Patent assertion entities (PAEs), firms that purchase pre-existing patents and then license them for products that are already on the market, have been derided as “patent trolls” and “extortionists,” while their defenders have argued that they are an efficient platform between individual inventors and manufacturers. Over the last decade, the antitrust world has debated whether the business model is anticompetitive or deters innovation. Those subject to PAE licensing fees have vocally lobbied for federal and state laws to deal with the perceived PAE problem. For example, in 2013, Vermont was the first state to enact legislation specifically aimed at PAEs. Since then, other states have followed, with at least one naming its statute the Patent Troll Prevention Act. Federally, H.R. 9, introduced in the House Judiciary Committee in the 114th Congress, was an effort to crack down on “patent trolls” through changes in patent litigation.
But is this push on the policy side empirically grounded? That is, is the PAE industry engaged in widespread anticompetitive and innovation-deterring behavior? The FTC attempted to analyze evidence to inform this policy debate.
The FTC Report Provides a Qualitative Assessment—Sort Of
The FTC’s report collects background information on the patent assertion industry and describes two business models. One it calls Portfolio PAEs, which are funded by investors, aggregate portfolios of thousands of patents, send out demand letters, and negotiate licenses. These entities make up 80% of the industry studied and account for $3.2 billion in licensing revenue. The second it calls Litigation PAEs, which rely on lawsuits to generate licensing revenue off of portfolios of fewer than ten patents. These licenses, accounting for 91 percent of the reported licenses in the study, typically yield royalties of less than $300,000 and are shared with the patent seller. Litigation PAEs make up 20% of the industry studied, account for $800 million in licensing revenue and often have no employees and hundreds of affiliates.
Perhaps the most interesting and yet deemphasized part of what the PAE report actually said deals with Non-Practicing Entities or NPEs. NPEs are patent holders that develop and transfer technology, and include universities and semiconductor design houses. In the policy debates and many state laws, NPEs have been distinguished from “patent trolls.” Interestingly, the FTC reported that their Wireless Case Study showed that NPEs sometimes act like Litigation PAEs and sometimes act like Portfolio PAEs; NPEs sent many more demand letters than PAEs; and the majority of NPE licenses are valued at less than $300,000.
The FTC took many years and considerable work to share these interesting facts with us. Notably, however, the antitrust agency took no position on competition in the industry.
Why Was the PAE Study Silent on Competition?
The short answer is that in one case, the FTC found no problem, and in another case, it was not feasible to determine if the problem exists. In the first case, the FTC looked at whether PAEs hold a large number of standard-essential patents. It found, however, that less than 1% of patent holdings in the Study are subject to a F/RAND commitment to a standard setting organization. This empirically refutes arguments that firms transfer patents to PAEs to escape their F/RAND commitments.
In the second case, FTC Chairwoman Edith Ramirez gave a speech indicating that the FTC study has not ruled out a competition problem in the Portfolio PAE industry, saying: “the aggregation of patents into large portfolios may present competitive concerns if there are many substitute patents.” The FTC found it too difficult, however, to determine whether such portfolios include all patents which are reasonably interchangeable in use from the point of view of the consumer. A portfolio that does include all substitutes would give the portfolio “hold-up” power in licensing and cause the antitrust agencies to worry about the failure of competition and consumer harm. In contrast, in a later speech, FTC Commissioner Ohlhausen suggested that those Portfolio PAEs may actually be an efficient platform between inventors and manufacturers “encouraging further innovation.” Additionally, Commissioner Ohlhausen distinguished between hold-up over “probably invalid or not infringed patents” (which would raise competition concerns) and the “appropriate and beneficial” patent license negotiated with a PAE after a “hold-out” company has deliberately ignored valid patents.
Can Firms Expect Future Enforcement Action?
On one hand, the report supports at least future study of the Portfolio PAE industry. And similar thinking is reflected in the Department of Justice’s recent challenge to the two major performing rights organizations, ASCAP and BMI. There, the possibility of hold-up power by firms that may license large numbers of copyrights led the Department to a specific interpretation of the consent decrees.
On the other hand, the Department’s interpretation of the consent decrees was rejected by Judge Stanton based on the language of the decrees. Additionally, Commissioner Ohlhausen’s speech suggests that countervailing considerations may lead the agencies to conclude that Portfolio PAEs are efficient platforms to license the many individual patents necessary to so much modern technology. Notably, licensing and policing efficiency originally led to the creation of ASCAP.
So, while the threat of enforcement action does not seem to be imminent, Portfolio PAEs and NPEs should consult with counsel to minimize antitrust risk in strategic long-term business plans.