Non-Practicing Entities (NPEs) and SEP Licensing

Companies producing goods and services often must comply with internationally recognized standards, requiring licenses to standards-essential patents (SEPs). Like all patent holders, SEP holders have powerful rights over the use of their patented inventions. This article explores the complex dynamics between licensors and licensees. It focuses on the rise of non-practicing entities (NPEs), which can seem like a strange, intransigent beast threatening production.

This article may be valuable to SEP licensors, licensees, policymakers, regulators, judiciary members, and arbitration bodies handling infringement cases and licensing disputes.

Understanding Standards-Essential Patents (SEPs)

Valid patents grant holders exclusive rights to control an invention within a national jurisdiction for a limited period. Please look at the video on the IP2I website for a short tutorial. When a standard appears to necessitate the use of a specific patent, potentially making it a Standards-Essential Patent (SEP), the rights of the SEP holder can significantly influence the adoption and implementation of the standard.

Origins of SEPs

Potential SEPs typically originate from the contributions of companies involved in developing a standard. This normally includes companies that:

1. Produce products or services utilizing the standard. They may use their SEPs to expand the market for their products, for defensive negotiation leverage, and/or potentially generate revenue through licensing or
2. Supply technical solutions that benefit the standard. They use proceeds from licensing their SEPs to generate revenue.

These primary contributing companies maximize their business objectives if the standard is rapidly adopted and ubiquitous.

Some potential SEPs may be held by unrelated companies that did not participate in the standard's development.

Role of Standards-Setting Organizations

To address the powerful rights conveyed when selecting specific, possibly patented technology as a requirement, Standard-Setting Organizations (SSOs) often ask potential SEP holders to voluntarily commit to licensing their SEPs on at least fair, reasonable, and nondiscriminatory (FRAND) terms [1]. SSOs must secure these FRAND commitments to maintain standard adoption and implementation. Therefore, they have strict rules to avoid including uncommitted SEPs [2].

FRAND assurances for potential SEPs of primary contributors and unrelated holders who agree to the SSO’s Patent Policy support the standard's widespread adoption.

However, as with any patent, SEPs can be transferred/sold to other parties with business motivations that do not align with those of the standard's originating contributors. Parties/entities that do not implement the standards in their products or services are often called non-practicing entities (NPEs). The first step in understanding how NPEs affect standards is to examine how they acquire SEPs.

The Rise of Non-Practicing Entities (NPEs)

SEPs, like other patent assets, can attract interest from different companies and entities. Examples include:

• A small inventor may lack the resources or expertise to utilize their patent rights fully.? Another entity with the necessary experience and resources might be willing to purchase the patent, giving the inventor capital to expend on other projects.
• A large company might have excess patents beyond what is needed for its business strategy. It may be interested in generating revenue by selling off parts of its portfolio.

Companies can transfer or sell SEPs unlimited times.

• For example, in 2014, Ericsson sold a portfolio of over 2,400 U.S. and international 2G, 3G, and LTE potential SEP patents to Unwired Planet LLC, an NPE. Under the terms of that agreement, Ericsson receives a portion of the revenue generated through Unwired Planet’s licensing.

NPEs buy patents to optimize licensing for revenue. Without compelling reasons to do otherwise, NPEs would prefer to avoid FRAND constraints that might limit what they charge. However, as noted above, SSOS must maintain FRAND commitments even for SEPs that are sold/transferred. The new SEP holder can still enjoy a royalty stream. Since the right to transfer patents is necessary, most SSO IPR Policies require that parties making FRAND commitments transfer their FRAND obligations to all subsequent assignees. [3]

Now that we have discussed how NPE might acquire SEPs, we must understand how their financial backers and business interests influence NPE negotiations.

Importance of Understanding NPE Funding

NPEs can be funded by individual investors, banks, litigation funding firms, financing institutions, sovereign wealth funds, governments, etc. These backers expect a return on their investment.

• For example, one litigation investment fund boasts a 39% internal rate of return (IRR). Promises of large returns are not uncommon. Maintaining such a high rate of return would require aggressive tactics.

The funding sources can be quite complex and important. Disclosure of funding sources in litigation can help assess the legitimacy of the lawsuit, evaluate resources and potential abuses, and uncover potential conflicts of interest.

While not a SEP case, U.S. District Judge Colm Connolly of Delaware outlined many pitfalls, potential abuses, and potential fraud due to NPE funding schemes in a detailed memorandum.

How NPE Business Strategies Affect Licensing Negotiations

Positive strategies - Some NPEs target specific technologies they hope to license, return value to their investors, and fund other projects. There is nothing wrong with a fair and reasonable licensing negotiation for a valid, infringed patent. However, be aware that even if all parties exercise good faith, these negotiations are complex, and poor outcomes can harm a licensee's business. Affected parties must seek experienced and competent legal counsel.

Harmful or counterproductive strategies - Some NPEs may acquire low-quality patents at bargain prices. Such patent portfolios often contain nonessential weak patents unlikely to survive validity challenges. However, these NPEs may use aggressive tactics and abuse the threat of injunctions and exclusion orders to maximize settlements. See?Navigating High Stakes Patent Injunction Abuse for information on the tactics of injunction abuse.

While any SEP holder can abuse the system, unscrupulous NPEs are likely to use aggressive tactics, as they have no repercussions to products and are not vested in the standard’s success.

NPE Injunction Abuse is a Real and Growing Problem.

The patent litigation case of Innovatio IP Ventures LLC exposed the tactics of an aggressive NPE. That case involved WiFi SEPs and impacted hundreds of companies that were unprepared to understand the technical or legal ramifications of Innovatio's licensing demands. More sophisticated parties stepped in, and the exposure was far less than the original request. For more information on how patent abuse can endanger small and medium-sized enterprises, see my article: Can Patent Abuse Endanger SMEs?

The good news is that the U.S. Supreme Court case eBay Inc. v. MercExchange, L.L.C. made obtaining injunctions less likely in U.S. district courts. However, aggressive NPEs still seek exclusion orders from favorable venues such as the U.S. International Trade Commission and injunctions in German courts. A recent report from Clarivate, NPEs in Focus: Examining global non-practicing entity litigation, shows a potential for an increase in NPE injunction cases in China and the new European Unified Patent Court, which also seems to favor patent holder interests. Both China and Europe could become preferred destinations for aggressive NPEs. In a positive move, the European Commission is reviewing new regulations to improve transparency and balance between licensors and licensees. See the European Commission’s Draft SEP Regulation for more information.?[4]

Conclusions.

This article began by defining standards-essential patents (SEPs) and exploring their origins and the role of standard-setting organizations (SSOs) in managing these patents to ensure fair play in standard adoption. We then discussed the rise of non-practicing entities (NPEs) and their impact on SEP licensing dynamics.

NPEs, driven by monetization rather than product development, can disrupt the delicate balance intended by FRAND commitments. Their strategies for acquiring patents and the potential for aggressive litigation, including injunction threats, pose significant challenges to fair and efficient standard implementation.?

SSOs make distinct efforts to uphold FRAND obligations when SEPs transfer, but the global legal landscape remains intricate and evolving. Recent trends, such as the potential uptick in injunction cases in China and the new European Unified Patent Court, underscore the need for continuous vigilance and adaptation.

The European Commission’s Draft SEP Regulation is a promising step toward greater transparency and balance between licensors and licensees. This evolving regulatory environment highlights the need for ongoing dialogue and policy refinement to address the challenges posed by NPEs and others and uphold the integrity of the standardization processes.

Call to Action

As stakeholders (whether you are a SEP licensor, licensee, policymaker, or legal professional), staying informed about the changing landscape of SEP licensing is essential. Every involved party should consider how NPE funding, injunctions, and exclusion orders can be abused. Judicial and regulatory bodies should be cautious not to enable abusive behavior. Engaging with regulatory developments, like the EC’s Draft SEP Regulation, helps create a more equitable and transparent patent ecosystem. Your proactive involvement is crucial for fostering a fair licensing environment.

Future Considerations

Looking ahead, we must explore strategies that balance the interests of all parties involved in SEP licensing. This includes strengthening the enforcement of FRAND commitments and curbing the impact of aggressive NPE tactics. Collaboration among international regulatory bodies, industry stakeholders, and legal experts will be vital to achieving these goals. Together, we can navigate the complexities of SEP licensing and ensure a fair and efficient standardization process.

Endnotes

[1] Individual SSOs may seek assurances that the party has no SEPs or is willing to license their SEPs on royalty-free and otherwise FRAND terms (RF-RAND). The SSO decides which type of commitment they require (waiver, RF-RAND, FRAND, selecting between all three options, and/or similar declarations). Most frequently, SSOs require at least FRAND assurances. This provides a reasonably level playing field for all competitive contributors and implementers of the standard.?

[2] SSOs want to capture the commitment to license any actual SEPs. However, it is impractical to determine whether a patent is essential during standards development. To avoid confusion, this article refers to potential SEPs when it may be important to understand that essentiality and validity have yet to be determined.

[3] The effectiveness of the FRAND transfer requirements depends on various factors, including the SSO IPR policy's language, the transfer agreement's terms, local laws, and other considerations.

[4] You will find many articles on the draft regulation. If interested, I wrote several articles that can be found here:

• The Total Aggregate Royalty: A path to fairer SEP licensing
• Balancing Innovation and Access: Refining SEP Regulations to Protect Non-Consenting Patent Holders
• Balancing the Use of Patent Injunction in Light of EC Draft SEP Policy

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