UK: The Non-Practising Entity – To Be Or Not To Be?

The Non-Practising Entity

At the recent IP Business Congress in Portugal, IPBC2012, there was an apparent sea change in attitude towards the role of the non-practising entity – a subject that was widely discussed.

A non-practising entity (NPE) is an organisation that owns patents but which does not manufacture products based on them. Instead, their income is obtained by licensing their intellectual property – their patent holdings. Some NPEs have been referred to as 'patent trolls' in the literature, although when used in this way the phrase has derogatory overtones and their modus operandi is not necessarily predatory.

There are those who believe that NPEs have a role to play now which is more sophisticated and refined than the outdated role of the troll. The NPE can allow a corporate to license to its competitors in a controlled way. The term non-practising entity also encompasses patent owners that primarily seek to develop and transfer technology, such as universities and semiconductor design houses.

Moreover, the new style of NPE that has emerged from the ashes of a bankrupt company with the prime purpose to deliver returns to creditors, including employee pension funds, has led to a sea change in attitude where NPEs have become legitimised.

Wikipedia tries to strike a balance:-

"A core criticism of patent trolls is that they are in a position to negotiate licensing fees that are grossly out of alignment with their contribution to the alleged infringer's product or service notwithstanding their non-practising status or the possible weakness of their patent claims. The risk of paying high prices for after-the-fact licensing of patents they were not aware of, and the costs for extra vigilance for competing patents that might have been issued, in turn increases the costs and risks of manufacturing."

On the other hand, the ability to buy, sell and license patents is seen by some as generally productive. The Wall Street Journal argued that by creating a secondary market for patents, these activities make the ownership of patents more liquid, thereby creating incentives to innovate and patent. Patent Licencing Entities also argue that aggregating patents in the hands of specialized licensing companies facilitates access to technology by more efficiently organizing ownership of patent rights.

In an interview conducted in 2011, former US federal judge Paul R. Michel regarded "the 'problem' [of non-practising entities, the so-called "patent trolls"] to be greatly exaggerated." Although there are a number of problems with the U.S. patent system, i.e. "most NPE infringement suits are frivolous because the defendant plainly does not infringe or the patent is invalid", "patent infringement suits are very slow and expensive". NPEs may add value to the patents by buying them up when manufacturers decline to do so. Inventors may have benefited from the developing market in patent acquisition."

The Cost of Litigation Caused by NPEs

A recent study from the Boston University School of Law claims that patent litigation caused by NPEs costs US software and hardware companies US$29 billion in 2011. "This figure does not include indirect costs to the defendant's business such as diversion of resources, delays in new products and loss of market share," the researchers said.

The study also looked at the impact of NPE litigation on small/medium-sized and large companies and concluded that much of the burden fell on small and medium-sized companies.

"The burden of all of these costs appears to rebut the assertions that NPEs play an important role in improving the profits of innovative start-ups," the study said. The implication is that more companies, large and small, need to be aware of IP rights that may be asserted against them.

The Impact on IP Strategy

With more pressure on business from NPEs some delegates at IPBC2012, commented that an IP strategy could no longer be that which only related to innovation in their own products. Knowing which companies might litigate against a business was as important as holding a patent portfolio to protect products and processes. Having an arsenal with which to respond to NPEs was to be considered as important as developing a portfolio that reads onto a company's products. Of course not all companies, particularly start ups, are in a position to invest in an arsenal from day one. However, litigation readiness now needs to be on the radar within an IP strategy if longevity is sought.

This discussion looks set to run and run and we will provide updates in future newsletters.

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