Esteemed business magazine’s piece has errors, faulty premises.


The business magazine Fortune has spent many decades chronicling developments affecting economies throughout the world. On October 6, the publication ran an article discussing the recent patent assertion entity study released by the Federal Trade Commission. The Fortune article’s headline says, “The FTC Has Some Harsh Words for Patent Trolls.”

Again, the popular press gets a patent story woefully incorrect. The FTC report did not have harsh words for patent trolls. In fact, the FTC had harsh words for those who use the term “patent
troll” to vilify patent owners! Anyone who has thoroughly read the FTC’s PAE study would know that Fortune’s coverage of the study was severely off the rails before the headline was even finished.

The facts: The FTC report mentions the word “troll” only five times through the text of the main study, not counting the appendices. This is remarkable, given that the report itself (i.e., not counting the appendices) is some 146 pages long. The word “troll” shows up far more often in the study’s footnotes, often just in the title of the source being cited. In other words, a simple word search would have demonstrated to Fortune that the FTC was not taking a position on, let alone sending a harsh message to, patent trolls.

The FTC’s harsh words were for the “patent troll” moniker, not the so-called patent trolls themselves. Early in Chapter 1, the report reads: “In the Commission’s view, a label like ‘patent troll’
is unhelpful because it invites pre-judgment about the societal impact of patent assertion activity without an understand of the underlying business model that fuels such activity.” It’s right there, in the first sentence of the first full paragraph on Page 17 of the report.

If you are going to cover a report, shouldn’t you at least read all of Chapter 1?

A key distinction

The FTC goes on to cite language in the United States Supreme Court’s decision in Halo Electronics, Inc. v. Pulse Electronics, Inc. regarding the “outsized licensing fees” supposedly exacted by
such trolls. “This definition incorporates a normative judgment that licensing fees are ‘outsized,’ which cannot be made without some understanding of the business model and its economics. The
Commission’s study and this report seek to bridge that knowledge gap,” the report reads.

If anything, the FTC’s work addresses issues posed by “nuisance litigation” or litigation that leads to licenses less than $300,000, seen by the FTC as the lower level for early-stage litigation costs—
essentially, cases in which the royalty is less than the costs of trying the case. That has very little to do with trolling, if anything. In fact, the very act of taking allegations of patent infringement past
the demand letter phase and into an actual lawsuit filed with a district court is a sign that the entity isn’t a troll at all.

“The $300,000 line in the sand gets back to a point I’ve spoken on before,” explained Jaime Siegel, CEO of Cerebral Assets and global director of licensing for the Open Invention Network. “Built into the system is a mismatch in valuation. Not every patent license is worth $1 million. I’m aware of patents that were valued at a $25,000 license, which was set not to be a nuisance, but rather because the alternative was a $50,000 workaround, so the appropriate price was less than that amount. A patent license should be based on how much value is in the license, and it isn’t always $1 million.

“Three hundred thousand dollars is a completely arbitrary number that attempts to put patent licenses into buckets and suggests that if it is $300,000 and below it must be a sham claim, and
that generalization is absolutely untrue. What makes a nuisance claim a nuisance claim is when a patent is not infringed or is almost certainly invalid. That is what makes a case a nuisance settlement. When a patent owner says we know we have a lousy patent, but we know the defendant will pay us X dollars because it costs so much to litigate, that is what makes a nuisance case.”

Fortune did not explore the merits of the FTC report—odd, given that it has long been regarded as one of the preeminent business publications. Rather than focusing on the business issues and analyzing whether an arbitrary figure by that fact means that all patent licenses below that figure are somehow problematic, Fortune chose to begin with and attempt to support what is clearly a factually inaccurate narrative, a fairy tale.

What PAE really means

Throughout its article, Fortune continues to force a patent troll narrative on false pretenses. Where it discusses the FTC’s discussion of litigation PAE behavior, the article adds a parenthetical: “Terms like PAE are more polite terms for ‘patent troll.’

That, too, is wrong. Even the FTC press release explained that the commission found two distinct PAE business models. One was referred to as “Portfolio PAEs,” which are strongly capitalized,
purchase patents outright, seek to negotiate broad licenses that cover large patent portfolios, and resemble the licensing arms of manufacturing firms. The second was referred to as “Litigation
PAEs,” which frequently rely on revenue-sharing agreements to acquire patents and generally file patent infringement lawsuits before securing licenses.

Interestingly, Fortune does mention “Litigation PAEs” but makes no mention whatsoever about “Portfolio PAEs.” Perhaps that is because the FTC report takes a neutral, if not positive, tone with respect to Portfolio PAEs—which would make it impossible to erroneously conflate the general term PAE, which is hardly used by the FTC, with non-practicing entities NPEs or patent trolls.

As you probably expected in an article that obviously leaves out important facts and then gets other facts wrong, the Fortune article does seem to wrongly conflate PAE with non-practicing entities
(NPEs), while the FTC study clearly delineates between the two.

Whereas a PAE is an entity that obtains patents to license or enforce them on other parties already practicing the technology, the FTC report defines NPEs separately as “patent owners that primarily seek to develop and transfer technology.” Technology transfer is a different business model than patent assertion, a fact of which Fortune should be well aware. However, Fortune’s coverage of the FTC report states that the FTC’s judicial and legislative recommendations applied to NPEs, which is not true.

The FTC’s PAE report has clearly differentiated the terms PAE, NPE and patent troll. It would have been nice if Fortune had noticed that before unleashing a poorly reasoned piece that will only
serve to confuse its readers and be inappropriately used to ramp up support for more unnecessary patent reform.