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Defending Against Non-Practicing Entities in Patent Litigation (Part 1)

This will be the first post of several posts regarding patent litigation defense against non-practicing entities.  This post focuses on understanding non-practicing entities and how they work.

In the last decade, the uncertainties in various patent laws (such as reasonable royalties in patent damages) have led to the rise of a new participant in the patent marketplace, the so-called non-practicing entities (NPEs) or patent trolls. NPEs are not originators or users of patents. Instead, they buy patents from inventors, often individuals or small businesses, and wait for others to infringe their patents. They selectively acquire patents (often in computers, electronics, business methods, or software fields) that are likely to lead to successful litigation outcomes and high licensing fees.  Leanly staffed, NPEs employ mostly attorneys and only a few engineers who examine prior art. After identifying a potential infringing use, NPEs file a patent infringement suit against the accused infringer. Because it costs millions of dollars to defend against a patent litigation suit (in part due to uncertain patent damage standards), most infringers are incentivized to settle or agree to a licensing agreement. The lucrative NPE business model is to acquire, detect, sue, license, and profit.

The negative impact of NPEs on patent damage awards has increased considerably in recent years. From 1995 to 2001, the median damages award for NPEs was only about $5 million, which was about the same as for practicing entities. The median award is now $12 million for NPEs, but only $3.4 million for practicing entities. In addition, in the past seven years, the numbers of defendants sued for patent infringement has nearly doubled (from 5,000 in 2000 to 9,000 in 2007).

The rise of NPEs has been accompanied by an increase in the number of jury trials and an increase in reasonable royalty awards. In the 1980s, juries decided only 14 percent of cases with patent damages awards; in the 1990s, juries decided 24 percent of cases. In the past decade, juries decided 51 percent of cases. It is no surprise that NPEs prefer juries, where plaintiff success rates are much higher compared to bench trials. In addition, NPEs cannot claim lost profits as a measure of damages. They do not provide products or services, so they have no established royalty rates and no profits to lose. As a result, NPEs must sue for reasonable royalties, leading to an increase in the use of this standard. A recent study showed that reasonable royalties have been the predominant measure of patent damages awards.

Some commentators have noted that NPEs are not all bad.  The goal should not be to not to drastically eliminate or weaken the power of NPEs, but to ensure that they are accurately compensated.  NPEs may actually play an important role in the innovation economy by acting as intermediaries between promising independent inventors and users of technology.

Recent patent legislation (i.e. America Invents Act) and other Federal Circuit rulings have made it harder for NPEs.  Still, NPEs have drastically increased the costs of patent litigation for both large and small businesses alike.

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