In the May 19, 2014 Federal Register, the Federal Trade Commission published a Notice and Request for Comments concerning its proposal ”to collect information about Patent Assertion Entity (‘‘PAE’’) organization, structure, economic relationships, and activity, including acquisition, assertion, litigation, and licensing practices.” Written comments on the proposed FTC PAE study are due by June 18, 2014.

Background On The Study

The FTC long has shown an interest in regulating the activities of PAEs, and supported the USPTO’s proposal to require disclosure of attributable ownership/real party-in-interest information in U.S. patent and patent applications. This study may be aimed at giving the FTC information it needs to lay the groundwork for regulating PAEs.

According to the Federal Register Notice, “PAEs are firms with a business model based primarily on purchasing patents and then attempting to generate revenue by litigating against, or licensing to, persons who are already practicing the patented technology.” Also according to the Notice, “PAE activity is a growing issue for the United States” and “may have ‘a negative impact on innovation and economic growth.’’’ Because publicly available information on PAE activity is limited, the FTC claims that it needs to undertake this study to generate an “empirical record addressing non-public PAE activity.”

Purpose Of The Study

According to the Notice, “[t]he proposed study will add significantly to the existing literature and evidence about PAE form, structure, organization, and behavior” by going beyond publicly available data and requiring detailed information from 25 PAEs. In particular, the study aims to obtain information pertaining to at least the following aspects of PAE activity:

  • How do PAEs organize their corporate legal structure, including parents, subsidiaries, and affiliates?
  • What types of patents do PAEs hold and how do they organize their holdings?
  • How do PAEs acquire patents; who are the prior patent owners; and how do they compensate prior patent owners?
  • How do PAEs engage in assertion activity (i.e., how do they behave with respect to demands, litigation, and licensing)?
  • What does assertion activity cost PAEs?
  • What do PAEs earn through assertion activity?
  • How does PAE patent assertion behavior compare to that of other entities that assert patents?

Talk about a fishing expedition!

The FTC proposes to send information requests to approximately 25 PAEs that use different organizational models and assertion strategies, and also obtain information from 15 non-practicing entities (NPEs) and manufacturers.

Scope Of The Study

The study would dig deeply into the inner workings of the PAEs, and would require the selected PAEs to disclose detailed information dating back to January 1, 2009, pertaining to:

  • Corporate Structure
    • A complete description of the corporate entity, its subdivisions, affiliates, branches, operations under assumed names.
    • “each Person(s) with a contractual or other legal right or obligation to a share of revenues, profits, costs, or other Economic Interest in the Firm”
  • Patent Information, for each patent including:
    • its number, priority date, expiration date
    • if it has been subject to review by the PTO, or a court
    • person(s) holding an interest in the patent, and the nature of that interest
    • all litigations involving the patent (including those before the PAE purchased the patent)
    • all licenses and agreements and, if there is an exclusive license, “a narrative response that identifies by Reference Number, all Reports that evaluate or analyze the Firm’s reasons for entering into the exclusive License” and any restrictions on the license.
  • Patent Valuations
    • If a value has been assigned to the patent, its date of valuation, its value, and a narrative of previous valuations
    • How much was spent on litigation and licenses, the details of expense sharing agreements
    • How much value was obtained through litigations and licenses, how it was shared, and the method for calculating projected revenues

The Notice also seeks detailed information on patent acquisition, licensing, transfer, and assertion, and reveals a special interest in PAEs that operate in the area of wireless communications.

Concerns About The Study

Companies that are the target of this study may be concerned about several issues, including:

  • Confidentiality
    • The study would force the selected PAEs to disclose all of their inner workings to the FTC. While the information technically would be protected from disclosure under § 6(f) of the FTC Act “while it remains confidential commercial information”(unlike the information the USPTO proposes to collect under its proposed “attributable owner” rules), companies that are the target of this study may be concerned about the FTC’s ability to keep the information secure. If a government contractor can steal secrets from the NSA, it is not unreasonable for a company to question whether the government can be entrusted with the keys to its crown jewels.
  • Subsequent inquiries and prosecution
    • It is possible that confidential information collected pursuant to the study could be used by the government in subsequent investigations and prosecution.
  • Conflicts with other legal obligations
    • The information to be reported under the study may be protected by confidentiality agreements with other entities. While most contracts permit disclosure of confidential information when required by law, it is not clear that an FTC inquiry under the proposed study would be encompassed by such terms.
  • Costs
    • The FTC estimates a total of “425-845” hours per PAE company and a maximum of $211,250 for a large PAE. As high as these amounts are, they likely significantly underestimate the true costs of collecting and reporting all of the requested information, particularly for any company having sizable patent portfolios.

Can They Do This?

According to the Notice, several U.S. Senators have urged the FTC to conduct a study of PAEs. Congressional urging is not the same as legal authority, however. The FTC cites to § 6 of the FTC Act (15 USC § 46) for its authority to conduct this study. That statute is a catch-all provision permitting the FTC to request information, and inquiries under that statute are subject to judicial review. It is difficult to believe that a study of this breadth falls within the normal scope of § 6 inquiries, and it is likely that at least some target PAEs would challenge the FTC’s authority to compel their confidential business information for the simple purpose of “provid[ing] a better understanding of the organizational structure and economic relationships of PAEs, as well as their activity and associated costs and benefits.”

Alan Rutenberg