Non-Practicing Entities

Definition

• A non-practicing entity (NPE) is an entity that holds patents but does not manufacture the patented invention or provide the patented service
• SPECTRUM OF NPEs: LEGITIMATE NPEs: individual inventors
• Universities and research institutions (MIT; Stanford; Caltech)
• Small R&D companies that develop and license technology
• Companies in a different stage of commercialization (holding patents before building products)
• PAEs (PATENT ASSERTION ENTITIES): sometimes called 'patent trolls' in the pejorative
• Entities that acquire patents primarily (or solely) to assert them against operating companies for licensing revenue
• Often have no product development history
• Acquire patents on the secondary market at low cost
• Send demand letters and file lawsuits against many companies in a technology space

Critics

• PAEs do not contribute to innovation
• The patents they assert often have questionable validity
• Demand letters target companies that will settle rather than litigate (even if they have valid defenses)
• Litigation asymmetry — NPE has nothing to lose
• Defendants bear all product and reputation risk
• Divert innovation dollars to legal fees

Defenders

• Patent rights should be enforceable by anyone who holds them regardless of whether they manufacture
• Some NPEs enable inventors to monetize inventions without the capital for commercialization
• University licensing programs (important for technology transfer) are technically NPEs
• The system SHOULD allow anyone to enforce a valid patent

Statistics

• NPEs represent the majority of US patent litigation by raw case count
• Many NPE suits settle pre-trial for nuisance value ($50,000-$500,000) regardless of merits
• Companies that defend NPE suits rather than settle often prevail — but at high cost.

Pre-tc Heartland

• NPEs filed the vast majority of their suits in plaintiff-friendly venues — particularly the Eastern District of Texas (high jury awards; fast trials; plaintiff-favorable local rules; minimal summary judgment practice)
• 44% of ALL US patent cases were filed in E.D. Texas in 2015

Tc Heartland Holding

• 28 U.S.C. § 1400(b) requires patent cases to be filed where the defendant is 'incorporated' or has a 'regular and established place of business'
• Defendants cannot be sued simply because they sell products in the district
• IMPACT ON NPEs: NPEs can no longer automatically file in E.D. Texas against any company that sells products there
• Tech defendants now typically must be sued in Delaware (state of incorporation) or in their home district (California; Washington; New York)
• The elimination of the Eastern District of Texas as a universal venue is one of the largest structural changes to NPE litigation in decades.

Track 1 — Invalidity Challenges

• IPR PETITION (most powerful tool): file within one year of service of complaint
• Institute IPR and stay the district court litigation
• ~40-50% of reviewed claims are canceled
• NPE has no product to cross-assert
• FTO analysis shows the patent is weak → leverage for early settlement
• EX PARTE REEXAMINATION (if IPR time bar passed): no estoppel
• Anonymous filing
• Cheaper than IPR

Cbmr (Covered Business Method Review)

• Available for financial services business method patents
• Broader § 101 grounds available (until 2020 sunset, now largely unavailable)

Track 2 — Non-infringement Analysis

• Do a rigorous claim chart analysis BEFORE settlement
• Many NPE demand letters are template-based with shallow analysis
• Often the accused product does not actually meet all claim elements under proper claim construction
• If non-infringement is clear, litigation becomes viable

Track 3 — Fee-shifting (Octane Fitness)

• Octane Fitness v. Icon Health (S.Ct. 2014): a district court can award attorney fees (35 U.S.C. § 285) in 'exceptional cases'
• The standard is lower than previously required (no need to show objectively baseless and subjectively bad faith separately)
• Courts have exercised § 285 discretion in NPE cases where: the patent was clearly invalid
• The demand was unreasonably broad
• Litigation conduct was abusive
• Fee-shifting risk changes NPE settlement calculus — especially for small NPEs

Track 4 — Venue Challenges

• Post-TC Heartland, challenge improper venue immediately via motion to dismiss or transfer
• Many NPE filings are in courts where defendants can seek transfer to more favorable venues

Track 5 — Coalition Defense

• LOT Network
• Open Invention Network
• Unified Patents
• Defensive aggregators acquire high-risk patents before NPEs do
• Consider joining before receiving demands

How it Works

• If Company A (LOT member) sells a patent to an NPE, all other LOT members automatically get a license to that patent
• The NPE CANNOT assert the patent against LOT members

Membership

• 3,000+ companies including Google
• Microsoft
• Ford
• Amazon
• Uber
• Many tech companies

Focus

• Linux/open-source software ecosystem
• Companies join and cross-license Linux System patents
• Reduces NPE risk for open-source implementations

Unified Patents

• Acquires and challenges patents in high-NPE-activity technology areas
• Files IPR petitions on behalf of members
• Membership provides cost-effective NPE defense for SMEs

Rpx Corporation

• Defensive patent aggregator
• Acquires patents that are likely to be asserted against its members
• Acts as a 'patent shield'

Patent Monitoring Tools

• Derwent Innovation
• PatSnap
• AcclaimIP: monitor new patent filings, assignments to known NPEs, and IPR petition activity
• Can identify potential NPE threats before demand letters arrive

Defensive Publication

• For innovations that are difficult or not worthwhile to patent but should not be owned by NPEs: publish in technical journals
• Submit to IP.com or Defensive Patent License database
• Creates prior art that prevents others from obtaining patents on the technology

Building a Defensive Patent Portfolio

• Strong patent portfolios deter NPEs (cross-assertion creates mutual assured destruction)
• Acquire patents in core technology areas
• Join cross-licensing networks.

Preserve Litigation Hold

• Issue a litigation hold for all relevant documents immediately
• NPE may file suit
• Evidence preservation is mandatory from the moment you receive notice of potential litigation

Confirm Receipt and Deadline

• Check if the letter sets a response deadline
• Most do — NPEs use short deadlines to pressure quick settlements

Engage Patent Counsel

• Retain patent litigation counsel immediately (even if only for advice)
• EVALUATION PHASE (2-6 weeks):

Patent Analysis

• Obtain the patent(s) identified
• Review the claims
• Conduct claims construction for accused products
• Identify the prior art (file date; earliest priority date; what was known before?)

Product Analysis

• Build claim charts comparing the patent claims to your product
• Is every claim element present? INVALIDITY SEARCH: prior art search for the asserted claims
• What does IPR potential look like? BUSINESS ANALYSIS: how significant is the product at issue? what is the settlement value vs. litigation cost? DECISION FRAMEWORK: SETTLE (nuisance value) WHEN: settlement cost < defense cost
• Product is tangential
• NPE has a credible claim

Defend When

• Patent is clearly invalid or not infringed
• Significant product at stake
• NPE has a history of meritless assertions
• Fee-shifting may be available

Response Strategy

• If defending: do NOT ignore demand letters — laches may be limited post-SCA Hygiene (S.Ct. 2017), but unexplained silence can have other adverse consequences
• Consider a noninfringement and invalidity letter if your analysis is strong

Counteroffer

• If settlement is desired, analyze comparable licenses (Georgia-Pacific factors)
• NPEs often accept significantly lower amounts than demanded when the defendant credibly threatens IPR and demonstrates non-infringement.