PublishedSeptember 30, 2013

Time To Put A Spotlight On Patent Trolls

One of the key authors of the FTC Act, Louis Brandeis, wrote a century ago: “sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”  There are probably few areas that need a strong dose of transparency as much as the conduct of patent trolls.  Patent trolls play on the lack of information, asymmetries in the litigation system, and the significant cost of litigation.  Although there are numerous studies of litigation by patent trolls, those studies are necessarily very limited because they are based solely on public information.  But those studies demonstrate that the problems from litigation by trolls are reaching crisis proportions.

With Justice Brandeis’ admonition in mind, I was delighted to hear the FTC announce a 6(b) study on patent trolls.  As I explained in a previous post on Patent Progress, when Congress created the FTC almost a century ago, it gave it unique powers to conduct studies and issue reports to better inform businesses, Congress, Courts and regulators about the nature of certain competitive practices.  Under Section 6(b) of the FTC Act, the FTC has broad powers to issue subpoenas to request information from industry participants to investigate market practices.  That power has led to critical reforms such as the Packers and Stockyards Act and the Securities and Exchange Act.  The FTC can shine needed light on patent trolls’ muddy activities – often involving numerous shell companies, hidden interests, and dubious business practices.

When I was the Policy Director of the Bureau of Competition of the Federal Trade Commission I helped shape the 6(b) study of generic drug litigation and the obstacles of generic drug entry conducted in 2002.  The completed report helped guide important reforms of the Hatch-Waxman Act.  It is based on this experience that I offer the following 4 points of guidance to the FTC:

  1. Time is of the essence. For the study to be useful it must be completed in time to be a part of the necessary debate on patent reform.  This debate is happening now because many Americans need action now.  Small businesses are getting hit with bogus demand letters and patent claims now because it is cheaper to settle than litigate.  Startup companies are getting put out of business now or are selling large parts of their businesses to fight off patent claims.  Unfortunately FTC 6(b) studies can often get bogged down (a recent study of authorized generic drugs took over 5 years to complete).
  2. The process should be iterative. The FTC should design the study so that there are logical checkpoints when information can be disseminated to the public.  It is vital that there is a constant flow of accurate information informing the debate.  The FTC should share the information they learn in many forms – through speeches, Congressional testimony and advocacy to regulators.
  3. The study should guide the FTC’s actions in promoting competition and consumer welfare. The data the FTC collects is not only vital to the public, but also to guiding the FTC’s own actions.  The FTC should use the data when filing amicus briefs, comments, testifying before Congress, or any other activity it regularly engages in to promote its core functions.
  4. The study should be complete. The FTC must make sure it collects data on all practices that cause harm because of the significant lack of information in this area.  For example, the FTC’s announcement does not address collecting data on patent trolls’ relationships with practicing entities.  It is important to know if practicing entities are exerting any control over patent troll activities or whether patent trolls are being used to drive up competitors’ costs through excessive transaction fees or supra-competitive licensing rates.

The FTC has an important task; the process of studying trolls can hopefully lead to important reforms to begin to correct the problems created by their conduct.

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David Balto

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