Back in December 2012, the Federal Trade Commission and the Department of Justice held a joint workshop to explore the impact that patent assertion entities (PAEs — or non-practicing entities/NPEs) may be having on innovation, competition, and the U.S. economy.  The FTC and DOJ invited the public to submit comments for consideration by the agencies, even extending the deadline for submission until early April.  All in all, 68 separate submissions have been received and posted on the FTC/DOJ workshop’s site.

The commenters represent a wide variety of industries and interests, and express divergent viewpoints and positions about the effects of PAE activity.  Many comments focus on the newly-reintroduced SHIELD Act.  Given that the main focus of this blog is on standard-essential patent issues, we won’t even try to give a comprehensive rundown of all of the comments — we’ll leave the focus on non-practicing entities to others.  But several of the comments do express particular concern about the interplay between PAEs, standard-setting organizations and standard-essential patents.  After the jump, we’ll discuss some of these issues that are being flagged as troublesome.

Potential for Manipulation of the Standard-Setting Process and Evasion of RAND Licensing Obligations is a Primary Concern

The vast majority of comments surrounding SEPs express concern about how PAEs may “game the system” of standard-setting and RAND licensing.  For example, the submission by Dell, HP, and Adobe argues that PAEs and their investors may be in the position to manipulate the standard-setting process to create hold-up and avoid FRAND obligations.  This is because ownership and investment in PAEs is often disguised or obfuscated, which can undermine the effectiveness of disclosure obligations in SSO patent policies.  For example, an investor in a PAE that is participating in an SSO might be able to drive the standard-setting process to incorporate the PAE’s technology without technically being bound to disclosing the existence of the PAE’s patent.  Then, once the standard has been adopted, the PAE could enforce its patent rights free of any licensing obligations, and the investor could financially benefit.  While this might pass muster under many current SSO patent policies, it likely violates the spirit of such policies.

Dell/HP/Adobe also note that while some PAEs actively seek to obtain and license standard-essential patents, there is very limited information available about internal practices of PAEs vis-a-vis SEPs.  They argue the FTC/DOJ to use investigative tools to obtain information about SEP-related licensing practices, such as whether PAEs might be requiring “bundling” — forcing licensees to pay a single royalty rate for both essential, FRAND-encumbered patents and non-essential patents.

The American Antitrust Institute (AAI) argues that PAEs “may be less inhibited than operating companies to circumvent prior owners’ F/RAND commitments, to demand unreasonable license terms or seek injunctions in court or exclusion orders before the International Trade Commission.”  According to the AAI, this is because operating companies are constrained by their reputations and the fact that they will almost certainly “return to the table” before various SSOs — a position taken by Qualcomm in 2011 (standard-setting is a “repeat game”).  The AAI argues that PAEs might, in contrast, benefit from developing a reputation for being aggressive.  Therefore, the AAI urges the FTC/DOJ to be viligant in pursuing antitrust claims against PAEs that fail to abide by prior owners’ FRAND commitments.

Michael Carrier, a professor at Rugers-Camden Law School, also echoes the “repeat game” concerns about PAEs in the standard-setting context.  But Prof. Carrier proposes a solution — that the FTC/DOJ block all acquisitions of patents (by either PAEs or operating companies) where the acquiring entity does not agree to honor prior RAND licensing obligations.  Prof. Carrier cites with concern statements made by the CEO of the Rockstar Consortium, an entity that acquired much of Nortel Networks’ patent portfolio out of bankruptcy, that imply that Rockstar may not honor prior licensing obligations.  Professor Robin Feldman from the University of California-Hastings Law School also expressed concerns about the transferability of FRAND obligations.

Verizon and the US Telecom Association devote much of their submission to SEP-related issues.  They claim that while recent court decisions have seemed to limit the ability of FRAND patent holders to seek injunctions and violate FRAND obligations, the agencies should do more.  Specifically, they urge the FTC and DOJ to encourage courts to prohibit the acquirers of FRAND-encumbered patents from extracting the hold-up value of those patents, either through seeking injunctive relief or supra-FRAND royalties.

Standard-essential patent-related issues even extend to other contexts.  For instance, the Computer and Communications Industry Association draws a parallel between FRAND obligations and licensing obligations entered into by prior owners of patents that are subsequently transferred to a PAE, arguing that these licensing obligation should be bind the PAE transferees.

But not everyone attributes SEP-related problems to PAEs.  IPNav (a patent assertion entity itself), argues in its comment that most of the antitrust-related problems stemming from the assertion of standard-essential patents lie with assertions from operating companies, not PAEs.  Along the same lines, Microsoft also urges the FTC and DOJ to continue to be vigilant in their regulation of standard-essential patent activity, regardless of the identity or business model of the patent holder.