Lies, Damn Lies and Media Bias: Fortune Misrepresents FTC Report on Patent Assertion Entities

By Gene Quinn & Steve Brachmann
October 13, 2016

Illustration of cartoon businessman with long nose shadow on wall in lying conceptThe business magazine Fortune has spent many decades chronicling developments affecting economies throughout the world. On October 6th, the publication ran an article discussing the recent patent assertion entity (PAE) study released by the Federal Trade Commission (FTC). The title of the Fortune article reads, “The FTC Patent Report Has Some Harsh Words for Patent Trolls.” That would be great if it were true, but once again we see the popular press getting a patent story woefully incorrect. 

Simply stated, Fortune is wrong. 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! Indeed, anyone who has thoroughly read the FTC’s PAE study, however, would know that Fortune’s coverage of the study was already severely off the rails before the headline was even finished. 

At the risk of upsetting the predetermined narrative obviously favored by Fortune, allow us to interject some facts into this discussion.

The actual FTC report itself only mentions the word “troll” a total of five times through the text of the main study, not counting the appendices. This is remarkable given the report itself (i.e., not counting the appendices) is some 146 pages in length. 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.

If anything, the FTC reserved its harsh words for those using the “patent troll” moniker rather than the so-called patent trolls themselves. Early on in Chapter One of the report, it 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. Curious how Fortune could have missed the FTC chastising those who use the term “patent troll.” Perhaps Fortune confined their coverage of the FTC report to the press release accompanying the report, which conspicuously leaves out any mention of patent trolls, or that they view the term “patent troll” as being unhelpful and prejudicial. 

Seriously, if you are going to cover a report shouldn’t you at least read all of Chapter One?

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The FTC goes on to cite language in the U.S. 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 bound for early-stage litigation costs; essentially, cases where 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.

Had Fortune been at all interested in being objective the magazine would have pointed out that the $300,000 figure arrived at by the FTC is completely arbitrary and does not in any way, shape or form do anything to inform anyone about whether a patent license is only being offered to extract nuisance value.

“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 (OIN). “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 work around, 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.”

“$300,000 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,” Siegel explained. “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, be we know the defendant will pay us X dollars because it costs so much to litigate, that is what makes a nuisance case.”

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

Over and over through the course of 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.’” Of course, that too is wrong. Even the FTC press release explained that the Commission found two distinct PAE business models. One it 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 it 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, and that 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.

Of course, as you probably expected in an article that obviously leaves out important facts and then seems to intentionally get 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, and something Fortune should be well aware of given its position as a preeminent business publication. However, Fortune’s coverage of the FTC report states that the FTC’s judicial and legislative recommendations applied to NPEs, which is simply not true. Taken in a light most favorable to Fortune this is improperly reporting what the report actually said, but given the egregious and rather obvious errors in their article it seems likely more than that. 

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 gin up support for more unnecessary patent reform. 

The Author

Gene Quinn

Gene Quinn is a Patent Attorney and Editor and President & CEO ofIPWatchdog, Inc.. Gene founded IPWatchdog.com in 1999. Gene is also a principal lecturer in the PLI Patent Bar Review Course and Of Counsel to the law firm of Berenato & White, LLC. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Gene Quinn

Steve Brachmann is a freelance journalist located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He writes about technology and innovation. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients and is available for research projects and freelance work.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 7 Comments comments.

  1. JNG October 13, 2016 12:05 pm

    Gene

    Not many people examine the other part of the equation either, like the origin of the $300,000 “defense” bill. How is that the fees by big D firms who decide to gouge their clients is somehow the benchmark for what is a reasonable royalty demand? This is a completely artificial construct, disconnected from the actual value of the patent, which is almost always tied to the product sales of the infringer, not how much their attorney charges. 284 doesn’t mention the other sides’ “attorney” fees as the standard for determining reasonable royalties either.

    It is even more a joke because the AIA, pushed by big D firms, of course actually drove up the cost of litigation. It used to be, 1 lawsuit, 10 defendants, the biggest ones hired a few firms, and the smaller defendants rode along for free in almost all aspects of the case, ranging from the Answer to Discovery. They paid little or nothing for attorneys. The big boys paid the freight for everyone. Now with AIA, even a tiny defendant who made have had small sales has to pony up full attorney fees just to file an Answer. So obscene attorney fees are somehow the measure of an appropriate demand by the plaintiff??

    Oh, and did we mention the new pleading requirements and how they’ve jacked up fees? Because now instead of “notice” pleading Plaintiffs have to allege every fact on the planet, and the Complaint is 50 pages long. Guess who LOVES this? Yup, big D firms who now get to bill 5x the hours “responding” to the Complaint with a 50 page “Answer.”

    The whole thing has become a sham, with the big infringers causing most of the damage punching holes in the boat, and then complaining that their feet are getting wet and the system is sinking. Every time there is a “reform” check and see how the system is being “deformed” to line the pockets of big D firms. Its as transparent as Saran Wrap.

  2. Gene Quinn October 13, 2016 12:52 pm

    JNG-

    You make an excellent points.

    Sad that a supposedly preeminent business publication like Fortune magazine didn’t choose to look at the business aspects of the FTC report. We will, however, be looking at the business aspects of the report here on IPWatchdog.com in the coming weeks. More to follow!

    -Gene

  3. Anon2 October 13, 2016 1:09 pm

    It would be highly ironic (and sad) to see current trends translate into a situation such that a small player, who upholds property rights, IP, and patents, become labeled as “trollish” or their rights disrespected (or even abrogated?) merely because they prefer to avoid litigation, prefer dealing with multiple small players, or demand moderate sums and employ moderate means to do so.

  4. Anon October 13, 2016 1:14 pm

    I would like to think that this type of view in a government report can be traced directly to Ron Katznelson’s efforts to reverse the blatant misuse of that term in the Executive Office’s “white” (more like yellow, in the journalistic sense) paper of a few summers ago.

    Another “thank you” to Ron for his actions in trying to preserve a strong patent system for the U.S.

  5. Dan Henry October 13, 2016 2:15 pm

    The author of the Fortune article is an anti-patent scribe who has consistently carried water for the infringer’s lobby over the last several years prior to landing at Fortune. His article should be viewed as just another polemic in his ever growing catalogue of attacks & smears.

  6. Curious October 14, 2016 1:55 pm

    That would be great if it were true, but once again we see the popular press getting a patent story woefully incorrect.
    This is emblematic as to why I rarely believe anything the media (from the left or right) publishes as to just about anything. Many/most(??) have agendas and presenting the truth is rarely on the list.

  7. staff October 18, 2016 7:41 pm

    ‘Lies, Damn Lies and Media Bias’

    We agree.

    from the FTC report…

    ‘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…’

    We believe the ‘troll’ smear propaganda campaign by large multinational infringers (thieves) is wholly an effort to obscure the fact of their theft. It is a pure red herring.

    The dialogue needs to be put on a proper course. This is not a matter of ‘societal impact’, or whatever the FTC or infringers wish to call it. It is a simple matter of property rights. As James Madison noted in Federalist No. 43 , ‘The right to useful inventions seems with equal reason to belong to the inventors.’ It is that simple. Those who steal should be punished. Those who steal millions upon millions, or on a grand scale should be punished on a grand scale. When thieves win, America loses.

    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