Are Non-Practicing Entities The Problem?

What if (Almost) Everything You Thought You Knew About America’s “Broken” Patent System Was Wrong?

What follows is the second installment in the four-part “Myths of the Patent Wars” series.

The necessary legislative effort to curb bad actors in the patent industry has been “hijacked” by a small handful of very powerful global technology companies intent on forcing broader changes in the patent system to make it better serve their business interests.

Under the banner of “patent reform,” these giant firms have spent tens of millions of dollars on lobbyists and media relations to promulgate a series of dramatic but false claims about America’s supposedly-“broken” patent system — claims that are now almost universally accepted as true by the media, Congress, and the public at large.

In Part 1 of this series, we examined the false claim that an “explosion of patent litigation greater than any in history” is imposing an unwarranted burden on industry and diverting resources better spent on innovation. In fact, today’s patent litigation rate is less than half what it was during the golden age of American innovation in the 19th century Industrial Revolution — a revolution which thrust the U.S. into the top ranks of industrial nations.

Today we will look at the second great myth of the patent wars:

Claim #2: Non-practicing entities (NPEs) are a new breed of parasitic patent litigants who hinder economic growth and contribute nothing to society.

The Facts: Leave aside for a moment the fact that despite all the crocodile tears shed by large technology firms over “abusive NPEs,” virtually every one of them — Hewlett-Packard, Cisco, Apple, Google, et. al. — operate their own internal NPE units and intellectual property holding companies that buy, sell, and litigate patents never used in their products. And they will sue anyone who infringes their non-practiced patents and fails to take a license. This cognitive dissonance — some would say “hypocrisy” — is exemplified in a letter Google sent April 5 to the Justice Department and Federal Trade Commission condemning NPEs, also called “patent assertion entities” or PAEs, which failed to mention that Google itself is an investor in the biggest PAE of them all, Intellectual Ventures.

And leave aside for the moment the Government Accounting Office’s report on NPEs issued in August 2013.  In the America Invents Act, Congress directed the GAO, the independent, nonpartisan agency that works for Congress, to include “recommendations for any changes to laws and regulations that will minimize any negative impact of patent litigation.”  Many expected the GAO report to damn NPEs.  But after completing its extensive research, the GAO elected to make no legislative or regulatory recommendations, to the disappointment of anti-patent lobbyists. Instead of condemning NPEs, the GAO emphasized at the very outset of its report that our nation’s history is filled with examples of inventors who did not develop products based on the patented technologies.

Of far greater importance is the little-known fact that the Founders of this nation deliberately and quite consciously authorized the creation of non-practicing entities 234 years ago as a way to kick-start the development of the new American economy.

Remember, at the time of its founding, America’s was a backward agrarian economy, almost wholly-dependent on imports, and lacking in any significant domestic industry. In fact, the U.S. at the time had a standard of living lower than that of many South American countries.

So in addition to creating lasting democratic institutions of governance, the Founders also faced the critical task of finding some way to unleash the latent creative and productive potential of the American citizenry. As Thomas Jefferson wrote to his daughter Martha in 1787, precisely because America was deprived of British imports and left to its own devices, “we are obliged to invent and execute; to find means within ourselves, and not to lean on others.”

But how, exactly, could they do that?

The Founders had studied the elitist British patent system, and they knew that patent fees there were 11 times the per capita income of the average citizen and that patent holders were required to “work” their patents — i.e., manufacture products based on their inventions. According to Bowdoin College historian Zorina Khan — her book “The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920” earned the Alice Hanson Jones prize in 2005 for outstanding work in economic history — they also knew that these high fees and “working requirements” restricted innovation activity primarily to a tiny handful of wealthy individuals with the factories (or the capital to build factories) needed to manufacture products. (In fact, says professor Khan, the exclusion of the “working classes” was regarded by British parliamentarians as one of the chief virtues of their patent system!) High fees and “working requirements” also tended to skew invention towards incumbent capital-intensive industries, rather than the disruptive new industries that usually spark great economic advances.

Clearly, the British patent model would not work for an America whose only asset (other than its natural resources) was a population widely-regarded as unusually enterprising. Unlike the tenant farmers and laborers that made up the bulk of England’s rigid class society, most Americans were free-holding small farmers, merchants, shopkeepers, artisans, and mechanics — the forerunners of what we today call the middle class — who were possessed of what 18th century publisher Hezekiah Niles called “a universal ambition to go forward.”

To rapidly develop the new U.S. economy, therefore, the Founders “quite self-consciously” (to quote economic historians Naomi Lamoreaux at Yale and the late Kenneth Sokoloff of UCLA) tried to design a patent system that could do what no other had ever done before — stimulate the inventive genius and entrepreneurial energy of the common man. Simply put, they tried to expand the pool of inventors to include as many people as possible, even those without the wealth or resources to commercialize their own inventions.

So they first of all set patent fees to a level an ordinary citizen could afford — less than 5 percent of the rate in Britain. Second, they decided against imposing “working requirements” on patentees. During the debate over HR-41 (the bill that became the first patent law in 1790), says Khan, “the Senate suggested requiring patentees to make products based on the patent or license others to do so, but the House rejected this as an infringement of patentee rights.” And third, they wrote the patent law expressly to facilitate the licensing and sale of patent rights, thereby creating the world’s first patent licensing industry and market in new technology.

The result, as Jefferson would write 13 years later, has “given a spring to invention beyond my conception.” Indeed, the low patent fees, lack of working requirements, and ability to license patent rights turned inventing into a new income-earning career path for thousands of poor but technically-creative citizens. Whereas most of Britain’s few hundred inventors came from privilege, the vast majority of America’s many thousands of inventors came from humble beginnings. They were farmers, workers, merchants, mechanics, and artisans for the most part.

Indeed, of the 160 so-called “great inventors” of early nineteenth century America, over 70 percent had only a primary or secondary school education. Half had little or no formal schooling at all. And many of the most famous names in American invention — Matthias Baldwin (locomotive), George Eastman (roll film), Elias Howe (sewing machine), and Thomas Edison (electric light and phonograph) — had to leave school early to support their families.

“The rapid growth of inventive activity during early American industrialization was characterized by a disproportionate increase in the involvement of segments of the population with relatively common sets of skills and knowledge,” note Sokoloff and Khan. “Rather than being accounted for by an elite who possessed rare technical knowledge or commanded large amounts of financial resources, the rise in patenting coincided with a broadening of the ranks of patentees to encompass many individuals, occupations, and geographic districts.”

America quickly became a nation of tinkerers. And as more and more citizens saw that they could make a living by applying a little “Yankee ingenuity” to the problems of agriculture and industry, the U.S. per capita patenting rate — defined as the percentage of citizens who became inventors — soared until by the Civil War it was triple that of Britain, according to the annual reports of the commissioner of patents in both countries. Each U.S. patentee was also far prolific than his or her British counterpart, so by mid-century, the U.S. was patenting five times the number of inventions as Britain each year, even though our populations were then equal in size. By 1885, our per capita patenting rate was more than quadruple the rate in Britain, and approximately 85 percent of all U.S. patents were licensed.

Patent licensing, in fact, was the principal means by which new inventions were commercialized during the decades before in-house corporate R&D departments emerged in the early 20th century. Publications such as Scientific American were founded expressly to facilitate the trade in patents, and it regularly featured descriptions of new and interesting patents, which commercial enterprises then licensed or purchased to use in their product development efforts.

American Bell Telephone’s new product pipeline, for example, operated like most others at the time. According to its 1894 annual report, the company’s R&D department licensed 73 patents from outside inventors, while developing only 12 from its own employees.

In the words of the Congressionally mandated Government Accounting Office (GAO) report on NPEs, “History is filled with examples of successful inventors who did not develop products based on the technologies they patented.” It specifically cited the case of Elias Howe, who patented a method of making a lockstitch but did not produce sewing machines. Instead, Howe licensed his patents to the Singer Company, which then deployed Howe’s invention in its sewing machines.

Such patent licensing, scholars now know, was facilitated by an array of intermediaries — lawyers, venture financiers, and patent licensing agents — who “lowered the transaction costs and improved the efficiency” of the trade in and commercialization of patented technology. “By enabling, indeed encouraging, inventors to focus on what they did best [i.e., invention], this division of labor gave rise to the most technologically fertile period in American history.”

The Founders’ decision to foster NPEs and patent licensing proved crucial to America’s rapid technological progress and economic growth. Indeed, patent records from the 19th century reveal that more than two-thirds of the “great inventors” of the Industrial Revolution, including Thomas Edison and Elias Howe, were NPEs who specialized in invention and licensed some or all of their patents to outside enterprises for development into new products.

The result of this division of labor was exactly as Adam Smith predicted:

“Observers attributed much of the country’s rapid technological progress to its distinctive patent system,” noted Lamoreaux and Sokoloff. “Quite revolutionary in design at inception, the U.S. patent system came to be much admired for providing broad access to property rights in new technological knowledge and for facilitating trade in patented technologies. These features attracted the technologically creative, even those who lacked the capital to directly exploit their inventions . . . and also fostered a division of labor between the conduct of inventive activity and the application of technical discoveries to actual production.”

The benefits of that division of labor remain visible today, embodied in the thousands of university and other NPE patents licensed by companies large and small each year, as well as by the positive U.S. balance of trade in patent licensing, estimated to be worth $150 billion annually in 2006. Over the last 30 years, more than 5,000 new products and 7,000 new companies have been launched with the help of university NPE patents. And industry technology licensors like Dolby and Qualcomm help the U.S. maintain its technology leadership in critical economic sectors.

President Obama was clearly unaware of this history when he condemned all NPEs as “patent trolls” on February 14, 2013, saying, “They don’t actually produce anything themselves.”

Once again, there is indeed a species of NPE that files strike suits using low-quality patents to extort settlements from small firms unable to pay the cost of standing up to them in court — the patent law equivalent of the ambulance chasers of personal injury law. But these abusive litigants should not be confused with legitimate NPEs whose primary business is invention and/or licensing, not litigation.

TO BE CONTINUED: Up next we will address the ITC and whether there really are excessive damages in patent infringement disputes.


Warning & Disclaimer: The pages, articles and comments on do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of Read more.

Join the Discussion

24 comments so far.

  • [Avatar for step back]
    step back
    April 15, 2014 03:41 pm

    Those math-is-software-is-math people will stop at nothing to blot out the truth. 😉

    But hardware rules.
    He who controls the memory hardware controls the bits.

  • [Avatar for Anon]
    April 15, 2014 11:30 am

    Filter affected?

    It appears that the landing page of IPWatchdog has been hacked. One can reach the blog posts by landing on a different page first and then navigating to another page, but any direct landings are being diverted.

  • [Avatar for step back]
    step back
    April 11, 2014 02:40 pm


    Well said.
    I have tried to put in my minor contribution into the patent wars over the course of many years.
    But as you say, it is an uphill battle against an ever expanding avalanche.
    Not just USA corporate money but also foreign sourced money.
    Numerous foreign entities have a vested interest in destroying the USA patent system.

    They call it “harmonization” and they have conned the average Joe Senator into believing that HARM-my-nation is something every patriotic American should embrace.

    Very sad that all three of the government branches, legislative, judicial and executive have signed on to the foreign-sourced propaganda. 🙁

  • [Avatar for NWPA]
    April 11, 2014 07:54 am

    This is good stuff. This is very much like when the bank regulation was burnt down. Now we have academics like Lemley that provide these false claims in law journal articles. For example, the functional claiming paper by Lemley is shameful. It misrepresents claiming and why there has been a rise to functional claiming. I would like to see a paper debunking Lemley’s functional claiming paper. Another false fact that Lemley puts out there is that software has no structure. That is outrageous. It like claiming there is no gravity.

    I think a good way to think about what is going on is that the corporate money is just hard to fight. We can win once, twice and even hundred times. But, each year they are there and push and push. Each year they find out ways to corrupt new groups of people with their money. That is what I see. The only argument that I have seen really debunked is that software is natural laws. But, then that same argument appeared in a New York Times op-ed piece by a professor of law. It is hard to fight this when the average judge is so ignorant of science.

  • [Avatar for step back]
    step back
    April 10, 2014 07:43 pm

    @Ken Fagin,

    Thank you for participating here.

    By law, a “patent” is a form of property (the personal property kind) that is bought and sold like any other item of property. If someone picks up at a garage sale, a cheap Rembrandt from the Attic, so be it. Let the seller beware.

    A lawful and legal “right” comes with obtaining legal title of a patent, namely, to exclude others from making, selling or using the claimed invention.

    In the USA there is no requirement for the owner of the patent to be “working” the invention.

  • [Avatar for step back]
    step back
    April 10, 2014 07:38 pm

    @Gene: It appears comments are locked out in some of your more recent postings 🙁

  • [Avatar for step back]
    step back
    April 10, 2014 07:38 pm

    Goldstone and Ebert (IPbiz) lock horns here:

  • [Avatar for Ken Fagin]
    Ken Fagin
    April 10, 2014 06:20 pm

    Very interesting and informative read. I wonder, however, whether there are two significant differences between the original “system” and what we see today that moderate the relevance/significance of the portrait of early American invention.

    First, did the companies that bought the patents from the non-practicing inventors then use them simply to assert against others who were practicing the inventions, without practicing the covered inventions themselves, or did they purchase those patents simply to “control” the technology they themselves wished to practice?

    Second, did the non-practicing inventors use their patents offensively, i.e., by suing those who refused to buy or license under the patents?

    The difference today that many people find offensive is the use of patents strictly as business weapons that can be bought and sold and used like Swords of Damocles (bastardized application of the phrase) irrespective of whether the owner or the owner’s employees had any involvement with developing the covered technology.

    But — and this, I think, is the important but — there is a lesson to be learned from the First Amendment and freedom of speech. Sometimes the very system that is so important to us forces us to tolerate actions (i.e., speech) that many/most of us find abhorrent, but the overall benefit of the protection far outweighs the discomfort such extreme applications of the “system” bring, and that is why we keep and use it as is.

    Just my $0.02.


  • [Avatar for step back]
    step back
    April 10, 2014 04:15 pm

    Hat tip to Greg Ahronian on this Mark Lemley find:

    According to Professor Lemley, patents can be done away with because now we live in a world of infinite creativity and zero scarcity:

    “More recently, new technologies promise to do for a variety of physical goods and even services what the internet has already done for information [.. make it abundant …]. … IP rights are designed to artificially replicate scarcity where it would not otherwise exist [by creating monopolies]. In its simplest form, IP law takes public goods that would otherwise be [freely] available to all and artificially… “

  • [Avatar for step back]
    step back
    April 10, 2014 04:06 pm

    well, comments seem to be working at least within here
    Anon, did you mean Kearns and his prototype windshield driving circuit?

  • [Avatar for step back]
    step back
    April 10, 2014 04:03 pm

    testing (comments seem to be blocked out in other posts)

  • [Avatar for Anon]
    April 9, 2014 08:52 pm

    Is Stern a non-practicing entity problem?

  • [Avatar for step back]
    step back
    April 9, 2014 07:57 pm

    Let’s not forget, Armstrong= inventor of FM radio, Kearns and the intermittent windshield wiper and Hyatt (?) who still waits 40 years later for action by the USPTO.

    And last but still foremost: Jerome Lemelson.

  • [Avatar for jodi]
    April 9, 2014 07:14 pm

    correction on last post: “The NEED to strengthen the patent system has been 100+ years in the making”.

  • [Avatar for jodi]
    April 9, 2014 06:55 pm

    The Wright brothers were granted four U.S. patents and yet Curtiss were still able to blatantly copy their innovations that everyone else struggled with.

    Strengthening the patent system has been 100+ years in the making.

  • [Avatar for step back]
    step back
    April 9, 2014 04:45 pm


    It’s near impossible to keep up with the “Hate the Inventors” propaganda machine
    Check out this recent animated video:

  • [Avatar for step back]
    step back
    April 9, 2014 04:39 pm


    Maybe off topic from the NPE focus taken in this IPwatch post is the bigger media and politics proposals of hey, guess what, let’s hate the inventors:

    I mean, figure it out. What percentage of the population is constituted by inventors and how can such an insular minority fight back?

  • [Avatar for Inventor0875]
    April 9, 2014 04:25 pm

    Thanks, step back.

    If stepback’s link has restricted access to you:

    Google search on title, “How a Patent Fight Grounded the Wright Brothers”
    then click on link Google provides.

  • [Avatar for step back]
    step back
    April 9, 2014 04:06 pm


    No harm in including the link to the WSJ piece:


  • [Avatar for step back]
    step back
    April 9, 2014 04:04 pm


    Not only is Obama an apparent captive of the DC Delusions Bubble, but so too are the US Supreme Court Justices.

    I was particularly fascinated by Justice Kennedy’s delusion during oral arguments n Alice. v. CLS regarding finding “any” bunch of computer users in a Silicon Valley coffee shop and having them “write” the code for your “idea” over the weekend so it can be executed on “a computer”.

    This a comic strip view of a much more complicated and nuanced world.

  • [Avatar for Inventor0875]
    April 9, 2014 04:01 pm

    Gene and all,

    There is an extreme anti-patent piece on the April 9, 2014 Wall Street Journal opinion page entitled:

    “How a Patent Fight Grounded the Wright Brothers”.

    Perhaps Gene, Ron K. and others can collaborate and set the record straight with a rebuttal published on the WSJ opinion pages.

  • [Avatar for EG]
    April 9, 2014 11:20 am

    “President Obama was clearly unaware of this history when he condemned all NPEs.”

    Like his ill-advised comment about NPEs, and has happened all too often during his presidency, Obama has failed to heed George Santayana’s astute warning: “Those who cannot remember the past are condemned to repeat it.”

  • [Avatar for Joe Allen]
    Joe Allen
    April 9, 2014 11:09 am

    I found the history on the Founding Fathers intent to expand the benefits of the patent system from the elites to the common folk fascinating. Thanks for sharing!