On October 6, 2016, the Federal Trade Commission [FTC]
released a 269 page report titled, "Patent
Assertion Entity Activity: An FTC Study" [Study]. The Study
reviews PAE activity from 2009 to 2014. The press
release from the study excerpts some highlights:
The report found two types of PAEs that use distinctly
different business models. One type, referred to in the report as Portfolio
PAEs, were strongly capitalized and purchased patents outright. They negotiated
broad licenses, covering large patent portfolios, frequently worth more than $1
million. The second, more common, type, referred to in the report as 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 report found that, among the PAEs in the study,
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 that the royalties typically yielded by
Litigation PAE licenses were less than the lower bounds of early stage
litigation costs. This data is consistent with nuisance litigation, in which
defendant companies decide to settle based on the cost of litigation rather
than the likelihood of their infringement.
Interestingly, the report relies on the AIPLA economic
survey on patent litigation costs to conclude that the majority of Litigation
PAE litigation is nuisance litigation. That merits additional scrutiny, I
think. The Study also includes reforms to address nuisance infringement
litigation:
“The FTC recognizes that infringement litigation plays an
important role in protecting patent rights, and that a robust judicial system
promotes respect for the patent laws. Nuisance infringement litigation,
however, can tax judicial resources and divert attention away from productive
business behavior,” the report states. With this balance in mind, the FTC
proposes reforms to:
- Address the imbalances between the cost of litigation
discovery for PAE plaintiffs and defendants;
- provide the courts and defendants with more
information about the plaintiffs that have filed infringement lawsuits;
- streamline multiple cases brought against defendants
on the same theories of infringement; and
- provide sufficient notice of these infringement
theories as courts continue to develop heightened pleading requirements
for patent cases.
Notably, the Study also reviewed " types of
patents held by PAEs, and found that 88 percent were in the information and
communications technology sectors; more than 75 percent of those patents were
software-related patents." Interestingly, some Study PAEs frequently
targeted a small number of firms in the "Computer and Electronic
Manufacturing" sectors. Further, the Study "also looked at
whether PAEs were able to make money by mass-mailing so-called “demand
letters”; however, the FTC observed an “absence of large demand letter
campaigns for low-revenue licenses among the Study PAEs.” This results in
the Study stating that reforms concerning demand letters "on its own"
would make little difference.
Notably, the Study includes an review of the wireless
chipset sector in particular:
[T]he report also looked at the wireless chipset sector,
examining how reported PAE assertion behavior compared to certain manufacturers
and non-practicing entities (NPEs) (who primarily seek to develop and transfer
technology ). For this study, the FTC obtained non-public data from eight
manufacturers and five NPEs, for the same timeframe using its 6(b) authority.
The wireless case study found that Litigation PAEs and
manufacturers behaved differently. Within the study, Litigation PAEs brought
far more infringement lawsuits involving wireless patents—nearly two-and-a-half
times as many as manufacturers, NPEs, and Portfolio PAEs combined. Litigation
PAE licenses involved simple lump-sum payments with few restrictions, if any,
whereas the reported manufacturer licenses frequently included field-of-use
restrictions, cross-licenses, and complicated payment terms.
Importantly, the Study does not draw conclusions concerning
the merits of PAE activity in monetizing inventions for inventors and
innovators:
Study PAEs had diverse and heterogeneous data-keeping practices. As a result, the FTC does not report how much revenue PAEs shared with others, including independent inventors, or the costs of assertion activity. The FTC sought to evaluate the role of PAE activity in promoting patent monetization for inventors and innovation as part of its study. Towards that end, the FTC requested that Responding PAEs provide detailed data describing how they shared licensing revenue with outside parties and their costs of patent assertion. Responding PAEs used different methods to maintain information describing their revenue sharing and costs, however, which prevented any meaningful comparison of the degree of revenue sharing by PAEs or their assertion costs. For example, some Responding PAEs viewed payments to outside counsel as a cost of patent assertion, but others viewed such payments as revenue sharing (counsel often received a fixed proportion of licensing royalties). Moreover, the majority of Responding PAEs did not maintain information on assertion costs, and only a few Responding PAEs provided such data at either the Affiliate level or assertion campaign level. For these reasons, we did not analyze either the proportion of licensing revenue that they shared with outside parties, or the costs of patent assertion. Due to this limited data, this report does not address the efficiency of PAE business models. [emphasis added].
And, what impact will Alice have? The
Study notes that "it did not collect enough information regarding patent
assertion after the Alice decision" to "directly
measure" Alice's impact, but:
In addition, because more than 75% of the patents in the FTC’s sample likely include software-related claims, and because the FTC estimates that Study PAEs held more than 75% of all U.S. patents held by PAEs at the end of 2013, any change in PAE behavior with respect to software patents that results from Alice will likely have a significant impact on both the overall volume of PAE assertion and the types of technologies that PAEs assert.
Study PAEs generated about $4 billion in licensing
revenue. And, the Study noted, "Fewer Than 1% of Study Patents Were
Identified as Encumbered by a FRAND Commitment to a SSO." [Hat
tip to Professor Dennis Crouch's Patently
Obvious Blog.]
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