The term Non Practising Entities or NPE is used for individual inventors, universities, both small and large patent aggregators who did not commercialize their patents and their primary purpose is to enforce their patents through licenses or litigation. Primarily the term NPE is used for individual inventors and universities who did practise or commercialize their inventions on their own. NPE’s are also termed as ‘patent troll’ who’s one and only purpose is to grab patents and use them against companies which manufacture similar products. Patent troll is a negative and controversial term. Primary functions of the non practising entities are as follows:
- A non-practising entity (NPE) hold’s the patents but do not manufacture products based on patents;
- Buys patent portfolio from one company in order to sue another company by claiming that one of its patent is being infringed;
- Enforces patent rights through licenses or litigation for individual inventors who do not use patented inventions;
- NPEs sole agenda is to enforce patent rights with using those patents themselves.
NPEs vs. Practicing Entities
Both practicing and non practising entities hold the patent ownership however only the practising entities actually makes, uses or sells a product for which patent is granted. On the other hand nonpracticing entities generally acquires patents with a primary purpose of robustly enforcing those patents against practising entities. Generally practising entities acquires patents through their own research and development but in contrast non practising entities acquire patents from other inventors or companies who are not using the same. The primary purpose of the practising entities is to commercialize products based on the patents and in case someone else infringes their
RECENT TRENDS: New Entities in the NPE System
NPEs have been emerging as a prominent feature in the developed countries IP landscape since last many years. NPE’s have increasingly become the source of curiosity for manufacturing companies. Now NPEs are playing a challenging role which is more intricate and refined than the redundant role of Patent troll. In recent years, entities acting as “brokers” or “clearinghouses” for IP and have boosted the span of secondary markets in IP. NPEs generally do not have or retain patent ownership which they handle and sustain by charging commission in the transactions. These Firms are actually turning very complex concepts like patents and patent litigation into a commodity which can be freely bought and sold in the market by increasing the liquidity and reducing the transaction cost for potential buyers. For example a company Ocean Tomo, a clearinghouse has earned huge attention for high-profile patent auctions over the last few years. Ocean Tomo characterizes himself as a “merchant bank,” and also involved in financing sales and licensing patent rights.1
Another term used for these entities is “patent aggregator”. These patent aggregators business is to obtain large number of patent rights, either for defensive purposes or for earning licensing revenue or both. Patent aggregators typically do not practise the patent or IP assets they acquire and hold, rather they prefer to license the same. Now a days the aggregators are offering defensive licenses which eliminate the threat of being sued on those patents. One well known patent aggregator who provides defensive licenses in consumer electronics, media and software is RPX. If was founded in 2008 and has acquired 1500 US and international patents since then.2
Controversy behind Non-Practising Entities
Business model of NPEs was criticised by the industry. The main argument of the critics was that NPEs could misuse the patent system to an extent that could at last spoil the incentives to innovate by “true” innovators that really make goods and offer services. Other reasons for opposition of NPC’s are
- NPEs do not fear of liability, counterclaim or unfair trade practises unlike their competitors who make and sell products. Thus NPEs do not behave like true business competitors.
- Settlements in law suit instituted by NPEs are very common which results in money spinning. It is believed that 9 out of 10 suits instituted by NPEs end in a settlement.
- NPEs due to their business model always remain well positioned to extract huge money by settlements from alleged infringers. Also the alleged infringes due to high cost and risk involved in the infringement suits always remain inclined towards settlement.
- NPEs diminish competition in the market as they do not use the invention and increase prices while companies with a product or services are charged through litigation for their contribution. The volatility of patent infringement litigation and the defence of lawsuits is moving money away from true inventors and the development of new products.
- NPEs are immune to infringement claim or counter claim hence defendants cannot counter that the plaintiff is infringing his patents and get injunctive relief as a defensive means for hindering business operations.
- NPEs are generally not engaged in promoting innovation and new products in the market as they don’t create patent, they simply buys the same and protect the same for others.
- Individual inventors or SMEs who sells their patents to NPEs are paid with very small amount while NPEs earn huge amount of settlement or licensing.
Negative impact of NPEs
At present NPEs account for half of the patent lawsuits in Unites States. However the success rate of the suits bought by NPEs is very low i.e. around 8 per cent where a suit brought by real competitor’s success rate is around 40 per cent. The major reason behind this is settlements by the defendants with the NPEs as they cannot afford the huge cost of litigation and damages if they lost the suit. It was observed that in a lawsuit brought by the NPEs the median decline in common stock value of a defendant is USD 20.4 billion.
The above problem is best illustrated in a recent case NTP, Inc. v. Research in Motion, Ltd. (RIM) Wherein NTP instituted a patent infringement suit against the RIM which resulted in a settlement for USD 612.5 million. However in this case the trial court has just awarded damages for USD 50 million and also casted doubts on the validity of some of the NTPs patents. Further the USPTO also review the questionable patents of the NTP and has invalidated some of its patents . But before the final determination of the case and the validity of the NTP’s patents both RIM and NTP settled their dispute by settlement. The settlement done by RIM is viewed as a result of pressure from investors and costumers who was worried about RIM’s ability to continue with the wireless services. This case is best example of influence of NPEs in the industry, where the same was able to obtain a very profitable settlement even though valuation of the suit much lower and validity of the infringed patents is also in question.
Non practising entities are performing valuable functions of facilitating markets for technologies which left unnoticed because of lack of resources and expertise of the inventors to successfully license or enforce their patents. NPEs can be termed as departmental stores for patents, offering one stop shopping for purchasing and licensing of patents. Further they also help individual inventors to generate revenue out of their inventions despite not having resources to work and commercialize their patents. It is beyond doubt that an efficient patent system also needs intermediaries who can reduce the transaction costs between the inventors and those who manufacture and commercial them. NPEs are market architects who take unused or under used assets and build value and add liquidity to the market through legitimate monetization efforts. However in order to check the negative impact of NPEs, rules and regulations to guide the activities of the NPEs should be created. Till date no guideline or statute is prescribed by any country for regulating business of NPEs.