Concept of Non-Practising Entities in Patent Law (Part-1)

Introduction

Non-practising entities (“NPEs'') are companies whose sole function is to operate as patent collectors. They do not produce anything by themselves. Upon acquiring patents, NPEs profit from licensing them to companies that require them, or by suing other companies for infringing the patents they own. NPEs have no intention to develop (manufacture, use or sell) the product or process patent that they own.

Patent Trolls

One type of NPE is “patent trolls”. Patent trolls accumulate numerous patents to sue individuals and companies they claim have infringed their patents by making unauthorized use of the patents wholly or in part. In the United States, the term “patent assertion entities” is being used by the Federal Trade Commission to refer to patent trolls to indicate their motive as compared to other types of NPEs

Other types of NPEs comprise universities, research institutions and individual inventors that do not possess adequate funding or resources to develop their patents further. How do they benefit from merely being able to hold a patent? NPEs typically profit off of their patents by suing individuals or institutions they claim have infringed their patents, and by transfer or license of the patent rights to third party individuals or institutions, which bestows royalty and other payments. Since NPEs do not commercially employ the patent, it is observed that countersuits are generally not filed against them.

Connoting this type of NPEs by the term “patent troll” has evolved the term to contribute to a large part of the controversy that surrounds it. Since they operate in the patent and commercial marketplace, the patent system itself begets an unpleasant association.

Are NPEs really the bad guys?

The buzz of terms like “patent wars” are a common phenomenon in the technology news sector. The term implies the battle between competing manufacturers of similar technology (say, softwares or smartphones) in which they engage in patent litigation to assert their individual patents. An interesting observation is that many companies that criticize NPEs have also used NPEs as an upper hand, maybe even created their own NPEs to assert their patents.

The advent of NPEs has brought with it a slew of deals that take place outside the spotlight, which often disadvantages companies with a legitimate use for the invention. This forces some companies to raise barriers of protection against NPEs to mitigate future legal action. This practice is ubiquitous among software start-ups, who do not have the funds to indulge in courtroom theatrics with an NPE. Instead, they are forced to pay through the nose for protection, which stagnates their innovation rates since they are left unable to afford their own growth.

Apart from spending money on protection, bigger software firms also squander millions of dollars to equip themselves with “defensive patents” to avoid being sued. The outcome of a multitude of flagrant NPE lawsuits has brought about a considerable change in spending patterns of many companies. Money spent on unnecessary courtroom theatrics appears to be a waste of time as well as money for small software start-ups and large firms alike.

These funds could have been redirected to more productive uses - perhaps to streamline waste disposal systems, to improve growth through investments or to incentivize innovation. The involuntary push towards a litigation-based regime of protection forces down otherwise conceivable goals since most of the company’s energy is spent on survival.

Conclusion

It is important to note here that the NPEs are a fairly American phenomenon. Despite the disturbing connotation that NPEs are surrounded by, it appears that the U. S. patent regulation and enforcement environment seems to be easing up on enforcement mechanisms, which has already led or may lead NPEs in their market to set up shop in countries that have pro-patent enforcement markets, like India.

In conclusion, inadequate attention has been paid to exploit the benefits that NPEs could offer to the patent enforcement landscape, if used in the right manner. These benefits could be anything from specialized monetisation to incentivise innovation, aiding businesses to enforce patents against competitors, reducing transaction costs of licensing and technology transfer and liquidity provision for patents, which enhances start-up investments, ultimately emphasizing the valuability of patents.

References:

Concept of Non-Practising Entities in Patent Law (Part-1)

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