Mixed Reviews for FTC's Patent Assertion Entities Report

U.S. Court of Appeals for the D.C. Circuit Judge Douglas Ginsburg and Searle Center leaders said FTC findings don't fully justify the accompanying policy recommendations. Commissioner Terrell McSweeny and other lawyers said they believe the report would be valuable in influencing the debate even though the document's scope was narrower than originally anticipated.

McSweeny said the three-commissioner FTC unanimously approved the study report, which indicates there's an “important bipartisan” consensus on the findings and recommendations. McSweeny acknowledged the agency was limited in its ability to draw conclusions from the data collected since it was information only on a select number of U.S. PAEs and didn't collect sufficient data on PAE business practices like entities sharing revenue with patent owners.

McSweeny said she believes the study shows the value of PAE conduct in increasing innovation is “relatively low.” The main findings “support reforms” at early stages in the infringement litigation process “when defendants are at a disadvantage,” she said. The study is important because it “provides actual data where it didn't exist before,” said FTC Chief IP Counsel Suzanne Munck. “You wouldn't have this data” if the FTC hadn't used its authority under FTC Act Section 6(b) to collect it from the PAEs, since no other entity “would be in a position to collect it and report it out,” she said.

Ginsburg said he's dubious about connections between the data and the recommendations in the study report. “The study is neither sufficient nor necessary to support the recommendations,” Ginsburg said: “There is simply a logical disconnect between the study and the recommendations,” though further study could better justify them. The study also doesn't account for the lowering of standards for shifting attorney's fees to the prevailing party in patent cases after the Supreme Court's 2014 rulings in Highmark v. Allcare Health Management Systems and Octane Fitness v. Icon Health & Fitness, Ginsburg said. Both those cases struck down Federal Circuit rules for determining fee shifting in patent cases, and patent revamp advocates viewed them as precedent for shifting rules in lower courts (see report in the May 1, 2014, issue).

Searle Center Director Matthew Spitzer also criticized FTC reasoning for making policy recommendations. “There's a lack of connection between the facts found in the main body of the report and the policy recommendations at the end,” Spitzer said. The study identified two distinct categories of PAEs -- “litigation” PAEs, which rely largely on the use of revenue sharing arrangements to acquire patents, and “portfolio” PAEs, which buy patents outright. Litigation PAEs were more common among the 22 entities included in the document. That “crucial distinction” was the most important finding but it “didn't make its way into the recommendations,” Spitzer said. “I regard the report as … on this element -- making the connection between the facts found and the recommendations given -- a failure.”

Stanford University Law School professor Mark Lemley defended the report as a “modest success, not a failure.” It resulted in collection of data “that we didn't have before” and that “demonstrates that there is a problem out there, though it is a narrower and more focused problem than people might otherwise have thought,” Lemley said. “The recommendations in the report are eminently sensible and fit logically within the framework of the study.”

The document is important in part because it validates what already had been a growing sense that PAEs aren't a “monolithic concept” as previously had been suggested in the lobbying for a patent litigation revamp on Capitol Hill and elsewhere, Lemley said. Charles River Associates Vice President Anne Layne-Farrar cautioned against drawing many conclusions about the behavior of portfolio PAEs based on the findings, since the study included only four entities that fit into that category.