FTC and DOJ Explore Role of Patent Assertion Entities in the Patent Innovation Market

On December 10, 2012, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) jointly presented the “Patent Assertion Entities (PAEs) Activities Workshop.”  This publicly-held workshop signaled a recognition by the FTC and the DOJ that the role and activity of PAEs is significant, controversial and growing, particularly in the technology and pharmaceutical markets.  The purpose of the workshop was to explore what, if anything, the FTC or DOJ can or should do regarding this issue.  Comments at the workshop reflected strongly held views on both sides.  The following are observations from the workshop.

 

There were substantial discrepancies in the facts recited regarding the role and impact of PAEs. Jon Leibowitz, chairman of the FTC, stated at the outset that PAEs lose 92% of the cases that go to trial on the merits.  Later on, however, one academic presenter referred to empirical evidence that PAEs win trials on the merits at about the same rate as producing plaintiffs. 

 

The FTC Chairman also stated that 40% of patent infringement actions filed in 2011 were filed by PAEs, whereas that rose to 60% in 2012.  He noted that in 2011, $29 billion was paid to PAEs with only 25% of that money going back into financing innovation.  He indicated that many startup PAEs fail and that without PAEs many patents would go unenforced.  He focused the workshop on the issue of whether PAEs provide financing and markets for innovation or constitute a tax on innovation. 

 

One prominent economist suggested that it was important to focus not on the business model of PAEs, but on their function in the market.  He stated that PAEs can “unlock” value in patents; without PAEs many patents are unenforced and in effect dedicated to the public, which could benefit competition in innovation to the detriment of inventors.  His analysis was that PAEs generally assert older patents against products existing in the market [ex post] rather than licensing patents to facilitate development of products to enter the market [ex ante]. 

 

Several commentators observed that it is difficult for PAEs to identify and acquire patent portfolios that are profitable to enforce and that it is expensive for PAEs to enforce patents through litigation as opposed to successful licensing invitations. 

 

There was discussion of “holdup” tactics by PAEs, which were described as presenting a patent to a potential infringer saying that it will cost in the range of $3 million to defend an infringement suit, but the PAE will sell a license for $400,000.  While such a license may make economic sense to the potential infringer, it encourages PAE activity.  Potential defendants were asking the FTC, DOJ and Congress to take action to prevent this practice.  The issue was what action is possible and appropriate.

 

Some potential solutions suggested were:

 

1.      require PAEs to publically disclose their portfolios (many complained that they negotiate without knowing what patents the PAEs hold and which may be asserted later),

2.      require that anyone holding an interest in a patent to publicly record that interest similar to real estate recorded interests,

3.      shift fees so the loser pays the fees and costs of the winner,

4.      prohibit PAEs from suing end user customers of alleged patent infringers,

5.      encourage stricter enforcement of damages, and

6.      have the FTC review large acquisitions of patents.

 

Participants observed that PAEs are not subject to countersuits for infringement or forces in the market similar to producing companies.  There was discussion around defensive patent aggregators with comments that they may get close to antitrust violations and may potentially disrupt the patent innovation market.

 

One speaker stated that PAE assertions against small open source companies often result in either the failure of that company or in its immediate withdrawal from the threatened area as those companies typically have little money, but make contributions to software innovation.

 

Producing companies with large R&D budgets commented that there are pressures to commercialize their unused patent portfolios and PAEs buy these patents at the highest prices.  According to these speakers, this demonstrated that the market was working as it should since companies can put that money back into innovation.

 

Several economists commented that PAEs create anomalies in the market, such as over compensation, resource diversion into litigation and lack of peace-making through cross licensing.

 

The FTC appeared proactive throughout the workshop, frequently asking: “What would you suggest the agencies do in this situation?” 

 

Several participants suggested that the FTC and DOJ take a more active role in antitrust enforcement against PAEs regarding their acquisition and assertion of patents in a manner that disrupts the patent innovation market.  Participants suggested more aggressive assertion of §5 of the FTC Act.

 

The FTC and the DOJ will accept public comments on PAEs through March 10, 2013.