The issue of non-practicing entities has been back in the news again recently. During a Google+ hangout last week, President Barack Obama used strong words to respond to a question about so-called "patent trolls":

"The folks that you're talking about ... don't actually produce anything themselves. They're just trying to essentially leverage and hijack somebody else's idea and see if they can extort some money out of them."

The America Invents Act, which introduced a wide range of reforms to the US patent system, did not solve the problem, he said. Part of the reason is that the issue of "trolls" (however that term may be understood), is much more complex than many wish to admit because, in reality, there are at least two types of NPE. At one end of the spectrum, there are holding companies that allow authors and inventors to cash in on their creations when they are most valuable (i.e. when the term of protection has longest to run), while at the other end sit companies set up to acquire the right to sue for IPR infringement and to share in any damages or settlements (a business strategy "innovation" too far, for some).

In claims by the latter type of NPE, which is the one most people dislike, courts are often asked to bring proceedings to an end on one of two mutually exclusive bases. The first is to find that the NPE does not have standing to bring the suit in the first place. The second is to find that the suit itself has no merit. The District Court of Nevada, in Righthaven, LLC v. Hoehn 792 F.Supp.2d [sic] 1138 (2011), held that because the agreement entered into between a copyright owner and the now infamous entity Righthaven did not grant Righthaven any of the exclusive rights enumerated in the Copyright Act, Righthaven had no standing to bring a claim for infringement of the underlying copyright work. The court simply restated existing precedent to hold that "the bare right to sue [is] something that is not transferable" and that, as a matter of substance over form, the disputed agreement's terms "deprive Righthaven of any of the rights normally associated with ownership of an exclusive right necessary to bring a suit for copyright infringement". Courts have now used this interpretation to dismiss a number suits brought by Righthaven.

A similar decision was reached by the Court of Justice of the European Union, the highest court in Europe, in Case C-376/11 Pie Optiek v. Bureau Gevers. In that case, the CJEU held that a trade mark licence must confer on the licensee the right to use a mark "for the purposes falling within the area of [its] exclusive rights ... in particular the essential function of guaranteeing to consumers the origin of the goods or services concerned". Once again, looking at substance over form, the Court held that the agreement at issue could not confer the status of "licensee" since it was "more akin to a contract for services than to a licence agreement".

Tackling NPEs on standing seems to be a more proportionate way of addressing the issues of "trolling" than, say, creating new precedents of "fair use" to cover whatever act has been complained of in the relevant proceedings. These two cases are also an excellent reminder that parties' freedom to contract is not absolute, particularly where their agreements are likely to have an adverse effect on third parties. To that end, the following should be considered every time an IPR is being divided so that different rights can be granted to different parties: before it can be effective, a licence of intellectual property must grant to each licensee at least one of the owner's exclusive rights: an administrative authorisation for one party to act as the other's agent or enforcer is not sufficient.

There is a further observation worth making, if for no other reason than to encourage anyone going through litigation: while legislatures argue about the best way to achieve an objective, judiciaries are showing themselves to be quite capable of using first principles to get there on their own.

Business purchases and group restructurings often involve the complex redistribution of a large number of business-essential IP rights. Our lawyers have extensive experience in the transfer and license back of all manner of IPRs, making sure that they not only work in practice, but that they will be upheld if challenged in litigation.