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

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).

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