Agreement 101
Any agreement that concerns the sale or purchase of a patent or patent portfolio is referred to as a patent purchase agreement. This agreement is signed by the buyer and seller and laid out in writing under the terms and conditions of sale of the respective patents. This purchase agreement is the final step in the procedure of the sale of a patent. So, you can categorize it under the formality of a contract.
Patent purchase agreements usually take the form of an asset purchase agreement. Here, the owner of the patent makes the sale. Essentially, an asset purchase refers to the selling of a company’s assets. The seller sells one or more business assets to another organization. This is a fairly simple process, as long as the buyer and seller are in agreement on the terms of the sale. As you might imagine , this requires some paperwork and proper documentation.
A patent assignment agreement is a specialized version of a patent purchase agreement. This is because this particular type of agreement is used when a patent is being assigned from one party to another. Because these documents generally contain similar requirements to other types of contracts electronically and are considered just as valid as paper contracts, they are also heavily used for these types of agreements.
The actual Patent Purchase Agreement will likely be exclusive and limited to only those patents, patent applications, and patent rights referenced in the agreement. Buyers should take the time to review the patents referenced in the agreement and make sure that the proper assignments are attached as well.
The Basics of a Patent Purchase Agreement
There are several elements that must be considered for a real transfer of rights to occur. These elements are as follows: (1) parties; (2) price; and (3) rights.
Parties. A patent owner, and an assignee, or the buyer and seller, must be identified. The names or title of the parties is sufficient. It is common to recite the name of the legal entity or business. If a patent agent relationship exists between the assignor and assignee, the patent assignment should be recorded in the patent file wrapper.
Price. The price of the agreement can be listed in a number of ways. First, a fixed price is often used. Alternatively, a formula for determining the price can be inserted as the price. This price is often paid in periodic installments.
Rights. The rights being sold must be specified. Importantly, the technical field of the invention can be identified. For example, the rights purchased may only be limited to the United States patent.
How Patent Purchase Agreements Differ from Other Agreements
Patent purchase agreements differ in many ways from the typical agreements used to obtain rights to the intellectual property of others. Patent purchase agreements differ from licensing agreements, non-assertion agreements, and the like in substantial ways.
First, as discussed above, with a patent purchase agreement you are purchasing rights to previously granted patent(s), aka issued patent(s). What you are not obtaining are pending patent applications. Pending applications are not available to be purchased. You may be offered the opportunity to buy those separately, on a case-by-case basis, or the owner may ultimately file a patent application for a pending application on his own or have someone else do it. But you, if you are a "first mover," will not have any control over that.
Second, you will see terms in the patent purchase agreement that you are likely not familiar with if you typically enter into licensing agreements. These terms include terms like Patent Hedge Potential, Patent Prosecution Control, Non-Competition, No Third Party Rights, Third Party Challenge, etc. These terms are discussed … here.
Third, the agreement itself will be expert-drafted for the purpose of being clear, concise, and achieving the goals of both parties. The questions, negotiation, and intellectual property legal templates shared with a buyer are likely tools that have only been seen by the Company’s lawyers, and likely yours as well.
Fourth, the agreement will be extremely efficiently drafted and consist of no more information than is needed. This is not an academic exercise. We rarely see buyer’s counsel ask for additional transaction contingencies or amending the purchase agreement with several pages of additional terms. The patent purchase agreement you are offered is the one offered to every buyer of a patent. This is standard form patent purchase agreement that was carefully drafted to balance the needs of seller and buyer and has had years of use without issue.
Fifth, if a patent purchase agreement is not signed, no payment is needed. This affects the buyer’s due diligence regarding payment of any advanced costs.
Legal Implications of Patent Purchase Agreements
As with any other commercial agreement, careful attention should be paid to both the seller’s ability to perform under the patent purchase agreement and enforceability of the agreement itself. The seller should have legal authority to enter into the agreement and make enforceable transfer of any rights to the purchased patents. This consideration is not merely theoretical; there are recent examples where the patent assignment to a subsidiary was found to have been legally ineffective because of the manner in which the subsidiary was set up (or acquired) by the parent company. To check for legal authority, it may be necessary for the purchaser to review the applicable company documents of the seller, including articles of incorporation and attorney’s certificate. The seller may also require its legal counsel to issue an opinion that the seller is authorized to enter into the patent purchase agreement, that the patent purchase agreement is enforceable against the seller, and that transfer of the purchased patents pursuant to the patent purchase agreement is lawful and enforceable. Such an opinion is typically given to the purchaser and the purchaser’s legal counsel.
In addition to checking for legal authority, for commercial reasons, purchasers frequently require representations and warranties and other contractual protections from the seller. For example, the seller may be asked to represent that it has full right and title in and to the purchased patents, that there are no claims or pending litigation involving the purchased patents, and that the patents are free and clear of any encumbrances and third-party rights (e.g., licenses). Other customary representations and warranties may include the category of patent (e.g., utility, design or plant), disclosures, patent prosecution history, there are no pending or threatened actions, standing in the U.S., history related to the patents, and transfer free of third-party rights. Representations and warranties are typically backed by an indemnity obligation from the seller, which may survive for a contracted duration.
The obligation imposed on the seller may also vary depending on whether the transaction involves a smaller number of patents or many patents and how much of a due diligence investigation the seller is willing to tolerate. For many small transactions, the purchaser may be satisfied with a bare assignment or a simple table of patents and representation that it has disclosed everything known to the seller. For more expensive transactions with potentially large value, the scope and level of due diligence may increase.
Purchasers may also obtain from the seller the option to acquire other patent and patent-like rights in exchange for a license to the purchased patents. The right to negotiate such a future agreement may be limited to a certain period of time following the acquisition deadline and the initial term of the patent purchase agreement. In the event that a patent purchase agreement is not enforceable or clearly excludes certain intellectual property rights, such legal shortcomings are typically subject to the same consequences as contractual breaches, including refund of the purchase price and indemnity obligations.
Steps in Drafting a Patent Purchase Agreement
A well drafted patent purchase agreement will address each issue as to whether the buyer or seller will be responsible for any action. For example, if there is any outstanding litigation related to the patents, the seller will want to retain responsibility for the claim and indemnify the buyer from any damages. The sale may be subject to claims of infringement or license rights. The seller is generally customary to indemnify the buyer from the costs of defending the patent and any damages that may result up to a certain level of royalties , which will be agreed upon by the parties prior to executing the agreement. The closing date of the patent purchase will need to be agreed upon and how the purchase price will be paid. Payment may require an upfront payment on the closing date and any future payments may be made on a royalty schedule or a milestone agreement. There are many aspects to a patent purchase that should be diligently reviewed to create a valuable transfer of patents agreement.
Common Problems and Avoiding Them
To avoid future disputes, it is essential parties give careful thought to the assignment process and the language used in their agreements. Some common problems may include the following:
Parties may forget to treat their patents as they would physical property, and run into issues or arguments later. For example, if a seller of their patent or patent application is involved in litigation with a third party for infringement of the same patent or patent application, and fails to assign their ownership rights to the other party, they may find themselves at odds with the buyer/assignee over control and maintenance of the litigation. This can be avoided by clear assignment language that provides that the seller also assigns future rights, successes and derivatives, whether existing or contingent, of the patent, and possibly also including specific approval rights in the event of a controversy related to the patent.
Many states require that a patent, patent application or other assigned property be recorded in order to have full effect; parties should check the law of their state to ensure proper handling.
If the assignee treats the sale of a patent as a "royalty" instead of an assignment, it will need to deal with issues of "trademark hearing" where a trademark was applied for but trademark protection was intended. A similar situation can occur with copyright issues.
Finally, when licensing a patent prior to the assignment of the patent, care should be taken to make clear whether the license is exclusive or non-exclusive, whether it is valid in a specific territory, and if royalties will be due based on infringement of the patent. A buyer might wish to limit licensing rights as a condition of purchase and the seller may not wish to give exclusive rights at an early stage of negotiations.
The Use of Patent Attorneys
As with any other legal agreement, it is a good idea to consult with a lawyer. The lawyer will be able to assist with drafting the package of documents needed to protect both the buyer and seller in a way that achieves the desired results. In addition, certain aspects of a patent purchase agreement are highly technical and require detailed legal knowledge for proper negotiation. For example, if the transaction involves licenses, warranties as to inventorship, or future obligations for patent maintenance, then it is important to negotiate such terms with a legal expert in the field. A patent attorney should also be consulted for any provisions relating to antitrust, tax or securities law issues that may be relevant to the transaction.
Future Developments in Patent Purchases
As the number of technology companies that have gone public has continued to increase, so has the secondary market for patents—the opportunities available to individual investors looking to acquire issued patents through patent purchase agreements. We have previously discussed how investors have shown increased interest in monetizing whole patents as opposed to solely acquiring licensing rights, and how the investment community has leveraged the capital markets in order to make these long-term investments. As institutional investors become more prominent players in this burgeoning investment market , private equity funds and other investment vehicles will eventually need to go public in order to raise the larger sums needed to craft extensive patent portfolios. As the patent market continues to gain momentum, expect new legislation such as the Stop Online Piracy Act, which would give patent holders governmental support for enforcing their patents, to fuel patent purchases and sales. As a result, expect the legal provisions and critical deal terms of patent purchase agreements to continue to evolve as market makers seek to systematically lower risk and enhance value.