NPE Model Still Alive and Kicking

In 1897, Mark Twain ironically told a newspaper that reports of his death had been “greatly exaggerated”. NPEs might be feeling equally bemused today. While many observers have interpreted a decline in new NPE litigation in the latter half of 2014 as a death knell, recent data suggests the NPE business model is still very much alive.

Preliminary data for the first quarter of 2015 shows that there were 863 new NPE suits filed in district court, a 17% increase from the same period last year. The number of total defendants rose 20% to 1,213 in Q1 and, overall, the pace of activity so far this year is only slightly slower than what we saw in 2013, when NPE litigation was at a record high.

One quarter, of course, is not an accurate indicator of the year ahead any more than the second half of 2014 is a good gauge for the long-term trend in NPE behavior. From Nortel to the America Invents Act (AIA) to Alice, there have been—and always will be—factors that affect NPE decision-making and litigation volume. Those factors might create long-term change, but they inevitably create short-term distortions.

Last April, for example, NPEs filed nearly 500 patent lawsuits, almost 200 on a single day. The rush to the courthouse was driven by new fee-shifting rules that could have gone into effect April 24 as part of a patent reform effort, which ultimately failed. It’s highly unlikely that April 2015 will see anywhere near that many NPE suits, but the year-to-year decline won’t be illustrative of anything fundamental about the patent ecosystem—except that it is constantly evolving and predictions based on short-term trends are unwise.

The one immutable truth of this market is that NPEs continue to acquire and assert patents. We believe the market can and will continue moving away from litigation-based monetization to a more rational, clearinghouse-based system for exchanging patent value. For the near term, however, infringement litigation will continue to be a fact of business life. Despite changing definitions of patent quality, shifts in monetization tactics, or ebbs and flows in litigation volume, NPEs remain a clear and present danger for operating companies. And that’s no exaggeration.