“Without any understanding… of the value of the core innovation… there is no way to know whether a license is being offered for nuisance value or whether it is being offered at full, fair and appropriate value to compensate the patent owner for the infringement they had to chase down in litigation.”
The much anticipated report on Patent Assertion Activity (PAE) released by the Federal Trade Commission (FTC) several weeks ago was much ado about nothing for a variety of reasons. It should also be used as Exhibit A with respect to the type of nonsensical debacle that befalls an agency dabbling in an area where they have no substantive expertise.
Let’s recall the role of the FTC. The FTC was created in 1914 for the purpose of preventing unfair competition. It is true that over the years Congress has expanded the FTC role with respect to policing anticompetitive practices, but the FTC is primarily responsible for policing deceptive practices that defraud consumers. Indeed, according to the FTC website, the agency’s mission is: “To prevent business practices that are anticompetitive or deceptive or unfair to consumers; to enhance informed consumer choice and public understanding of the competitive process; and to accomplish this without unduly burdening legitimate business activity.”
It is hardly surprising the word “patent” is not found in the FTC mission, the agency does practically nothing relating to patents or the innovation industry in any substantive way. Instead, the FTC is most often involved in garden-variety scams that prey on the unsophisticated, identity theft, antitrust violations, mergers, fraudulent advertising, and the Do-Not-Call Registry. Simply stated, the FTC has absolutely no knowledge, familiarity, or expertise with the subject matter. The FTC stepped out of their lane for political purposes in order to take on Patent Assertion Entities. It is no wonder the resulting report shows little understanding regarding the core issues involved.
For example, the FTC was fixated on the number 300,000 throughout the report. It seems that the FTC got in their collective conscious the idea that a patent settlement that is less than $300,000 is some kind of sham settlement or shakedown. Only those who are blissfully ignorant to the realities of the patent licensing marketplace could ever come to such an absurd conclusion.
When speaking of “Litigation PAEs,” the FTC writes:
Litigation PAEs typically sued potential licensees and settled shortly afterward by entering into license agreements with defendants covering small portfolios, often containing fewer than ten patents. The licenses typically yielded total royalties of less than $300,000. According to one estimate, $300,000 approximates the lower bound of early-stage litigation costs of defending a patent infringement suit. Given the relatively low dollar amounts of the licenses, the behavior of Litigation PAEs is consistent with nuisance litigation.
I’ve been as critical of anyone when it comes to the extortion-like shakedowns that sometimes take place, which rely on the inefficiencies of the federal judiciary to shake down defendants into settling rather than fighting. The system can and should do something about these abuses. If the FTC were to have conducted a review of these abuses the report might have been useful, although they still would be dealing with an issue where they lack expertise and the conclusions hardly worthy of being called a “report” given the shallow investigation undertaken (i.e., only 22 responses received and one niche market considered).
Instead, the FTC has in its collective consciousness that $300,000 makes a settlement a nuisance litigation. But why? According to the FTC this is because patent litigation is so expensive. The report explains:
The American Intellectual Property Law Association (AIPLA), which periodically surveys the costs of patent litigation, recently reported that defending an NPE patent lawsuit through the end of discovery costs between $300,000 and $2.5 million, depending on the amount in controversy. By this estimate, 77% of Litigation PAEs’ settlements fell below a de facto benchmark for the nuisance cost of litigation. This suggests that discovery costs, and not the technological value of the patent, may set the benchmark for settlement value in Litigation PAE cases.
So the $300,000 number has nothing to do with whether that amount represents fair value for the license obtained in a forced settlement after litigation is commenced, but instead only relates to the cost of defending the claim brought by the property owner in order to defend the property rights trampled?
Why should the costs of the tortfeasing infringer be relevant in determining whether the extracted value from a settlement is fair?
“The report highlighted one significant issue: why do patent litigations in the United States cost so much? I lay that at the feet of all the parties including the judiciary,” explained Jaime Siegel, CEO of Cerebral Assets and Global Director of Licensing for the Open Invention Network (OIN). “There are inconsistent practices within the judiciary, in terms of scheduling, to allow parties to clarify case dispositive points early in the case, for example.”
Another issue driving up litigation costs is the pressure on law firms and attorneys, who in the real world don’t get paid once a settlement has been achieved.
“Law firms are under pressure, so there is this perverse incentive to prevent settlement until discovery is done, which helps the firm’s bottom line,” Siegel said. “Of course that is not to suggest that most attorneys do not put their client’s best interests first, but it is incumbent on clients to ensure that they are managing their law firms to get to the most efficient result possible from a business perspective.”
I have to agree with Siegel, and will take it one step further. Many years ago, when I was a new attorney, the firm where I worked represented plaintiffs in all manners of litigation. It was well known that you could not settle a case with defense counsel until after they had achieved a certain amount of billing. Once the client had been billed at least a certain amount settlement might be possible, but never before. That is just the way things work in the real world.
So the fact that law firms charge a lot of money to defend patent infringement cases, and don’t particularly have any incentive to settle cases early, somehow translates into certain settlements being for nuisance value without any consideration of whether the settlement is a fair value for the rights trampled upon by the infringer? The FTC has quite a lot of explaining to do, because it seems they picked an arbitrary number that is a function of what attorneys ordinarily charge infringing defendants through discovery. I don’t see how that is a function of the value of the innovation, or how it says anything about the merits of the infringement case, the damages case, or the tactics of the patent owner. In fact, it seems as if the $300,000 figure is completely irrelevant.
“Not every patent license is worth $1 million,” Siegel explained. “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. There are always big players and small players in a market. Where a few big market share licensees may be paying millions, a smaller market shareholder may be paying less than $300,000. That doesn’t make the smaller license a nuisance; it just is a reflection of market size.”
“$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 said. “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.”
Siegel is absolutely correct. Pretending that $300,000 is a relevant number ignores the reality that innovations come in all shapes and sizes, and they convey very different values. It almost seems as if the FTC is suggesting that if your innovation cannot be licensed for more the $300,000 then you shouldn’t have a right to license it at all. Go back to the drawing board little poor failed inventor and try harder next time! How arrogantly ignorant!
Of course, the reality is the FTC doesn’t know enough about the industry to understand that $300,000 is an arbitrary line in the sand that holds no relevance in the real world. For the very same reason that they said the term “patent troll” is unhelpful (i.e., because it inappropriately discriminates against rights owners without understanding the business model and practices), so too is $300,000 equally unhelpful. Without any understanding or appreciation of the value of the core innovation subject to the license there is no way to know whether a license is being offered for nuisance value or whether it is being offered at full, fair and appropriate value to compensate the patent owner for the infringement they had to chase down in litigation.
I thought the FTC was charged with ensuring fair business practices? It seems what they are doing is radically discriminating against incremental innovations valued at less than $300,000 and actually encouraging patent owners to charge more for their licenses than they are worth so they don’t get labeled a nuisance. Talk about perverse incentives! The FTC should stick to areas where they have subject matter competence and leave these patent issues to the experts.
EDITORIAL NOTE: Jaime Siegel will be moderating a panel at the IP Dealmakers Forum in New York City on Thursday, November 17, 2016, on the topic of Efficient Transactions vs. Efficient Infringement. CLICK HERE to REGISTER.