Patent assertion entities (PAEs) were at the center of a lively discussion on 10 December 2012 before an overflow crowd of senior antitrust enforcers, economists, practitioners, and industry players. PAEs are organizations whose business model is to acquire patents and license (or sue) practicing entities making products that read on those patents. The public workshop hosted by the Department of Justice (DOJ) and Federal Trade Commission (FTC) focused on how PAEs affect innovation and competition, and what role the federal antitrust enforcement agencies should play in regulating the activities of PAEs. While the workshop did not resolve the question of what can or should be done to regulate PAE activities, nearly everyone agreed that PAE activity is an issue of increasing importance to the United States and likely to draw continued scrutiny of the DOJ and FTC in the years to come. In fact, one DOJ attorney noted that PAE issues were the topic of daily conversations at both agencies.
The workshop’s diversity of viewpoints provided a forum for both supporters and detractors of PAE activities. PAE defenders argued that their business model promotes invention by creating patent market efficiencies of scale, access to capital, and lower transaction costs, allowing more people to benefit from their innovation. PAEs provide liquidity in an otherwise illiquid market, the argument goes, rewarding the smallest inventors for their contributions to society and allowing them to continue inventing, rather than wasting time trying to enforce rights against infringers. Some participants described PAE enforcement activities as simply the creative use of intellectual property rights, which may lead to monopoly, higher prices, and consumer harm, but entirely within the limits of the patent system. A representative from Nokia argued that infringers often act as though they are entitled to patented technology without fair compensation, an act that is a crime in some countries.
Other participants, including FTC Chairman Jon Leibowitz, cited statistics that suggest PAE activity may distort competition and reduce consumer welfare. For example, PAEs initiated almost 40 percent of the more than 4,000 patent lawsuits filed in 2011, but when a PAE-initiated lawsuit reaches the merits, PAEs lose 92 percent of the time. A frequently cited report by panelist Michael Meurer estimated that PAEs imposed a direct cost of US$29 billion on defendants and licensees in 2011 alone. According to Meurer, most of this cost is deadweight loss, with at most 25 percent flowing back to innovation. Several panelists stated that the mere threat of litigation with a PAE forces companies to settle or take a license in the vast majority of cases, especially where the PAE is a large patent aggregator. Practicing entity representatives also testified that the cost to defend against PAE threats and litigation far outstrips the expense of taking a license, especially for small companies that don’t have the resources and scale to fight. A panelist from a small technology company called Rackspace testified that PAE activity has a disproportionate effect on startups and smaller companies. Small companies may not have the resources to battle PAEs or pay the requested license fees, which means that their products either may not be viable or they may not include all the features that larger competitors can afford to provide.
In the final panel, academics and private practitioners discussed the antitrust theories that may apply to PAE activities.1 The panelists suggested Section 7 of the Clayton Act may apply in some circumstances where an operating company transfers patents to a PAE with the explicit or implicit understanding that the patents will be aimed at the operating company’s competitors in order to raise its rivals’ costs. This is a practice that Chairman Leibowitz described in his opening remarks as "unsavory." But if the operating company retains no control over the enforcement of the transferred patents, and by definition there is no diversion between the products of the rival and the PAE (which makes no products), it may be difficult to bring a standard Section 7 case. Section 1 of the Sherman Act may be implicated in the same scenario where the seller and the PAE agree to harm the seller’s competitors, for example through contractually aligned incentives. Finally, the panelists discussed whether Section 7 may also apply to PAEs that have amassed market power through a series of acquisitions or the acquisition of standard essential patents.
The theories may be novel, but there can be no doubt that the antitrust enforcement agencies are actively considering their roles in what Chairman Leibowitz called the "minefield of problems" raised by patent issues and PAE activities in particular. The DOJ and FTC are accepting public comments on the competitive effects of PAE activities through 10 March 2013.