Role of enforcing patents recognized; term “patent troll” deemed not helpful.

On Sept. 27, 2013, the Federal Trade Commission announced that it voted to collect public comments and gather information on 25 companies known as patent assertion entities. 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 Oct. 6 of this year, 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 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 commission’s official press release. Specifically, the FTC had concerns about the ex post nature (actual returns) of PAE patent transactions, in which licenses or settlements occur after a demand letter 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 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. “It invites pre-judgement (sic) about the societal impact of patent
assertion activity without an understanding of the underlying business model that fuels such activity,” it said.

PAEs put in 2 categories

Todd Dickinson, former director of the United States Patent and Trademark Office and current partner with Polsinelli PC, said the report didn’t have many surprises. “The exception, and the one
interesting new takeaway, is the FTC separating PAEs into the two big categories: portfolio PAEs and litigation PAEs, and then demonstrating that the ‘bad assertion/bad litigation phenomenon’ is
largely confined almost exclusively to the latter,” he explained. “Having the FTC no longer paint all PAEs with the same negative brush would seem to validate the portfolio PAEs and their business

Portfolio PAEs were identified as businesses that acquire patents and negotiate licenses without first suing the infringer. By contrast, litigation PAEs typically file suit for patent infringement
first before settling with a license agreement. Nearly two-thirds of portfolio PAEs negotiated licenses that generated more than $1 million in royalties per license, whereas 77 percent of litigation PAEs signed license agreements netting less than $300,000 per license.

Ninety-six percent of patent infringement cases filed and analyzed in the FTC report came from litigation PAEs. Although these PAEs accounted for 91 percent of reported licenses, those licenses only amounted to 20 percent of the total revenue earned by PAEs through patent enforcement activities. “Given the relatively low dollar amounts of the licenses, the behavior of Litigation PAE is consistent with nuisance litigation,” the report said. The FTC also examined PAE activities related to the sending of demand letters asserting patent rights against an alleged infringer.

The FTC found that PAEs weren’t successful in generating low-revenue licenses by sending a demand letter without also suing the target. “This suggests that demand-letter reform, on its own, would not fully address the potential negative repercussions of PAE activity,” the report reads. The FTC noted a high percentage of litigation that preceded licensing activities, especially among litigation PAEs. Overall, litigation preceded 87 percent of PAE licensing agreements, but it preceded 93 percent of litigation PAE patent licenses while only preceding 29 percent of portfolio PAE patent licenses.

The PAE report also found a strong correlation between the patents acquired by PAEs and the industrial sectors to which those patents were related. A full 88 percent of patents held by PAEs analyzed in the FTC report fell under the Computers & Communications or Other Electrical & Electronic category of technologies. More than three-quarters of the patents surveyed were software-related patents.

Many industries affected

Despite the heavy focus on software and information technologies, the FTC found that these patents were asserted against firms operating across a broad range of industries. This suggested to the
FTC that PAEs asserted patents not only against manufacturers but also end-users of the technology.

A finding that patent owners are enforcing patents against those that use technology, such as large retail giants like JCPenney, for example, is hardly surprising.

In recent years, patent laws have been so significantly tilted in favor of infringers that it has become virtually impossible for patent owners to license their innovations to the entities that create and manufacture the infringing technologies. Without the ability to seek reasonable compensation for ongoing infringement through licensing, patent owners have increasingly had to turn to litigation. Whenever litigation is the choice or the only possible resolution mechanism, everyone who is liable must be sued. It would be malpractice for a lawyer or law firm not to sue all liable entities. Because the patent grant provides the patent owner the right to prevent others from making, selling, offering for sale, importing, or using technologies that infringe, those who use must be sued because of the recalcitrant, efficient infringement strategies employed by those who make, sell and import the infringing technologies.

Nevertheless, in the study computer and electronic product manufacturers were found to be the most common targets of demand letters and lawsuits among PAEs. Companies in that sector accounted for more than half of the firms that either received the most demand letters from PAEs, were sued the most often or paid the largest royalties to PAEs. While 73 percent of all
assertion targets were defendants in only one lawsuit brought by a PAE, 2 percent of firms received more than five demand letters and one firm received as many as 17 demand letters.

FTC recommendations

The FTC 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 FTC said. “A PAE may thus be able to subject a defendant to exhaustive discovery requests while itself facing a relatively light discovery burden.”

Some industry groups weren’t keen on the agency’s findings. The Innovation Alliance released a statement from Brian Pomper, the organization’s executive director, which voiced concerns over
flawed methodologies in the study that led to misguided policy recommendations. “In filings with the Office of Management and Budget, the FTC itself has admitted that the study’s findings are
‘not generalizable to the universe of all PAE activity’ and that the work should only be viewed as a ‘case study’ that could inform the development of future research,” Pomper is quoted as saying.

He added that patent law and economic experts have questioned the usefulness of the FTC’s study in light of the small sample size and inadequate survey questions that missed key information from licensing firms.

Pomper is correct regarding the small sample size. It seems this report should be characterized as less a “study” and more anecdotal evidence from a surprisingly small subset within the industry.

Still, the FTC did note the important role patent enforcement plays within the patent system, acknowledging in the press release that “infringement litigation plays an important role in protecting patent rights.” Also significant was the FTC recognizing that the term patent troll is unhelpful because it inappropriately judges the patent owner from the start—overall, probably a much better report than most had anticipated.