FTC Seeks to Examine Patent Assertion Entities and Their Impact on Innovation, Competition

The Federal Trade Commission voted to seek public comments on a proposal to gather information from approximately 25 companies that are in the business of buying and asserting patents, known as Patent Assertion Entities (“PAEs”). The FTC intends to use this information to examine how PAEs do business and develop a better understanding of how they impact innovation and competition.

After considering the public comments, the FTC will submit a request to the Office of Management and Budget (OMB) in compliance with Paperwork Reduction Act, seeking clearance of the FTC’s proposal to issue compulsory process orders seeking information from the PAEs.

PAEs are firms with a business model based primarily onpurchasing patents and then attempting to generate revenue by asserting the intellectual property against persons who are already practicing the patented technologies. The FTC is conducting the study in order to further one of the agency’s key missions—to examine cutting-edge competition and consumer protection topics that may have a significant effect on the U.S. economy.

In December 2012, the FTC and the Antitrust Division of the United States Department of Justice (DOJ) jointly sponsored a workshop to explore the impact of PAE activity on innovation and competition. The FTC and DOJ also received public comments in conjunction with the workshop. While workshop panelists and commenters identified potential harms and efficiencies of PAE activity, they noted a lack of empirical data in this area, and recommended that FTC use its authority under Section 6(b) of the Federal Trade Commission Act. Responding to these requests, and recognizing its own role in competition policy and advocacy, the Commission proposes a Section 6(b) study that will provide a better understanding of PAE activity and its costs and benefits.

“Patents are key to innovation and competition, so it’s important for us to get a better understanding of how PAEs operate,” said FTC Chairwoman Edith Ramirez. “We want to use our 6(b) authority to expand the empirical picture on the costs and benefits of PAE activity. What we learn will support informed policy decisions.”

The proposed study would add significantly to the existing literature and evidence on PAE behavior. Earlier studies have focused primarily on publicly available litigation data and concluded that PAE litigation activity is on the rise. The Commission, however, has unique Congressional authority to collect nonpublic information, such as licensing agreements, patent acquisition information, and cost and revenue data, which will provide a more complete picture of PAE activity.

Because the Commission believes a broader study will enhance the quality of the policy debate surrounding PAE activity, it proposes information requests directed to the following questions:

• How do PAEs organize their corporate legal structure, including parent and subsidiary entities?
• What types of patents do PAEs hold, and how do they organize their holdings?
• How do PAEs acquire patents, and how do they compensate prior patent owners?
• How do PAEs engage in assertion activity (i.e. demand, litigation, and licensing behavior)?
• What does assertion activity cost PAEs?; and
• What do PAEs earn through assertion activity?

To understand how PAE behavior compares with patent assertion activity by other patent owners in a particular industry or sector, the FTC also proposes sending information requests to approximately 15 other entities asserting patents in the wireless communications sector, including manufacturing firms and other non-practicing entities and organizations engaged in licensing.

The Commission vote to approve and publish the Federal Register Notice soliciting public comment on the proposal was 4-0. The Commission is authorized to issue Orders To File Special Reports by Section 6(b) of the FTC Act. The proposal will be published in the Federal Register shortly. Public comments on the proposal can be submitted electronically and will be accepted until 60 days after the Notice is published. Written comments should be sent to: FTC Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.

The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Bureau of Competition, Federal Trade Commission, 601 New Jersey Ave., N.W., Room 7117, Washington, DC 20001. To learn more about the Bureau of Competition, read Competition Counts. Like the FTC on Facebook, follow us on Twitter, and subscribe to press releases for the latest FTC news and resources.