The Federal Trade Commission will launch an extensive inquiry into so-called patent assertion entities, taking a close look at firms that base their business on accumulating and asserting patents, Chairwoman Edith Ramirez announced June 20 in a speech in Washington.
Such entities, often referred to as trolls, are "distorting the incentive to innovate," Ramirez said, and impose "direct and indirect costs along with little evidence of benefits."
In the last five years, lawsuits by patent assertion entities have increased more than 250 percent and now account for more than 60 percent of all patent litigation, according to the American Antitrust Institute and the Computer and Communications Industry Association, which sponsored the National Press Club event where Ramirez spoke.
Under Section 6b of the FTC Act, the agency has broad powers, including the ability to issue subpoenas, to conduct in-depth industry studies and make reports to Congress and the public. In the past, such studies have yielded real-world results, such as the FTC's 2002 inquiry into generic drugs, which led to amendments to the Hatch-Waxman Act in 2003.
Ramirez said the patent study aims to provide "the full, complete picture" of patent assertion entities, and will "focus on areas where there may be competitive harm." For example, she cited a practice known as "privateering," where an operating firm transfers patents to a nonpracticing entity, which then sues the operating firm's rivals for infringement.
Such a practice is made possible in part, she said, by the "lack of transparency in the ownership of patents," and she called on the U.S. Patent and Trademark Office to move forward with rules to provide better information about the real party in interest who controls the patent.
Ramirez noted that suits by patent assertion entities typically involve software and information technology patents, and are increasingly directed as businesses outside the high tech arena.
Retailers are the most common low-tech target, she said, and are being hit with suits for website features such as drop-down menus and electronic shopping carts. Too often businesses are "victims of nuisance suits that are cheaper to settle than to litigate," she said. "The cost to consumers is increasingly tangible and direct."
In addition, Ramirez said the FTC stands ready to use its authority under Section 5 of the FTC Act, which forbids unfair or deceptive acts, to go after patent assertion entities for making false or illegal licensing demands. Businesses may be informed that they are infringing a patent and must pay a fee when in reality there is no patent, or it's expired, she said. "We'll use our enforcement power in areas where it's appropriate," Ramirez said.
David Balto, a public interest antitrust lawyer and former FTC policy director, applauded Ramirez's announcement.
"There is an urgent need for the FTC to put a spotlight on the egregious practices of patent trolls," he said. "They use uncertainty and deception to exploit vulnerable small businesses, raising costs for consumers, stifling innovation and ultimately dampening economic growth."
Russell Steinthal, a partner in Axinn, Veltrop & Harkrider's antitrust group, agreed that the study is "very important and a good idea," he said. "Both operating companies and patent privateers are hiding in the obscurity that the system lets them get away with. … The FTC can advance the ball a lot by doing an investigation."
Earlier this month, President Obama issued five executive actions and seven legislative recommendations intended to protect innovators from unnecessary litigation and improve patent quality. These include more training for patent examiners and outreach by the PTO to educate end-users about their rights when facing a suit by a patent assertion entity.
The White House also urged Congress to pass laws that would give district courts more discretion to award attorney fees as a sanction for abusive court filings and provide better legal protection against liability for a product being used off-the-shelf for its intended purpose.
Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., in a letter June 20 to Ramirez encouraged the FTC to "prioritize investigations of and enforcement actions to prevent unfair and deceptive trade practices in patent infringement allegations," he wrote. "We must combat the abusive behavior to preserve and advance the patent system envisioned by the founders and provided for in our Constitution."
Jenna Greene is a reporter for The National Law Journal, a Legal affiliate based in New York. This article first appeared on The BLT: The Blog of Legal Times. •