Fighting Back: Defense Strategies When Patent Trolls Target Small Companies

Patent litigation by non-practicing entities (NPEs) remains a frustration for companies who manufacture products in innovative industries.

NPEs follow a consistent business model: acquire patents at low cost by purchase or filing, and assert then them against companies where the settlement value exceeds the cost of defense. This creates an asymmetry that NPEs exploit—they face no risk of counterclaims because they manufacture nothing. NPEs target smaller companies strategically, knowing that the high cost of defense makes settlement attractive even when the infringement claims lack merit.

Between 2005 and 2011, NPE lawsuits against small companies (those with less than $100 million annual revenue) grew from 800 to nearly 2,900 cases. The median defendant’s annual revenue was $10.3 million. Understanding available defense strategies helps smaller companies respond to NPE assertions while managing costs and business risk.

Responding to Demand Letters

Most NPE campaigns begin with cease and desist letters rather than immediate litigation. These letters serve to test which targets will settle quickly. How a company responds to the initial demand letter often determines whether the NPE proceeds with litigation.

Do not ignore a demand letter

Ignoring demand letters creates risk. Respond to the letter, even if only to acknowledge receipt and request additional time to investigate.

Investigate before sending a substantive response

Research the NPE and the asserted patent before engaging in substantive discussions. Public sources provide valuable information:

• Search PACER (Public Access to Court Electronic Records) for the NPE’s litigation history
• Review the patent file history on Public PAIR at the USPTO website
• Identify examiner rejections and how the patent owner overcame them
• Look for claim amendments that may narrow the scope of coverage
• Search for prior art that the examiner may not have considered
• Check whether the patent has been challenged in PTAB proceedings

Demand specificity with respect to infringement allegations

NPEs often assert claims with minimal detail, hoping targets will settle rather than investigate. Request detailed information about the alleged infringement:

• Identify which specific claims of the patent are allegedly infringed
• Provide detailed claim charts showing how each element of each asserted claim reads on the accused product or service
• Explain whether infringement is alleged to be literal or under the doctrine of equivalents
• Specify which products or services allegedly infringe
• Provide evidence supporting the infringement allegations

This pressure shifts costs to the NPE. The NPE may prefer to focus on companies that settle quickly without demanding proof. Requesting specificity signals that the company will not be an easy target.

Investigate the NPE’s history

Understanding the NPE’s business model and litigation history informs response strategy. Key questions include:

• How many cases has the NPE filed on this patent?
• How many cases settled, and at what amounts?
• Has the NPE taken any case to trial?
• What is the NPE’s success rate in litigation?
• Which companies has the NPE targeted—similar size and industry?
• How has the NPE responded when defendants fought back?

Contact other companies that received demand letters from the same NPE. Many are willing to share information about settlement demands and negotiation tactics. Some NPEs send hundreds of letters but file suit against only a small percentage of recipients.

Litigation Defense Strategies

After an NPE files suit, defendants have several procedural and substantive defenses available.

Section 101 Patent Eligibility Challenges

Many NPE patents were examined before the Supreme Court decisions in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. 66 (2012) and Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014). These patents often claim abstract ideas without transforming them into patent-eligible applications.

The Federal Circuit has found certain categories of claims per se ineligible under 35 U.S.C. § 101:

• Claims directed to displaying and transmitting information.
• Claims to monitoring information through GPS or similar technologies.
• Claims to targeted advertising using generic computer components.

Section 101 challenges can be raised through motions to dismiss under Federal Rule of Civil Procedure 12(b)(6). Success rates vary by district. However, courts recognize that patent eligibility determinations often require claim construction and fact discovery, making early dismissal difficult.

Inter Partes Review at the PTAB

Inter Partes Review (IPR) at the Patent Trial and Appeal Board provides an alternative forum for challenging patent validity. IPR offers several advantages over district court litigation:

• Lower burden of proof—preponderance of the evidence rather than clear and convincing evidence
• Lower cost—typically hundreds of thousands of dollars rather than millions
• Faster resolution—final written decision within 12 months of institution
• Technical expertise—cases decided by administrative patent judges with technical backgrounds

IPR challenges patents on grounds of anticipation or obviousness under 35 U.S.C. §§ 102 and 103, based on prior patents or printed publications.

The PTAB disrupts the NPE business model by offering accused infringers a credible path to invalidate asserted patents. The threat of IPR filing decreases settlement values and provides defendants significant leverage in negotiations.

Recent data shows a concerning trend for defendants, with the USPTO director denying institution of most IPR petitions. This makes stays in district court less likely and may contribute to an uptick in NPE litigation.

Motions to Stay District Court Litigation

When IPR is instituted, defendants often move to stay district court proceedings. Courts consider three factors:

1. Status of discovery and trial preparation in district court
2. Whether a stay will simplify the issues before the court
3. Whether a stay would unduly prejudice the patent owner

Strategic considerations for obtaining a stay include:

• Wait until after PTAB institutes the IPR before moving to stay—courts are reluctant to speculate whether a petition will be granted
• Challenge all asserted claims in the IPR—courts deny stays where significant claims remain unchallenged
• File early in litigation—stays become harder to obtain after substantial discovery or claim construction
• Demonstrate that IPR challenges are strong—PTAB institution decisions finding claims reasonably likely to be invalid strengthen stay motions

Note that PTAB decisions are not binding on district courts.

Managing Legal Costs

Controlling litigation costs presents a major challenge for smaller defendants. Several strategies can reduce expenses while maintaining an effective defense.

Strategic Use of PTAB Proceedings

IPR petitions cost significantly less than district court litigation—typically $200,000 to $400,000 compared to millions for trial. For smaller defendants, IPR may be the only realistic option to challenge patent validity.

Some law firms offer IPR representation on contingency or reduced fees for strong cases. The high PTAB invalidation rate makes these arrangements attractive to counsel.

Collaborative Defense

When an NPE targets multiple companies with the same patent, defendants can share costs:

• Joint retention of counsel to prepare common defenses
• Shared prior art searches and invalidity analysis
• Coordinated IPR petitions (subject to estoppel considerations)
• Information sharing about the NPE’s settlement positions

Courts sometimes consolidate related cases for pretrial proceedings, which reduces duplicative discovery and motion practice costs.

Settlement Decisions

Small companies face difficult decisions when NPEs demand settlement. The economics often favor settlement even when the infringement claims lack merit. Understanding the NPE business model helps in making informed decisions.

The NPE Settlement Strategy

NPEs structure settlement demands to fall below the cost of defense.

First, NPEs follow a sequential targeting strategy. Research shows that after filing an initial lawsuit, NPE plaintiffs file approximately seven follow-on lawsuits under the same patent. When a company is sued by an NPE, the likelihood of its technology peers being sued increases by 14% in the subsequent year. A company that settles quickly may become a known target for future assertions.

Second, the cost to defend does not always reach trial-level amounts. Many cases resolve earlier through:

• Successful motion to dismiss on Section 101 grounds
• PTAB invalidation in IPR (which costs far less than trial)
• Summary judgment of non-infringement after claim construction
• NPE withdrawal when faced with a prepared defense

When to Consider Settlement

Settlement may be appropriate when:

• The infringement case is strong—the accused product clearly practices each element of an asserted claim
• The patent appears valid—strong prior art is not readily available
• The settlement demand is reasonable compared to the value of the accused product
• Litigation would distract management from critical business operations
• The company lacks resources to fund even initial defense costs
• The NPE has a track record of taking cases to trial and winning

When to Fight

Fighting may be the better choice when:

• The patent claims abstract ideas likely ineligible under Section 101
• Clear prior art exists that the examiner did not consider
• The infringement contentions are vague or unsupported
• The NPE has never taken a case to trial
• The NPE is asserting the patent against dozens of companies simultaneously
• Other defendants are fighting the same patent (opportunity for cost-sharing)
• The settlement demand is excessive relative to the actual use of the technology
• Counsel is available on contingency or alternative fee arrangements

Negotiating Settlement Terms

If settlement is the chosen path, negotiate favorable terms beyond just the payment amount:

• Scope of the license—ensure it covers all products and services, not just current offerings
• Transferability—the license should transfer if the company is acquired
• Covenant not to sue—seek coverage for related patents in the same family
• Confidentiality—NPEs often demand confidentiality, but defendants can negotiate the right to disclose settlement terms to similarly situated companies
• Payment terms—installment payments may be available rather than lump sum
• Most favored nations clause—if the NPE later settles with others for less, the company receives a refund of the difference

Settlement agreements typically grant perpetual licenses in exchange for lump-sum fees. Read all terms carefully. Some NPE licenses contain restrictions that create problems later, such as non-transferability or limitations to specific product versions.

Avoiding the Willfulness Trap

Whether settling or fighting, avoid creating evidence of willful infringement. Willfulness can result in enhanced damages up to three times the actual damages. Do not:

• Continue unchanged after receiving a detailed infringement allegation without investigating
• Ignore competent legal advice about infringement risk
• Destroy or fail to preserve documents related to product development
• Make internal statements acknowledging infringement without qualification

Obtain an opinion of counsel analyzing infringement and validity. While expensive (typically $15,000 to $50,000), an opinion of counsel can defeat willfulness claims and eliminate the risk of enhanced damages.

Practical Steps for Small Companies

Small companies facing NPE assertions should take these practical steps:

1. Do not ignore demand letters—respond promptly to avoid willfulness findings
2. Research the NPE and patent before engaging in substantive discussions
3. Demand detailed infringement contentions before considering settlement
4. Consult with patent counsel on limited scope for critical decisions
5. Consider IPR as a cost-effective alternative to district court litigation
6. Connect with other targets of the same NPE to share information and costs
7. Evaluate settlement versus defense based on patent strength and infringement clarity
8. Negotiate favorable settlement terms if settlement is appropriate
9. Obtain opinion of counsel to avoid willfulness exposure

NPE litigation continues to evolve.

Despite these challenges, small companies have options. No single strategy works in every case. The specific facts—the strength of the patent, the clarity of infringement, the NPE’s litigation history, available resources, and business priorities—determine the optimal approach. Working with experienced patent counsel helps companies navigate these decisions and implement effective defense strategies tailored to their circumstances.

Justin Miller is a solo patent attorney. In 2025 he started his own law firm, Distinct Patent Law, after nearly 15 years of practice. His firm is located in Saint Petersburg Florida. He serves clients in Tampa Bay, and because patent law is federal, can file patent applications for clients all over the United States.