DISPUTE RESOLUTION: Intellectual Property: Non-Practicing Entities (Patent Trolls) Target Oil and Gas Companies

by King & Spalding

As the number of patent infringement lawsuits brought by Non-Practicing Entities (NPEs) has increased, oil and gas companies have increasingly become targets.

A Non-Practicing Entity is typically defined as any entity that gets its revenue from licensing or enforcing patents that does not itself otherwise apply the patent. NPEs may include government agencies, universities, companies, and individuals. “Patent troll” is a widely used pejorative for NPE. Because NPEs do not sell products, they have no exposure to counterclaims of patent infringement.

Recently, a specific type of NPE has been suing oil and gas companies. These NPEs comprise shell companies expressly created to generate revenue by suing target companies for patent infringement. The NPEs have no assets except patents, and sometimes, they merely have the right to litigate while another entity maintains ownership of the patent. These NPEs employ a business model based on the premise that corporate decision makers typically choose a low-cost settlement rather than a more expensive defense. Knowing that it costs at least $1M to defend a patent case (AIPLA Report of the Economic Survey 2011, pp. I-153-55), NPEs initially demand between $100,000 - $300,000 to settle. NPEs file nearly identical complaints against a plethora of diverse defendants and follow each filing with a demand for a quick settlement at a price far lower than the cost to defend the litigation. See Eon-Net v. Flagstar Bancorp, 2011 WL 3211512 (C.A. (Wash.)).

Oil and gas companies are being sued because they appear on the Fortune 500 list and use a wide range of technologies such as GPS, Internet, networks, and encryption. While the oil and gas is not the most often targeted industry, it gets its fair share of NPE suits. See www.patentfreedom.com/about-npes/industry/. Recently, Fortune 500 oil and gas companies have been sued by NPEs as follows:

In each case, the oil and gas company is merely one of tens or hundreds of Fortune 500 defendants. Few foreign oil and gas companies have been sued. Clearly, NPEs target U.S. or multinational companies where jurisdiction is easily established and significant resources are available to pay settlements.

Some companies are finding that the best defense is a good offense and are refusing to pay the initial settlement demand. NPEs expect corporate decision makers will choose a low-cost settlement rather than more costly defense. Further, the patent is the NPE’s only asset. Thus, NPEs aim to avoid substantive review of the patent by incentivizing early settlement. By showing a willingness to challenge the merits of an NPE patent, companies are disrupting the NPE business model.

Certainly, the cost of any litigation strategy must be balanced against the settlement demand. A good strategy is to identify the single issue most likely to win at an early stage of the case and then spend precious resources on that issue. A defense may include post-grant review by the United States Patent and Trademark Office, or substantive review by a district court. Additionally, defendants being sued by the same NPE may be jointly represented and/or they may form a joint defense group with shared costs. If a win is defined by defeating the NPE without spending much more than the settlement demand, cost sharing is likely a must.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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