Everyone in the intellectual property community will be aware that the debate over the activity of “patent trolls” has lasted years, and has always contained plenty of heat and not a lot of light. The heat shows no sign of diminishing, as journalists realise that there’s an easy story to file in a day trip to Tyler or Beaumont to look at a corridor of brass plated doors with no-one behind them – but there are at least some attempts to shine a light under the bridge to see what these trolls really look like. The latest of these is the recently announced proposal for a collection of information by the Federal Trade Commission (the FTC).
There has been little unanimity on what a patent troll is – except than that no definition ever covers the commercial activity of whoever is making the definition. It has even been difficult to find a neutral generic term for such behaviour. We used to use NPE (“Non Practising Entity”), to distinguish patent owners only interested in licensing from patent holders who used patents to support their own commercial activity in selling products and services. This term fell out of use when it was appreciated that one class of NPEs is long established, generally respected, and considered by most to be behaving in an acceptable way with its stock of intellectual property – such NPEs are often known as “universities”.
Nowadays, the preferred generic term for “patent troll” is PAE (“Patent Assertion Entity”). PAEs are defined by the FTC as “firms with a business model based primarily on purchasing patents and then attempting to generate revenue by asserting the intellectual property against person who are already practicing the patented technology”, stating further that the FTC “distinguishes PAEs from other… NPEs that primarily seek to develop and transfer technology, such as universities, research entities and design firms”.
Why is the FTC involved? The FTC is not the first Trade Commission normally thought of when considering the IP landscape in the US, but it is quite distinct from the better known (in IP circles) International Trade Commission (ITC). The ITC has a broad jurisdiction relating to international trade issues and it has quasi-judicial functions which include the ability to injunct against imports found to infringe patents – the ITC is in consequence used as a forum by PAEs. The FTC is also a federal agency, but its remit is to enforce antitrust and consumer protection laws by investigating complaints against individual companies, and to ensure that markets function competitively by elimination of unfair or deceptive trade practices.
The FTC considers that “patent troll” behaviour may fall within its brief. In December 2012 it sponsored, together with the Antitrust Division of the US Department of Justice (DOJ), a one day workshop on PAE Activities. This is long, but worth a speedy read as it contains full discussion of the perspectives of all the players, from PAEs to SMEs to technology giants, along with the opinions of academic economists and lawyers and representatives of different parts of the justice system. Also notable are the many public submissions made afterwards, and found here – it is interesting that some of these are prepared jointly by major competitors within a single industry (who in some cases may agree on very little else). Discussion of the submissions, and links to the materials, can be found in this post on the Essential Patent blog, which is recommended reading for those interested in developments on standards-essential patents.
The FTC is now launching a consultation before it carries out an important evidence gathering step – the collection of a large amount of patent-related commercial information from a group of PAEs, together with matching information in some areas from a selection of “other companies asserting patents in the wireless communication sector”, including manufacturers and other types of NPE. This kind of data collection is a normal part of an FTC investigation into whether an industry is behaving in a way that harms others (particularly consumers). This information would be obtained by compulsory process orders. Again, this is a standard FTC mechanism for obtaining information in an investigation – while noncompliance does not bring automatic penalties, compulsory process orders are enforceable by a district court.
The FTC is asking for a lot of information of every firm. In addition to identify fully the firm’s corporate structure, including anyone who has a financial stake in it and what that stake is, it wants a ream of information on every patent “held by the firm since January 1, 2008” – these are only US patents (and applications). In addition to case history data for each patent, the FTC wants to see whether the firm has engaged in R&D relevant to the patent (and how much this cost), whether any other party has a legal or economic interest in the patent, whether any claim in the patent is subject to a licensing commitment to a Standard-Setting Organization and whether this was on RAND, FRAND or royalty-free terms, whether there has been any attempt to assert the patent (including making any Demand, defined as a communication to a third party relating to any effort to assert the patent), and finally a copy of any documents “relating to any communication since January 1, 2008 between the firm and any investor or potential investor, financial or otherwise, relating to any patent held by the Firm since January 1, 2008.
That already seems like plenty, but we’re only down to the end of item D in the collection. The FTC also wants to know how each patent portfolio owned by the firm is organised and why it is organised that way, which patents were acquired or sold since January 1, 2008, who else was involved, and how much they cost or are costing (in full detail), along with full details of every Demand made the firm since January 1, 2008 and how much it cost to make them, costs of every litigation and benefits of every license relating to patents over this period, and finally aggregate cost and aggregate revenue information for the firm.
It is only PAEs who need to provide all of this information. The FTC is also asking for information from “other entities asserting patents in the wireless communications sector” for comparison, but it does not require the full patent-by-patent breakdown, or patent portfolio or patent acquisition information. This is certainly less information – but it is still a lot of information.
As the immediate reaction of anyone that the FTC will ask to provide this information is likely to be that this creates an undue burden on them, the FTC has thoughtfully provided its retaliation in advance by adding an estimated burden in time and cost. This will provide some entertainment to anyone previously involved in providing patent-related data of this level of detail, provided that they aren’t likely to be on the wrong end of a collection request from the FTC. The FTC is estimating that a company will typically require 200 hours of time from a mid-level manager paid around $50 an hour for their trouble – it is expected that a little clerical labour will be needed too, but no senior management time, with a company’s costs coming to a little over $10k, typically.
Information like this is generally hard to obtain, as it requires excellent understanding of the patent portfolio and also of all financial matters relating to the patent portfolio – in my experience, the only kind of firm likely to be able to provide this expertise in one person is a PAE, though most PAEs are sufficiently thinly staffed that they may struggle to lose a man month of labour from a mid-level manager (or comparable person – most PAEs are sufficiently small that there would not be such a thing as a mid-level manager in the firm). Unless the firm is organised around monetizing specific patent families, it may be close to impossible to obtain much of this financial information without advanced guesswork. The cost of providing fully considered answers to all these questions for a significant patent holder in the wireless technology space is likely to be far, far greater than estimated – some guessing is therefore to be expected.
What is the FTC looking for here? The stated aim is to “provide a better understanding of PAE activity and its costs and benefits,” presumably because it has at least some concern that this may involve market distortion by unfair trade practices, as this would be within the FTC brief. In order to understand whether there has been distortion, some understanding of the undistorted position is needed. While comparison data is to be collected, the reason for collecting comparison data specifically from other “entities asserting patents in the wireless communication sector” is unclear – the PAE collection does not appear necessarily related to this field at all. The theory may be that the easiest way to show distortion is by looking at products and services covered by standards with patents widely licensed under RAND and FRAND terms – if PAE activity for such standards-related patents appears jarringly at odds with how technology developers behave, then the FTC may smell blood.
In the meantime, the mandatory 60 day comment period on the proposed collection is open. Many comments are to be expected – if of course, they can be filed. The FTC is heavily affected by the federal shutdown, and much of its website currently redirects to a short information message announcing this.
Richard Lawrence 7 October 2013