A new Federal Trade Commission report spotlights the business practices of patent assertion entities (PAEs), firms that acquire patents from third parties and then try to make money by licensing or suing accused infringers. The report includes several recommendations for patent litigation reforms.

“This report is a big step forward in enhancing our understanding of PAEs and provides an empirical foundation for ongoing policy discussions,” said FTC Chairwoman Edith Ramirez. “The recommendations we are proposing are designed to balance the needs of patent holders with the goal of reducing nuisance litigation.”

The report, Patent Assertion Entity Activity: An FTC Study, examines non-public information and data covering the period 2009 to 2014 from 22 PAEs, 327 PAE affiliates, and more than 2100 holding entities (those entities that did not assert patents) obtained through compulsory process orders (subpoenas) using the agency’s authority under Section 6(b) of the FTC Act.

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.

“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.

The report examined the 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.

The report 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.”

To gain a better understanding of how PAE behavior compares with the behavior of other firms that assert patents, the 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.

This new report furthers the Commission’s commitment to addressing patent policy issues, that began with its 2003 report, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, and continued with its 2011 report, The Evolving IP Markeplace: Aligning Patent Notice and Remedies with Competition.

The Commission vote approving the report was 3-0.

FTC Seeks to Examine Patent Assertion Entities and Their Impact on Innovation, Competition