How to Negotiate a Patent Sale: Price and Key Terms

What Law Governs a Patent Sale in Minnesota?

Federal patent law controls how ownership of a patent transfers, and Minnesota law controls the contract around it when Minnesota law applies. Under federal law a patent has the attributes of personal property and is assignable in law by an instrument in writing. The purchase agreement, letter of intent, company approvals, and liens follow Minnesota law when Minnesota law applies to the seller or the contract.

35 U.S.C. § 261 provides: “Subject to the provisions of this title, patents shall have the attributes of personal property.” The same section provides: “Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing.” An agreed price leaves the patent with the seller until a written assignment is delivered.

Minnesota adds four layers that a seller here should plan for:

1. The letter of intent. Minnesota case law decides whether a preliminary letter binds anyone.
2. Company approval. Chapters 302A and 322C decide whether shareholders or members must approve the sale.
3. Liens. Minnesota’s version of Uniform Commercial Code article 9 decides whether a lender’s security interest follows the patent to the buyer.
4. Employee inventions. Minn. Stat. § 181.78 limits what an employee invention-assignment clause can reach, which affects the company’s chain of ownership.

If the buyer is outside Minnesota, the purchase agreement should name the state whose law governs the contract, so the parties do not have to argue that point in a dispute. This page covers selling a patent; obtaining a patent or suing over one is outside its scope.

What Exactly Are You Selling in a Patent Sale?

A patent sale transfers whatever the agreement describes, so the description is the first term to negotiate. It should name each patent and application, any related patents in other countries, the territory, any know-how or improvements that go with the patent, and who keeps claims for infringement that happened before the sale.

The patent itself grants “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States,” under 35 U.S.C. § 154(a)(1). Because that grant runs throughout the United States, related patents in other countries are separate assets that the agreement should list if they are part of the sale. The territory can also be divided: § 261 lets the owner convey an exclusive right “to the whole or any specified part of the United States.”

When a patent owner asked me to draft a purchase agreement for a patent the owner’s company held, I raised three issues before any drafting. The first was exactly what the company was selling: the patent, any related patents or applications in other countries, and any designs, technical knowledge, or later improvements that went with it. The second was the chain of ownership from the owner, as the inventor, to the company, because a buyer wants proof that the seller owns what it sells. The third was how the company would be paid and protected.

Claims for past infringement deserve their own line. Under 35 U.S.C. § 100(d), “The word ‘patentee’ includes not only the patentee to whom the patent was issued but also the successors in title to the patentee.” 35 U.S.C. § 281 provides: “A patentee shall have remedy by civil action for infringement of his patent.” Neither section says whether a claim for infringement that happened before the sale moves with the patent. I suggest the agreement say expressly who keeps those claims, because a known infringer can be worth money to either side.

How Do Buyers Value a Patent?

A buyer values a patent by what it lets the owner stop others from doing, for how long, and at what risk. The inputs are the remaining term, whether maintenance fees are current, how closely the claims cover products on the market, the risk that the patent is found invalid, and any licenses or co-owners that already limit exclusivity.

Term sets the outer limit of value. Under 35 U.S.C. § 154(a)(2), “Subject to the payment of fees under this title, such grant shall be for a term beginning on the date on which the patent issues and ending 20 years from the date on which the application for the patent was filed in the United States or, if the application contains a specific reference to an earlier filed application or applications under section 120, 121, 365(c), or 386(c), from the date on which the earliest such application was filed.” Term adjustments under the rest of § 154 and earlier related applications can change the end date, so I suggest reading the current section and the patent’s own record before quoting a remaining term to a buyer.

Maintenance fees can end that term early. Under 35 U.S.C. § 41(b)(2), if a maintenance fee is not paid by its due date or within the grace period that follows, “the patent shall expire as of the end of such grace period.” Under § 41(c)(1), the USPTO may still accept a late fee “if the delay is shown to the satisfaction of the Director to have been unintentional,” but a buyer may price that uncertainty. Under § 41(c)(2), a patent maintained that way “shall not abridge or affect the right of any person or that person’s successors in business who made, purchased, offered to sell, or used anything protected by the patent within the United States, or imported anything protected by the patent into the United States after the 6-month grace period but prior to the acceptance of a maintenance fee under this subsection, to continue the use of, to offer for sale, or to sell to others to be used, offered for sale, or sold, the specific thing so made, purchased, offered for sale, used, or imported.” A buyer can check the fee record, so I suggest checking it first, along with the current text of § 41.

For the asking price, I suggest building the number from evidence a buyer can test, because a buyer may discount a number it cannot check:

• products on the market that the claims cover, with the claim chart that shows it;
• licensing income the patent already earns;
• offers or sales for comparable patents, if you have them; and
• the cost a buyer would face to design around the claims.

Interest from more than one buyer gives you a market check on price. A letter of intent that grants exclusivity ends that check while it lasts, which is one reason to keep any exclusivity period short and tied to the buyer’s diligence steps.

How Should the Purchase Price Be Paid?

A patent price can be paid at closing, in installments, or as running payments tied to the buyer’s sales, and each structure shifts risk between buyer and seller. A seller who accepts deferred or royalty payments is extending credit to the buyer, so the agreement should give the seller security for what remains unpaid.

The three structures compare this way:

1. Lump sum at closing. The seller takes no credit risk. The buyer takes the risk that the patent earns less than expected, and it may offer a lower price for that reason.
2. Installments. The buyer pays a fixed price over time. The seller’s risk is the buyer’s ability to keep paying.
3. Running payments. Payments rise and fall with the buyer’s sales of patented products. The seller shares the upside and the risk that the buyer never commercializes the invention, so the agreement should define the payment base, require reports, and give the seller a right to audit. The mechanics are covered in royalty structures for intellectual property.

For any deferred amount, I suggest the seller ask for a security interest in the patent or a right to take the patent back if the buyer stops paying, because a bare promise to pay leaves the seller as an unsecured creditor of the buyer. A take-back right can be a security interest too: under Minn. Stat. § 336.9-109, subsection (a)(1), article 9 applies to “a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract,” and under Minn. Stat. § 336.1-201, subsection (b)(35), a security interest means “an interest in personal property or fixtures which secures payment or performance of an obligation.” Under Minn. Stat. § 336.9-310, subsection (a), “a financing statement must be filed to perfect all security interests and agricultural liens,” with the exceptions it lists. Under Minn. Stat. § 336.9-317, subsection (a)(2), except as subsection (e) provides, a security interest “is subordinate to the rights of” a person that becomes a lien creditor before the earlier of the time it “is perfected” or the time one of the conditions in section 336.9-203(b)(3) “is met and a financing statement covering the collateral is filed.”

Filing does not replace the security agreement. Under Minn. Stat. § 336.9-203, subsection (b), except as subsections (c) through (i) provide, a security interest “is enforceable against the debtor and third parties with respect to the collateral only if” three conditions are met. Value must have been given, the debtor must have rights in the collateral or the power to transfer them, and one of the listed conditions must be met, such as that “the debtor has signed a security agreement that provides a description of the collateral.” The buyer is the debtor, so the buyer’s location decides which state’s filing rules apply. Under Minn. Stat. § 336.9-301, “while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection.” Under Minn. Stat. § 336.9-307, subsection (e), “A registered organization that is organized under the law of a state is located in that state,” and under subsection (b)(1), “A debtor who is an individual is located at the individual’s principal residence.” Subsection (c) limits that rule: subsection (b) “applies only if a debtor’s residence, place of business, or chief executive office, as applicable, is located in a jurisdiction whose law generally requires information concerning the existence of a nonpossessory security interest to be made generally available in a filing, recording, or registration system as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral,” and “If subsection (b) does not apply, the debtor is located in the District of Columbia.” I suggest checking the filing rules of the place where the buyer is located when that place is outside Minnesota.

Tax can change what the seller keeps. For an individual inventor, 26 U.S.C. § 1235(a) provides that “A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are” periodic or “contingent on the productivity, use, or disposition of the property transferred.” A holder is “any individual whose efforts created such property,” or certain individuals who paid the creator before the invention was actually reduced to practice and who are neither the creator’s employer nor related to the creator. Subsection (c) excludes transfers between related persons, applying the related-person rules of sections 267(b) and 707(b) with “the phrase ‘25 percent or more’ shall be substituted for the phrase ‘more than 50 percent’ each place it appears in section 267(b) or 707(b).” Under 26 C.F.R. § 1.1235-2(b)(1), “The term all substantial rights to a patent does not include a grant of rights to a patent” that is “limited geographically within the country of issuance,” among other limits that paragraph lists. A corporation that owns the patent is not a holder. Under 26 C.F.R. § 1.1235-2(d)(2), “Although a partnership cannot be a holder, each member of a partnership who is an individual may qualify as a holder as to his share of a patent owned by the partnership,” and under 26 C.F.R. § 301.7701-3(b)(1), “unless the entity elects otherwise, a domestic eligible entity is” a partnership “if it has two or more members,” which is the default for a Minnesota LLC with two or more members. I suggest settling the tax treatment of the payment structure before the price terms are agreed, because the structure can change the after-tax result, and checking the current text of § 1235 before relying on it.

How Does a Buyer Confirm That You Own the Patent?

A buyer confirms ownership by tracing a written assignment from each inventor to the seller, because under § 261 patents “shall be assignable in law by an instrument in writing.” A missing link, such as an employee inventor who never signed an assignment, is easier to fix before negotiations than during the buyer’s diligence.

The chain starts with the inventors named on the patent. Each transfer from an inventor to a company, and from one owner to the next, should be a signed writing under § 261. The buyer can also search the assignment records of the U.S. Patent and Trademark Office (USPTO). Those records show what was recorded, not whether it was effective. Under 37 C.F.R. § 3.54, recording a document “is not a determination by the Office of the validity of the document or the effect that document has on the title to an application, a patent, or a registration.”

For a Minnesota company whose employees invented the patent, the employee agreements are part of the chain. Under Minn. Stat. § 181.78 subd. 1, an employee invention-assignment provision “shall not apply to an invention for which no equipment, supplies, facility or trade secret information of the employer was used and which was developed entirely on the employee’s own time, and (1) which does not relate (a) directly to the business of the employer or (b) to the employer’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the employee for the employer.” Under subdivision 3, an employer using such a provision “must also, at the time the agreement is made, provide a written notification to the employee” describing that exception. A buyer may ask for both the agreement and the notice. More on these agreements appears in employee invention rights in Minnesota.

The wording of the employee agreement also matters. “In most circumstances, an inventor must expressly grant his rights in an invention to his employer if the employer is to obtain those rights,” the Supreme Court said in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 563 U.S. 776 (2011). In FilmTec Corp. v. Allied-Signal Inc., 939 F.2d 1568 (Fed. Cir. 1991), the court said of a contract that “did not merely obligate MRI to grant future rights, but expressly granted to the Government MRI’s rights in any future invention” that “Ordinarily, no further act would be required once an invention came into being; the transfer of title would occur by operation of law.” I suggest a signed assignment of the patent itself from each employee inventor whose agreement only promises to assign.

I suggest gathering the signed inventor assignments, the employee agreements, and a printout of the USPTO assignment record before the first serious buyer conversation, because a gap found early can be cured with a confirmatory assignment while the inventor is still cooperative. If an employee inventor hesitates, see what happens when an employee inventor refuses to sign.

How Do Liens and Co-Owners Affect a Patent Sale?

A lender’s security interest in the patent survives the sale unless the lender authorizes the sale free of it or another provision of Minnesota’s Uniform Commercial Code provides otherwise, and a co-owner who does not join the sale keeps the right to use the invention. Both reduce what a buyer receives, so both are worth clearing before the buyer finds them.

On liens, Minn. Stat. § 336.9-315, subsection (a)(1), provides that, “Except as otherwise provided in this article and in section 336.2-403(2),” “a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien.” A business loan secured by all of a company’s assets can reach the patent if the patent falls within the collateral the loan documents describe. For a Minnesota company, the search starts with Minnesota’s filing records:

• Under Minn. Stat. § 336.9-301, “while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection.”
• Under Minn. Stat. § 336.9-307, subsection (e), “A registered organization that is organized under the law of a state is located in that state.”
• Under Minn. Stat. § 336.9-501, subsection (a)(2), a financing statement for this kind of collateral is filed in “the central filing system operated by the office of the secretary of state, in all other cases.”

I suggest asking your lender for its written consent to the sale free of its security interest well before closing, because, except as the Uniform Commercial Code otherwise provides, without that authorization the security interest continues in the patent the buyer is paying for.

On co-owners, 35 U.S.C. § 262 provides: “In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners.” Unless the owners agreed otherwise, an owner who keeps its share can keep practicing the invention after the sale, so a buyer that wants exclusive rights needs each owner’s assignment. The owners’ own arrangements are covered in jointly owned patents.

Licenses you have already granted belong on the same list. I suggest disclosing each one with its terms, because the buyer is paying for the exclusivity that remains after those licenses.

How Do You Protect Confidential Information During Negotiations?

Technical information that the patent does not disclose stays protected as a trade secret only if the owner keeps making reasonable efforts to keep it secret, under both Minnesota and federal law. A signed confidentiality agreement before technical disclosure, followed by disclosure in stages, is how a seller shows those efforts during a sale.

The issued patent is public, but the know-how around it may not be: manufacturing methods, test data, unpublished improvements, and customer information. Two statutes protect that information, and both require secrecy efforts:

• Minnesota. Under the Minnesota Uniform Trade Secrets Act (MUTSA), Minn. Stat. § 325C.01 subd. 5, a trade secret must be information that “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
• Federal. Under the Defend Trade Secrets Act (DTSA), 18 U.S.C. § 1839(3), information qualifies only if “the owner thereof has taken reasonable measures to keep such information secret.” Under 18 U.S.C. § 1836(b)(1), an owner may sue “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”

I suggest disclosing in three stages: the public patent record first, then business information such as sales of covered products, and know-how only after the buyer has signed a confidentiality agreement and the price terms are close. Each stage gives the buyer what it needs for the next decision without handing over information a buyer who walks away could use. How trade secrets and patents fit together is covered in trade secret and patent protection.

When Does a Letter of Intent Bind the Parties?

Under Minnesota case law, a letter of intent that clearly disclaims binding effect does not create a contract, and the disclaimer can reach promises inside the letter, including an exclusivity promise in the same paragraph. Terms you want enforced before the purchase agreement, such as confidentiality or exclusivity, should be stated as binding in their own section, outside the disclaimer.

In Hansen v. Phillips Beverage Co., 487 N.W.2d 925 (Minn. Ct. App. 1992), the parties signed a letter of intent for the sale of a business’s assets. Its “Non-Binding Offer” paragraph said the letter would not be a binding legal agreement until a definitive purchase agreement was signed, and the same paragraph said the parties would stop negotiating with other buyers. The buyers sued after the seller declared the letter void. The court affirmed summary judgment for the seller: “No contract exists in this case where the parties have, by their letter of intent, clearly indicated an intent not to be bound.” On the exclusivity sentence, the court held that “This paragraph applies to the entire document and no separate contract rights arise based upon a separate sentence contained in the same paragraph as the clear disclaimer.” The court noted that the buyers had not argued promissory estoppel, and it did not reject that theory on those facts.

For a patent sale, I suggest a letter of intent with two parts. The first part states the business terms (the patents, the price, the payment structure, and the diligence timetable) and says they are not binding. The second part, labeled binding, covers confidentiality, any exclusivity period and its end date, and who pays its own costs. A seller asked for a long exclusivity period can ask for a fee if the buyer walks away; breakup fees in a letter of intent explains how those terms work.

What Approvals Does a Minnesota Company Need to Sell Its Patent?

If the patent is all or substantially all of a Minnesota corporation’s assets and the sale is outside the usual course of its business, the shareholders must approve it unless the corporation retains a significant continuing business activity, and dissenters’ rights can apply. A Minnesota LLC’s default rules require the consent of all members for a sale of all or substantially all of its property outside the ordinary course and, in a member-managed or manager-managed LLC, for any act outside the ordinary course, unless the operating agreement provides otherwise.

For a corporation, Minn. Stat. § 302A.661 subd. 2 covers a corporation that “may sell, lease, transfer, or otherwise dispose of all or substantially all of its property and assets, including its good will, not in the usual and regular course of its business.” That sale requires board approval and approval “at a regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the voting power of the shares entitled to vote.” Written notice of the meeting must go to all shareholders, “whether or not they are entitled to vote at the meeting,” and must state that a purpose of the meeting is to consider the sale. Under Minn. Stat. § 302A.441 subd. 1, “An action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting by written action signed, or consented to by authenticated electronic communication, by all of the shareholders entitled to vote on that action.” Two limits matter:

• Continuing business. “Shareholder approval is not required under paragraph (a) if, following the sale, lease, transfer, or other disposition of its property and assets, the corporation retains a significant continuing business activity.” Subdivision 2(b) sets a numeric safe harbor for that test, and I suggest applying it to the company’s own financial statements.
• Usual course. Under subdivision 1, the board alone may “sell, lease, transfer, or otherwise dispose of all or substantially all of its property and assets in the usual and regular course of its business.”

When a vote is required, Minn. Stat. § 302A.471 subd. 1 gives a shareholder the right to “dissent from, and obtain payment for the fair value of the shareholder’s shares” when the corporation makes “a sale, lease, transfer, or other disposition of property and assets of the corporation that requires shareholder approval under section 302A.661, subdivision 2,” subject to the exceptions listed in that clause. If the corporation calls a shareholder meeting to vote on the sale, under Minn. Stat. § 302A.473 subd. 2, “the notice of the meeting shall inform each shareholder of the right to dissent and shall include a copy of section 302A.471 and this section and a brief description of the procedure to be followed under these sections.” When the corporation holds that meeting, under subdivision 3 a shareholder who is entitled to dissent and wishes to exercise dissenters’ rights “must file with the corporation before the vote on the proposed action a written notice of intent to demand the fair value of the shares owned by the shareholder and must not vote the shares in favor of the proposed action.”

After approval, under subdivision 4 the corporation “shall send” the shareholders that subdivision lists a notice of the procedure, and “In order to receive the fair value of the shares, a dissenting shareholder must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice required by paragraph (a) was given.” I suggest reading the current text of § 302A.473 before the meeting, because later subdivisions set further steps.

For an LLC, Minn. Stat. § 322C.0407 sets the defaults by management type:

1. Member-managed. Under subdivision 2, “An act outside the ordinary course of the activities of the company may be undertaken only with the consent of all members.”
2. Manager-managed. Under subdivision 3, the consent of all members is required to “sell, lease, exchange, or otherwise dispose of all, or substantially all, of the company’s property, with or without the good will, outside the ordinary course of the company’s activities,” and to “undertake any other act outside the ordinary course of the company’s activities.”
3. Board-managed. Subdivision 4 requires the consent of all members for the same kind of sale, “provided that member consent is not required for” certain transactions it lists, such as granting a security interest.

These are default rules. Under Minn. Stat. § 322C.0110 subd. 2, “To the extent the operating agreement does not otherwise provide for a matter described in subdivision 1, this chapter governs the matter.” I suggest reading the operating agreement or bylaws, and any shareholder agreement, before signing a letter of intent, because a buyer may ask for proof of approval at closing. The broader rules for selling company assets apply alongside these.

What Should the Purchase Agreement and Closing Cover?

The purchase agreement should state what is sold, the price and its security, the promises each side makes, who keeps claims for past infringement, and who pays the next fees that keep the patent in force. Closing then delivers a written assignment, acknowledged before a notary, that the buyer records with the USPTO.

I suggest a seller promise facts it controls: that it owns the patent, has disclosed each license and lien, and has disclosed any challenge it knows about. A promise that the patent is valid is different, because validity can turn on earlier publications and products the seller has never seen. How these promises and their limits work in a sale of assets is covered in representations and warranties.

At closing, the assignment itself carries the transfer. Under § 261, a certificate of acknowledgment before an authorized officer “shall be prima facie evidence of the execution of an assignment, grant or conveyance of a patent or application for patent,” so I suggest having the seller’s signature notarized. The drafting points are covered in drafting the patent assignment.

Recording protects the buyer against a later sale by the seller. Under § 261, “An interest that constitutes an assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.” I suggest checking the current text of § 261 and recording promptly. Under 37 C.F.R. § 3.11, subsection (a), the USPTO records assignments of patents that are “accompanied by completed cover sheets” in the form its rules require. The timing questions are covered in recording an assignment with the USPTO.

Fee status also changes with the sale. Small entity status reduces USPTO fees. Under 37 C.F.R. § 1.27, subsection (a), a small business concern qualifies only if it has “not assigned, granted, conveyed, or licensed” and is not obligated “under contract or law to assign, grant, convey, or license, any rights in the invention to any person, concern, or organization which would not qualify for small entity status as a person, small business concern, or nonprofit organization.” Individual inventors face a parallel condition in the same subsection. Under 37 C.F.R. § 1.27(g)(2), notice of the loss of that status “must be filed in the application or patent prior to paying, or at the time of paying, the earliest of the issue fee or any maintenance fee due after the date on which status as a small entity as defined in paragraph (a) of this section is no longer appropriate.” Under the same paragraph, “Payment of a fee in other than the small entity amount is not sufficient notification that small entity status is no longer appropriate.” I suggest the agreement say who pays the next maintenance fee and at which rate, because a signed agreement to assign to a larger buyer can end small entity status before closing.

Next Steps Before You Negotiate a Patent Sale

A patent seller who settles the hard points before the first price discussion negotiates from a stronger position. I suggest answering five questions first. Which patents, foreign counterparts, know-how, and past-infringement claims are in the sale? Does a signed writing connect each inventor to the current owner? Does any lender, co-owner, or licensee hold rights that reduce what the buyer receives? How will deferred payments be secured, and what does the structure mean for tax? Which shareholders, members, or managers must approve the sale?

If you would like me to analyze a letter of intent or purchase agreement for a patent sale and tell you which terms to change before you sign, email [email protected] with a brief description and any drafts.