United States: Federal Trade Commission Publishes Study Analyzing Patent Assertion Entity Organization And Behavior

Last Updated: October 14 2016
Article by Alex Okuliar and Jay Jurata

For years, a debate has swirled in Washington and around the country about the role and economic value of "patent assertion entities" – often referred to derisively in the press as "patent trolls." Some of these PAEs have been known to blanket small businesses with threatening letters claiming infringement of sometimes questionable patents hoping to receive a quick payout. The Federal Trade Commission just recently published a long-awaited Patent Assertion Entity Activity Study that analyzes the structure, organization, and behavior of PAEs, hoping to inform the debate about these entities. Using responses from a sample of 22 PAEs and more than 2,500 PAE affiliates and related entities, the study analyzes PAE acquisitions, litigation, and licensing practices over a six-year period. The findings in the study are extensive and are likely to provoke further discussion and debate. The Commission's key findings and recommendations are discussed below.

Findings

  • Business Models: The Commission identified two types of PAE business models: Portfolio PAEs and Litigation PAEs. According to the study, Portfolio PAEs first attempt to assert their patent rights through negotiations. Litigation PAEs, on the other hand, first try to assert their patent rights through litigation. The study found that Litigation PAEs filed 96 percent of the suits reported, typically resulting in settlements that include licensing agreements. The study identified several additional differences between the two models:
    • Portfolio PAEs usually include many patents, while Litigation PAEs execute licensing agreements for single patents or much smaller portfolios.
    • The majority of Litigation PAEs generated less than $300,000 per license, while the majority of Portfolio PAEs generated much larger royalties at over $1,000,000 per license. The study refers to litigation brought by many Litigation PAEs as "nuisance litigation" because defendants may opt to settle despite their belief that the PAE plaintiff's case is weak and, at $300,000, the value of settlements in those cases is often lower than a public industry association benchmark set for the "nuisance cost" of litigation.
    • Portfolio PAEs generate 80 percent of reported revenue despite only accounting for 9 percent of reported licenses. The Commission did not observe PAEs successfully generating revenue from sending demand letters without suing the target.
  • Targets: The PAEs in the study acquired and asserted patents mainly in the Information and Communications Technology sectors. The study observed that, in addition to manufacturers, "end-users are frequently PAE targets."1 In addition, the study found that PAEs sometimes targeted a small number of entities repeatedly, but most entities had only a single encounter.
  • Wireless Chipset Sector: The Commission observed different assertion behaviors by Litigation PAEs than those of wireless manufacturers in a case study on the wireless chipset sector. Wireless manufacturers would send demand letters before licensing, while Litigation PAEs would file suit. Additionally, PAE Litigation licensing agreement terms typically resulted in lump-sum payments, while wireless manufacturers included cross-licensing arrangements, more sophisticated payment terms, and certain restrictions. In addressing concerns by some that PAEs are more aggressive because they face lower litigation costs and fewer reputational risks, the Commission found that the reporting PAEs were more likely to litigate. However, the Commission did not attempt to analyze whether those royalties were in-line with what an original assignee would have received for the patent.
  • Patent Assertion Efficiencies: Some scholars have argued that PAE activity can create procompetitive results, such as helping inventors monetize their patents. The Commission had trouble verifying whether the data supported this argument because PAEs had differing methodology concerning revenue sharing. As a result, the study leaves open whether certain types of PAEs can result in efficiencies and, if so, by how much.

Recommendations

The Commission made four recommendations for legislative and judicial reform:

  • Discovery Costs: The study notes that PAEs are not manufacturers and therefore do not have the same discovery costs as defendants (similar to many class actions, for example). Further, they are not subject to infringement counterclaims. This asymmetry can result in the defendant having to expend greater resources on discovery as compared to a PAE plaintiff. To remedy such asymmetry, the Commission proposes amending Federal Rule of Civil Procedure 26. Rule 26 requires that parties discuss and set their discovery plan. The Commission recommends modifying Rule 26 to effectuate "early disclosure of asserted claims and infringement invalidity contentions2 Other recommendations include limiting discovery before preliminary motions and mandating early disclosure of damage theories.
  • Identifying Affiliates: Litigation PAEs sometimes use multi-affiliate structures to organize. Federal Rule of Civil Procedure Rule 7.1, which requires that corporate parties identify certain affiliated entities, can help identify these relationships in order to provide parties and the court with more information. Because Rule 7.1 does not currently cover many Litigation PAE affiliations, the Commission recommends expanding reportable relationships under the rule.
  • Streamlining Litigation: As discussed above, PAEs may target both manufacturers and their customers. To address concerns over PAEs suing end-users, the Commission recommends that Congress and the Judicial Conference enact legislature to encourage district courts to stay suits involving end-users if there is a concurrent suit against the manufacturer.
  • Notice: Lastly, the Commission notes recent changes in patent pleading requirements. The Federal Rules of Civil Procedure now require that patent infringement pleadings include factual allegations that make the underlying infringement claim "plausible."3 Given these recent changes in the plausibility standard, the Commission urges courts to provide sufficient notice to alleged infringers.

The Commission's in-depth findings and proposed solutions leave open some questions about the effect of PAEs on competition. There already exists a debate about what role, if any, antitrust law should have in addressing PAE issues. This recent study should add a new layer of context to that debate.

To view the full study, please click here.

Alex Okuliar was attorney advisor to Commissioner Maureen Ohlhausen at the U.S. Federal Trade Commission from 2012-2015. The views reflected in this blog post are his own and not necessarily those of the Commission or any Commissioner.

Footnotes

1. FED. TRADE COMM'N, PATENT ASSERTION ENTITY ACTIVITY 6 (2016), https://www.ftc.gov/system/files/documents/reports/patent-assertion-entity-activity-ftc-study/p131203_patent_assertion_entity_activity_an_ftc_study.pdf.

2. Id. at 10.

3. Id. at 13 (citations omitted).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

10 Oct 2018, Conference, Florida, United States
Julie Totten is Program Chair of this year’s conference, Lynne Hermle is speaking on women in the courtroom, boardroom, and c-suite, and Erin Connell is speaking on pay equity and pay transparency.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions