FTC Releases Big Report On Patent Trolls, Says The Patent System Needs To Change

Patents

from the but-will-it? dept

For quite some time now the FTC has been making lots of noises about the problems of the patent system and patent trolls in particular. While the US Patent Office itself has done little to address the problem, the FTC has recognized the harm patent trolling is doing to innovation and consumers. More than five years ago, the FTC released a big report on patent trolling and the problems it causes — suggesting that the Patent Office should start getting rid of vague patents with “indefinite” claims. That has happened a little bit, but much more because of the Supreme Court forcing the issue, rather than the USPTO listening to the FTC.

However, since then, it’s appeared that the FTC has only grown more concerned. Basically every year we report that the FTC is investigating patent trolls in some form or another. In 2012 (a year after that first report), the FTC began exploring patent trolling more thoroughly. In 2013, it announced an official investigation that would make use of subpoenas to find out how patent trolls were actually operating. Later that year it was revealed that it would subpoena 25 patent trolling operations. Since then, though, it’s been mostly crickets. There was one famous troll, MPHJ, who sued the FTC in a case that was dismissed.

And now, finally, after all these years, the FTC has released its big report. It appears that 22 patent trolling operations responded to the subpoenas, though many had “affiliates and other related entities” allowing the FTC to study many more patent trolling operations overall. The study lumps patent trolls (they prefer the euphemistic “Patent Assertion Entities” or PAEs) into two categories: litigation trolls and portfolio trolls. In short, litigation trolls are the smaller guys with just a small number of patents, who would threaten and sue companies (and quickly reach settlements) over those few patents. It’s more of a “mom & pop” shakedown kind of business. Portfolio trolls are the bigger, well funded operations, that have a massive portfolio of patents and play a more comprehensive shakedown game, going to lots of big companies and basically saying “you infringe on some of our patents, so give us a bunch of money to not figure out which ones.” Think: Intellectual Ventures or Acacia.

The differences here matter, because the businesses are quite different. Lots of the actual lawsuits come from the litigation trolls as a sort of negotiation tactic. The portfolio trolls don’t actually have to go to court that often — they have “sales people” who are a bit more effective. But the amount of dead-weight loss to the economy from the portfolio trolls is much larger. When big companies agree to a portfolio troll shakedown it’s often for a tremendous amount of money. The FTC study found 80% of the revenue went to portfolios, and only 20% to litigation trolls — even though litigation trolls filed 96% of the lawsuits and 91% of the reported licenses.

One interesting — and potentially surprising — finding of the study was that the FTC did not see evidence of much pure demand letter shakedown. That is, it’s been said that many of the smaller trolls just send letters, but never expect to go to court, since many may just settle based on the demand letter. But the FTC didn’t find much evidence to support that — saying that most of the revenue for litigation trolls came from actually going to court (and then rapidly settling). In short, it appears that the leverage of a federal lawsuit (in eastern Texas, probably) is much stronger than just a threat of a lawsuit. But a key takeaway from this is that attempts to reform demand letters (which has been regularly proposed — such as requiring them to outline what the infringement is) won’t actually help much.

The study also looked at wireless chipset manufacturers (i.e., companies that actually implement products) to compare them to patent trolling operations. The key question here: do the actual implementers use patents in the same way to “protect” their business. As you might expect, they don’t act very similar at all:

We observed that Wireless Manufacturers sent demand letters before executing licenses, while Litigation PAEs sued before licensing their patents. Wireless Manufacturers and NPEs also sent nearly three times as many demand letters as all of the Study PAEs combined. Litigation PAEs brought nearly two-and-a-half times as many patent infringement cases involving wireless patents as Wireless Manufacturers (which collectively accounted for approximately 90% of worldwide chipset sales), NPEs, and Portfolio PAEs combined.

Wireless Manufacturer and Litigation PAE license characteristics also differed markedly. Wireless Manufacturer licenses frequently included field-of-use restrictions, cross-licenses, and complicated payment terms, whereas Litigation PAE licenses involved simple lump-sum payments with few restrictions, if any.

In short, the trolls’ activity is inconsistent with the activity of actual innovators.

In the Wireless Case Study, the FTC found that Study PAEs were more likely to assert their patents through litigation than were Wireless Manufacturers. For example, 30% of Portfolio PAE wireless patent licenses and nearly 90% of Litigation PAE wireless patent licenses resulted from litigation, while only 1% of Wireless Manufacturer wireless patent licenses resulted from litigation.

In other words, all of the people who insist actual innovators need patents to protect their business, and that patent trolling is just a form of the same thing are full of it.

There are a few other items in the report, but these seem to be the big ones. The report also comes with some recommendations (which hopefully won’t be ignored this time). First up is to somehow deal with the high costs of being sued by a troll, starting with the costs of discovery. This has been a known problem for years, where the trolls basically ask for everything in discovery, knowing that the discovery process alone is so time consuming and expensive that many companies will simply give in and pay.

Because defendants frequently paid less than the estimated value of discovery costs to settle litigation with Study PAEs, and because there is asymmetry in discovery burden between PAE plaintiffs and defendants, Congress, the Judicial Conference of the United States, and individual courts should promote case management practices that take these costs and asymmetries into account. One step toward achieving this goal would be to amend Federal Rule of Civil Procedure 26, which addresses discovery in civil actions, in a way that helps balance these relative burdens. Rule 26 requires parties to meet and confer to discuss, among other things, a plan for discovery. Early disclosure of asserted claims and infringement and invalidity contentions in PAE litigation would help to balance the asymmetries of plaintiff and defendant-side discovery costs. Likewise, measures that would limit discovery before preliminary motions together with provisions to ensure that such motions are decided in a timely manner would help alleviate the asymmetry problem. Furthermore, early disclosure of damages theories would flag potential legal issues for summary judgment motions and provide more information for settlement discussions. In general, any measures that reduce discovery burden and costs while ensuring discovery of information appropriate to the case should be considered.

They sort of bury it in the middle, but limiting discovery before preliminary motions would be a huge help.

A second recommendation is basically forcing troll shell companies to reveal who they’re affiliated with. We’ve discussed how trolls often hide behind shells and how Intellectual Ventures has thousands of shells. Congress has proposed a true disclosure rule so that lines up somewhat with the FTC’s recommendation.

The third recommendation has also popped up in proposed patent reform: encouraging courts to put patent troll lawsuits on hold when they’re suing both manufacturers and end users. Basically the idea is to put the lawsuits against end users on hold until the issue with the manufacturer has gone through the judicial system.

The final recommendation is to require patent trolls filing a lawsuit to actually show how the defendant infringed upon filing the lawsuit, rather than just making vague statements accusing the defendant of infringement at the initial pleading stage, as happens today.

Every single one of these suggestions has been included in the patent reform bill that has been floating around Congress basically this entire session. Unfortunately, the coalition behind it fell apart under really strong pressure from pharmaceutical companies and giant patent licensing firms like Qualcomm.

One hopes that this data-driven report from the FTC will give a renewed push to Congress to actually push through the very reform that the FTC says would solve many problems, but Congress doesn’t often seem to care about fact-driven policy, preferring to stick with faith-based, emotion-driven bullshit from patent holders about how any such reform would destroy innovation in America.

Filed Under: ftc, litigation, patent assertion entities, patent reform, patent trolling, patent trolls, patents