A substantial number of other patent plaintiff s fall into the category of non- producing entities (NPEs) — companies that developed the patented technol- ogy at issue but, for some reason, do not presently market products using that technology. Th is type of company may have sold products using this technol- ogy at one time but was not able to compete in the marketplace. Another such company may have had a successful product that used the patent, but may have failed for reasons having nothing to do with that product. Still another company may be successfully selling some products but may not have found a use for the patented technology in those products and is thus willing to license that technology to others.
A good example of this type of NPE company is NTP, who successfully sued RIM — the owner of the Blackberry technology — for patent infringement. At one time, NTP had developed a product based on its patented technology, but did not have the resources necessary to compete in the marketplace. It thus chose to base its business model on its patent portfolio.
For the most part, this type of company does not maintain its competitive advantage by selling products. Rather, its business is to license its patents to as many companies as possible for the highest possible price. Th e only excep- tion would be where an NPE company presently sells products but does not use the patented technology for the products it sells. If that NPE company’s products compete with an infringer’s products, then the economic consider- ations for that plaintiff in determining a reasonable royalty would be similar to those for a company that does use its patented technology to compete, whether or not the patentholder uses its patent in its products.
Another important economic consideration for most NPE plaintiff s is that the company will not have any other source of income besides the licenses it grants and will have a substantial incentive to keep the price of the license less than the maximum it could obtain in order to actually sign up licensees and generate revenue. Th is NPE will also tend to license the patent on a non- exclusive basis so as to expand the “customer base” for these patents.
A countervailing consideration for an NPE plaintiff is the fact that it may have substantial sunk costs — whether related to the development of the tech- nology or to its failed attempts to develop and sell actual products that use the technology — and may feel the need to recover them by licensing the patent to others. Th is type of company will seek to recover those costs through licensing. Such a strategy may make the NPE more eager to grant a license to
Th e Plaintiff : Six Category Types 19 the patents, but may force it to hold out for a higher royalty amount. Th e royalty demanded by the NPE plaintiff may also be tied closely to the costs expended to develop the technology, because these costs will represent, to this party, how much the patent is “worth.” Another plaintiff , without such sunk costs, is more likely to rely on market considerations in agreeing to a license.
[D] Universities
Th e university, while in a similar position to an NPE plaintiff , has diff erent economic considerations. Although it does have an incentive to license the patent rather than use it to maintain some competitive advantage, it does not have the same competitive pressures that a plaintiff in private business would have. Indeed, the university’s patent portfolio is more or less a byproduct of the research its faculty members are doing anyway — either under govern- ment grant or not.
Th e university’s patent portfolio has economic value (as opposed to the “reputational” value cutting edge research may give the institution) in two ways. First, the university can enable its faculty members to organizationally “own” that technology so that a company can later be spun out of the insti- tution run by the participating faculty member. Th is gives faculty members a personal incentive to devote themselves to performing relevant research because they will able to personally benefi t from its exclusive use.
Th e more likely outcome, however, is that the university will simply license the technology to an outside company. Th e university’s fi nancial incentive, then, is to ensure the patented invention is used by as many companies as possible, so as to generate the greatest amount of licensing revenue. Th e uni- versity has little incentive to maintain its exclusivity in the technology or to demand a high royalty rate. Indeed, as an institution that has no real need to make money from the technology it develops, the university has an even lower incentive than an outside company to demand a high royalty. What might, therefore, be a reasonable royalty for a university might not be reason- able for a profi t-making institution in the commercial world.
As a nonprofi t institution, the university also does not have the same incentive to license the patent quickly and cheaply as a private business that was depending on this licensing income to stay alive. On the other hand, it does not have the same incentive to hold out for a higher price in order to recover its sunk costs as a business would. Indeed, if the patent was the result of a government grant, the university may not have any sunk costs at all.
In fact, many universities have a disincentive to be overly aggressive in licensing their patents or in threatening litigation against recalcitrant targets. Prominent companies are oft en major contributors to such institutions, and their executives oft en serve on the board of trustees. A university may well
Chapter 2 Introducing the Combatants
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decide that driving the hardest bargain possible with such targets may not be in its long-term interest.
Accordingly, universities will not, by and large, have an economic incen- tive to hold out for a high reasonable royalty rate.