FTC report sheds new light on patent assertion entities

The US Federal Trade Commission (FTC) has released a report examining the way in which patent assertion entities (PAEs) operate and suggesting that policy makers should introduce reforms.

The report, called “Patent Assertion Entity Activity: An FTC Study”, was released yesterday, October 6, and examined the practices of PAEs, also known as non-practising entities, over a five-year period.

According to the report, PAEs are businesses that acquire patents from third parties and seek to generate revenue by asserting them against alleged infringers.

PAEs monetise their patents primarily through licensing negotiations with alleged infringers and infringement litigation.

In the study, the FTC examined and analysed information from 22 responding PAEs and more than 2,500 of their affiliates and entities.

The practices used by the PAEs were examined between 2009 and 2014.

In the report, the FTC found that there are two “distinct” business models used by PAEs, namely “portfolio PAEs” and “litigation PAEs”.

Portfolio PAEs negotiate licences covering large portfolios, which often contain hundreds or thousands of patents, frequently without suing the alleged infringer first.

In the study, portfolio PAEs accounted for 9% of the reported licences and  generated 80% of the reported revenue. This is approximately $3.2 billion.

Litigation PAEs sue potential licensees and settle shortly afterwards by entering into licensing agreements with defendants. They typically have small portfolios, often containing fewer than ten patents.

The licences yielded total royalties of less than $300,000, which according to one estimate amounts to the “lower bound of early-stage litigation costs” of defending a patent infringement suit.

These relatively “low dollar” amounts and the behaviour of litigation PAEs are consistent with “nuisance litigation,” the report said.

Additionally, litigation PAEs filed96% of the lawsuits reported in the study and accounted for 91% of the reported licences, with the revenue generated representing 20%, or $800 million, of the total reported amount. In its report, the FTC also recommended that policy makers make “procedural and substantive” reforms.

The report said that “prior literature” has attempted to identify the “potential harms” and benefits of patent assertion activity.

These harms include that patent assertion activity can impose litigation and licensing costs that don’t correspond to the value of the patented technology at issue, which creates an “unwanted” tax on products and services.

Second, the report said that the lawsuits “disproportionately” affect start-ups and small firms, which “inhibits entrepreneurship”.

Additionally, the report listed the potential benefits of PAEs, such as inventors being able to enforce their intellectual property rights more effectively against accused infringers.

The report concluded that deciding whether PAES are harmful or beneficial is based on “circumstance” and “context”, and that there are those who believe that NPEs are “not to blame” and are part of a “broken patent system which needs reform”.

Edith Ramirez, chairwoman of the FTC, said: “This report is a big step forward in enhancing our understanding of PAEs and provides an empirical foundation for ongoing policy discussions.”

The report can be viewed in full here.