The Federal Trade Commission (FTC) has taken the first formal step to launching a far-reaching study of the impact that patent assertion entities (PAEs) have on innovation and competition. On 27 September 2013, the four Commissioners unanimously voted to seek public comments on a proposal to issue compulsory process orders to some 25 PAEs and 15 other firms in the wireless communications industry, including manufacturers and others engaged in licensing. These orders would demand the production of public and non-public documents and information about the costs and benefits of PAE activities. The much anticipated study could then be used to inform the Commission’s competition policy advocacy efforts as well as potential future enforcement actions.
For purposes of the study, the FTC defines PAEs—known to some critics as “patent trolls”—as firms having a business model based primarily on purchasing patents and then seeking licensing fees from companies that are already practicing the patented technologies. PAE critics claim that PAE activity does not provide any “novel or useful invention” to the public, which is the only reason that the patent laws provide an ability to exclude others from infringing on a patented invention or technique. Moreover, critics complain that PAEs secure patent licenses and settlements at supracompetitive prices by exploiting the high costs of patent litigation and the “hold up” that results from the high costs of switching away from a previously selected technology. As President Barak Obama has bluntly put it, “[ t ]hey’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”
Defenders of PAEs claim that PAE activity spurs innovation by enabling small businesses and individual inventors to achieve the maximum return for their inventions. Supporters also point out that PAEs are merely enforcing the basic right to exclude granted by the patent laws. For years, many courts and businesses believed that the patent laws granted immunity from antitrust law for restrictions and litigation threats within the scope of a patent. However, the FTC’s recent consent orders against Robert Bosch GmbH and Google, Inc., and the high-profile Supreme Court decision in FTC v. Actavis, which opened the possibility of antitrust liability for so-called “reverse payment” settlements in the pharmaceutical industry, reversed this line of reasoning. The assertion of patent rights by PAEs is the next front in the growing battle between the antitrust and patent laws.
The FTC has the authority to launch the proposed study under Section 6(b) of the FTC Act, which empowers the Commission to demand, under penalty of perjury, the production of a broad range of data and information. A 2002 study under Section 6(b) regarding generic drug entry prior to patent expiration resulted in significant legal and policy reforms, culminating with the FTC’s recent victory in the Actavis case. The idea for a 6(b) study on PAE activity has gained momentum since the December 2012 workshop jointly sponsored by the FTC and the Department of Justice. Many workshop participants and commenters called on the FTC to study the merits of PAE activities due to the lack of publically available data and information on which to base a judgment about the competitive effects of PAE activity. Influential politicians have joined in the calls for further study of PAEs, including Sen. Amy Klobuchar, the chairwoman of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, and President Obama, who in June announced a series of executive orders and legislative proposals designed to curb frivolous patent litigation by PAEs.
In recent months, all four of the FTC’s current Commissioners publicly announced support for the 6(b) study. However, the Commissioners have also expressed differing opinions on whether the FTC can or should address any problems found by the study. Whether the Commission will eventually reach a consensus on the use of its enforcement powers under Section 5 or otherwise is still an open question.
The proposal will be open to public comments for 60 days following publication in the Federal Register. After considering the public comments, the FTC will seek clearance from the Office of Management and Budget to begin issuing the compulsory orders. Based on the length of prior 6(b) studies, it is likely that the proposed study will take more than a year to conduct.