Understanding Non-practicing Patent Entities & Their Impacts

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Love them or hate them, but you cannot ignore the bearing Non-Practicing Entities (NPE) have over the patent landscape. Considered an unwanted nuisance by many, NPEs certainly made it hard for operating companies to carry their business in peace. By the 2nd quarter of 2022, NPEs were responsible for almost 73% of all patent litigation. Below we elaborate on NPEs and the issue they pose to a robust patent ecosystem.  

Table of Contents

What are Non-Performing Entities?  

Any person or business with patent rights that does not practice the invention is labeled an NPE. They do not use, license, sell, manufacture, or conduct any commercial activity that embodies their patented technology. For this reason, they are also referred to as patent assertion entities and patent trolls. IT and electronics are two fields where NPE litigation is rampant, while pharmaceuticals are rarely targeted

Types of NPEs 

  1. R&D based 
    Universities and research institutions that treat inventions as academic pursuits come under this category. Their aim is only to fuel technological innovation. 
  2. Offensive Patent Aggregators (OPA) 
    Such entities use patents as a means to earn revenue by threatening infringement. They usually charge a ‘nuisance amount’ to settle the matter. 
  3. Defensive Patent Aggregators (DPA) 
    It may be a patent owner who earns revenue by licensing their invention or entities that purchase threatening patents and then licenses them to safeguard members against patent trolls. 
  4. Patent Service Management Company 
    These are intermediary firms that investigate, patents and help NEPs and performing entities reconcile.  

The Role of OPA & DPA 

Offensive Patent Aggregators (OPA) acquire patents and seek to monetize them by licensing or through enforcement litigation. It can be a strategy employed by practicing entities, research institutes, or single inventors to earn revenue through licensing and strengthen their IP asset management. These NPEs conduct extensive research into patent infringements and are experts at license negotiations and litigation. They can also be referred to as enforcers who are instrumental in raising the cost of patent infringements as well as demand for patent rights. For inventors or manufacturers that do not wish to engage in commercial activity, OPAs can offer a lucrative exit. They thus help boost competition within IP markets.  

The DPA strategy relies on creating third-party patent pools by buying patent rights on behalf of their members/investors. They buy ‘dangerous’ patents that may be a potentially critical invention or technology and then license it to members. These members pay a regular fee to avert the chances of litigation from these patent owners.  

Controversy Surrounding NPEs   

NPEs have earned notoriety due to their deemed role as ‘extortionists’. They have been under scrutiny in recent years for abusing their role in the patent system. By aggressively asserting patent rights and threatening litigation, they force infringers to pay. To avoid the expensive cost and burden of litigation, infringers are left with no choice but to give in. 

Since they do not produce or sell the product based on an invention and are immune to liability, unfair trade practices, etc. They cannot be considered true competitors. Instead, they are famous for settling lawsuits outside of court so they can receive quick compensation from actual manufacturers. 

Given that they are not affected by an infringement claim or a counterclaim NPEs can wield their power without any responsibility. The defendant cannot seek any injunctive relief against them. They are also known to buy patents at extremely paltry sums and not share the huge settlement amount with the actual inventors. 

Countering NPEs    

NPEs usually operate by bombarding the target with multiple claim violations. Most often they provide skimpy information so that the defender is unable to prepare for the legal assault. They embroil the infringer in a direct legal battle rather than first approaching them to work out a settlement.  

You may consider the following recourse when dealing with NPEs: 

  1. Assess the need for further action 
    A lot of times NPEs simultaneously target multiple businesses and send out random claims without proper investigation. If you receive a claim from an NPE the best thing to do is to consult an outside patent attorney to evaluate your level of exposure. If you feel there has been no infringement and licensing was not required, then the best step to take is to not respond to the NPE. But it must be borne in mind that if at a later stage you are indeed found guilty of patent violation then you will have to pay thrice the amount of compensation for acting recklessly.  
  2. Scrutinize Supplier Indemnity Clauses 
    If the infringement claims can be traced to a supplier who is legally obligated to indemnify the business against such claims, then you are absolved of responsibility. Instead, the supplier must handle the defense in these cases. Once the indemnity clause has been clarified by your counsel consider whether you seek a settlement with the NPE or would prefer to pass the case to the supplier to defend.  
  3. Seek Clarification From The NPE 
    The information provided by NPEs is usually insufficient to establish infringement. Consult with your attorney and submit questions to the NPE that require them to clearly answer how their patent was infringed.  
  4. Consider Settlement 
    Sometimes the infringement claim may hold weight, and, in such situations, it is best to evaluate a settlement option to avert the nuisance value posed by the lawsuit. The focus in such cases should be on finding leverage that will help you significantly reduce the settlement amount. 

Conclusion

The debate on the role of NPEs in the patent system still continues with some lauding their positive effects as others criticize their trolling strategies. As the threat of NPEs grows, it is best for businesses to take precautionary measures and be prepared with a strategy to counter the potential risks.  

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