NPE Patent Assertion

Non-practicing Entity (NPE)

• Any patent holder that does not manufacture products practicing the patents
• Includes universities
• Individual inventors
• Failed startups
• Hedge funds
• And dedicated licensing companies
• The term is value-neutral — universities are NPEs but are generally not considered trolls

Patent Assertion Entity (PAE)

• An NPE whose primary business is acquiring and asserting patents against operating companies
• PAEs are what critics call 'patent trolls'
• The distinction from legitimate NPEs is the PRIMARY REVENUE SOURCE being litigation/licensing rather than innovation

Patent Troll

• Pejorative term for PAEs
• Some apply it broadly to any NPE that demands licensing fees
• Others apply it only to the most abusive PAE practices

Acquisition

• Buy distressed patent portfolios from bankrupt companies
• Failed startups
• Or individual inventors
• Often at a fraction of assessed value

Aggregation

• Combine patents from multiple sources into thematic portfolios
• Build a claim chart for each target company

Demand Letter Campaign

• Send demand letters to target companies asserting infringement
• Offer to license for $50K-$500K (less than the cost of litigation)
• Many companies pay immediately without investigating validity

Escalation

• If the company does not pay, file suit
• PAE litigation threat is credible because PAEs have no products for counter-assertion

Favorable Jurisdictions

• Historically filed in Eastern District of Texas
• Now Western District of Texas and District of Delaware (post TC Heartland)

Why Demand Letters Work

• Litigation costs $2-10M per case
• Many companies pay the demanded license fee even if the patent is invalid or non-infringed
• Settlement is often cheaper than defense regardless of the merits

No Counter-assertion Leverage

• Operating companies typically settle with other operating companies partly because of mutual patent portfolios (cross-license)
• NPEs have no products so operating company's patents cannot be asserted back.

AIA Inter Partes Review (IPR)

• The America Invents Act (2011) created IPR, which allows anyone to challenge an issued patent at the PTAB
• PAEs typically hold patents of weaker quality (older portfolios; broad claims)
• IPR has been highly effective: PTAB institution rate on PAE-asserted patents was historically higher than for operating company patents
• Approximately 80% of instituted IPR proceedings result in at least one claim being cancelled or amended
• IPR is cheaper than district court ($50-200K vs. $2-10M per side in litigation)
• A PTAB institution decision can pressure NPEs to drop suits or settle cheaply

IPR Timing

• Must file IPR petition within 1 year of being served with a complaint
• VENUE REFORM — TC HEARTLAND (S.Ct. 2017): TC Heartland LLC v. Kraft Foods Group (S.Ct. 2017): patent venue is proper only where: (a) the defendant is incorporated
• OR (b) the defendant has committed acts of infringement AND has a regular and established place of business
• This overturned the broadly permissive pre-2017 rule that allowed NPEs to file anywhere the defendant sold products

Impact

• Eastern District of Texas NPE filings dropped dramatically
• Cases concentrated in Delaware (for nationally incorporated companies) and Western District of Texas (W.D. Tex. has emerged as a major patent venue)

AIA Joinder Limitations

• Before AIA, NPEs could sue 100+ defendants in one case (accusing unrelated companies of infringement in a single suit = efficient extraction)
• AIA § 299 requires true joint parties or related transactions
• NPEs must now file individual suits against each unrelated defendant
• Significantly increases PAE transaction costs
• FEE SHIFTING — OCTANE FITNESS (S.Ct. 2014): Octane Fitness v. ICON Health (S.Ct. 2014): lowered the standard for 'exceptional case' attorney fees under 35 U.S.C. § 285
• Exceptional case = one that 'stands out from others with respect to the substantive strength of a party's litigating position or the manner in which the case was litigated'
• Fee shifting has become a real deterrent for weak PAE assertions
• Highmark (S.Ct. 2014): district court fee decisions reviewed for abuse of discretion (deferential) not de novo.

Preliminary Legal Assessment

• Before responding, assess: patent validity (prior art; § 101; § 112)
• Claim scope (does your product really infringe the claims?)
• Patent ownership (chain of title; standing)
• NPE's litigation track record
• The merits determine which defense strategy makes sense

Early Dismissal — Alice § 101

• For software and business method patents (common in NPE portfolios), file a Rule 12(b)(6) motion to dismiss on § 101 grounds
• Courts grant § 101 motions at the pleading stage relatively frequently for abstract idea patents
• Success on § 101 = case dismissed before discovery
• Cost: $50-200K (cheap compared to full litigation)

Inter Partes Review (IPR)

• If you have strong prior art against key claims, file an IPR petition within 1 year of complaint service
• IPR can cancel claims BEFORE trial
• Settlement leverage increases dramatically with a strong IPR filing
• Joining with other defendants (same patents asserted against multiple companies) = share IPR cost

Invalidity in District Court

• Assert § 102 (novelty)
• § 103 (obviousness)
• § 112 (indefiniteness; written description; enablement) in district court in parallel with IPR

Claim Construction

• Narrow claim construction through Markman briefing can eliminate infringement even if claims survive invalidity
• NPEs often depend on broad functional claim constructions

Non-infringement Arguments

• Element-by-element comparison against actual products
• Especially important for method claims (must perform all steps)

Exceptional Case Fee Motion

• If NPE's position is objectively unreasonable, preserve fee motion
• Document NPE's unreasonable positions throughout litigation
• Motion filed after winning on the merits

Business Decision — Pay or Fight

• For demands < $200K with weak patents, paying may be cheaper
• For threats to core products or high demanded amounts, litigation is often necessary
• Operating company must consider: precedent for future demands (paying once often generates follow-on demands)
• Multiple defendant situations (if others are fighting, piggyback on their IPR).

Bankrupt Companies

• When a startup or technology company fails, its patent portfolio is often sold in bankruptcy proceedings for pennies on the dollar
• PAEs are active buyers at bankruptcy auctions
• Classic example: Nortel Networks bankruptcy (2011) — consortium led by Apple/Microsoft/Sony paid $4.5B for 6,000 patents
• PAEs bid on the same portfolios

Individual Inventors

• Inventors who obtained patents but lacked resources to manufacture or license
• PAEs offer upfront cash (often $5K-$50K per patent) for assignments

Large Company Spinouts

• Some large companies sell non-core patent portfolios to PAEs while obtaining back-licenses
• This monetizes patents while maintaining freedom of operation
• Sometimes structured as NPE 'partnerships'

R&D Companies without Commercialization

• Pure research organizations that patent discoveries but cannot commercialize them
• University TTOs (though universities prefer to license directly)
• WHAT MAKES A PATENT ATTRACTIVE TO PAEs:

Broad Functional Claims

• Claims using generic functional language ('means for processing'; 'a system configured to communicate') that may read on many different implementations
• Large number of potential defendants = high aggregate license value

Patent Watch Program

• Actively monitor PAE patent acquisitions and demand letter campaigns
• PAE portfolios and pending suits are public records
• Knowing which PAEs are active in your technology space enables proactive defense

Lot Network (License on Transfer)

• Patent cross-license community
• Members share licenses when patents transfer to PAEs
• If a PAE acquires a patent from a LOT member, all other LOT members receive a license
• Increasingly large community (Apple; Google; Salesforce; Ford; etc.)

Unified Patents

• Membership organization that funds IPR challenges against PAE-asserted patents in specific technology sectors
• Members pay fees
• Unified Patents' PTAB team proactively challenges PAE patents before they are asserted

Defensive Patent Acquisition

• Buy your own patents in technology areas where PAEs are active
• A patent you own cannot be asserted against you
• Cross-licensing leverage increases

Prior Art Library

• Participate in prior art search databases (Article One; defensive disclosure databases)
• Submit relevant prior art for PAE-asserted patents in your space

Database of Pae Demand Letters

• Track demand letters received by your organization and industry peers
• If PAE sends demand letters to many companies, defendants may coordinate defense

Insurance

• Patent assertion insurance (litigation defense insurance) covers cost of defending patent suits
• Premiums calibrated to company's patent exposure
• Large technology companies often self-insure or use captive insurance structures

Strong IP Portfolio of Your Own

• Own key patents in your technology space
• When a PAE asserts, review whether any of your patents can be asserted in defense (may not work against NPEs with no products but may support a cross-licensing negotiation if the PAE has licensed others with competing patents)