On September 27th, 2013, the Federal Trade Commission (FTC) announced that it had voted to collect public comments and gather information on 25 companies known as patent assertion entities (PAEs). The study was intended to shed more light on the PAE business model and create a better understanding of how their patent litigation activities affect innovation and competition in the U.S. economy. As defined by the FTC, PAEs are companies that do not produce, manufacture or sell goods but rather acquire patents from third parties which the PAE monetizes through negotiating licenses or litigating against an alleged infringer.
On October 6th, 2016, the FTC released the long-awaited findings of this report, titled Patent Assertion Entity Activity: An FTC Study, which includes analysis of 22 PAE respondents and more than 2,500 affiliates and related entities, conducted between January 2009 and mid-September 2014. The report’s findings and recommendations for legislative and judicial reform were intended to “balance the needs of patent holders with the goal of reducing nuisance litigation,” according to a quote attributed to FTC Chairwoman Edith Ramirez in the FTC’s official press release. Specifically, the FTC had concerns about the ex post nature of PAE patent transactions, in which licenses or settlements occur after a target has already developed a technology for marketing.
In what could be considered a positive, and perhaps surprising step in the right direction from the perspective of patent owners, the FTC acknowledged in this report that the term “patent troll,” which has widely been used to vilify all patent owners and not just those committing abuses of the patent litigation system, wasn’t helpful.
“In the Commission’s view, a label like ‘patent troll’ is unhelpful because it invites pre-judgement about the societal impact of patent assertion activity without an understanding of the underlying business model that fuels such activity,” the report reads. So the FTC officially took a stand against the use of the term “patent troll” despite how loudly that phrase has echoed on Capitol Hill in recent years. Unfortunately, the FTC also rather arbitrarily adopted $300,000 as a threshold for a nuisance license. In other words, if your patent license is worth less than $300,000, the FTC believes you are simply engaging in nuisance litigation without any consideration of whether the innovation is worth less than $300,000, which is rather puzzling. See Why should litigation costs be relevant to determining nuisance litigation?
The FTC also included a number of recommendations for legislative and judicial reform to reduce “nuisance litigation,” or patent infringement litigation resulting in licenses which were valued less than the estimated cost of defending a patent lawsuit through the end of discovery. One recommendation was to develop rules and case management practices addressing the cost asymmetries in PAE litigation, especially related to discovery costs. “Because PAEs do not invent, develop, or manufacture products incorporating their patented technology, they generally have less discoverable information than the party accused of infringement,” the report reads. “A PAE may thus be able to subject a defendant to exhaustive discovery requests while itself facing a relatively light discovery burden.” Specifically, the FTC notes that changes to Federal Rule of Civil Procedure 26 regarding discovery in civil actions could help by requiring early disclosure of asserted claims of infringement or invalidity, or limiting discovery prior to preliminary motions. Amendments could also be made to Federal Rule of Civil Procedure 7.1 to expand upon the disclosure requirements of business relationships in order to overcome difficulties in identifying instances where judicial disqualification is likely on the basis of financial information. The organization of litigation PAEs with multiple affiliates makes such identification difficult. The FTC report also called for Congress to enact provisions that would stay a lawsuit filed against an end-user when a similar infringement suit is also filed against the manufacturer. Such a “customer stay” provision is included in patent reform legislation introduced into both houses of Congress.
There is little doubt that the FTC report will be used by those who favor patent reform come January 2017. Stay tuned.
Tags: FTC, PAE, patent, patent assertion entities, Patent Litigation, patent troll, patent trolls, patents
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