FTC and DOJ Looking at Trolls under Antitrust Authority

A Sunday article in the Wall Street Journal reports the Federal Trade Commission (FTC) and Department of Justice (DOJ) are devoting “huge energy, particularly at a senior level” to assess the impact of non-practicing entities (a/k/a patent assertion entities, or PAEs) on competition in high-tech markets.  The agencies also intend to host informal hearings on the matter to provide market participants the opportunity to explain their position directly to regulators.  These efforts are very welcome news and is further evidence of both the magnitude of the problem as well as regulators’ resolve to find a solution.

There will be a joint FTC-DOJ Workshop on “Patent Assertion Entity Activities” on December 10, 2012 at the FTC.  They are also accepting comments through January 10, 2013.  For more information and to RSVP for the workshop, please click here.  (Patent Progress will be on hand that day to cover the event.)

There are many aspects of the PAE business model that regulators may find troubling.  PAEs are not true market participants because they do not actually practice the claims covered by their patent, or manufacture products that compete with the defendants in their lawsuits.  Instead, PAEs hold hostage companies that actually provide an economic benefit to society by capitalizing on the relative uncertainty and expense of patent litigation.  Often these infringement lawsuits are based on vague, weak and unrelated patents, which enable PAEs to target both unsuspecting startups and larger established tech companies.  By doing so, PAEs are essentially a tax on doing business for established innovators, and an entry barrier for those entering the market.

The impact of PAEs on the economy and the tech industry is worth repeating.  A recent study by Boston University School of Law professors James Bessen and Michael Meurer estimates the direct cost of PAEs on operating companies totaled approximately $29B in 2011.  This is more than a tax on the market leaders.  PAEs actually focus on smaller competitors, creating a substantial entry barrier.  Santa Clara Law professor Colleen Chien’s research indicates that “Companies with less than $100M annual revenue represent at least 66% of unique defendants and the majority of them make much less than that: at least 55% of unique defendants in PAE suits make under $10M per year.”  The problem stems at least in part to the issuance of too many patents, which when sold to PAEs equip them with blanks rather than bullets.  In nearly a year of USPTO inter partes reexaminations, only 11% of patents reviewed had all of their claims certified as valid.

One angle the FTC may consider is an action under Section 5 of the FTC Act.  The FTC could target PAE conduct as unfair methods of competition.  This would be very similar to the approach taken by Co-plaintiffs Cisco Systems, Inc., Motorola Solutions, Inc. and NETGEAR, Inc. whose 55-claim Amended Complaint includes allegations that the infamous PAE Innovatio IP Ventures, LLC violated California’s Unfair Competition Law §17200, often referred to as the “Little FTC Act,” through the use of “pattern and scheme” of “fraud, deceit, misrepresentation, and other forms of unfair and unlawful conduct.”  The plaintiffs accuse the defendants of misrepresenting and leveraging patents against the plaintiffs’ clients.

As a past post on Patent Progress has explained, there is no single form of conduct for the agencies to focus on.  This article and the announcement of joint hearings on the subject suggest that the agencies understand the delicate nature of this problem, and appropriately are gathering as much information as possible to ensure a prudent and effective solution.  Most encouragingly, the search for a solution assumes a problem has been identified.  This is an important step, and one which I applaud.

David Balto

David Balto

David Balto is a public interest antitrust lawyer in Washington, DC.  He has over 15 years of government antitrust experience as a trial attorney in the Antitrust Division of the Department of Justice and in several senior level positions at the Federal Trade Commission. David was the Policy Director of the Bureau of Competition of the Federal Trade Commission (1998-2001) and attorney advisor to Chairman Robert Pitofsky (1995-1997). He was a senior advisor in all aspects of the FTC’s merger and non- merger enforcement program and helped litigate the challenges to the Staples/Office Depot, Drug Wholesalers, and Heinz/Beechnut mergers, the Intel monopolization case, and the challenges to anticompetitive conduct by several pharmaceutical companies.