PublishedApril 5, 2013

Suggestions for an FTC 6(b) Study on Patent Assertion Entities

The Department of Justice Antitrust Division and the Federal Trade Commission (FTCjointly hosted a workshop to explore the issue of patent assertion entities (PAEs) on December 10, 2012.  Since then there has been a growing consensus that PAEs are a significant problem for the technology and software industries.  Representative Peter DeFazio from Oregon and Representative Jason Chaffetz from Utah introduced a second version of the SHIELD Act designed to implement a fee shifting regime for PAEs that litigate and lose.  The House Subcommittee on Courts, Intellectual Property, and the Internet hosted a hearing on March 14, entitled “Abusive Patent Litigation: The Impact on American Innovation & Jobs, and Potential Solutions.”  President Obama even weighed in on the issue a recent Google+ event in which he commented “[PAEs] don’t actually produce anything themselves.  They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

The next step is to devise a solution to this problem.  However, crafting a solution has proven difficult.  One of the main barriers is a lack of hard data on which to base reform. Academics like Colleen Chien are trying their best to collect and analyze such data, but they must rely on public records and survey companies.  When small companies try to negotiate with PAEs they are usually required to sign confidentiality agreements as a condition for settling.  PAEs often operate through shell companies, which makes it difficult to get a full picture of their operations.

As we have previously discussed, the task of collecting and analyzing the hard data necessary to craft an adequate solution lies with the FTC.  Under Section 6(b) of the FTC Act, the FTC has the power to use subpoenas to secure information from companies to conduct studies.  As the FTC Office of General Counsel explains, “Section 6(b) [of the FTC Act] empowers the Commission to require the filing of ‘annual or special * * * reports or answers in writing to specific questions’ for the purpose of obtaining information about ‘the organization, business, conduct, practices, management, and relation to other corporations, partnerships, and individuals.’” The FTC’s 6(b) power is an important and potent tool, and historically has been used as a launching point to draft legislation curbing industry abuse. A 6(b) study led to the Packers and Stockyards Act of 1921 and, more recently, to reform of the generic drug regulatory system in the Medicare Modernization Act of 2003.

Through a 6(b) study, the FTC can carefully analyze the purpose and impact of many of the practices of PAEs.   Indeed, much of the concern over PAEs in these comments and others focuses on the lack of transparency into their businesses.  The FTC can remedy lack of information with an independent, unbiased study.  A 6(b) study can focus on the following issues, among others:

  • Determining the full ownership interest of PAEs and a list of all subsidiaries and affiliates;
  • What are the type and scope of demand letters used by PAEs;
  • How often is litigation by PAEs successful; at what stage is litigation typically resolved;
  • How are patents acquired by PAEs and from whom;  what is the purpose of these transactions;  and
  • How does the PAE determine which patents to acquire.

We provide below some suggestions on questions the FTC might consider including in a 6(b) study on PAEs.  These questions are designed to provide answers that will move the analysis forward into a comprehensive understanding of the PAE business model and its impact on competition.  We have split our questions into three categories.  First, there are questions for stand-alone PAEs.  Second, there are additional questions for hybrid PAEs that have a relationship with established operating companies.  Finally, there are questions concerning procompetitive efficiencies claimed by PAEs.

These questions are designed to solicit information to provide statistical evidence for or against what are believed to be common business practices in the industry.  For example, many commentators portray PAEs as acquiring patents late in their life cycle; using a complex network of subsidiaries and shells to obscure patent ownership; and aggressively pursuing licenses from any conceivable infringer without performing due diligence on the technology in question or the likelihood of infringement.

The questions:

Information about PAE structure

  • List any current or former corporate parent.

  • List all entities in which Company has an ownership interest.  For each entity Company has an ownership interest in, provide the full name, address, state of incorporation (if applicable), and nature of ownership interest.  Ownership interest includes any business association, subsidiary, sole proprietorship, or shell organization.

  • List all entities in which Company has a financial interest and/or relationship.  Interest and/or relationship in an entity is defined as ownership, assignment interest, and any financial or commercial benefit stemming from a contractual arrangement relating to a patent.

  • If Company has a board of directors or similar governing body, list all other business associations (companies, subsidiaries, partnerships, etc) in which these individuals have a role with a fiduciary responsibility.

Information about interest in Company’s patents

  • List all patents in which Company has a current ownership interest, including options, or has had such an interest within the past five years.  For all patents listed describe the nature of acquisition (original patentee, assignment, purchase, etc).

  • List all patents Company has transferred to another entity within the last five years and indicate Company’s interest in or relationship to that entity.  State the nature of the interest and the responsibilities of each party.

Information about Company’s licensing and litigation practices

  • Provide a comprehensive list of all entities, including individuals:

    • To whom Company has sent an invitation, notice, or demand letter in the past five years;

    • With whom Company has been involved in a lawsuit;

    • From whom Company currently collects royalties

  • For each licensing agreement made in the past five years by Company, provide the agreement and any correspondence prior to the agreement.

  • Describe the process through which Company learns of potential licensees.

  • Describe the process through which Company identifies and selects invitation/notice/demand letter recipients.

  • Describe the process through which Company prices its patent licenses.

  • Describe how Company determines whether a potential licensee already has a license to the technology in question and whether the potential licensee has any indemnification against patent infringement.

Information on strength of patents in which Company has an interest

  • For each patent purchased in the past five years

    • provide any information received on the patent prior to purchase.

    • state the age of the patent at the time of purchase.

    • identify whether the patent had been licensed, was the subject of litigation, or was embodied in a product prior to the date of purchase.

  • Describe the process through which Company selects patents to purchase.

Hybrid PAEs (Including Privateers)

As explained briefly above, hybrid PAEs are those that are aligned with an established operating entity.  Typically hybrid PAEs enter into a contractual relationship in which the operating entity either sells patents or assigns enforcement rights to the PAE, who in turn targets likely infringers.

Information about hybrid PAE relationship (questions in addition to those above)

  • For each patent purchased from or assigned by an Operating Company to the patent Company in the past five years, provide the agreement and information on any continuing responsibilities of either party.

  • Provide or describe any agreement, including any payment schedule, requiring patent Company to share royalties with an Operating Company.

  • Provide or describe any agreement between patent Company and an Operating Company that restricts the parties that the patent Company can seek licenses from or lists companies that already a license.

  • Provide or describe any agreement between patent Company and an Operating Company that specifies or targets other Operating Companies.

 Procompetitive Efficiencies

  • Describe the actions, if any, Company is taking to bring the patented technologies to market. Include efforts to educate operating entities on the patented technologies to encourage the adoption of the patented innovation.

  • Identify any patents Company owns where the inventor uses the patented innovation in a product on the market or is in the process of bringing a product to the market using the patented innovation.

  • Identify any licensees or potential licensees that proactively sought out a license from Company.

  • Provide any evidence that Company’s licensing practices have benefitted licensees other than limiting liability.

This information will help determine if PAEs are providing any benefits to innovation.  Many PAEs claim they are an important step in transferring technology from inventors who have no interest in forming operating companies, and the companies that successfully bring products to market.  Many others disagree with this claim, but antitrust law requires a balancing of the procompetitive benefits against the harm to competition.

Ultimately this information secured from the 6(b) study can better inform the debate before Congress and the regulators on the impact of PAE business practices.

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Brendan Coffman

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