The Federal Trade Commission (FTC) recently released a 296-page report entitled "Patent Assertion Entity Activity: An FTC Study" (hereinafter, "PAE Report").1 The report details the FTC's investigation into the behavior and effects of Patent Assertion Entities (PAEs), which are companies that primarily acquire patents and attempt to monetize them by suing or licensing accused infringers.2 In sum, the report finds that a majority of PAE lawsuits studied resulted in settlements for less than the expected cost of litigation through the end of discovery, or "nuisance-value" settlements.3 It goes on to recommend judicial and legislative reforms targeted at reducing nuisance infringement litigation.4

The PAE Report examines public and non-public5 data from 2009 to 2014, covering nearly 350 PAEs.6 At a high level, the FTC observed two PAE business models. "Portfolio PAEs" obtain large portfolios of patents typically in the millions of dollars, often through capital raised from investment funds and manufacturing firms.7 These PAEs tended to obtain licenses through pre-litigation demand letters and negotiations, and such licenses were often in excess of US$1 million.8 In contrast, "Litigation PAEs" typically acquire smaller numbers of patents before assertion, and they tend to be more thinly capitalized.9 These PAEs almost always filed suit before beginning license negotiations, and typically settled quickly for small lump-sum payments.10 Indeed, 77 percent of settlements were below US$300,000, estimated to be the lower bound of litigating a patent case through discovery.11 Thus, the PAE Report concludes that the Litigation PAE business model often results in nuisance-value settlements.12 It suggests that nuisance infringement litigation "can tax judicial resources and divert attention away from productive business behavior."13

In addition, the PAE Report includes a case study within the wireless chipset sector.14 In this case study, the FTC investigated non-PAEs to compare business practices with those of PAEs.15 The FTC found that Litigation PAEs, in particular, brought nearly two-and-a-half times as many patent infringement cases as Portfolio PAEs and non-PAEs combined.16 The report posits that low litigation costs for Litigation PAEs may be to blame for their more aggressive approach to litigation.17

In light of these findings, the PAE Report proposes that Congress and the courts "[d]evelop rules and case management practices to address discovery burden and cost asymmetries in PAE litigation."18 For example, the PAE Report suggests that civil discovery rules19 could be altered to provide for earlier disclosure of infringement and invalidity contentions, which the FTC posits would "help to balance the asymmetries of plaintiff and defendant-side discovery costs."20 In general, the FTC submits that "any measures that reduce the discovery burden and costs while ensuring discovery of information appropriate to the case should be considered."21 Relatedly, the FTC also proposes that, as courts continue to evaluate the "plausibility" standard for patent claims, they ensure that patent infringement complaints provide more particularity so that defendants can evaluate the nature and scope of infringement at the outset of a case.22

The PAE Report also compares the technology asserted by PAEs to the business of the accused infringers. The FTC observed that although the study PAEs held mostly information and communication technology (ICT) patents, these patents were asserted across a broad range of industries.23 For example, the FTC highlighted the frequency of PAEs suing retailers and other end-users of a product instead of its manufacturer.24 In response, the FTC proposed "establish[ing] procedures encouraging courts to stay a PAE's infringement action against a customer or end-user, where the PAE has also sued the manufacturer of the accused product under the same theory of infringement."25

In addition, the FTC observed that Litigation PAEs often were organized in multiple affiliate relationships, where it was difficult to ascertain which entities control.26 The FTC observed that the current corporate disclosure rule27 would not capture the financial relationships in these multi-affiliate organizations.28 To fully capture these relationships, the FTC proposed amending the disclosure rule "to reach a broader range of non-party interested entities or persons."29

Of note, the FTC did not recommend reforms with regard to pre-litigation demand letters.30 The PAE Report finds that Litigation PAEs almost always file infringement lawsuits before commencing licensing negotiations.31 Thus, the FTC "did not observe demand-letter campaigns that, on their own, generated low-revenue licenses." 32

On a media teleconference to discuss the PAE Report, an FTC spokesperson explained that the upcoming presidential elections could impact enactment of the FTC's proposals. For now, the FTC has no plans to push legislative reforms during the remainder of President Obama's term in office. The spokesperson noted that neither mainstream presidential candidate has taken a firm stance on patent reform. Thus, it remains to be seen whether these proposals will find a favorable political climate after the upcoming presidential election.