Almost half of all infringement actions brought these days are brought by patentholders that do not practice the invention, but rather by holders who seek to capitalize on the value of the patent through either licensing fees or via damage awards in infringement actions. While simply asserting patent rights cannot be an antitrust violation, the manner in which these patent holders — referred to Patent Assertion Entities (PAEs) or sometimes, pejoratively, as “patent trolls” — amass their portfolios and assert their patents can raise antitrust concerns. Given the enormous toll that patent litigation takes on our innovation economy, the Federal Trade Commission has proposed a study “to understand how PAE behavior compares with patent assertion activity by other patent owners.” This post provides background on the issue and why PAEs are singled out separately from other types of patent holders. A subsequent post will discuss potential antitrust concerns with PAE activity, what information the FTC is seeking from PAEs and others, and what the study means for you.
For years, patent law and antitrust law have butted heads because patent law, which grants the patentee the right to exclude, is the antithesis of antitrust law, which seeks to increase output and maximize consumer welfare. Although the Sherman Act, the federal government’s basic antitrust law, has been hailed as the “magna carta of free enterprise,” patent law is rooted in the Constitution and accordingly has emerged victorious when the two have come into conflict. Over the past decade, abuses of the patent system and the soaring cost of litigation has had many re-examine the traditional balancing of patent and antitrust policy. Much of the debate over the last several years has focused on two distinct areas — Standard Essential Patents (SEPs) and the activities of PAEs. The federal government has held workshops on both of these issues and is now, pursuant to Section 6(b) of the Federal Trade Commission Act, the FTC is proposing to collect non-public information from a number of industry participants in order to commence a research study that would investigate the impact of PAE activity.
In December 2012, the Federal Trade Commission and the Antitrust Division of the Department of Justice — the federal government’s two antitrust enforcers — jointly sponsored a workshop to understand better the impact of PAEs on innovation and competition. The workshop included representatives of PAEs, as well as some of their most vocal critics. Members of industry and academia identified several areas of potential harm, along with a number of areas of efficiencies. Universally, though, the belief was that the lack of empirical data on the true effects of PAE activity hampered effective policy-making and law enforcement efforts. To fill that knowledge gap, the FTC has voted to engage in a research study to better understand PAE activity and its costs and benefits. Unlike prior studies that focused only on publicly available litigation data, the FTC will used its Congressionally mandated authority to collect non-public information on licensing agreement, patent acquisitions, and costs and revenue data. The goal is that through collection of such non-public information a more accurate assessment of PAE activity can be made.
Why are they picking on PAEs?
Patent infringement is extremely expensive and is a huge drain on the time and resources of the defending company. So why pick on PAEs when the same could be said for any patent holder asserting its rights? According to one panelist at the workshop, 40% of infringement actions are now brought by “patent monetizers.” A study cited at the workshop estimated that PAE activity imposed $29 billion in costs in 2011, only 25% of which “flowed back to innovation.” Certainly, PAEs provide a unique benefit. They provide an ability for individual inventors and small start-ups to monetize their patents, which further spurs innovation. Yet, the litigation they commence can cripple a defendant’s own ability to innovate, and may well chill future innovation for fear of running afoul of a patent in a nameless PAE portfolio.
PAEs have also become the focus of enforcement priorities because of the type of infringement actions they bring. For example, many PAEs assert longstanding patents against operating companies’ existing products, a practice that some say result in “higher prices, reduced output, and stifled innovation for consumers.” Similarly, it is believed that PAEs often assert vague patents, which are very difficult to defend against because the alleged infringers cannot identify the scope of those patents, and they often bring cases at a time when there is maximum lock-in and holdup. The Hobson’s choice facing many defendants — defend the suit at huge costs and distraction or agree to unreasonable settlement terms — often results in settlements simply because they are the lesser of the two evils.
Additionally, one of the biggest differences between PAEs and other patent holders is the differing incentives to litigate. For example, patent holders that practice and market the invention (operating companies) are often reluctant to bring an infringement suit because such litigation is expensive, tends to provide a low return on investment, and invites counterclaims. Think “mutually assured destruction.” PAEs, on the other hand, have almost every incentive to litigate because they can reduce their “per patent” enforcement expenses by including more patents in a suit. More importantly, however, there is no MAD deterrent because they do not practice any invention and thus do not run the risk of a countersuit.
Fundamentally, PAEs are seen as companies who acquire patents in order to assert them against others in the hopes of achieving a lucrative licensing arrangement or a significant damage award (or settlement) in resolution of litigation. Indeed, because of their aggressive nature and their readiness and willingness to litigate, PAEs are often pejoratively referred to as “patent trolls.” The irony, of course, is that many large operating companies have themselves established PAEs, some for defensive purposes, while others use their affiliates offensively. Thus, which PAE is truly a “troll” depends on one’s perspective. Whatever their moniker, the exponentially growing cost of their activity has caused the agencies to focus on their activity.