Litigation as a Source of Profit? Non-Practicing Entities and Patent Litigation

Litigation as a Source of Profit? Non-Practicing Entities and Patent Litigation

Michelle Mao is an incoming 2L JD student at Osgoode Hall Law school and an IPilogue Writer.

Litigation is almost always recommended to be avoided, whether because of the sheer amount of time needed to get a court date, the expensive costs for the client and law firm, or the risks associated with receiving an unfavorable judgement. So why do non-practicing entities  (NPEs) act as the exception to the rule? Furthermore, how is litigation a viable option for them to make a profit when litigation seems burdensome for most other types of entities? 

NPEs are a special type of entity that specifically purchases patents or patent rights but does not commodify the patent. There are typically 2 kinds of NPEs: academic institutions and private individuals/companies. The first kind, academic institutions, acquire patents to protect the research work of their faculty and researchers while licensing others to use the results of the research produced without commodifying the patent. The second kind, private parties, often use the patents they acquire for profit through damage or settlement awards, or royalties and licensing rights.

NPEs who acquire patents solely for profit (and not commercialization) are also called “Patent Trolls” or "patent assertion entities.” They earn profit from collecting royalties, licensing transfer patent rights, or resorting to court proceedings to enforce patent rights against infringers. They do not practice, develop, manufacture, or otherwise commercialize the patent. Furthermore, because they do not practice or develop their manufacture, they experience no risk of patent infringement litigation themselves. 

From this description alone, it seems that an NPE’s core business model infringes on the spirit of Intellectual Property law, where innovation is simultaneously protected and encouraged. So why are they still allowed to operate?

Despite the obvious tension between the business models of NPEs and IP law, NPEs can exist for the following two reasons. First, it is legal to profit from acquiring patents. Second, NPEs have a functional role in the corporate world— an inventory for struggling companies to liquidate their patents

Due to the ongoing problem of strategic patent litigation, technology companies have now begun to compromise and accommodate NPEs, even at times utilizing the actions of NPEs to evaluate the strength or profitability of their patents should they choose to develop them. For example, a patent that is rejected by an NPE for purchase may implicitly tell companies that their patent is not strong or not seen to be in line with market trends. This, however, can still permanently shift and alter the values in which patents are developed. Previously, patents were developed due to a new technological innovation or to address a technological need. While profit was still a factor for developers when registering their patents, decisions around profitability were made by technology companies and experts. With the rising market influence of NPEs, the voices of technology companies and experts have diminished. Their unique market expertise and knowledge of consumer demand may be pushed aside in favour of “evaluations” by NPEs, based solely on their self-interested criteria of how profitable a patent is, based on their typical avenues of income: royalties, licensing, and litigation. 

With huge technological strides being made in the tech sector in the present day, the conflict between NPE patent trolls and developers will become increasingly contentious. Moving forward, Canadian government authorities should consider becoming involved in balancing the tensions between NPE patent trolls and technological innovation. Public institutions have a direct interest in fostering technological development and innovation for the betterment of communities and the national economy. Currently, aggressive NPEs who increase the time and difficulty of obtaining a patent solely due to profit are a direct obstacle to that interest.