Non-practising entities: How to protect a business

What is a non-practising entity?

A non-practicing entity (NPE) is a person or business who holds a patent for a product / process but has no intentions of developing it. An NPE can be anything from a legal entity owning a single patent, to a dedicated licensing division of a corporate technology company with a large patent portfolio. Here are some key characteristics for NPEs:

• NPE businesses monetize technology patents, but will not typically sell products or services containing these patents
• NPEs profit from their patents by licensing them to third parties. This licensing activity often includes unsolicited communications to other third parties who they believe are using their patents
• NPEs often threaten or commence legal action against businesses to secure a license agreement or monetary compensation for patent infringement
• A high proportion of NPE-owned patents relate to specific functionalities that exist in software solutions

How does exposure arise?

There are many ways in which patent infringement exposures can occur:

• NPEs frequently target software companies directly which can cause financial difficulties, particularly for low revenue micro-businesses
• Businesses can also be exposed to infringement allegations simply by using software provided to them by third parties
• The end customers of a software company may also be targeted by NPEs

We’ve created three short claims examples, based on claims we have handled, to showcase how these common patent exposures can materialise.

Direct claims

A software developer provides and sells an operations software platform to customers in the construction and logistics industry sectors. An NPE, who are a subsidiary of a specialist supply chain technology company, filed a patent infringement lawsuit alleging the developer’s platform was directly infringing two of their patents.

The developer had CFC’s patent infringement insurance which covers the costs of defending the allegations, including securing legal representation, legal costs, and compensation. When reviewing the allegations, legal staff realised the NPE was demanding a both a disproportionate compensation payment and restrictions on the developer’s future trade. After some unsuccessful negotiations to dismiss the matter, the developer commenced invalidity proceedings against the NPE’s patent. As a result, the NPE withdrew their lawsuit because they were concerned about their patent being legally challenged and potentially found to be invalid.   

The total legal costs incurred in the matter were £850,000, the majority of which was paid by CFC’s patent insurance, after self-insured retentions.

Using a third party’s software

An online marketplace platform was created using a third-party supplier’s technology. An NPE filed a patent infringement lawsuit due to the online marketplace platform being able to be accessed across multiple devices. The NPE filed the same infringement allegation against 10 other defendants.

The online platform had CFC’s patent infringement insurance which covers the costs of defending the allegations, with legal representation, legal costs, and compensation.

It emerged that each of the 10 defendants had used the same third-party supplier to enable multi-device functionality across their own websites. After legal correspondence with the NPE which included threats to initiate proceedings against the NPE’s patent, the NPE withdrew the allegation.

The total legal costs incurred was £20,000, most of which was covered by their patent insurance, after self-insured retentions. The legal representative undertook some additional work to pursue subrogation from the third-party supplier and was able to reduce the costs of the claim, on behalf of the online platform by £10,000.

Contractual liability

A digital agency provides website design services. They built a website for one of their retail customers, adding in functionality to notify website users about upcoming sales. Three months later the retailer got in touch with the marketing agency to advise an NPE had contacted them alleging patent infringement over the functionality of detecting website user behaviour.

The digital agency had a service contract with their retail customer which outlined an IP infringement indemnity, including a hold-harmless, for all costs incurred to resolve an IP infringement allegation.  

The digital agency had CFC’s IP insurance policy which provides cover for contractual obligations, covering defense costs and compensation to resolve the IP infringement dispute. Through legal support, the digital agency secured a license agreement which allowed them to continue selling their website software to their existing customer base, as well as new customers with no further restrictions.

The policy paid out approximately £200,000, of which around £50,000 were legal expenses and £150,000 were a settlement payment to reflect the period and extent of patent infringement.

CFC have been insuring software users and providers for a number of years. Our experienced claims handlers have specific expertise in NPE patent infringement allegations. CFC’s patent infringement coverage provides access to financial support and high quality legal representation in the event of a claim.

To find out more, please email ip@cfc.com or take a look at our product brochure.