The Death Of The Non Practicing Entity?

Editor’s note: Leonid (“Lenny”) Kravets is a patent attorney at Panitch, Schwarze, Belisario and Nadel, LLP in Philadelphia, PA. Lenny focuses his practice on patent prosecution and intellectual property transactions in computer-related technology areas. He specializes in developing IP strategy for young technology companies and blogs on this topic at StartupsIP. Follow Lenny on Twitter: @lkravets and @startupsIP.

While perusing the latest patent lawsuit filings on PriorSmart this week, I was drawn to a series of cases filed by a small company called PersonalWeb against RackSpace (possibly for hosting GitHub), Nexsan, Facebook, Apple, Yahoo, Microsoft, and IBM:


RackSpace responded strongly on its blog to being sued by PersonalWeb, taking the opportunity to call support for the SHIELD Act. The SHIELD Act ostensibly aims to protect high-tech companies from patent-infringement suits from Non Practicing Entities (NPEs) by requiring unsuccessful plaintiffs in hardware and software patent cases to pay for the litigation costs of defendants. Its passage may lead to the end of the Non Practicing Entity business model, and, by extension, allow infringers of patents owned by NPEs to continue practicing patented technologies without fear of litigation.

The SHIELD Act may also have implications on startup companies. Shifting the cost burden of litigation to patent plaintiffs may result in startups having even less ability to protect their legitimate inventions from larger competitors. Which brings me back to PersonalWeb, a company that blurs the line between a traditional Non Practicing Entity and a startup technology company. Perusing PersonalWeb’s website, it is clear that this is a real company with real offices (in Tyler, Texas, the home of the famous Eastern District of Texas Federal District Court), real employees and at least one product. Did PersonalWeb hire a staff, furnish its offices, and make a product simply to give the appearance of being a real company? Certainly, having a real product would help make the case for seeking lost profits under the patent act and would help avoid the possibility of venue transfer. However, it’s possible that they are a small company with interesting products – like many startups. The point is that the line between NPE and operating company is so easily blurred – especially in today’s age of low-technology costs – that it is often difficult to tell what the true intentions of a company are.

Why Does It Matter That PersonalWeb Is Not A NPE In Its Strictest Form?

It shows that the traditional Non Practicing Entity model is evolving. The strong public opinion against the traditional Non Practicing Entity business model has led to proposals, such as the SHIELD Act, admonitions from federal judges, and the like. At the same time, the cost of starting a software-based business has never been lower. These notions are clearly not lost on PersonalWeb, which can act as a startup with real employees and real products, while still attempting to enforce its patents in a friendly court. After all, it is  likely that a jury in the Eastern District of Texas, which would be drawn from a pool of jurors residing in and around Tyler, Texas, would be more kind to a local 15-person company battling against corporate giants.

In the long run, I expect this model of pairing a patent portfolio with a small, but operating, technology company to become more popular. The business model provides a mutually symbiotic relationship, as the entrepreneur may find it easier to receive funding when the technology business is paired with a patent monetization program, and the funding entity can continue patent monetization while covered by an operating technology company with real employees and a real business model.

What Does This Mean For The SHIELD Act?

Certainly, there are compelling reasons for and against the Act and it is worth watching its progress in Congress. However, I am not sure that the answer to the Non Practicing Entity problem is to make patent lawsuits financially untenable for small entities, as there are plenty of legitimate examples of  small companies attempting to enforce patents against wrongdoers. Similarly, as the line between a traditional Non Practicing Entity and an operating company blurs or disappears, we should not assume that every small company attempting to enforce a patent is a patent troll.