FTC Proposes Reforms to Patent Assertion Entity System

The Federal Trade Commission has released a study of Patent Assertion Entity (PAE) Activity—dubbed "patent trolls" by their critics—and recommended reform of the patent assertion process.

The FTC defines a PAE as "a firm that primarily acquires patents and seeks to generate revenue by asserting them against accused infringers."

The FTC said that it recognized that patent infringement litigation "plays an important role in protecting patent rights, and that a robust judicial system promotes respect for the patent laws." But it also said: "Nuisance infringement litigation, however, can tax judicial resources and divert attention away from productive business behavior" and proposed the following:

"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."

PAEs have been increasingly buying patents then asserting them—demanding payments—and suing companies for products already on the market.

Various bills have been introduced in the past couple of years as Congress tries to get a handle on the increase in PAE patent suits, balancing the desire to discourage those trying to game the systems and extort money with the legitimate interests of inventors in protecting their intellectual property.

Related: Reps Renew Effort To Troll for Patent Trolls

The Computer & Communications Industry Association—the study was unveiled at a CCIA event—said one key finding was that PAEs who sue usually collect less than $300,000 and, since patent litigation usually costs more, the suits are nuisance suits calculated to draw payment as the cost of business given the cost of defending against them.

The FTC also found that it was suits, rather than demand letters, that were generating the cash flow for PAEs, which CCIA says means that clarifying demand letters will not be sufficient to address the problem of trolls (their term).

“The FTC followed the money and found that patent trolls do indeed have business models that extract large sums of money from productive sectors of the economy," said CCIA president Ed Black. "These practices are a significant drag on both innovation and the performance of the U.S. economy. The FTC study revealed patent trolls frequently target the computer and communications industry. In fact, 88 percent of the patents in the study were from that sector of the economy."

The Innovation Alliance, which represents PAEs, did not see it the same way.

"While the Innovation Alliance welcomes research into the patent system and its impact on innovation, we are deeply disappointed that the Federal Trade Commission has made policy recommendations and drawn conclusions based on its unscientific case study of a limited number of so-called patent assertion entities," said alliance executive director Brian Pomper. "Due to methodological flaws in this study, it does little to shed light on this important issue and provides no basis on which to justify sweeping policy changes...“It is important to remember that patent licensing plays a vital role in bringing new technologies and medical breakthroughs to market. It critically allows innovators to focus on inventing and research, instead of manufacturing, sales and marketing."

"We applaud the FTC for shedding light on how sleazy so-called  patent assertion entities-(known as patent trolls)-operate," said Consumer Technology Association president Gary Shapiro. "The report documents the unjust businesses practices of those who threaten litigation and file frivolous lawsuits to extort American businesses.

"We are pleased that the FTC report calls for many of the critical reforms for which CTA is advocating, including heightened pleading standards and discovery reforms that would make these illegitimate troll cases more transparent and help victims fight back. Moreover, the findings from this report underscore the need to pass legislation such as the Innovation Act, the PATENT Act, and the VENUE Act to preserve our nation's entrepreneurial spirit and grow our innovation economy. We look forward to working with the FTC and Congress to stop patent trolls from killing American jobs and extorting $1.5 billion per week from our economy."

John Eggerton

Contributing editor John Eggerton has been an editor and/or writer on media regulation, legislation and policy for over four decades, including covering the FCC, FTC, Congress, the major media trade associations, and the federal courts. In addition to Multichannel News and Broadcasting + Cable, his work has appeared in Radio World, TV Technology, TV Fax, This Week in Consumer Electronics, Variety and the Encyclopedia Britannica.