FTC’S fixation on $300,000 figure in report shows it’s in over its head. 

The anticipated report on Patent Assertion Activity released by the Federal Trade Commission several weeks ago was much ado about nothing for a variety of reasons. It should also be used as Exhibit A with respect to the type of debacle that befalls an agency dabbling in an area in which it has no substantive expertise.

The FTC was created in 1914 for the purpose of preventing unfair competition. So it is hardly surprising that the word “patent” is not found in the FTC mission; the agency does practically nothing relating to patents or the innovation industry in any substantive way. Instead, the FTC is most often involved in garden-variety scams that prey on the unsophisticated; identity theft; antitrust violations; mergers; fraudulent advertising, and the Do-Not-Call Registry. The FTC stepped out of its lane for political purposes in order to take on Patent Assertion Entities. It is no wonder the resulting report shows little understanding of the core issues involved.

For example, the FTC was fixated on the number 300,000 throughout the report. It seems the agency got into its collective consciousness the idea that a patent settlement that is less than $300,000 is some kind of sham settlement or shakedown. Only those who are blissfully ignorant to the realities of the patent licensing marketplace could come to such a conclusion.

The wrong focus

When speaking of “Litigation PAEs,” the FTC writes: “Litigation PAEs typically sued potential licensees and settled shortly afterward by entering into license agreements with defendants
covering small portfolios, often containing fewer than ten patents. The licenses typically yielded total royalties of less than $300,000. According to one estimate, $300,000 approximates the
lower bound of early-stage litigation costs of defending a patent infringement suit. Given the relatively low dollar amounts of the licenses, the behavior of Litigation PAEs is consistent with nuisance litigation.”

I’ve been as critical of anyone when it comes to the extortion-like shakedowns that sometimes take place, which rely on the inefficiencies of the federal judiciary to coax defendants into settling rather than fighting. The system can and should do something about these abuses. If the FTC were to have conducted a review of these abuses, the report might have been useful—although
it still would be dealing with an issue in which it lacks expertise and the conclusions hardly worthy of being called a “report,” given the shallow investigation undertaken (only 22 responses received and one niche market considered).

Why does the FTC have in its collective consciousness the notion that $300,000 makes a settlement a nuisance litigation? Because patent litigation is so expensive, it says:

“The American Intellectual Property Law Association (AIPLA), which periodically surveys the costs of patent litigation, recently reported that defending an NPE patent lawsuit through the end
of discovery costs between $300,000 and $2.5 million, depending on the amount in controversy. By this estimate, 77% of Litigation PAEs’ settlements fell below a de facto benchmark for the nuisance cost of litigation. This suggests that discovery costs, and not the technological value of the patent, may set the benchmark for settlement value in Litigation PAE cases.”

So the $300,000 number has nothing to do with whether that amount represents fair value for the license obtained in a forced settlement after litigation is commenced, but instead only relates to the cost of defending the claim brought by the property owner in order to defend the property rights trampled? Why should the costs of the tort-feasing infringer be relevant in determining  whether the extracted value from a settlement is fair?

“The report highlighted one significant issue: Why do patent litigations in the United States cost so much? I lay that at the feet of all the parties, including the judiciary,” said Jaime Siegel, CEO
of cerebral assets and global director of licensing for the Open Invention Network. “There are inconsistent practices within the judiciary, in terms of scheduling, to allow parties to clarify case
dispositive points early in the case, for example.”

Ignoring reality

Another issue driving up litigation costs is the pressure on law firms and attorneys, who in the real world don’t get paid once a settlement has been achieved. “Law firms are under pressure, so
there is this perverse incentive to prevent settlement until discovery is done, which helps the firm’s bottom line,” Siegel said. “Of course that is not to suggest that most attorneys do not put their
client’s best interests first, but it is incumbent on clients to ensure that they are managing their law firms to get to the most efficient result possible from a business perspective.”

Many years ago, when I was a new attorney, the firm where I worked represented plaintiffs in all manners of litigation. It was well known that you could not settle a case with defense counsel
until after they had achieved a certain amount of billing. That is just the way things work in the real world.

So the fact that law firms charge a lot of money to defend patent infringement cases, and don’t particularly have any incentive to settle cases early, somehow translates into certain settlements being for nuisance value without any consideration of whether the settlement is a fair value for the rights trampled upon by the infringer? The FTC has quite a lot of explaining to do, because it seems it picked an arbitrary number that is a function of what attorneys ordinarily charge infringing defendants through discovery. I don’t see how that is a function of the value of the innovation, or how it says anything about the merits of the infringement case, the damages case, or the tactics of the patent owner.

Pretending that $300,000 is a relevant number ignores the reality that innovations come in all shapes and sizes, and they convey very different values. It almost seems as if the FTC is suggesting
that if your innovation cannot be licensed for more than $300,000, you shouldn’t have a right to license it at all. For the same reason that the FTC said the term “patent troll” is unhelpful
(i.e., because it inappropriately discriminates against rights owners without understanding the business model and practices), the $300,000 figure is equally unhelpful.

The FTC is charged with ensuring fair business practices but seems to be radically discriminating against incremental innovations valued at less than $300,000—and actually encouraging patent owners to charge more for their licenses than they are worth so they don’t get labeled a nuisance. The agency should leave these patent issues to the experts.