PublishedApril 5, 2013

Using the Full Powers of the FTC to Combat Patent Trolls

A century ago there was a lively debate in Congress over the enforcement of the antitrust laws.  Much of the 1912 presidential campaign had focused on the lack of effective antitrust enforcement by the Justice Department and the failure of the Sherman Act to stop growing anticompetitive conduct in the marketplace.  In 1913, Congress focused on the urgent need for reform of the antitrust laws and stronger enforcement.

Although there were many proposals put forth, there was a general consensus that the nation needed a new enforcement entity with broader powers than the Department of Justice.  Ultimately, in 1914 the Congress established the Federal Trade Commission and gave it far broader powers than the Justice Department to police, educate, and regulate.  Unlike the Justice Department which could solely conduct investigations leading to enforcement actions, the goal of Congress with the FTC was to create an agency with much broader powers not only to bring enforcement actions, but also to engage in regulatory reform, serve as an investigatory arm to Congress and provide advisory opinions, and continuously educate the legislature, the public, and the market about the impact of anticompetitive practices.

Perhaps the most important authority of the FTC is the Commission’s unique power to use subpoenas to secure information and documents to conduct broad studies of the market. Congress’ goal in granting this power, known as 6(b) after the section of the FTC Act that establishes it, was to allow the Commission to conduct in-depth industry studies and provide reports to the public and Congress.  As one of the key authors of the FTC Act, Louis Brandeis wrote in 1913 in discussing the need for broad investigatory powers, “sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

Since the passage of the Act, the courts have been explicit that Section 6(b) gives the FTC broad powers to secure information, not limited solely to investigations that would lead to law enforcement actions.  This broad directive has allowed the FTC to use its power not just to pursue a focused theory of unlawful activity, but also for general policy planning, economic studies, selecting enforcement priorities, guiding regulators, and advising Congress.  The FTC’s 6(b) power has perhaps had some of the most substantial impact and enduring value of any FTC power, and has ultimately led to major regulatory reforms such as the Packers and Stockyards Act (1921), the Securities Act of 1933, the Stock Exchange Act of 1934 and the Public Utility Holding Act of 1935, as well a variety of more recent studies and enforcement actions.

Now is the time for the FTC to turn its full panoply of powers toward addressing one of the most severe competitive concerns in today’s economy: the patent troll problem.  There is clear precedent for the FTC taking a multi-faceted approach to such issues.

For example, a decade ago, at the beginning of the Bush administration, there was tremendous concern over efforts by brand name drug companies to delay generic entry through abusive regulatory filings, sham litigation, and abuse of the regulatory system.  In response, the FTC took a thorough and multi-pronged approach.  First, it brought targeted enforcement actions against some of these practices, including patent settlements and sham regulatory filings.  This discouraged some of the most egregious conduct by pharmaceutical companies.

Second, it recognized the opportunity to help guide the courts by participating as an amicus curiae in cases brought by private parties.  For example, in 2002 there was a private lawsuit against Bristol-Myers Squibb for regulatory abuse that delayed the entry of generic versions of the drug Buspar.  The branded manufacturer’s conduct included inconsistent and contradictory statements made to the USPTO and FDA, as well as material misrepresentation and failure to disclose material information to the USPTO in order to obtain patent protection.  (For a more detailed discussion, see “Removing Obstacles to Generic Drug Competition.”)  The defendants claimed their actions were protected by the Noerr-Pennington doctrine.  The FTC filed an amicus brief authored and argued by then-FTC Office of Policy Planning Director (now Senator) Ted Cruz that explained why the defendant’s conduct was subject to the antitrust laws. Ultimately, the court adopted the FTC’s arguments and Bristol-Myers was forced to abandon its anticompetitive practices and settled the case for over $500 million in damages.

Even more important was the FTC’s 2002 6(b) study of generic drug litigation and the obstacles to generic drug entry entitled “Generic Drug Entry Prior to Patent Expiration.”  The study was based on a comprehensive request for information under Section 6(b).  The study sought out and secured critical information about the nature of litigation between branded and generic firms and identified a wide range of abusive practices by brand name firms to delay generic entry.  Although the FTC secured a huge amount of information from the over 20 brand name and 50 generic firms surveyed, they completed the study and submitted their report to Congress in less than 18 months.  Based on the FTC report, Congress revised critical provisions of the Hatch-Waxman Act, and the FDA adopted key reforms to try to prevent regulatory abuse.

The FTC should adopt this same type of comprehensive approach in addressing the critical problem of patent trolls.  They have taken an important first step by holding hearings on the subject with the DOJ and using speeches to help educate the public about some of the competitive concerns.  But they need to go further.  First, they should find focused law enforcement actions using the full range of their statutory powers, including considering enforcement actions against unfair trade practices under Section 5 of the FTC Act.  Second, they should identify critical private cases in which they can intervene as amicus to instruct the courts about the proper approach to both intellectual property and antitrust issues.  Finally, the FTC should utilize its 6(b) powers, conduct a comprehensive study of the conduct of patent trolls, and provide a thorough report to Congress so that Congress and the USPTO can adopt reforms to prevent the abuse of the intellectual property system.

The FTC should not hesitate to use all of the tools at its disposal to attack the patent troll industry, and put a stop to the billion-dollar toll it levies on our economy each year.

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David Balto

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