Yesterday, the U.S. Federal Trade Commission (“FTC”) released a 269-page Report following its study of patent assertion entities (“PAEs”) — i.e. what the FTC’s press release calls “firms that acquire patents from third parties and then try to make money by licensing or suing accused infringers.” (see our Sep. 27, 2013 post, May 21, 2014 post and Aug. 14, 2014 post for background on this PAE study). The report is based on a study of public information as well as non-public information that the FTC used its subpeona power to obtain resulting in data covering the 2009 to 2014 period from 22 PAEs, 327 PAE affilidate and over 2100 holding entities (entities that owned but did not assert patents).
The report indicates that not all PAEs are the same and concerns about PAEs should be focused on problematic behavior of a subset of PAEs–i.e., certain Litigation PAEs, but not Porfolio PAEs. The report also indicates that there is no widespread concern about PAEs sending demand letters or PAEs owning standard essential patents subject to a FRAND or other standard setting licensing commitment. The report provides some recommendations concerning patent reform, which are directed to patent litigation and the behavior of some Litigation PAEs.
Portfolio PAEs versus Litigation PAEs.
The report found two types of PAE business models that were either licensing focused (“Portfolio PAEs”) or litigation focused (“Litigation PAEs”). The FTC’s press release summarized those models as follows:
One type, referred to in the report as Portfolio PAEs, were strongly capitalized and purchased patents outright. They negotiated broad licenses, covering large patent portfolios, frequently worth more than $1 million. The second, more common, type, referred to in the report as Litigation PAEs, frequently relied on revenue sharing agreements to acquire patents. They overwhelmingly filed infringement lawsuits before securing licenses, which covered a small number of patents and were generally less valuable.
The report found that, among the PAEs in the study, Litigation PAEs accounted for 96 percent of all patent infringement lawsuits, but generated only about 20 percent of all reported PAE revenues. The report also found that 93 percent of the patent licensing agreements held by Litigation PAEs resulted from litigation, while for Portfolio PAEs that figure was 29 percent.
The FTC’s press release stated that “the royalties typically yielded by Litigation PAE licenses were less than the lower bounds of early stage litigation costs” which “is consistent with nuisance litigation, in which defendant companies decide to settle based on the cost of litigation rather than the likelihood of their infringement.”
No Widespread Patent Demand Letter Concern.
The FTC’s study did not appear to find any widespread concerns about alleged mass-mailing patent demand letter campaigns, finding an “absence of large demand letter campaigns for low-revenue licenses among the Study PAEs.” This may raise further questions about the need for federal or state regulation of patent demand letters.
Wireless Case Study: Litigation PAEs Behave Differerently Than Manufacturing or R&D Entities
The FTC’s study included a case study on the “wireless chipset sector,” which included Litigation PAEs, Portfolio PAEs, wireless product manufacturers and non-practicing entities (NPEs). The latter, NPEs, are entities that primarily invest in research and development to develop technological innovations that are then transferred to someone else to commercialize. The FTC found a distinction in the behavior of Litigation PAEs and other patent-owning entities:
The wireless case study found that Litigation PAEs and manufacturers behaved differently. Within the study, Litigation PAEs brought far more infringement lawsuits involving wireless patents–nearly two-and-a-half times as many as manufacturers, NPEs, and Portfolio PAEs combined. Litigation PAE licenses involved simple lump-sum payments with few restrictions, if any, whereas the reported manufacturer licenses frequently included field-of-use restrictions, cross-licenses, and complicated payment terms.
No Widespread PAE Problem re FRAND-Committed SEPs
The FTC’s study sought information about PAEs owning and asserting standard essential patents. The FTC report indicates that there is no widespread concern about PAEs owning and asserting FRAND-encumbered SEPs. Below is the entirety of the FTC reports statement on the issue (non-substantive footnotes omitted):
Fewer Than 1% of Study Patents Were Identified as Encumbered by a FRAND Commitment to a SSO
The FTC’s study examined the extent to which PAEs have acquired patents declared “essential” to practice a technical standard adopted by a standard setting organization (SSO). These patents are often referred to as “standard-essential patents” or “SEPs.” Some commentators have suggested that owners of SEPs could attempt to evade FRAND or other commitments, while exploiting the SEPs’ importance to a standard, by transferring encumbered SEPs to a PAE. To measure the extent of this activity in practice, the FTC required Responding PAEs to identify whether any patent it or its Affiliates or Holding Entities held since 2009 had ever been the subject of a licensing commitment made to any SSO.
Responding PAEs did not identify patents encumbered by a licensing commitment to an SSOP as a large portion of their patent holdings. [fn 324] Only four of the 22 Responding PAEs identified that they, or their Affiliates and Holding Entities, held anyh patents that had been committed to an SSO for licensing. [fn 325] The total number of patents known to be encumbered in this way comprised less than 1% of the total study sample. [fn 326] During the study period, approximately 75% of the patents identified as encumbered were licensed, but fewer than 25% of these patents were asserted in litigation. Finally, the proportion of overall holdings classified as encumbered did not differ significantly across the Responding PAEs that identified encumbered patents, which suggests that the FTC’s sample did not include any PAEs that focused on monetizing SEPs. [FTC Study at 136-137]
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[fn 324]: The FTC’s question focused on whether the PAE knew that it held an encumbered patents because the Commission was interested in whether the PAE would use this information in licensing negotiations. SSO commitments would be underreported if Study PAEs and Holding Entities held patents that they did not know, or had not yet determined, were subject to an encumberance. They may also hold patents that were not subject to a licensing commitment, or declared to a standard, but which may still be required to practice a standard.
[fn 325]: Three of these Responding PAEs were Portfolio PAEs, and the fourth was a Litigation PAE.
[fn 326]: Responding PAEs identified commitments to ANSI, ETSI, IEEE, IETF, ITU, ITU-T, and JEDEC. All of the SSO commitments required licensing the relevant patents on either FRAND or RAND terms, except for one commitment, which required royalty-free licensing.
Below are the SEP specific questions that the FTC sought responses on in the study (from the report’s Appendix C: PAE Special Order):
D. Standard Setting Commitments
1. If any Person has committed to a Standard Setting Organization that it will License any Patent(s) Held by the Firm since January 1, 2009, for each commitment
a. State the date the commitment was made.
b. Identify the Person who made the commitment.
c. Identify the Standard Setting Organization.
d. Identify the standard(s) to which the commitment applies.
e. Provide a narrative response identifying any Wireless Patents held by the Firm that are subject to the commitment.
f. State whether the commitment is to License the Patent(s) or any Patent claim(s) on reasonable and non-discriminatory (RAND); fair, reasonable, and non-discriminatory (FRAND); royalty-free (RF); or other terms.
(1) if the commitment is to License on terms other than RAND, FRAND, or RF, provide a narrative response describing the terms.
g. Is the commitment subject to a field of use restriction? (Y/N) If yes:
(1) state the specific field of use restriction(s); and
(2) identify, from the following list, in which sector(s) is the field of use restriction: Chemical, Computers & Communications, Drugs & Medical, Semiconductors, Other Electrical & Electronic, Mechanical, or Other.
h. Provide a narrative response listing all Patent(s) that any Person has declared, or otherwise identified to any Person, as subject to the commitment.
i. Produce, and provide a narrative response identifying by Reference Number, all agreements embodying the commitment.
Further, below are the SEP specific inquiries that the FTC made in relation to its specific Wireless Case Study (from the report’s Appendix D: Wireless Special Order):
C. Standard Setting Commitments
1. If any Person has committed to a Standard Setting Organization that it will License any Wireless Patent(s) Held by the Firm since January 1, 2009, for each commitment
a. State the date the commitment was made.
b. Identify the Person who made the commitment.
c. Identify the Standard Setting Organization.
d. Identify the standard(s) to which the commitment applies.
e. State whether the commitment is to License the Wireless Patent(s) or any Patent claim(s) on reasonable and non-discriminatory (RAND); fair, reasonable, and non-discriminatory (FRAND); royalty-free (RF); or other terms.
(1) if the commitment is to License on terms other than RAND, FRAND, or RF, provide a narrative response describing the terms.
f. Is the commitment subject to a field of use restriction? (Y/N) If yes:
(1) state the specific field of use restriction(s); and
(2) identify, from the following list, in which sector(s) is the field of use restriction: Chemical, Computers & Communications, Drugs & Medical, Semiconductors, Other Electrical & Electronic, Mechanical, or Other.
g. Provide a narrative response listing all Patent(s) that any Person has declared, or otherwise identified to any Person, as subject to the commitment.
h. Produce, and provide a narrative response identifying by Reference Number, all agreements embodying the commitment.
FTC Proposed Patent Reform.
The FTC recognized the “important role” of patent litigation in protecting patent rights. To balance that role with concerns about “nuisance” litigation, the FTC made four suggestions for patent reform:
- Address the imbalances between the cost of litigation discovery for PAE plaintiffs and defendants;
- provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits;
- streamline multiple cases brought against defendants on the same theories of infringement; and
- provide sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.