FTC Issues Long–Awaited Patent Troll Study

The Federal Trade Commission today announced the publication of its formal study of the problem of patent trolls—which the Commission more politely refers to as “patent assertion entities” or “PAEs.” Using its investigative authority, the Commission examined non–public information for 2009–2014 from 22 PAEs, 327 PAE affiliates, and 2,100 holding entities. The FTC divided the troll universe into two types: Portfolio PAEs, which negotiate broad licenses to extensive portfolios; and Litigation PAEs, which generally file infringement lawsuits, then extract nuisance–value settlements. Litigation PAEs accounted for 96% of the litigation generated by the PAEs studied. The Commission further noted that end–users were frequent targets of patent troll licensing and litigation activity, noting that retailers received 17% of demand letters, represented 10% of litigation defendants, and were 13% of the pool of licenses studied.

While the report is worth reviewing in detail, here are the Commission’s high–level conclusions about how to combat the patent troll problem in court and in Congress:

• Courts should use their authority under the Federal Rules of Civil Procedure to manage patent troll cases in a way that minimizes the costs to defendants early in the litigation, and so reduces the pressure to settle based on the cost of litigation, not the value of the underlying invention.
• Federal Rule of Civil Procedure 7.1, which requires the disclosure of companies affiliated with named plaintiffs and defendants, should be expanded to include the kinds of relationships common among patent trolls and their affiliates, thus informing the courts of who really stands to profit from the litigation.
• Congress and the Federal Judicial Conference should create procedures to stay claims against end users, such as retailers, while litigation against manufacturers or software developers proceeds first.
• Courts should require patent trolls to state more clearly in their patent infringement complaints what claims are being allegedly infringed by what specific accused systems or instrumentalities, so that accused infringers and presiding judges can determine earlier in the litigation what is actually at stake in the case.

While none of these conclusions is new or surprising to anyone who has been in the trenches of patent troll litigation in recent years, it is refreshing to see confirmation by the FTC, based on non–public information, of the kinds of sensible changes that need to be made to even the playing field between trolls and their targets.

The complete FTC Patent Assertion Entity Study is available here.