Cisco to NPEs: Stop That Racket

Non–practicing entities—firms that exist for the purpose of litigating, and licensing patents—base their success in part on a litigation asymmetry in their favor. Because NPEs don’t practice their patents or sell products incorporating the inventions they own, NPEs can sue for patent infringement without fear of counterclaims for unfair trade practices or an antitrust violation. Because they don’t make competing products, they can’t be competitors of their targets. And if they aren’t competitors of their targets, then they can’t be accused of anticompetitive practices. That leaves defendants with only the usual array of defenses: non–infringement, invalidity, and unenforceability.

As reported in the Wall Street Journal, Silicon Valley–based Cisco Systems has found a novel legal theory to assert against NPEs: racketeering. In a recently filed lawsuit, Cisco, Netgear, and Motorola have accused NPE Innovatio IP Ventures LLC, based in Chicago, of engaging in an extortion scheme directed at Cisco’s customers that is “misleading, fraudulent, and unlawful” under federal racketeering laws. According to the complaint, Innovation has sent 8,000 threatening letters to Cisco customers that use Wi–Fi equipment provided by Cisco, Netgear, or Motorola in their businesses. Innovatio disputes the claims and plans to seek dismissal of the lawsuit.

While proving a racketeering claim will no doubt prove a challenge for Cisco, it will be fascinating to see what effect this kind of aggressive strategy and aggressive defense of its customers will have. With research suggesting that as many as 40% of patent cases are being brought by NPEs, accused infringers and their vendors will need to get creative in their efforts to stem this tide.