FTC report on PAEs could have an outsized effect on U.S. patent reform debate

By William Cory Spence
August 16, 2016

Federal Trade CommissionIn September 2013, the Federal Trade Commission (FTC) issued a request for public comment for information on patent assertion entities (PAEs) and their licensing activities in an attempt to add to the existing literature and evidence on PAE behavior. The PAE study is the result of media coverage and Congressional pressure regarding the potentially abusive behavior of PAEs and the potential that their licensing activities could be “a drag on innovation, competition, and our economy.”

For the purposes of the study, the FTC has defined a PAE as any business having a model which is primarily based upon purchasing patent rights and then enforcing that intellectual property against parties who are already practicing the technology in order to generate revenues. Along with publicly available information, the FTC will also be drawing from nonpublic information including licensing agreements, patent acquisition data as well as cost and revenue data from businesses. The FTC study specifically looks at PAEs in the wireless communication sector.

The information the FTC has been collecting regarding patent assertion entities is extensive. Along with standard corporate information, the FTC is making a survey of each patent in PAE portfolios going back to 2008 to investigate the date of patent acquisition, the patent’s maintenance fee status as well as the assertion history for all patents upon which the PAE has attempted to enforce its rights. Firms are also being asked to describe their business model, the methods used to organize their patent portfolios and the aggregate costs of patent acquisition and assertion. The FTC has sent information requests to 25 PAEs in order to build its evidence.

The second part of the PAE study will compare the business activities of PAEs to that of non-practicing entities (NPEs), companies which license technologies without manufacturing it themselves, as well as manufacturing firms. One aspect which the FTC is investigating is how behaviors differ among PAEs and other firms with respect to the threat of a countersuit in response to patent enforcement. The FTC surveyed 15 NPEs and manufacturing firms for this part of the report.

The FTC study follows a June 2013 report issued by the White House which lays out many of the issues that the FTC itself is likely investigating. It notes that PAEs, which the report also called “patent trolls,” have tripled the number of infringement suits filed and accounted for 62 percent of all infringement suits, up from 29 percent in recent years. The report notes the important place in the U.S. economy played by companies which own patents but license the technology to others instead of practicing it themselves. However, the report charges PAEs with harming innovation in health information technology and other sectors, taking advantage of the uncertain scope of their claims and preventing useful technologies from being used by society.

The FTC’s report on PAE business activities has taken longer to deliver than the federal agency had indicated as recently as a few months ago. This March, FTC chairwoman Edith Ramirez told a subcommittee of the U.S. Senate Committee on the Judiciary that the agency expected the report to come out this spring. As of August 1st, the report had not yet been issued by the FTC.

Many expect, however, that the FTC’s PAE report will not look kindly upon those patent assertion entities which are surveyed. Some observers have cited an FTC report on the intellectual property marketplace which came out in March 2011 and stated that PAEs “can deter innovation by raising costs without making a technological contribution.” The report held this view despite making note of the argument that PAEs can encourage innovation through inventor compensation. This report also reveals the different viewpoints which the FTC holds regarding PAEs and NPEs; NPEs like universities and semiconductor design houses develop technologies for licensing and are not involved in the PAE business model of purchasing patents for assertion.

There’s also fear regarding how the report’s small sample size will be applied to the patent reform debate which could affect the entire U.S. patent landscape. Analysis of the PAE study published by the Center for the Protection of Intellectual Property (CPIP) concluded that the report won’t show how PAEs affect innovation in a general way because so few companies are being surveyed. Considering the FTC’s past positions as well as public comments made by industry organizations regarding the study, however, CPIP believes that the study will be used by the anti-patent crowd to fuel fears in the marketplace regarding PAEs. Back in January 2015, FTC commissioner Julie Brill indicated that patent system reforms brought to Congress should not be delayed until the findings of the PAE study come out. She also held that state and federal agencies should take enforcement actions against abusive PAE tactics without waiting for the report to issue first.

There is also some belief that the FTC’s PAE study will be informative. Although the sample size of companies surveyed is too small to support the case for major policy decisions, the current study is the first empirical study conducted by the FTC on PAEs. Observers have acknowledged that the report’s findings, though limited in scope, will at least create some hard data which is relevant to the debates surrounding PAEs and patent trolls.

At the end of the day, it’s very likely that the FTC’s findings on PAE behavior won’t sway those who have already developed strong views on the subject. If the study is critical of PAEs, which seems to be expected, those pushing for patent reform will likely beat their drums louder. If the study only finds minor issues, that same crowd could argue that too few companies were surveyed. Whatever the long-anticipated study finds should spark a new round of conversations surrounding patent reform.

The Author

William Cory Spence

William Cory Spence is the founder in the IP law firm of SpencePC in Chicago, Illinois. Mr. Spence is a trial attorney with focus on patent, trade secret, unfair competition (including conspiracy, tortious interference, and related antitrust claims), breach of contract, trademark, and copyright litigation. He has litigated claims in both state and federal courts throughout the United States and counseled on post-grant patent proceedings in front of the US Patent and Trademark Office. Mr. Spence has extensive experience with a wide range of patent monetization strategies, including complex, international patent infringement litigation involving multiple parties and jurisdictions, most notably including Japan. He is a graduate of the University of Notre Dame where he received separate B.S. degrees in Chemical Engineering and Biophysics (“Physics in Medicine”). Mr. Spence also holds a J.D. from the University of Houston Law Center. Prior to forming SpencePC, Mr. Spence spent twelve years practicing law with Kirkland & Ellis LLP in Chicago, IL and Tokyo, Japan. Mr. Spence may be reached by email or by phone at 312-404-8882.

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There are currently 1 Comment comments.

  1. staff August 18, 2016 9:34 pm

    ‘PAE study is the result of media coverage and Congressional pressure’

    plain English translation: the “study” is the result of concerted large multinational invention thief propaganda

    So if an inventor or small entity has to sell their patents to avoid fiscal collapse those who buy them cannot justly assert them?? How can we then get anything for our patents? How is that fair? If you sell your house should it then be wrong for the new owner to assert their rights to it? What on earth is the FTC thinking??!!

    At first we we thought we would respond 1 by 1 to all the lies and distortions of invention thieves, but then in the interest of brevity we decided it would be far simpler and shorter to list their truths……..

    See how much shorter that was. 🙂

    For our position and the changes we advocate (the rest of the truth) to truly reform the patent system, or to join our effort, please visit us at https://aminventorsforjustice.wordpress.com/category/our-position/
    or, contact us at aifj@mail.com