Opinion NON-PRACTISING ENTITIES Not all NPES are created equal Matthew Rizzolo and Keyna Chow analyse why perceptions of non-practising entities vary widely across different IP sectors Matthew Rizzolo Keyna Chow

Non-practising entities (NPEs) have been was a holding company who sought to active in intellectual sectors for acquire from authors of previously decades, and come in many shapes and published news content who then initiated sizes. Some NPEs are viewed favourably – but “The targeting website owners, including others have been called “trolls,” and a few models of NPEs bloggers and nonprofit organisations, for may be even viewed as criminal. What might unauthorised copying and posting of news affect the perception of NPEs in any given vary widely. Some articles. Some early defendants quickly settled, situation? Many factors are at play. but eventually met its demise as Generally, NPEs are organisations who do NPEs purchase one court ruled that it lacked due to not practise their IP rights, but instead enforce IP, other NPEs invent an insufficient transfer of the right to sue and these rights for monetisation purposes. The another court ruled in favour of defendants on business models of NPEs vary widely. Some IP, and some NPEs do their defence. NPEs purchase IP, other NPEs invent IP, and both. NPEs monetise Perhaps the most fascinating story some NPEs do both. NPEs monetise their IP in involving a NPE was . two main ways: licensing and litigation. Many their IP in two main Three lawyers, the principals of Prenda, first seek to license their IP to practising entities created shell companies, commissioned the without litigation. These NPEs may approach ways: licensing and production of pornographic videos, claimed their targets with a licensing offer or demand. litigation.” copyrights on those videos under the shell If and when negotiations fail, these NPEs may company, uploaded them on the internet, then file a alleging infringement of their and then lured potential targets (ie, individual IP. The success of any given NPE’s monetisation persons) to illegally download and share those efforts largely depends on its ability to obtain Copyright NPEs videos online. Prenda Law then threatened the licensing fees and royalties, while incurring In the copyright realm, it is nothing new for targets with lawsuits, minimal legal fees and associated costs. an entity to aggregate copyrighted materials, and offered to settle lawsuits silently for offer to license them, and enforce them if thousands of dollars, typically below the cost of NPEs attempts to license fail. Automated online a legal defence. Prenda was mostly successful The most well-known NPEs are in the patent enforcement of copyright provides an in extorting the amounts from sector, commonly known as patent assertion affordable alternative to litigation and forms their targets, but the scheme was eventually entities (PAEs). While some PAEs focus a big part of the copyright landscape. The exposed. Now the lawyers behind Prenda primarily on monetising their , others music publishing industry has a long history Law have been indicted on , perjury, and – such as research entities and universities – of acquiring copyrights and licensing them. charges, and have pleaded have different primary goals (eg, education). American Society of Composers (ASCAP) guilty to some of these charges. For these entities, patent monetisation is and Broadcast Music, Inc (BMI) are two well often merely an opportunity to further known non-profit organisations who collect / NPEs the organisation’s primary goal. The US licence royalties on behalf of copyright owners On the trademark side, so-called “trolls” have International Trade Commission categorises (eg, songwriters or composers), and distribute been active in the form of cybersquatters NPEs in a similar manner. “Category 1” NPEs those royalties back to the copyright owners. and opportunistic applicants. Cybersquatters are “[u]niversities, research institutions/entities, Other companies who don’t make and sell register domain names of famous brands, and start-ups, individual inventors, manufacturers copyrighted materials, such as television capitalise by selling the domain names to the whose products do not practice the patents.” distribution companies, have relied on licensing brand owners. Opportunistic applicants, on “Category 2” NPEs, on the other hand, are as their business model. Even companies that the other hand, register well-known marks “[e]ntities whose business model focuses on have traditionally focused on products, such as or popular phrases, and threaten litigation purchasing and asserting patents.” Some well- record companies, are evolving into licensing to enforce their marks. In the US, though, known patent NPEs are Intellectual Ventures, . trademark rights are based on use, not mere InterDigital, Acacia Research Corporation, and One famous copyright NPE case in recent registration – thus brand owners generally the Wisconsin Alumni Research Foundation. years is Righthaven LLC v Hoehn.1 Righthaven prevail over these opportunistic applicants

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Opinion

when disputes arise. Further, “trolling” seems for-profit status of other NPEs. to be less of an issue with than Nature of the target is also relevant to the with other IP. The nature of trademarks is to perception of a NPE. The smaller the target, exclusively identify the commercial source the worse a NPE is perceived. Defending an or origin of products or services. Unlike infringement lawsuit is part of the cost of with patents and copyrights, businesses use doing business for many large companies. trademarks to differentiate their identity from However, the same is not true for individuals one another, and generally have less incentive or small entities, who may lack the funding to license another’s trademarks. and expertise to defend such a lawsuit. Similarly, NPEs have not yet appeared to For example, Righthaven was labeled as a present a significant issue or controversy in the “” for its practice to bring “no- trade secret sector. Before the Defend Trade warning lawsuits” targeting small businesses Secret Act (DTSA) was passed in 2016, there and non-profits. Prenda Law was labeled as were fears that the new act would prompt a “porn troll” for its scheme to extort money an uptake in “troll-like” activities. Some by shaming individual persons in the names commentators even predicted that “trade of copyright infringement. Many patent NPEs, secret trolls could be the new patent trolls”, but such as MPHJ and Innovatio such fears have not come to pass. Again, the IP, were similarly derided for enforcement nature of the IP right at issue may be a limiting campaigns focused on small entities. factor. Trade secrets must be information not Specific enforcement behaviour also generally known (or reasonably ascertainable) affects the perception of a NPE. Overextension by others that a business can use for a of IP rights is a common theme. For example, a commercial advantage. High transaction NPE who indiscriminately sends mass demand and enforcement costs associated with trade letters without regard for the merits of secrets likely make them unappealing to most infringement is likely to be viewed unfavourably, NPEs. and may even rise to the level of unfair trade “Some commentators practices. In the case of MPHJ Technologies, for Not all NPEs are viewed the example, such behaviour drew the attention same even predicted that of the Federal Trade Commission. Broad There are many factors that may affect how ‘trade secret trolls automated online enforcement of copyright, a NPE is perceived. At least four factors are at by NPEs and others, has also drawn scrutiny play: (1) nature and strength of the IP rights; could be the new from regulators and the courts. Some NPEs (2) business model of the NPE; (3) nature of the employ these approaches to cast a wide net target; and (4) enforcement behaviour. patent trolls’, but over targets, and their return on investment is Fundamental to the perception of a NPE such fears have largely determined by the number of targets is the nature of IP rights asserted. A NPE is who are willing to settle, rather than based generally viewed less favourably when it not come to pass.” on the merits of the IP rights asserted. Such asserts exclusionary IP rights irrespective of enforcement campaigns are typically viewed whether the target has engaged in copying. A as unfavourable. patent is generally more of an “exclusive” right When companies are faced with threats of than a copyright, for example – independent litigation from a NPE, it is important to know creation is a valid defence in a copyright by its business model. Organic acquisition- ie, the opponent—and that includes how the infringement case, but not in a strict liability invention – is generally viewed more favourably NPE may be generally perceived, whether by suit. This may be one than aggregation. This is true for both patent the public, a judge, or jury. Companies can reason why patent NPEs are viewed with more and copyright NPEs. For example, universities gain a strategic advantage by understanding disdain than copyright NPEs. and research institutions are perceived the NPE’s business, its prior activities, and The strength of the individual IP rights favourably as innovators and contributors, enforcement strategy. Factors such as the being asserted also matters. For example, NPEs while other NPEs are perceived merely as NPE’s business structure, the main revenue asserting high-quality patents, even if they seek brokers or unnecessary “middlemen”. source of the NPE, how the NPE acquires its large , are generally viewed more Copyright NPE Righthaven, whose business IP, and the historical enforcement tactics of favourably than NPEs who bring weak claims model was aggregating previously published the NPE may colour the public’s perception. and seek to settle for the cost of litigation. news content, rather than creating new A resourceful target of a NPE may be able to While many operating companies settle these content, faced the same perception issue. use this perception to its defensive advantage, “nuisance suits” as part of the cost of doing Notably, this factor does not appear to affect whether in litigation or public relations. business, others – most famously Newegg – the perception of ASCAP and BMI, who are often take a stand and will pay their attorneys aggregators of copyrighted music materials. Footnote to litigate rather than settle with a NPE. This may be explained based on ASCAP’s and 1. Righthaven LLC v Hoehn, 716 F.3d 1166 (9th Cir Perception of a NPE is highly influenced BMI’s “non-profit” status, in contrast to the 2013).

Matthew Rizzolo is based in Ropes & Gray’s Washington, DC office. He advises companies to both enforce clients’ IP rights and defend clients from patent infringement claims. Keyna Chow is an associate in the intellectual property litigation practice based in the firm’s Silicon Valley office. She advises companies on offensive and defensive IP strategies.

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