Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, April 8, 2013

David Balto on Patent Assertion Entities

Posted by David Balto

Using the Full Powers of the FTC to Combat Patent Trolls

A century ago there was a lively debate in Congress over the enforcement of the antitrust laws.  Much of the 1912 presidential campaign had focused on the lack of effective antitrust enforcement by the Justice Department and the failure of the Sherman Act to stop growing anticompetitive conduct in the marketplace.  In 1913, Congress focused on the urgent need for reform of the antitrust laws and stronger enforcement.    
Although there were many proposals put forth, there was a general consensus that the nation needed a new enforcement entity with broader powers than the Department of Justice.  Ultimately, in 1914 the Congress established the Federal Trade Commission and gave it far broader powers than the Justice Department to police, educate, and regulate.  Unlike the Justice Department which could solely conduct investigations leading to enforcement actions, the goal of Congress with the FTC was to create an agency with much broader powers not only to bring enforcement actions, but also to engage in regulatory reform, serve as an investigatory arm to Congress and provide advisory opinions, and continuously educate the legislature, the public, and the market about the impact of anticompetitive practices.

Perhaps the most important authority of the FTC is the Commission’s unique power to use subpoenas to secure information and documents to conduct broad studies of the market.  Congress’ goal in granting this power, known as 6(b) after the section of the FTC Act that establishes it, was to allow the Commission to conduct in-depth industry studies and provide reports to the public and Congress.  As one of the key authors of the FTC Act, Louis Brandeis wrote in 1913 in discussing the need for broad investigatory powers, “sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

Since the passage of the Act, the courts have been explicit that Section 6(b) gives the FTC broad powers to secure information, not limited solely to investigations that would lead to law enforcement actions.  This broad directive has allowed the FTC to use its power not just to pursue a focused theory of unlawful activity, but also for general policy planning, economic studies, selecting enforcement priorities, guiding regulators, and advising Congress.  The FTC’s 6(b) power has perhaps had some of the most substantial impact and enduring value of any FTC power, and has ultimately led to major regulatory reforms such as the Packers and Stockyards Act (1921), the Securities Act of 1933, the Stock Exchange Act of 1934 and the Public Utility Holding Act of 1935, as well a variety of more recent studies and enforcement actions.

Now is the time for the FTC to turn its full panoply of powers toward addressing one of the most severe competitive concerns in today’s economy: the patent troll problem.  There is clear precedent for the FTC taking a multi-faceted approach to such issues.  

For example, a decade ago, at the beginning of the Bush administration, there was tremendous concern over efforts by brand name drug companies to delay generic entry through abusive regulatory filings, sham litigation, and abuse of the regulatory system.  In response, the FTC took a thorough and multi-pronged approach.  First, it brought targeted enforcement actions against some of these practices, including patent settlements and sham regulatory filings.  This discouraged some of the most egregious conduct by pharmaceutical companies.  

Second, it recognized the opportunity to help guide the courts by participating as an amicus curiae in cases brought by private parties.  For example, in 2002 there was a private lawsuit against Bristol-Myers Squibb for regulatory abuse that delayed the entry of generic versions of the drug Buspar.  The branded manufacturer’s conduct included inconsistent and contradictory statements made to the USPTO and FDA, as well as material misrepresentation and failure to disclose material information to the USPTO in order to obtain patent protection.  (For a more detailed discussion, see “Removing Obstacles to Generic Drug Competition.”)  The defendants claimed their actions were protected by the Noerr-Pennington doctrine.  The FTC filed an amicus brief authored and argued by then-FTC Office of Policy Planning Director (now Senator) Ted Cruz that explained why the defendant’s conduct was subject to the antitrust laws. Ultimately, the court adopted the FTC’s arguments and Bristol-Myers was forced to abandon its anticompetitive practices and settled the case for over $500 million in damages.

Even more important was the FTC’s 2002 6(b) study of generic drug litigation and the obstacles to generic drug entry entitled “Generic Drug Entry Prior to Patent Expiration.”  The study was based on a comprehensive request for information under Section 6(b).  The study sought out and secured critical information about the nature of litigation between branded and generic firms and identified a wide range of abusive practices by brand name firms to delay generic entry.  Although the FTC secured a huge amount of information from the over 20 brand name and 50 generic firms surveyed, they completed the study and submitted their report to Congress in less than 18 months.  Based on the FTC report, Congress revised critical provisions of the Hatch-Waxman Act, and the FDA adopted key reforms to try to prevent regulatory abuse.  

The FTC should adopt this same type of comprehensive approach in addressing the critical problem of patent trolls.  They have taken an important first step by holding hearings on the subject with the DOJ and using speeches to help educate the public about some of the competitive concerns.  But they need to go further.  First, they should find focused law enforcement actions using the full range of their statutory powers, including considering enforcement actions against unfair trade practices under Section 5 of the FTC Act.  Second, they should identify critical private cases in which they can intervene as amicus to instruct the courts about the proper approach to both intellectual property and antitrust issues.  Finally, the FTC should utilize its 6(b) powers, conduct a comprehensive study of the conduct of patent trolls, and provide a thorough report to Congress so that Congress and the USPTO can adopt reforms to prevent the abuse of the intellectual property system.  

Let me focus in particular on the need for further study. Crafting a solution to the PAE problem is difficult and one of the main barriers is a lack of hard data on which to base reform.  Academics like Colleen Chien are trying their best to collect and analyze such data, but they must rely on public records and survey companies.  When small companies try to negotiate with PAEs they are usually required to sign confidentiality agreements as a condition for settling.  PAEs often operate through shell companies, which makes it difficult to get a full picture of their operations. Moreover, the studies have only looked at litigation but much of the harm occurs before then from demand letters and other tactics by the PAEs.

 Under Section 6(b) of the FTC Act, the FTC has the power to use subpoenas to secure information from companies to conduct studies.  As the FTC Office of General Counsel explains, “Section 6(b) [of the FTC Act] empowers the Commission to require the filing of ‘annual or special * * * reports or answers in writing to specific questions’ for the purpose of obtaining information about ‘the organization, business, conduct, practices, management, and relation to other corporations, partnerships, and individuals.’” The FTC’s 6(b) power is an important and potent tool, and historically has been used as a launching point to draft legislation curbing industry abuse. A 6(b) study led to the Packers and Stockyards Act of 1921 and, more recently, to reform of the generic drug regulatory system in the Medicare Modernization Act of 2003.  

Through a 6(b) study, the FTC can carefully analyze the purpose and impact of many of the practices of PAEs.   Indeed, much of the concern over PAEs in these comments and others focuses on the lack of transparency into their businesses.  The FTC can remedy lack of information with an independent, unbiased study.  A 6(b) study can focus on the following issues, among others:

  • Determining the full ownership interest of PAEs and a list of all subsidiaries and affiliates;
  • What are the type and scope of demand letters used by PAEs;
  • How often is litigation by PAEs successful; at what stage is litigation typically resolved;
  • How are patents acquired by PAEs and from whom;  what is the purpose of these transactions;  and
  • How does the PAE determine which patents to acquire.

Below are some suggestions on questions the FTC might consider including in a 6(b) study on PAEs.  These questions are designed to provide answers that will move the analysis forward into a comprehensive understanding of the PAE business model and its impact on competition.  We have split our questions into three categories.  First, there are questions for stand-alone PAEs.  Second, there are additional questions for hybrid PAEs that have a relationship with established operating companies.  Finally, there are questions concerning procompetitive efficiencies claimed by PAEs.

These questions are designed to solicit information to provide statistical evidence for or against what are believed to be common business practices in the industry.  For example, many commentators portray PAEs as acquiring patents late in their life cycle; using a complex network of subsidiaries and shells to obscure patent ownership; and aggressively pursuing licenses from any conceivable infringer without performing due diligence on the technology in question or the likelihood of infringement.  

The questions:

Information about PAE structure

  • List any current or former corporate parent.
  • List all entities in which Company has an ownership interest.  For each entity Company has an ownership interest in, provide the full name, address, state of incorporation (if applicable), and nature of ownership interest.  Ownership interest includes any business association, subsidiary, sole proprietorship, or shell organization.  
  • List all entities in which Company has a financial interest and/or relationship.  Interest and/or relationship in an entity is defined as ownership, assignment interest, and any financial or commercial benefit stemming from a contractual arrangement relating to a patent.
  • If Company has a board of directors or similar governing body, list all other business associations (companies, subsidiaries, partnerships, etc) in which these individuals have a role with a fiduciary responsibility.

Information about interest in Company’s patents

  • List all patents in which Company has a current ownership interest, including options, or has had such an interest within the past five years.  For all patents listed describe the nature of acquisition (original patentee, assignment, purchase, etc).  

  • List all patents Company has transferred to another entity within the last five years and indicate Company’s interest in or relationship to that entity.  State the nature of the interest and the responsibilities of each party.  

Information about Company’s licensing and litigation practices

  • Provide a comprehensive list of all entities, including individuals:
    • To whom Company has sent an invitation, notice, or demand letter in the past five years;
    • With whom Company has been involved in a lawsuit;
    • From whom Company currently collects royalties
  • For each licensing agreement made in the past five years by Company, provide the agreement and any correspondence prior to the agreement.
  • Describe the process through which Company learns of potential licensees.
  • Describe the process through which Company identifies and selects invitation/notice/demand letter recipients.
  • Describe the process through which Company prices its patent licenses.
  • Describe how Company determines whether a potential licensee already has a license to the technology in question and whether the potential licensee has any indemnification against patent infringement.

Information on strength of patents in which Company has an interest

  • For each patent purchased in the past five years
    • provide any information received on the patent prior to purchase.
    • state the age of the patent at the time of purchase.
    • identify whether the patent had been licensed, was the subject of litigation, or was embodied in a product prior to the date of purchase.
  • Describe the process through which Company selects patents to purchase.

Hybrid PAEs (including “privateers”)

As explained briefly above, hybrid PAEs are those that are aligned with an established operating entity.  Typically hybrid PAEs enter into a contractual relationship in which the operating entity either sells patents or assigns enforcement rights to the PAE, who in turn targets likely infringers.  

Information about hybrid PAE relationship (questions in addition to those above)

  • For each patent purchased from or assigned by an Operating Company to the patent Company in the past five years, provide the agreement and information on any continuing responsibilities of either party.
  • Provide or describe any agreement, including any payment schedule, requiring patent Company to share royalties with an Operating Company.  
  • Provide or describe any agreement between patent Company and an Operating Company that restricts the parties that the patent Company can seek licenses from or lists companies that already a license.
  • Provide or describe any agreement between patent Company and an Operating Company that specifies or targets other Operating Companies.

Procompetitive Efficiencies

  • Describe the actions, if any, Company is taking to bring the patented technologies to market. Include efforts to educate operating entities on the patented technologies to encourage the adoption of the patented innovation.
  • Identify any patents Company owns where the inventor uses the patented innovation in a product on the market or is in the process of bringing a product to the market using the patented innovation.
  • Identify any licensees or potential licensees that proactively sought out a license from Company.
  • Provide any evidence that Company’s licensing practices have benefitted licensees other than limiting liability.  

This information will help determine if PAEs are providing any benefits to innovation.  Many PAEs claim they are an important step in transferring technology from inventors who have no interest in forming operating companies, and the companies that successfully bring products to market.  Many others disagree with this claim, but antitrust law requires a balancing of the procompetitive benefits against the harm to competition.  

Ultimately this information secured from the 6(b) study can better inform the debate before Congress and the regulators on the impact of PAE business practices.

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