A non-practicing entity (“NPE”) or patent troll, as it is sometimes pejoratively called, is an entity which enforces patent rights against alleged infringers in an attempt to collect licensing fees, but which does not manufacture products or supply services on the back of these patents. They frequently take out or buy generalised patents – often on widely available technology – and then demand money from companies who use or offer it. This “legalised extortion,” as some call it, also means that companies are spending more time and money defending themselves against these infringement lawsuits rather than using those resources for R&D and innovation.
NPEs operate much like any other company that is protecting and exploiting a patent portfolio, however their focus is on obtaining additional money from existing uses, not from seeking out new applications for the technology. They monitor the market for possibly infringing technologies and review published patent applications for signs that another company is developing infringing technology. NPEs often pursue vulnerable companies which have little money to defend themselves, hoping that an early victory or settlement will establish a precedent to encourage other companies to agree to licences. As patent litigation can often be prohibitively expensive, many companies are ultimately forced to settle.
Because they do not sell products or services (other than the licensing of their patents), NPEs generally do not infringe on the patent rights contained in others’ patent portfolios. Consequently, they are invulnerable to the threat of counter-assertion, which is otherwise one of the most important defensive measures in patent disputes. Though not all NPEs exist solely to pursue aggressive licensing strategies, the number of NPEs has grown steadily, with calls for patent reformation particularly loud in the United States.
Patent trolls are generally viewed in a negative light due to their negotiating position in respect of licensing fees, which tend to be grossly out of alignment with their contribution to the alleged infringer’s product or service, even in light of the possible weakness of their patent claims. They are also notable for their purported abuse of the patent system via frivolous lawsuits, as they are filed in order to extort money out of companies rather than protect their own market position. Conversely, there are those who believe that the ability to buy, sell and license patents makes the ownership of patents more liquid, thereby creating incentives to innovate and patent.
If you have an NPE problem, or want to know what you can do to avoid one, feel free to give us a call.
Photo credit: Tom Woodward