The Rise of NPEs in Patent Litigation

By Marshall Phelps

Patent litigation is in the midst of a great fluctuation. For most of its history, patent litigation was largely between competitors in a particular industry. This is no longer the case. It is now estimated that some 60% of patent litigation is driven by entities which do not compete in any particular industry, entities which do not manufacture or produce products. This group of patent litigators is referred to as “non-practicing entities,” or NPEs.

There is an important distinction to be made here. The term NPE comprises a disconnected group. It includes research universities, individual inventors, design shops, and of course, the speculators who buy patents, not caring at all about the quality of their purchases, and launch legal broadsides against large groups of defendants such as “Mom and Pop” stores and coffee shops who cannot afford the expense of litigation. It is this last group which especially earns the sobriquet “Trolls”.

Originally, the trolls sued the Apples and Microsofts of the world – and nobody cared. After all, such companies could certainly take care of themselves. But over time, the trolls moved down the food chain and began to attack that most popular entity, the SME.

Thus, the FTC and Congress have started hearings and introduced legislation respectively to attempt to limit troll activities, or curb litigation abuse. Litigation abuse is not unique to the patent situation but needs to be addressed in order to “protect the benefits of a robust innovation policy and in part to simply correct injustice,” in the words of CAFC CJ Randall Rader.

The risk is in the definition and using it to condition enforcement on whether a party fits within that definition. If too broad, it involves research universities, single inventors and the like. If too narrow, the proscriptions may be ineffective. This can become worrisome – are we throwing the baby out with the bathwater? Litigation abuse can invite an “equally abusive” form of correction.

First, American law generally does not condition enforcement of law in the characteristics of a party.

Second, at some level, the definitions are meaningless. No one would consider IBM or Microsoft to be trolls. After all, their massive patent holdings are the result of self-created effort. Yet, there is no way those companies practice each and every one of their tens of thousands of patents at all times. But they do license them routinely, presumably for some form of economic consideration. Is this troll-like behavior meriting legislation? Doubtful, for sure. .As Rader puts it, “the definition of the troll will always be over inclusive or under inclusive to the detriment of justice.”

I do not have any definitive solution to the troll issue except to raise a caution flag. Certainly, there are judicial tools that can be used more often to curb the excesses in the system. One that comes to mind is more frequent use of the “British Rule” or fee reversal in cases of abuse. The thought that the plaintiff might have to pay the costs and fees of the defendant should go a long way to limit the most aggressive and egregious situations.

[This post originally appeared at Patent Quality Matters.]