On October 6th, the FTC issued its long anticipated report concerning the structure, operation and impact of Patent Assertion Entities (PAE), including PAE demand, litigation, and licensing behavior. The report included a case study directed to the wireless industry, and reported on certain characteristics of patents held by PAEs, including patent age and citation patterns, technology, commitments to standard setting organizations and recordation at the Patent & Trademark Office. The report also makes recommendations for legislative and judicial reforms to address behavior that the FTC found consistent with nuisance litigation. The full report is available here.

The FTC collected non-public information and data from 22 responding PAEs and over 2500 of their affiliates and other related entities. The FTC observed two PAE business model types - Portfolio PAEs, which negotiated licenses covering large patent portfolios, and Litigation PAEs, which typically sued potential licensees on smaller patent portfolios and settled shortly thereafter. The report found that Litigation PAEs accounted for the majority of total infringement lawsuits, but only a small amount of total licensing revenues. The FTC also found that Litigation PAE behavior was consistent with nuisance-value litigation, since the overwhelming majority of licenses generated by Litigation PAEs resulted from litigation settlements, more than 75% were valued at less than estimated discovery costs, and most were settled early - 66% within one year and 83% within 18 months. The FTC also observed that 88% of the patents held by the PAEs included in its study were patents directed to computers, communications, or other electronic technology, and that a significant portion of firms targeted by PAEs were end users, including retail businesses.

The FTC went on to make four recommendations to reform patent litigation practice. First, it recommended developing rules and practices that would level the discovery burden and costs between PAEs and accused infringers. Second, it proposed that Federal Rule of Civil Procedure 7.1 should be amended to require PAEs to disclose affiliate companies that have interests in the litigation. Third, it proposed the adoption of provisions encouraging courts to stay PAE actions against end-users when the manufacturer has been sued under the same infringement theory. Fourth, it suggested that courts should further develop the “plausibility” standard of pleading to provide sufficient notice to accused infringers.

*Amy Song, a Baker Botts law clerk, assisted in the preparation of this article.