FTC Releases Report on Patent Assertion Entities

Three years ago, the Federal Trade Commission announced a study of “patent assertion entities” (“PAEs”): “businesses that acquire patents from third parties and seek to generate revenue by asserting them against alleged infringers.”  The FTC’s purpose was to gather information about PAEs in order to make informed policy decisions regarding “the role of PAEs in promoting innovation and economic growth.”

Yesterday, the FTC released its report, Patent Assertion Entity Activity: An FTC Study, which considers—in 269 pages—the practices of 22 PAEs and 327 affiliated entities from January 2009 through mid-September 2014.  This post addresses three findings in the report.

Portfolio PAEs and Litigation PAEs.  Portfolio PAEs negotiated licenses for large portfolios, potentially containing hundreds or thousands of patents, without first suing the alleged infringer.  The licenses generated by these PAEs, although accounting for only 9% of reported licenses, generated 80% of reported revenue.  Litigation PAEs, on the other hand, “typically sued potential licensees and settled shortly afterward by entering into license agreements with defendants covering small portfolios, often containing fewer than ten patents.”  Litigation PAEs filed 96% of cases and accounted for 91% of all reported licenses, but amounted to only 20% of reported revenue.  The FTC found the behavior of Litigation PAEs to be consistent with “nuisance litigation.”

Demand Letters and Litigation.  Demand letters sent by PAEs were not successful in generating low-revenue licenses unless the PAE also instituted legal proceedings.  The FTC concluded that demand letter reform alone would not fully address concerns with PAE activity, so it proposed litigation reforms to: “1) address discovery burden and cost asymmetries in PAE litigation; 2) provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits; 3) streamline multiple cases brought against defendants on the same theories of infringement; and 4) provide sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.”

“Patent Troll.”  The FTC concludes that the term “patent troll” is not useful in discussing and understanding PAEs.  “The patent system makes important contributions to innovation, consumer welfare, and U.S. prosperity, in part because of the patent holder’s right to exclude.”  Thus, according to the FTC, the nominative judgment inherent in the term regarding the large licensing fees associated with PAEs could not fairly be made without additional information on the business models and economics of PAEs.  Through its study and report, the FTC hoped “to bridge that knowledge gap.”