As we went to press with the October Wealth of Ideas® e-letter, the Federal Trade Commission (FTC) released its long-awaited report on Patent Assertion Entities (PAEs). Titled “Patent Assertion Entity Activity: An FTC Study,” this report was generated at the request of the anti-IP-rights lobby that hoped it could use the report to push through patent-weakening legislation. The report turned out to NOT be the smoking gun that Big Tech was looking for!
Launched in 2013, the 269-page report was three years in the making. The FTC used authority granted to the agency by Congress to subpoena documents for the study that focused on patent “acquisition, litigation, and licensing practices” at both assertion firms and operating businesses.
The FTC divided PAEs into two segments: Portfolio PAEs (larger, often publicly held companies that own, manage and license hundreds of patents) and Litigation PAEs (smaller, often privately held companies that hold fewer patents and rely on litigation to generate revenue). The FTC study also analyzed the wireless chip set sector since it includes both Non-Practicing Entities (NPEs) and operating companies.
Information was analyzed from 22 PAEs and over 2,500 affiliates and other related entities, and covered their activities form January 2009 through September 2014. The FTC also identified 2,189 “Holding Entities,” companies that own patents but do not practice, license or assert them. The FTC did not study those patent assertion firms that send out “demand letters” since it determined that the revenue generated from this effort is minimal.
Key Data and Differences
The FTC found that 93% of the licenses secured by Litigation PAEs were the result of litigation, while just 29% of the licenses secured by Portfolio PAEs were the result of litigation. Among the patents held by PAEs, 88% were under the Computers & Communications or Other Electrical & Electronic Technology categories, and more than 75% were software related.
The study reported that 73% of all assertion targets were defendants in only one patent infringement lawsuit, and just 13% of all assertion targets were defendants in two lawsuits. Just a small number of businesses reported multiple PAE-filed lawsuits.
Companies that were defendants in patent infringement lawsuits were primarily in the “Computer & Electronic Product Manufacturing” industry. Firms in this sector accounted for more than half of the top 25 firms that received the largest number of demands, were sued for patent infringement, and paid the largest royalties to PAEs.
In the wireless chipset sector, the FTC found, patents are asserted differently. The agency observed that manufacturers sent demand letters before executing licenses, while Litigation PAEs filed lawsuits prior to securing licenses. The study also reported a difference in the licenses. Manufacturer licenses frequently included field-of-use restrictions, cross-licenses, and complicated payment terms, while PAE licenses involved a simple lump-sum payment with few restrictions, if any.
Not surprisingly, the FTC reported that patent infringement litigation is a key element in the PAE business model. Among all patent infringement lawsuits filed by PAEs, 93% resulted in a license. Among those companies that took licenses, 34% did so within six months of the filing of the lawsuit, 66% within one year, and 83% within 18 months.
The key sentence in the FTC Study is this: “The FTC recognizes that infringement litigation plays an important role in protecting patent rights, and that a robust judicial system promotes respect for the patent laws.” This sentence was a serious blow to the anti-IP-rights lobby. However, the study then added that, “Nuisance infringement litigation, however, can tax judicial resources and divert attention away from productive business behavior.”
The FTC study proposes four reforms.
- Address Discovery burden and cost asymmetries in PAE litigation: Because PAEs do not invent, develop or manufacture products that use their patented technology, they generally have less discoverable information than the party accused of infringement, and they are not subject to a countersuit for patent infringement, so they do not face potential Discovery relating to infringement counterclaims. This imbalance in the Discovery burden can give PAEs an advantage in litigation.
- Provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits: This recommendation is consistent with the Obama Administration’s recommendation that Congress “require patentees and applicants to disclose the ‘Real Party-in-Interest,’ by requiring any party sending demand letters, filing an infringement lawsuit or seeking USPTO review of a patent to file updated ownership information, and enabling the USPTO or district courts to impose sanctions for non-compliance.”
- Streamline multiple cases brought against defendants on the same theories of infringement: For example, when a PAE sues a manufacturer and its customers on the same claims of infringement, Congress and the Judicial Conference should enact provisions that encourage the District Court to stay actions against end-users until the manufacturer's lawsuit has been resolved.
- Provide sufficient notice of infringement claims as courts continue to develop heightened pleading requirements for patent cases: As courts continue to address the “plausibility” of pleadings in patent cases, ensure that patent infringement Complaints provide sufficient notice to the accused infringers.
The recommendations made by the FTC have all already been included in various patent bills introduced in Congress. What the anti-IP-rights lobby was looking for from the FTC – a broad condemnation of Patent Assertions Firms and other Non-Practicing Entities – was NOT in the study. What was in the study was that using the term “Patent Troll” to describe an NPE was “not helpful.” This study will have little effect on the current patent rights debates before Congress as it does not provide a strong argument for – nor a strong argument against – increasing or limiting patent enforcement rights, but comes down in the middle.