How to Approach Non-Practicing Entities

Virgil Cojocaru is a JD candidate at Osgoode Hall Law School.

Using various processes or technologies is a minefield. Patent trolls or non practicing entities (NPE) are a large part of the problem. Knowing how to deal with their likes becomes a matter of legal tactics and strategy. However, before getting into potential solutions, we need to understand NPEs.

Jenn Wood in her article Response to Rise of the Patent Trolls describes patent trolls as entities, whether individuals or corporations, that acquire patents for the sole purpose of asserting them against other companies. In other words, they do not capitalize on their patents; they merely seek to profit off aggressive licensing. In this context, it makes business sense to have strategies for dealing with NPEs. How Sun Tzu Would Outflank Patent Trolls by David Wanetick offers a multitude of solutions.

Instead of fighting the NPE over the validity of its patent or the alleged infringement, preliminary strategies could be more successful. One of these is a pre-emptive collective purchasing initiative. A group purchases a list of patents. In order to assure optimal use of funds, these patents have to be the most likely to be targeted by NPEs. This is based on a patent’s potential for royalties. However, a major weakness in this strategy is cost. The group’s patent mass buying initiative requires members to pay a high premium. A second preliminary approach is to show that your company does not generate a lot of revenue from the process or resulting product. Even if the NPE were to win at trial, following opportunity cost and potential legal fees, it would not get much in their damages assessment. Royalties are based on a fraction of the revenue generated on the product. Of course, this is most effective when a corporation has the relevant information on the patent troll. Hence, when first served a demand letter, a company should learn anything that might be useful about their opponents, through sources such as PatentFreedom and IP Law 360.

If preliminary strategies do not placate the NPE’s demands, and a corporation’s legal department sees legal conflict on the horizon, minimizing collateral damage is the next best thing. Opinion letters from outside counsel protect a corporation from liability to its shareholders. However, this is a tricky manoeuvre, because opinion letters annul solicitor client privilege on that particular issue. If a corporation has been looking around for the ‘best’ opinion letter, this ‘shopping around’ will come out.

Once collateral damage is minimized, a corporation has to attack the NPE’s supply lines. These come in the form of contingency based law firms. Contingency means that a law firm only gets paid if its counsel is successful for the NPE. Hence, my earlier comment on potential legal fees for non practicing entities. This can be done through another company or body, so as to be more credible—by proxy. Issues that this proxy could point out to the NPE are weaknesses with its law firm and arrangement with the latter. For instance, not all law firms are strong enough to withstand years of litigation on a contingency basis. The firm could fall apart. On the other hand, if the NPE’s firm does win the legal battle, it might fall apart on suddenly coming up on a large award if sharing agreements are not set in stone between its partners. Lastly, the proxy could point out to the NPE any discrepancies or uncertainties into how its law firm calculates legal fees once the case is won.

David Wanetick also points out an interesting compromise strategy. This has the potential to avoid legal warfare, while resulting in lower fees. When NPEs serve demand letters, they are also looking for validation. If a corporation is on a long list of potential targets agreeing to pay royalties early on, helps the NPE by making the others fall in line. Often, the NPE is willing to reward this first corporation with lower royalties.