Key Takeaways:

  • A non practicing entity (NPE) holds patents but does not manufacture or sell products based on them.
  • NPEs can be universities, startups, or individuals seeking to monetize patents through licensing or litigation.
  • The distinction between legitimate NPEs and “patent trolls” is often debated; the term “patent assertion entity” (PAE) is used for entities that primarily litigate.
  • NPEs have been shown to win fewer lawsuits post-2000, especially at trial, although they frequently reach settlements.
  • Defensive strategies against NPEs include early settlement, challenging patent validity, and joining collective defense groups.
  • The impact of NPEs on innovation is controversial; some argue they deter R&D, while others say they offer monetization opportunities for small inventors.

Non-practicing entities are people who hold patents for a product or process without any intention of developing it.

What are Non-Practicing Entities?

If you hold a patent for a process or product but do not plan to develop it, you are a non-practicing entity (NPE). A patent is a license issued by the government that gives you exclusive rights. You get rights to manufacturing, using, or selling the invention for a certain timeframe. The NPE does not provide any of these.

A type of NPE is patent trolls. These trolls gather a large number of patents and plan patent infringements suits. The suits go against individuals and companies that illegally used some of the patent's elements. To differentiate between trolls and NPE, the Federal Trade Commission uses the term patent assertion entities (PAEs) to describe trolls.

Types of Non Practicing Entities

Non practicing entities (NPEs) come in several forms. While some are derided as “patent trolls,” others play legitimate and even valuable roles in the innovation ecosystem. Common types of NPEs include:

  • Universities and Research Institutions: These entities often develop technologies but lack the resources to commercialize them. Instead, they license patents to generate revenue and fund further research.
  • Startups and Individual Inventors: When inventors lack the means to bring a product to market, they may license or sell patents to NPEs for enforcement.
  • Patent Aggregators: These firms acquire patents from various sources and enforce them through litigation or licensing. Their goal is usually to extract settlements from alleged infringers.
  • Patent Assertion Entities (PAEs): A subset of NPEs that focus specifically on enforcing patents through lawsuits rather than innovation or product development.

The legitimacy of an NPE’s activity often depends on its motives and behavior. While some act as stewards of innovation, others may seek only to exploit vague or overly broad patents for profit.

What is a Patent?

A patent doesn't let you use the invention if it's too similar to a previous patent. The patent also has no involvement with a business model or pricing. The government issues a time limit as to how long you can share your invention with the public. This timeframe is typically 20 years starting at the filing date.

A patent system provides incentives to you so that you can put money toward development and research. In exchange, you provide information for exclusivity. Keeping the competition away during that timeframe gives you a chance to get your up-front money back. In addition, you can sell, license, mortgage, transfer, or abandon the patent.

What are Monetizing Innovations?

If you're a single inventor or university researcher, you can opt to manufacture and sell products via your own company. You can also choose to become a licensor of the patent and garner restricted-right status.

Exclusive rights give you a chance to garner capital thanks to licensing. This lets others focus on marketing and manufacturing products. For instance, if you develop pharmaceutical drugs, you can turn around and license them to other companies for commercial sales.

Patent Right Cross-Licensing

On occasion, companies deal with complexities when working with licensing agreements pertaining to one product. As a result, competitors can issue patents to one another through cross-licensing agreements. This lets both parties split the gains obtained by using each other's inventions and reducing the possibility of facing a lawsuit.

Sometimes one party sues the other and the other countersues. Litigation typically involves both parties agreeing via cross-licensing patents and the company with the weaker case pays licensing fees.

Value Proposition for Non-Practicing Entities

When an NPE wants to license rights to others, a value proposition occurs. This refers to rights of an invention regardless of the knowledge on how to conduct the service or operate the product.

Occasionally, the NPE analyzes popular products to find isolated patents and approaches the patent holder to either acquire the patent or obtain a license in order to sue. In some instances, the firms purchase inexpensive patents from technology companies on the brink of bankruptcy with the only reason to sue. Some patent trolls claim they are helping smaller businesses fight against larger companies that have copied their ideas.

Value Proposition or Legal Extortion

Even though it's legal to get income from patent rights, the NPE might encounter difficulty from the producers and sellers. The NPE's patent is often more menacing to those in the industry, especially when compared to a competitor's patent. Sometimes you might encounter businesses that sell NPEs their patents so that the companies are not involved.

As a result, the NPEs hopes that the supposed infringer seeks to pay the money instead of heading to court. However, if the defendant opts to litigate, both sides need to pay costly litigation costs. Successful litigants also must reimburse the court fees, which can cost millions of dollars.

Patent Trolling: How Does it Affect You?

NPEs hoard patents while patent monetization entities (PMEs) usually consist of a law firm that protects patents for NPEs. Some claim that patent trolls interfere with patent protection for those who need it. They tend to lengthen the entire process of obtaining a patent and make the process more expensive for everyone involved.

Patent trolls tend to do one of the following:

  • Secure patents to sue
  • Gather patents and end up not using them
  • Get companies to settle
  • Sue businesses for patent infringement

As a result, most companies settle out of court instead of dealing with lengthy and expensive legal issues.

Impact of Non Practicing Entities on Innovation

The effect of non practicing entities on U.S. innovation is hotly debated:

Arguments That NPEs Harm Innovation:

  • NPE litigation often targets small to mid-sized companies, burdening them with legal costs.
  • Fear of lawsuits may discourage companies from investing in certain technologies.
  • Resources are diverted from R&D to legal defense and compliance.

Arguments That NPEs Support Innovation:

  • NPEs provide monetization opportunities for inventors who lack commercial resources.
  • Universities and small entities can benefit from licensing deals facilitated by NPEs.
  • The threat of enforcement encourages larger companies to respect IP rights.

Ultimately, the impact of a non practicing entity on innovation may depend on its business model, the nature of its patents, and how aggressively it pursues litigation.

Strategies for Responding to NPE Lawsuits

Companies targeted by a non practicing entity should weigh various defensive strategies:

  • Early Settlement: If the costs of litigation outweigh potential licensing fees, some businesses opt to settle quickly.
  • Motion to Dismiss or Summary Judgment: Legal teams can challenge the NPE’s patent validity or infringement claims early in the process.
  • Inter Partes Review (IPR): Petitioning the USPTO to reevaluate a patent’s validity can be a powerful tool to invalidate weak claims.
  • Join Defense Groups: Organizations like the LOT Network or Unified Patents pool resources to deter NPE lawsuits.
  • Public Relations Campaigns: Some companies expose abusive litigation tactics publicly to pressure the NPE or rally industry support.

The best response depends on the NPE’s track record, the strength of its patent, and the defendant’s appetite for litigation risk.

Legal Outcomes and Trends in NPE Litigation

Non practicing entities have historically filed a substantial number of patent lawsuits in the United States. However, litigation trends have evolved. Research from Stanford Law School shows:

  • Pre-2000s: NPEs were often successful, prevailing in roughly 35–40% of patent trials.
  • Post-2000s: Win rates for NPEs have dropped significantly, particularly at trial, where they now win only about 9% of the time.
  • Settlement Rates: Despite low trial success, NPEs still reach favorable settlements in many cases due to the high cost of litigation for defendants.

Courts have also become more skeptical of vague or abstract software patents—often used by NPEs—especially after the Supreme Court’s Alice Corp. v. CLS Bank decision, which made it easier to invalidate such patents on grounds of ineligibility.

Frequently Asked Questions

1. What is a non practicing entity? A non practicing entity (NPE) is an individual or company that holds patents but does not manufacture or sell products based on them. They typically earn revenue through licensing or litigation.

2. Are all non practicing entities considered patent trolls? No. While some NPEs engage in aggressive litigation tactics, others—like universities and research labs—use patents to support innovation and research through licensing.

3. Can non practicing entities win patent lawsuits? While NPEs have lower success rates at trial compared to product-producing companies, they often succeed through settlements due to the high cost of patent litigation.

4. How can companies defend against NPE lawsuits? Defense strategies include early settlement, challenging patent validity, initiating inter partes review, joining collective defense groups, and launching public campaigns.

5. Do non practicing entities hurt or help innovation? It depends. Some argue that NPEs stifle innovation through costly lawsuits, while others believe they provide a necessary mechanism for inventors to monetize their work.

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