FTC issues study on 'patent assertion entities'; attorney says some PAEs are white-collar bandits

By Tara Mapes | Oct 18, 2016

CHICAGO – Saying an imbalance has continued in litigation over patent rights, federal regulators have called for changes to level the legal playing field for businesses targeted with patent lawsuits.

On Oct. 6, the Federal Trade Commission issued a study, titled "Patent Assertion Entity Activity: An FTC Study," taking a look at so-called patent assertion entities (PAEs), revealing information that confirms what many already knew concerning the activities of one type of PAE, that the FTC says perpetuates "nuisance litigation."

Known by some derisively as "patent trolls," PAE business entities procure patents from third parties and venture to generate revenue by asserting the rights that came along with the patent, targeting alleged infringing parties, including businesses or individuals allegedly already using the patented technology. The PAEs then convert patents into money by negotiating licenses with alleged infringers or by filing lawsuits against them.

The concern with this tactic is that PAEs are monetarily benefiting from patents from which they are not producing or selling goods, and potentially have no intent to produce the patented product. The study said this behavior raises policy questions about the role of PAEs in promoting, or limiting, innovation and economic growth. The study also asserts these PAEs may be abusing the intent of patent laws to enrich themselves.

The FTC identified two types of PAEs that use markedly different business models. One type is referenced as Portfolio PAEs, which purchase patents outright. The second, more common, type referred to in the report are Litigation PAEs. 

“Litigation PAEs frequently relied on revenue-sharing agreements to acquire patents. They overwhelmingly filed infringement lawsuits before securing licenses, which covered a small number of patents and were generally less valuable,” the press release said. 

Adam Kelly, an intellectual property law attorney and partner with the firm of Loeb & Loeb in Chicago, said each kind of PAE presents its own set of challenges. But he said litigation PAEs, in particular, "are a major problem."

"Typically, litigation PAEs will sue multiple defendants and seek a quick settlement for a nominal amount, oftentimes less than the cost of completing the pretrial discovery phase of the case," Kelly said. "Such tactics are akin to white-collar stick-ups; only the bandits don’t wear a mask or carry a pistol. Instead, they brandish a patent and leverage the Federal Rules of Civil Procedure.”

The FTC study said litigation PAEs accounted for 96 percent of all patent infringement lawsuits, but generated only about 20 percent of all reported PAE revenues. The report also found that 93 percent of the patent licensing agreements held by litigation PAEs resulted from litigation, while for portfolio PAEs, that figure was 29 percent.

The study found the results to be consistent with nuisance litigation, in which defendants agree to settle based on the cost of litigation rather than the probability the court would agree that any alleged infringement occurred.

“Based on the overall findings of this study and consistent with the FTC’s history of recommending improvements to patent law to facilitate the benefits of patent rights, while minimizing practices that can ‘discourage innovation, prevent competition, and raise prices through unnecessary litigation and licensing,’ the FTC recommends that policymakers address PAE litigation asymmetries through procedural and substantive reform,” the report states.

The FTC lists a few recommendations in its report, including: policy makers should address the imbalances between the cost of litigation discovery for PAE plaintiffs and defendants; courts and defendants should be provided with more information about the plaintiffs who have filed infringement lawsuits; and multiple cases brought against defendants on the same theories of infringement should be streamlined.

“Taking their findings at face value, I agree with FTC’s recommendations. Its analysis is thorough and the recommendations are sensible. The issues created by non-practicing patent assertion entities over the last 20 years are real and problematic. Without judicial and legislative action, these issues will unfortunately persist,” Kelly said.

"Each of these objectives could be accomplished in short order. But with the national election season upon us, unfortunately, I do not anticipate any changes this year.”  

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Loeb and Loeb LLP U.S. Federal Trade Commission

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