FTC report recommendations largely legislative in scope in new patent assertion entity report

ftc-federal-trade-commission-1The Federal Trade Commission’s (FTC) recently released report on patent assertion entities (PAEs) includes a number of key findings made by the agency on the business model of such companies. The FTC identified two different business models employed by PAEs which differ in terms of litigation and licensing activity. The report also includes a number of judicial and legislative recommendations to deter what the FTC calls “nuisance litigation.”

The FTC report identifies nuisance litigation as any lawsuit which is settled with a patent licensing agreement that pays less than $300,000 in total royalties. This $300,000 figure is the lower bound of a range taken from an American Intellectual Property Law Association (AIPLA) study regarding the costs of defending a patent infringement suit through discovery. The FTC’s recommendations seek to reduce nuisance litigation, which the agency finds to be a drain on judicial resources and can divert business resources from productive activities.

One aim of the FTC report’s recommendation is reducing the cost.  The agency’s report found asymmetries in the costs of legal discovery between PAEs, which don’t manufacture or develop technologies and thus typically have less discoverable information than a defendant whose business practices may require extensive discovery. This is one reason why the FTC’s report indicates that “discovery costs, and not the technological value of the patent, may set the benchmark for the settlement value in Litigation PAE cases.”

The FTC recommends changing Federal Rule of Civil Procedure 26, which governs duty of disclosure to enable early disclosure of asserted claims and invalidity contentions in litigation which involves PAEs. The agency notes that the rule could be adjusted to limit discovery before preliminary motions along with changes in other provisions designed to make sure that such motions are decided in a timely manner. The report also calls for early disclosure of damages theories, which the agency believes will be more helpful in identifying potential legal issues for summary judgment motions as well as providing more information for settlement discussions. “In general, any measures that reduce discovery burden and costs while ensuring delivery of information appropriate to the case should be considered,” the report reads.

The FTC’s report also targets Federal Rule of Civil Procedure 7.1, which governs disclosure statements filed by corporate parties to identify parent corporations, as a candidate for possible amendments. The agency found that, in many cases involving PAEs, affiliate companies were set up in such a way that the parent PAE would not be identified by the disclosure statement. The FTC recommends amending Rule 7.1 to expand upon the relationships which are reportable in the disclosure statement so that the statement may provide defendants and the judiciary with a greater sense of financial relationships related to the plaintiff.

The report notes that 15 percent of case filings made by litigation PAEs, a type of PAE which the FTC finds to be more litigious in nature, are filed against defendants in the retail trade industry, not manufacturers of the technology. In order to avoid what the FTC sees as unnecessary litigation, the report recommends a provision known as the “customer stay.” In essence, a customer stay would be enforced when a patent suit is filed against a tech manufacturer and a tech end-user; the suit against the end-user would be stayed until the case against the manufacturer is resolved. The rationale is that the outcome of the legal action against the manufacturer could obviate any legal action filed against the end-user, thus making that legal action frivolous. “Should the patent be invalidated in one case, for example, it would make further litigation in the other cases unnecessary,” the report reads.

This customer stay provision is included in patent reform bills which have been introduced into both houses of Congress. In the U.S. Senate, lawmakers have introduced S.1137, the PATENT Act, which would allow a court to consider a motion to stay an action against a retailer or end-users when the manufacturer is a party in a related case.  In the U.S. House of Representatives, committees have held hearings on H.R.9, the Innovation Act. This bill would require a court to stay a legal action against a retailer or end-user when the manufacturer is a party in a separate action. With bills including customer stay provisions being considered in both houses on Capitol Hill, the FTC’s PAE report could put some momentum behind either of them.

Most of the FTC’s recommendations are legislative in scope but the report does include some advice for the country’s judicial system. Last year, the use of Form 18 to plead patent infringement was abolished because it was argued that the form doesn’t require sufficient enough evidence. Because of this, the courts now have to develop a “plausibility standard” in which plaintiffs have to plead the plausibility of infringement based on factual allegations. The agency believes that a requirement that plaintiffs provide more detailed information in complaints could provide the defense with better information on the scope of their accused infringement. “As the courts continue to develop the plausibility standard in patent cases, they should continue to consider the benefits of pleadings that provide sufficient notice to accused infringers,” the report reads.

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