Feel secure? Security interests in patent sales transactions

Unlike a license, once a patent is sold the seller will not necessarily have significant leverage if the buyer fails to make good on its subsequent payment obligations

Traditionally, patent holders have used the licensing model to commercialize their patents. Patent licensing transactions can have many different bells and whistles, but at their core they usually contemplate a grant, to the licensee, of specified rights in the patents (e.g., to make, use and sell products covered by the patents) in return for a running royalty. In recent years, patent holders, particularly inventors and others who may own patents but do not have the financial wherewithal to aggressively enforce their patent rights, have been faced with a changing commercial environment, where patent assertion entities and others are taking advantage of a growing marketplace for patent assets by focusing on the outright purchase of patent portfolios.

In many instances, perhaps because patent owners are used to the licensing model, this trend has led to patent sales transactions where the purchase price is structured as an “earn-out,” meaning a payment of an agreed amount over a period of time. These types of transactions usually involve an assignment of the relevant patents in the first instance, in return for which the seller receives an agreed amount at the time the sale is consummated, then receives subsequent payments (sometimes, much like a running royalty, payments are made periodically based on a percentage of revenue earned by the buyer in the course of its post-closing efforts to commercialize the patents; sometimes fixed amounts paid in installments over time) until an agreed purchase price has been paid, or perhaps until an agreed end date for payments has been reached.

Contributing Author

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Jeffrey C. Johnson

Jeffrey C. Johnson is a partner in Pryor Cashman’s Intellectual Property Group. He is experienced in the transactional aspects of technology and intellectual property exploitation...

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