The Economics and Controversies of Nonpracticing Entities (NPEs): How NPEs and Defensive Patent Aggregators Will Change License Market
Les Nouvelles, the Journal of The Licensing Executives Society International, March and June 2012.
23 Pages Posted: 1 Oct 2011 Last revised: 25 May 2014
Date Written: September 29, 2011
Nonpracticing entity or NPE has sparked hot debates among practitioners and scholars. Numerous studies have been published in a wide range of areas in law, economics, and innovation management. This study takes an integrating approach, by reviewing what we have learned from the literature, analyzing the major issues in NPE economics, and finally, providing an integrative framework of technology commercialization in which NPE and defensive patent aggregators (DPAs) would play a critical role to the complement venture capital (VC) model.
The taxonomic discussions in this paper will examine two major approaches in defining and distinguishing NPE and patent troll, namely, by business model and by tactics. While holdup or troll as a market inefficiency does exist, there have been no compelling theories and models to prove that holdup is a systematic rather than idiosyncratic problem, nor any evidence that it is a pervasive rather sporadic phenomenon. NPEs, a new breed of market players, are the offspring of the specialization trend in technology commercialization, and will play an important role in navigating the patent thickets, by specializing at developing and/or acquiring complementary patents and building up patent portfolios.
Specialization and patent proliferation also challenged the economics of symmetry, the bedrock of the conventional market remedies for patent thickets, such as patent pool and cross license. The dramatically increased asymmetries in patent holding and in product revenue exposure have caused defensive patenting. However, as shown in the paper, more patents are not a solution to too many patents. Defensive patent aggregators (DPA) offer a new risk management mechanism to end the vicious cycle of defensive patenting, and bring all players to the system, including NPEs, patent-holding producers, and non-patent-holding producers.
Just as VC has drastically boosted the competition model by helping startups to build up complementary assets for technology commercialization, NPE will revitalize the cooperation model by building up complementary patents. NPE-held patents will be a mirror image of VC-backed startups across the two models for technology commercialization, while corporate licensing entity mirrors corporate venture capital. Before the Newtonian philosophy rooted in license market is updated and the new framework is in place, however, NPEs will keep being called “trolls,” just as VC firms used to be, and sometimes still are, called “company nappers” or “vulture capitalists.” NPEs may have to take the negative publicity as a growth pain.
Keywords: Nonpracticing entity or NPE, defensive patent aggregators or DPA, license market, patent troll, holdup, patent thickets, specialization, technology commercialization
JEL Classification: O30, O31, O32, O33, O34
Suggested Citation: Suggested Citation