Patent licensing companies and how they work

Many of the largest patent licensors are operating companies that also make products. Large technology, semiconductor, telecommunications and pharmaceutical companies run licensing programs alongside their product businesses. Some license patents that cover technology they no longer use. Others license as part of cross-license agreements, where two companies grant each other rights under their portfolios and settle any imbalance with a payment.

For an operating company, licensing serves several goals: it earns revenue from research that has already been paid for, it reduces litigation risk through cross-licenses, and it shapes markets by making a technology widely available on known terms. Because these companies also sell products, they are exposed to counterclaims, which tends to make their licensing negotiations more commercial and less adversarial than pure assertion campaigns.

• Revenue from patents on technology the company no longer practices.
• Cross-licenses that give freedom to operate in exchange for access to the company's own portfolio.
• Programs tied to technology the company wants adopted widely.

A patent pool is an arrangement in which several patent owners contribute patents essential to a standard and a pool administrator licenses them together under one agreement. Pools are common for video codecs, audio formats and wireless standards, where a product maker would otherwise have to negotiate with dozens of separate owners. The administrator collects royalties and distributes them to the contributors under an agreed formula.

Pools usually license on fair, reasonable and non-discriminatory terms, since the patents are typically subject to FRAND commitments made to the standards organization. Licensees get a single, published rate and broad coverage. Contributors get efficient collection without running their own program. Competition authorities have generally accepted pools that include only essential patents, license on non-discriminatory terms and allow patent owners to license outside the pool as well.

A pool's list of patents changes as patents expire, are added or change hands. For a licensee, the pool list is the starting point, not the end of the inquiry. A patent sold by a pool member to a third party may leave the pool, and the new owner may try to license it separately. Checking the current owner of record for the patents that matter most is a simple way to keep the picture accurate.

Licensing agents run licensing programs on behalf of patent owners that lack the staff or experience to do it themselves, such as smaller companies, individual inventors or universities. The agent identifies likely licensees, prepares claim charts, negotiates, and is usually paid a share of the revenue. The patent owner keeps title, although the agent may receive a power of attorney or an exclusive right to negotiate.

Patent brokers focus on sales rather than licenses. They package patents, prepare marketing materials and claim charts, contact buyers, run a sale process and are typically paid a commission on the closing price. Many brokers also advise buyers. If you are on the selling side, our guide on how do you sell a patent covers the process step by step.

For anyone dealing with an agent or broker, the key question is the agent's authority and the principal's title. An agent can only offer what its client owns. Ask who the client is, confirm that client is the owner of record at the USPTO, and check whether any other party holds rights that limit the deal.

• Agents license on behalf of owners and are usually paid from royalties.
• Brokers sell patents and are usually paid a commission.
• Neither can grant more than the owner holds, so verify the owner first.

A non-practicing entity (NPE) is a company that owns patents but does not make or sell products covered by them. The term covers universities and research institutes as well as companies whose business is acquiring patents and licensing them, often after or alongside litigation. The latter are sometimes called patent assertion entities.

The usual model is to acquire patents from operating companies, inventors or bankruptcy estates, identify companies whose products appear to practice the claims, send notice letters with claim charts, and negotiate licenses, with litigation as the fallback. Funding often comes from investors or litigation finance, and patents are frequently held in separate subsidiaries created for each portfolio. As a result, the entity named in a demand letter may be recent, and the patent may have changed hands several times.

That history is exactly why ownership checks matter. Standing to sue depends on holding legal title, or an exclusive license with all substantial rights. A plaintiff that bought the patent through an assignment with gaps, or that holds rights that fall short of all substantial rights without joining the owner, may face a standing challenge. Recorded assignments also reveal related entities, prior owners who may have granted licenses, and security interests held by funders.

• Who is the current owner of record, and when did it acquire the patent?
• Does the chain of title run cleanly from the inventors through each prior owner?
• Did any prior owner grant licenses that might already cover you or your suppliers?
• Is there a recorded security interest suggesting outside funding?
• Are related patents held by affiliated entities with similar names?

Defensive aggregators take the opposite side. They acquire patents, or licenses to patents, so that their members are protected from assertion. RPX Corporation operates a membership model in which members pay a fee and receive licenses to patents RPX acquires. Allied Security Trust is a member owned organization that buys patents on behalf of its members, takes licenses for them, and then typically resells the patents subject to those licenses. Other collectives, such as royalty free cross-license communities in specific technology areas, follow similar ideas.

For patent owners, aggregators are also buyers, which makes them part of the market for selling patents. For operating companies, membership is a way to reduce exposure, although no aggregator can buy every patent that might be asserted. When an aggregator resells a patent subject to member licenses, the buyer takes it with those licenses attached, which is an encumbrance to check during diligence.

Universities and research institutes license inventions made by their researchers through technology transfer offices. These offices file patents, market inventions, negotiate licenses (often exclusive licenses to startups or established companies) and share income with inventors under the institution's policy. Typical terms include upfront fees, milestones, running royalties, minimum annual payments, diligence obligations and equity in startups.

Federally funded inventions are subject to the Bayh-Dole Act, which allows universities to retain title but gives the government a non-exclusive license and certain other rights, and generally requires a preference for US manufacturing in exclusive licenses for US sales. A licensee from a university should confirm that the university holds title, that inventor assignments are in place, and whether government rights apply.

The models differ in who owns the patents, how revenue is earned and what a licensee or seller should check.

Whether the approach is a friendly offer from a pool or a demand letter from an assertion company, the first steps are similar. Identify the patents by number. Confirm their status, remaining term and maintenance fee payments. Confirm who owns them today and how ownership got there. Then look at the claims, the products they are said to cover, and validity risks. Licensees should remember that, under MedImmune v. Genentech (2007), they can challenge validity without first breaching a license, and that patent exhaustion under Quanta v. LG (2008) and Impression Products v. Lexmark (2017) may mean that products bought from an already licensed supplier are covered.

Ownership research is quick compared to claim analysis, and it sometimes ends the conversation early: a patent that expired for non-payment, a demand from an entity that is not the owner of record, or a prior owner's license that already covers the product. A patent ownership search is a sensible first step, and a patent assignee search across all the names a licensing company has used often reveals the rest of its portfolio and its affiliates.

• List the patents and check status and expiry.
• Confirm the owner of record and the full chain of title.
• Search other names and affiliates for related patents.
• Look for prior licenses through suppliers and earlier owners.
• Only then invest in claim charts and validity analysis.