In the early 2000’s, a new kind of company began to form.  They like to call themselves “NPEs”, which stands for Non-Practicing Entity.  People who were not born yesterday call them “Patent Trolls”.  The simplest explanation is often the best, so to sum it up in one sentence: These companies were built around the process of buying patents and then suing companies for infringing them.  Some say these companies came into vogue about the time the “Dust Docket”, perhaps more commonly known as Asbestos litigation, started to die down.  Tort reform prevented the huge, multi-million dollar judgments against companies for the people they made sick from the use of asbestos, so the lawyers had to find another ambulance to chase.  Enter the .com boom and the rise of Intellectual Property as a monetizable asset.

If you think about it, it was a smart move.  You have a process by which one could prevent anyone else from using a specified piece of information or tool or process that they have registered with the government (in the form of a patent) unless they pay you to use it.  Patents are defensive tools: they prevent anyone from doing what you’re doing unless they pay you for the right to do it.   We have all heard the stories of the guy who accidentally invented the rubber tire or the man who suffered through his child’s complaint that she had too many stuffed animals on her bed, and thus invented the Corner Stuffed Animal Hanger bag thingy.  Those people deserve a little something for their willingness to go out and invent a solution to a problem, no?  Of course, yes.  So they file a patent and the government examines the claims (what does this object or process claim to do?) and checks to see if anyone else has done it before (a prior art check) and then issues the patent.  There are a few other steps in between, but the idea is that Intellectual Property, the ideas that make things work, can be protected via patents.

Now, it could be argued that the purpose of an NPE is altruistic, in that they provide a way for inventors to both obtain a patent in the first place, and to seek compensations for their use by the Big Guns of industry.  This happens in two ways:  Firstly, Bob the Inventor from Boise, Idaho is not very wealthy.  The patent process is long and expensive and confusing (hello? It’s the government we’re talking about here) and he will need help getting his invention in front of the patent examiners and that nice big GRANTED stamp he needs on the final paperwork.  NPE’s help people do this.  They provide the money up front plus a little extra for Bob, in exchange for either owning the patent outright at the end of the process, or taking a license to it.

Secondly, should Bob the Inventor from Boise, Idaho feel as though a company who makes computers and mp3 players, we’ll just call them Apple, is using his intellectual property without having paid him for a license to use it, has little chance of approaching that company on his own.  Who’s going to listen to Bob from Boise?  With the backing of an NPE, however, he stands a better chance.  A well-funded company with a stable of lawyers and experience in the industry can whip up a Nastygram (a patent assertion letter), send it off to Apple, and say “Hey Steve Tim (supposing that’s the CEO’s name), you’re using Bob’s intellectual property, which by the way we now own, and we’d like you to pay us for the privilege.  Please?  Or, guess what, we’ll see you in Marshall, TX.  Have a nice day!”  Much more effective than Bob, who will never make it past Steve’s Tim’s secretary.

Now Apple, our company who has (allegedly) infringed upon this patent has a couple of choices:  they can go ahead and take a license for the patent at a inflated price offered by the NPE, or they can choose to go to court when the NPE sues them for infringement.  Both options are equally bad:  the license price that the NPE offers will be only slightly less expensive than the cost to Apple to defend themselves in court, where they may possibly lose and have to pay not only legal fees but a judgment as well.

And so was born a new industry, brought about by an unintended side-effect of laws built to protect inventors.  There is a place for companies formed to help the small guy from the small town who has the next Big Idea.  But is there a place for that same company to go after the proverbial deep pockets just because they can?  Right now, the answer is yes.

Updated:  July 15th, 2012 for clarity and to fix a grammatical error.  HATE THOSE.

6 thoughts on “Backgrounder

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