A non-practising entity (NPE) owns patents but does not make products or provide services based on them. It earns money by licensing the patents or by suing companies that allegedly infringe them. Critics call the most aggressive NPEs patent trolls. The term is popular, but it lumps together very different organisations.
Not all NPEs are alike
| Type | Examples | Typical behaviour |
|---|---|---|
| Universities and public research organisations | University technology transfer offices | License inventions; rarely sue |
| Individual inventors | Small inventors without manufacturing capacity | License or sell patents; occasionally sue |
| Defensive aggregators | Membership organisations that buy patents to keep them away from assertion | Acquire patents and license them to members |
| Portfolio licensing companies | Firms holding thousands of patents | Negotiate broad licences, sometimes backed by litigation |
| Litigation-focused entities | Shell companies holding a few patents | File many suits and settle for less than the cost of defence |
The US Federal Trade Commission’s 2016 study of patent assertion entities distinguished two main models. Portfolio entities negotiated licences, often without litigation, and earned most of the revenue. Litigation entities accounted for most lawsuits but earned far less per case. Their settlements were typically below the cost of defending a patent case, which made settling the rational choice even for defendants with strong defences.
The arguments
For NPEs (or at least some of them):
- They give small inventors and universities a way to profit from patents they cannot use themselves.
- They create a market for technology, which may encourage invention.
- Specialist intermediaries can lower the costs of finding, valuing and transacting patents.
Against (especially litigation-focused models):
- They exploit vague patents, especially in software, and the high cost of litigation.
- They tax productive companies, including small businesses and end users such as retailers using standard technology.
- Empirical studies have linked NPE litigation to reduced R&D spending at targeted firms. The size of the effect is debated.
How the law responded
Much of the NPE debate is American, because the US combined broad software patents, high litigation costs and the absence of a “loser pays” rule. Several changes since 2006 have shifted the balance:
- eBay v. MercExchange (2006): the US Supreme Court ruled that injunctions are not automatic. Courts must weigh factors such as whether money damages are enough. Without the threat of an injunction, an NPE that does not compete in the market has less leverage.
- America Invents Act (2011): created the inter partes review procedure at the Patent Office, a cheaper way to challenge the validity of a patent than going to court.
- Alice v. CLS Bank (2014): tightened the test for patent eligibility, invalidating many abstract software and business-method patents.
- TC Heartland (2017): limited where companies can be sued, reducing “forum shopping” for favourable courts.
NPE litigation has not disappeared, but its patterns have changed. Litigation funding, often from investment funds, has become a significant factor.
In Europe, the Unified Patent Court, which started in 2023, allows a single action covering many countries. Some observers expect this to attract NPEs, because one win can bring an injunction across multiple markets. In China, patent litigation has grown quickly and courts have awarded larger damages. NPE activity is still limited compared with the US, but it is rising in sectors such as telecommunications.
Assessing NPE risk: an intelligence task
For a company entering a technology market, NPE risk is part of competitive and patent intelligence:
- Map the patent landscape of the technology, including who owns the relevant patents.
- Check assignment records. Patents bought from operating companies by entities with no products are a warning sign.
- Search litigation databases for the owners and for the technology area.
- Watch standards. Standard-essential patents (for example in wireless communication) are frequently asserted, sometimes by NPEs.
- Consider defensive options: membership of defensive aggregators, validity analyses of high-risk patents, and freedom-to-operate opinions for key products.
The label “troll” is less useful than a precise question: who owns patents that read on our products, what is their business model, and what have they done before? That question can be answered with public data.