The US Federal Trade Commission issues report on patent assertion entities

Posted by Social Science Research Network

The US Federal Trade Commission issues report on patent assertion entities

By Michael A. Carrier (Rutgers Law School)

Abstract:     In October 2016, the Federal Trade Commission (FTC) issued its long-awaited report on patent assertion entities (PAEs). Sometimes called “patent trolls,” these actors have elicited fierce debate, with critics lamenting their ability to demand ransom money and hold up an industry while proponents applaud their role in making markets more efficient and returning money to individual inventors. Pursuant to FTC Act Section 6(b), the agency issued subpoenas, seeking to obtain information not previously available on these questions. This brief article summarizes the report and then elaborates on the following five observations.

First, the report did not answer the $64,000 question about the effect PAEs have on inventors, as the agency could not “quantify the frequency or magnitude of revenue sharing with independent inventors” due to the “significant differences in how [the] PAEs maintained their data.”

Second, and more successfully, the report uncovered useful information on PAEs’ patents, in particular the timing of enforcement and number of citations.

Third, the FTC gained crucial insights on PAE enforcement, distinguishing between “Litigation PAEs” (which settle after filing suit, enter into licenses less than litigation costs, and pose transparency challenges for defendants) and “Portfolio PAEs” (which are more likely to resemble manufacturing firms in obtaining complex licenses without filing suit).

Fourth, the FTC offered four policy recommendations relating to discovery, transparency, litigation management, and notice. Although they make sense, the proposals do not directly follow from the report, which was “descriptive and limited to the observed sample,” rather than being “generalizable to the universe of all PAE activity.”

Fifth, the report was silent on the appropriate antitrust assessment of PAEs. Despite its robust detail, the report’s findings are not likely to affect antitrust analysis. As I have previously written (http://ssrn.com/abstract=2209521), the antitrust agencies can challenge PAE conduct based on the individual facts of cases, scrutinizing the evasion of standards-based promises through transfer, challenging mergers reflecting an ability and incentive to harm competition, and bringing Section 1 claims against collusive agreements.

In short, the FTC report sheds needed light on a phenomenon that has been shrouded in secrecy and controversy. Though it does not answer the question of the contribution PAEs offer in the innovation ecosystem and its proposals do not bear direct support from its findings, the report sheds invaluable light on PAEs’ patents and enforcement behavior, offering benefits that policymakers should consider in the years ahead.

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