'Ethical NPE' Has Sights Set On China
Share us on: By Matthew Bultman
Law360 (August 2, 2018, 8:06 PM EDT) -- Amid a challenging U.S. market for patent enforcement, a new patent licensing firm that has coined the term “Ethical NPE” is turning its focus on China, with a lofty vision for the country’s first $100 million damages award.
Over the past year, iPEL Inc. has been quietly stockpiling a collection of patents that CEO Brian Yates predicts could generate a nine-figure award in China, where damages in patent cases have historically been much lower than in the U.S.
“IPEL’s strategy for China includes asserting numerous patents against an infringer’s most profitable product lines,” said Yates, adding a cumulative damages award of $100 million through multiple lawsuits was “quite realistic.”
Talk of record-breaking awards has drawn some attention to iPEL, which was launched in late June by Yates and Rasheed McWilliams, who previously led the litigation practice group at the law firm Cotman IP Law Group PLC. But it’s not the only thing that is turning heads.
Based in Pasadena, California, iPEL has set up an unusual licensing model — including offering free licenses to startup companies — and established a set of business practices for what it calls an “Ethical NPE,” short for nonpracticing entity.
What makes an NPE ethical? According to iPEL, suing a company for infringement only after offering an opportunity to license the patent. It also says entities should, among other things, reward companies that proactively seek a license with better terms.
The creation of the new firm comes in a difficult U.S. market for nonpracticing entities, which generate revenue by licensing and enforcing patents, rather than developing new products. These types of entities have disparagingly been referred to as patent trolls.
There have been changes in U.S. law that have made patent enforcement more difficult, including Supreme Court decisions that have created uncertainty about what is eligible for a patent and put limits on where defendants can be sued.
The 2011 America Invents Act also created new proceedings to challenge the validity of patents.
Faced with these challenges, some prominent NPEs have begun to revamp their business models. Canadian licensing firm WiLan Inc., for example, said last year it would shift focus away from monetizing patents and toward acquiring internet of things, or IoT, businesses.
Intellectual Ventures Management LLC, which was co-founded by a former Microsoft Corp. executive and is reported to have more than 70,000 intellectual property assets, has also said it is winding down its acquisition of patents as a result of changes in the market.
“It’s a tough environment, not just for NPEs but for patent litigation in general,” said Matthew Rappaport, co-founder and managing director of patent analytics firm IP Checkups.
Yates is a veteran in the patent monetization business. According to RPX Corp., a patent risk and discovery management firm that tracks NPE litigation, he oversaw entities that filed more than 500 patent infringement suits in 2015 and 2016 alone.
Yates said he is taking a different approach with iPEL. Whereas his previous entities were focused on patent assertion and licensed after litigation, he said iPEL is looking to be a licensing company first and will enforce its patents “as necessary.”
“With iPEL, we hope to minimize the need for litigation and maximize the number of companies that we can work with amicably by offering licenses to our large and diverse portfolio under reasonable terms,” he said.
IPEL is said to have acquired more than 1,000 distinct patent families over the past year after raising $100 million in initial capital, with an eye toward obtaining additional patents. Yates said the firm is looking for patents in various fields, including IoT, consumer electronics and artificial intelligence.
RPX earlier this year reported that Yates has already acquired patents from some notable places, including companies like Panasonic Corp. and ZTE Corp. IPEL’s current assets include a large number of Chinese patents, which Yates called the “centerpiece” of the company’s patent portfolio.
It wasn’t long ago that bringing a patent lawsuit in China could be considered laughable, attorneys say. But the country, which has long been criticized as being lax in protecting intellectual property rights, has made a concerted effort to ramp up enforcement, including by creating specialized IP courts.
For patent owners, the main draw is often the availability of powerful injunctions in the Chinese courts, which are virtually guaranteed if infringement is found and can stop goods from entering or leaving the country.
But there are also indications that damages awards, which according to one study averaged about $12,400 in 2014, could be on the rise. Still, there are still plenty of unknowns with the relatively young Chinese system.
“It’s sort of like the wild west,” Rappaport said. “I think people are testing it out and seeing what they can come up with.”
IPEL is offering a free one-year license to small businesses and startups with less than $5 million in revenue. For larger business, iPEL has set up “haggle-free” licensing options, with different tiers that offer varying degrees of protection.
The firm has touted both licensing models as unprecedented and “the result of iPEL’s desire to make patent licensing an efficient and friendly process.” But there are skeptics.
Joshua Landau, patent counsel at the Computer & Communications Industry Association, said small companies that take a free license could, in effect, be painting a target on their backs and alerting iPEL to their presence.
In a recent blog post, titled “If A Free Patent Portfolio License Sounds Too Good To Be True - It Is,” Landau also said that evidence of a prior license could come back to hurt a company should it ever cut ties with iPEL and then face an infringement lawsuit down the road.
“The very first fact they’re going to bring up to a jury is, 'Well, they used to have a license and now they don’t,'” he said in an interview. “That’s more convincing to a juror than maybe it is to a lawyer who can look at it and say, 'They don’t need [a license] but they took it because it was free.'”
Others questioned the value of a patent license to startups. Jackie Hutter, founder of The Hutter Group LLC, which provides strategic IP counseling to small and medium-size companies, said a license could also give pause to potential investors and larger companies interested in an acquisition.
“If the baggage, and this would be baggage that comes along with a startup, affects their existing business model, it’s going to be a problem from an exit perspective,” she said.
Yates maintained that iPEL was not looking to seek out potential infringers with its free licensing program, saying the program was motivated “by a genuine desire to help small companies thrive.”
“We want the world to know that iPEL is not a threat to startups and small companies, and is indeed a friend who is offering a helping hand,” he said.
--Editing by Kelly Duncan and Aaron Pelc
