FTC Recommends Legislative Fixes For Nuisance Patent Lawsuits But Some Question Study

LONDON — Procedural and substantive legislative reforms are needed to keep nuisance patent infringement lawsuits at bay, the United States Federal Trade Commission said in an October report. The question is whether the size of the study on activities of “patent assertion entities” (PAEs) was large enough to prove there’s a problem, say some patent attorneys, including speakers at the 13-14 October London IP Summit.

The FTC report (available here) defined patent assertion entities (PAEs) as businesses that acquire patents from third parties and then try to generate revenue by asserting them against alleged infringers. PAEs make money from the patents mostly through licensing negotiations with alleged infringers, lawsuits or both, it said.

When acquiring and asserting patents, PAEs target individuals and businesses that already use, at least allegedly, the patent technology, the FTC said. PAE activity therefore results in what are often referred to as ex post patent transactions, because any licence or settlement takes place after someone has developed or marketed the product at issue, rather than with ex ante transactions where the technology and related patent rights transfer from an inventor to a manufacturer before the product is developed and marketed, it said. The fact that PAE actions facilitate ex post patent transactions raises policy questions about the role of PAEs in promoting innovation and economic growth, it said.

The FTC looked at PAE acquisition, litigation and licensing practices in order to analyse the non-public aspects of PAE business models. It focused on the wireless chip sector in which not only PAEs but also other non-practicing entities and wireless chipset makers assert wireless-technology patents.

The study surveyed information from 22 responding PAEs and over 2,500 of their affiliates and other related entities from January 2009 to mid-September 2014. It showed there are two distinct PAE business models, the FTC said.

Portfolio PAEs negotiate licences covering large patent portfolios, often containing hundreds or thousands of patents, often without first suing the alleged infringer. While these PAEs accounted for only 9 percent of the reported licences in the study, they generated 80 percent of the reported revenue, around $3.2 billion.

Litigation PAEs, on the other hand, typically sue potential licensees and settle shortly afterwards by entering into licensing deals with defendants covering small portfolios, the FTC said. These licences typically provided royalties of less than $300,000. Given those relatively low dollar amounts, the agency said, “the behaviour of Litigation PAEs is consistent with nuisance litigation.”

Nuisance lawsuits “can tax judicial resources and divert attention away from productive business behavior,” the FTC said. It called, among other recommendations, for new rules and case management practices that take into account the fact that PAEs, which don’t invent, develop or manufacture products incorporating their patented technology, generally have less discoverable information than the parties they accuse of breach, and are not subject to counter-suits. The report also recommended amendments to Federal Rule of Civil Procedure 7.1 to require PAEs with multiple affiliates to disclose them as early as possible.

Does Size Matter?

Speakers at the London summit disagreed on the validity of the study given the small number of PAEs analysed.

The report was based on a small set of data, said Qualcomm Inc. Vice President, Patent Counsel George Whitten, who worried that it could be part of an effort to push down the value of patents. He pointed to the many reports and papers, on issues such as “excessive royalties,” that make it appear that the patent system is in trouble, but said there’s no evidence for that. No one says the system is perfect, but there should be no changes without proof of actual problems, he said.

More research is always better, but despite the fact that the FTC only looked at 22 companies, under its subpoena power it was able to get at their confidential licensing documents, said Matthew Lynde, senior vice president of economic and financial consultancy Cornerstone Research. Legitimate licensing companies are taking issue with the “leap from one small sample study to policy recommendations,” he told Intellectual Property Watch later. There is also some commentary in the legal press that the report gives portfolio PAEs a free pass, although they’re collecting the lion’s share (80 percent) of the PAE licensing revenue from the sample, he emailed.

PAEs are already being affected by the 2013 US Supreme Court holding, in Alice Corporation Pty. Ltd. v. CLS Bank International et al., that abstract ideas can’t be patented because it deals with the sort of computer technology-related patents they seek to enforce, Lynde said at the conference. In addition, legislation working its way through Congress (the Innovation Act, aimed at curbing patent trolls) would, among other things, limit early discovery and require disclosure about interested parties in patent lawsuits, he said.

Can’t Happen in Europe

Whatever the seriousness of the issue in the US, however, frivolous patent litigation is not an issue Europe, speakers noted.

For one thing, several said, the US system isn’t “loser-pays.” Moreover, it’s more expensive to file a patent action in Europe than in the US, said Whitten. The European system permits much less discovery, a huge burden in the US, he said. Another difference between the US and Europe is that the Seventh Amendment guarantees the right to jury trials, said Lynde.

 

Image Credits: EFF