Antitrust & Competition Policy Blog

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

Tuesday, April 9, 2013

Bert Foer and Kexin Li on Patent Assertion Entities

Posted by Bert Foer and Kexin Li

Patent assertion entities (PAEs) are a new yet rapidly growing creature (likely of the genus monster) in the technology market. They have turned patents into commodities – they monetize, but do not practice, the patents they own. Their business model is simple and straightforward: to purchase and hold patents solely to use for asserting or threatening to assert them in court in order to obtain large license fees from operating companies that are already using the patents in their products. Irritated operating companies call PAEs “patent trolls.” It is an interesting metaphor – in the old folklore, a troll is a monster hiding under a bridge waiting to catch people on the bridge. President Obama described patent trolls as entities that “hijack somebody else’s idea and see if they can extort some money out of them.”

PAEs are not happy about the name of “patent trolls.” They probably prefer the old and seemingly harmless name “non-practicing entities” (NPEs), which would allow them to hide, camouflaged among a bevy of innocent NPEs (universities, research institutes, non-profit organizations, start-ups, and some individual inventors). They argue that they promote efficiency and liquidity in the technology market by facilitating technology transfer and patent enforcement. We acknowledge that it is highly important to facilitate technology transfer in order to promote innovation and benefit the public. For example, the Congress enacted the Bayh-Dole Act to “use the patent system to promote the utilization of inventions arising from federally supported research or development.” Also, there are companies like Ocean Tomo (which has existed for many years) offering financial products and services related to intellectual property. We can hardly perceive anything wrong with monetization of patents as long as the whole process is open and transparent.

However, PAEs are the opposite. They harm innovation and market competition not just because of their assertion of patents, but also because of the secrecy of their activities.[1] Intellectual Ventures (IV)’s Peter Detkin said during the workshop on PAEs (the PAE Workshop) jointly held by the Federal Trade Commission (FTC) and Department of Justice (DOJ) that, as no investor would like to disclose his or her investment portfolio, IV does not disclose the patents it owns.  What is more, IV has created more than 1,276 shell companies to hide its patents.  Another PAE, Acacia, controls 250 patent portfolios via its subsidiaries. As a result, a willing licensee-to-be will never be able to find where the patents are.[2]

Target companies often unwillingly surrender. Even if the target company surrenders to a PAE’s threats, the settlement may not bring peace due to this secrecy. A PAE may aggregate a massive portfolio, use it to threaten many potential infringers, and demand portfolio-wide licenses. However, it often at the same time refuses to disclose the patents it owns or even which patents it believes are being infringed. Without knowing if they are actually infringing anything or what they are paying for, the targets of these threats, especially the smaller start-up businesses but large operating companies as well, often see no attractive alternative to acquiescing in an expensive portfolio-wide license (in patent cases, settlement costs are usually much less than litigation costs). Moreover, the aggregation process typically combines many weak patents with a smaller number of strong patents; the net effect is to artificially boost the exclusionary power of the weak patents as if they were strong patents. If any standard-essential patents (SEPs) are within the portfolio, a portfolio-wide license demand may make the entire portfolio a de facto standard-essential portfolio. To make matters worse, after amassing a huge portfolio, the PAE may spin off several parts of it to several other PAEs. These PAEs may go to the same targets with infringement suits without disclosing what patents in the initial portfolio they each own and what patents they are asserting, which may give rise to the problem of royalty stacking. Also, each of them may again threaten to assert patents outside the licenses that the licensee previously accepted.

Besides the secrecy, PAEs make use of other advantages in patent assertion. As they do not make or sell any product, they do not confront any reputational constraint or risk of counterclaims normally faced by operating companies in patent litigation. Additionally, unlike the operating companies, PAEs produce few documents, do not incur heavy discovery burdens since they have no business other than patent licensing and litigation, and may pay only a contingency fee to their lawyers. If patent wars between operating companies can be called “mutually assured destruction,” in the PAE context, “mutually assured” has been separated from “destruction.”

PAEs are professional litigants. PAEs’ concentration on highly profitable patent litigation strategies attracts investment from third parties such as hedge funds to finance their lawsuits.  They operate “on similar terms to private equity and venture funds,” seek “to make most of [their] money on carried interest,” and “forge ahead with weak patents” to “reinforce their bargaining position with future targets.” PAEs often assert vague software patents, which are very difficult to defend against because the alleged infringers cannot identify the scope of those patents. They may concentrate on maximum lock-in and holdup situations by asserting patents late in the patent term. Moreover, PAEs not only approach operating companies that manufacture the allegedly infringing products, they may also target those companies’ downstream customers that use those products. The customers may be small businesses and often lack experience in patent litigation, so they are more likely to accept PAEs’ proposed unreasonable licensing terms. Since February 2011, a PAE named Innovatio IP Ventures has sent more than 8,000 letters to customers (mainly “hotels, coffee shops, restaurants, supermarkets, and other commercial users of wireless internet technology . . .”) of Cisco, Motorola and Netgear in all 50 states “alleging infringement of its patents and demanding that the [t]argets pay for a license.”

Many operating companies decide to transfer their patents to PAEs because of all the above reasons – to let professional PAEs attack their rivals without worries about counterattack or reputational restraints. For instance, MobileMedia was created by Nokia, Sony and a licensing group called MPEG-LA and holds their patents. It achieved a big victory in Delaware in December 2012, where a federal court found Apple infringed its patents. This trend has not stopped even after the PAE Workshop called public attention to abuses. On January 10, 2013, Ericsson announced its plan to transfer to a PAE called Unwired Planet 2,185 issued United States and international patents and patent applications. In addition to this portfolio, Ericsson is required to transfer 100 patent assets each year to Unwired Planet from 2014 through 2018. Unwired Planet, in return, will grant Ericsson a license to its expanding patent portfolio, among other benefits.

So is there any sign showing that the market may fix these PAE problems in the foreseeable future? Unfortunately, no. PAEs are becoming more and more aggressive. It is reported that the number of new patent cases initiated by PAEs increased from 569 in 2006 to 2,544 in 2012 (through December 1, 2012). More specifically, in the year of 2011, PAEs brought 1,509 cases in federal district courts against 2,995 companies – a 211% increase from the number of companies sued in 2005, when PAEs brought 453 cases against 933 companies.  PAE cases increased from 19% of all new patent suits in 2006 to more than 60% in 2012 (through December 1, 2012).  It is further reported that “PAE-generated revenue cost defendants and licensees $29 billion in 2011, a 400% increase from 2005,” and that “no more than 25% of this flowed back to innovation,” even though PAEs reportedly lose 92% of the time when cases are actually litigated. These figures suggest a move far away from the original purpose of patent protection – to reward and facilitate innovation.

PAE activities continue threatening the U.S. economy and innovation process. Because of the risk of unexpected and even baseless lawsuits by PAEs, market incumbents (especially small businesses) may have to bear significantly increased litigation, licensing and invent-around costs while potential new entrants (also especially small businesses) may hesitate to enter a market. The distractions caused by PAEs may significantly harm innovation. Small companies face a particularly difficult situation. They may not be able to find investors and may even have to exit the U.S. market because of the risk of PAE challenges. Even if they receive venture capital funding, they may have to avoid announcing it, because PAEs may begin to target them upon learning that information. They may not even want to speak publicly on the PAE problems they face for that same reason.

This situation has not become better after the PAE Workshop on December 10, 2012. For example, on February 25, 2013, a Texas patent holding company SmartPhone Technologies LLC (SmartPhone), in two separate actions sued AT&T, Apple, and LG for patent infringement. Apple and AT&T settled a month later. The terms of settlement were not disclosed. SmartPhone started its litigation journey in March 2010, and its other targets include Samsung, Research In Motion (Now Blackberry), Motorola and Sanyo. Facing the current situation, we applaud the efforts made by the antitrust agencies so far in addressing all the PAE problems, but we also call for more enforcement actions that can have real teeth.[3]

[1] In contrast, more and more operating companies seem to have become aware of the importance of openness and transparency in the patent system. Both Google and Microsoft have launched their patent pledges in the year of 2013 in order to reduce litigation and promote innovation, although some commentators suspect they are simply empty promises.


[2] The United States Patent and Trademark Office (PTO)’s pending real-party-in-interest (RPI) recordation proposal is a very desirable part of the solution, as we explained in our recent comments to the PTO. But we also encourage the FTC to use its own authority under the Section 5 of the Federal Trade Commission Act to impose disclosure requirements.


[3] Even the International Trade Commission (ITC) has taken some creative actions. It recently ordered an administrative law judge (ALJ) in a Section 337 case filed by a PAE to “hold an early evidentiary hearing, find facts, and issue an early decision, as to whether the complainant has satisfied the economic prong of the domestic industry requirement.” Also, it has given the ALJ 100 days to issue an initial determination with respect to “the economic prong of the domestic industry requirement.” If a PAE plaintiff fails its burden of proof, no further litigation will proceed.


April 9, 2013 | Permalink | Comments (0) | TrackBack (0)

Objective and Subjective Theories of Concerted Action

Posted by D. Daniel Sokol

William H. Page, University of Florida - Fredric G. Levin College of Law has written on Objective and Subjective Theories of Concerted Action.

ABSTRACT: Communication is useful and often necessary for rivals to coordinate price and output decisions. All would agree that evidence of communication on these issues is relevant to the issue of whether firms reached an illegal agreement or engaged in concerted action in violation of Section 1 of the Sherman Act. Most courts and commentators would go further and define agreement and concerted action to require communication of one kind or another. I call this view the objective theory of concerted action. Louis Kaplow has recently challenged this approach in three important articles, all of which argue that the focus on communications is misguided. Although he does not propose a fully specified definition, he suggests that a standard of successful oligopolistic interdependence--in which rivals reach a meeting of the minds--would provide a superior basis for identifying unlawful agreements. In this essay, I describe this subjective theory of concerted action and identify the equilibria that it includes and excludes. I then consider its likely costs and benefits relative to the current objective theory. I argue that it will deter few durable instances of oligopolistic interdependence that present law would not prohibit. On the other hand, it apparently immunizes some equilibria, even if reached through communication. If so, it would raise the possibility of new and problematic defenses to claims of illegal concerted action. Moreover, Kaplow excludes certain noncompetitive equilibria from the subjective standard on the ground that they do not involve the requisite meeting of minds. But these equilibria differ in only a few ways from other, strategic equilibria that arguably do involve the necessary meeting of minds. Reliance on the concept of a meeting of the minds to distinguish these equilibria would risk significant false positives.

April 9, 2013 | Permalink | Comments (0) | TrackBack (0)

Michael Carrier on Patent Assertion Entities

Posted by Michael Carrier

How Antitrust Agencies Can Address PAE Activities

Michael A. Carrier, Professor, Rutgers Law School

Post adapted from longer article


Antitrust can—and should—regulate PAE activity. As I have explained in more detail elsewhere,
the antitrust agencies can rely on guidelines, Clayton Act Section 7, Sherman Act Section 1, and FTC Act Section 5. This post highlights the six actions the agencies can take to address PAEs.

1. Offer guidance about potential harms from patent aggregation

First, the Department of Justice and Federal Trade Commission can revise the 1995 Intellectual Property Guidelines, or at least offer guidance, on potential harms from the creation and exploitation of massive patent portfolios. The agencies should reevaluate the Guidelines’ exclusive focus on the procompetitive justifications of IP combinations in “facilitat[ing] integration of the licensed property with complementary factors of production,” which “lead[s] to more efficient exploitation . . . benefiting consumers through the reduction of costs and the introduction of new products.”

While these justifications will still be relevant in many settings, the agencies can recognize a fact that was not so obvious in the mid-1990s: that massive patent portfolios can be used offensively, and can be valuable primarily because of their size rather than the validity of each patent in the portfolio. The agencies can explain that large portfolios could present anticompetitive effects including patent holdup, raised rivals’ costs, and even increased price or reduced innovation.

2. Promote transparency

Second, the agencies could require transparency in evaluating patent-based behavior. Companies that are sued (or face threats of litigation) must know who is suing them, what patents they are being sued on, and which patents the plaintiff owns. It is difficult, for example, to engage in licensing negotiations with entities that have no “website, employees, or offices.”

Despite the need for transparency, much PAE activity today is hidden beneath a labyrinth of
shell companies. Acacia’s subsidiaries control 250 patent portfolios. And Intellectual Ventures has used at least 1276 shell companies to purchase and hold patents.

The category of secret activity includes the related concern of “privateering,” a concept that traces
to “state-sponsored piracy” in which governments allowed private parties to “seize the property of the state’s enemies.” In the PAE setting, privateering can result in aggressive third parties scaring customers and suppliers. A practicing company, for example, could reject a license offered by a PAE, but then be sued for even more by a privateered third-party PAE. The sheer scale of such networks could offer clues about competitive effects. Gathering evidence on these entities is consistent with the FTC’s 2010 changes to the Hart-Scott-Rodino Act, which introduced the concept of “associates,” which includes entities managed by the acquiring entity. In analyzing PAE behavior, the agencies must be able to obtain as much information as they need to determine competitive consequences.

3. Prohibit transfers to PAEs that refuse to adhere to previous standards-based licensing promises

Standard-setting organizations (SSOs) allow industries to adopt a common technology. SSOs often adopt policies to mitigate the power acquired by a company with patents incorporated into the standard. One of those policies requires patentees to agree, before selection, to license their patents on reasonable and nondiscriminatory terms (RAND) if selected.

RAND promises are typical for standard-essential patents (SEPs), which are essential to the implementation of a standard. But a potentially fatal loophole is created if RAND promises could be avoided by the transfer to a subsequent party that is not bound by the promise. To pick one example, after the agencies approved the acquisition of the Nortel patent portfolio by the Rockstar consortium based on promises made by members (Apple and Microsoft) to agree to RAND licensing, the Rockstar CEO publicly stated that the consortium “isn’t bound by the promises that its member companies made” since “[w]e are separate” and the promises “do[] not apply to us.”

The agencies should make crystal clear that they will not allow any acquisition by a PAE (or an operating company) that does not agree to honor RAND promises made by its predecessor. Evading such a solemn obligation through transfer threatens to make a mockery of the RAND promise at the heart of the standard-setting process.

4. Use PAEs’ distinct incentives to employ Clayton Act Section 7 when “plus” factors are met

The ability and incentive to exercise market power and harm competition is crucial to the analysis of
mergers and acquisitions
. PAE acquisitions can allow incumbent companies to harm rivals due to their unique characteristics. Litigation between operating companies is constrained by risk symmetry, as mutually assured destruction (MAD) fosters settlement and reduces litigation.

PAE litigation, in contrast, is characterized by risk asymmetry. PAEs have no real disincentive to sue since they do not manufacture products, and thus do not face the possibility of countersuit. As a
result, there is no MAD. PAEs also benefit from (1) producing few documents; (2) not facing disruption to their business since “litigation and licensing are their business”; (3) not confronting reputational harms when suing or threatening to sue; (4) not encountering constraints from being a repeat player in a standards organization; and (5) not facing customers exerting pressure to settle litigation or shareholders skeptical of patent enforcement.

Not every patent acquisition by PAEs will automatically violate Section 7. But the different incentives confronting PAEs call for careful scrutiny when these entities are involved in acquisitions. Six “plus” factors exacerbate the concerns, in some cases pushing the acquisition over the line of antitrust liability.

The first occurs when facts demonstrate incentives to harm competition beyond those confronting
the typical PAE. For example, after acquiring 2,000 Nokia wireless patents in 2011, Mosaid agreed
to fund the portfolio acquisition “through royalties from future licensing and enforcement revenues,” and its ownership of the patents was “subject to minimum future royalty milestones.” If Mosaid did not reach certain milestones, it would lose the right to transfer the patents and cede ownership of the patents altogether.These provisions encourage the aggressive filing of lawsuits.

A second, related, plus factor could be present when a PAE follows an investment model designed to
provide a certain level of returns to investors. In this case, again, the PAE has a strong incentive to sue or threaten to sue. Intellectual Ventures has raised more than $5 billion from operating companies, institutional endowments, and wealthy individuals who expect venture-capital-like returns. One study estimated that to be successful, Intellectual Ventures would need to amass a
25% return each year, leading to a lifetime revenue expectation of between $40 billion (over a 10-year period) and $244 billion (over a 20-year period).

A third plus factor could be revealed by a pattern of late filing of suits in relation to patent issuance.
Patents that are used to protect companies against rivals are typically litigated shortly after their products are introduced. In contrast, PAEs tend to assert patents late in the patent term and litigate their patents “to the verge of expiration.” While this third factor alone would not be sufficient to
show antitrust harm, PAEs that consistently file lawsuits at the end of the patent term provide evidence of patents that are not directly used to recoup the rewards of the invention.

A fourth factor could be specific PAE conduct blocking needed disclosure. For example, in the
operating-company context, Barnes & Noble alleged that Microsoft refused to disclose the patents on which it was suing Barnes & Noble. Microsoft apparently would not disclose this basic information unless Barnes & Noble executed a non-disclosure agreement.

A fifth factor could be presented by the combination of a PAE and an operating company where
the operating company has an incentive and ability to harm its rivals. For example, the operating company could acquire patents with a PAE and then enlist the PAE to sue its rival. This could present a combination of the operating company raising its rivals’ costs and the asymmetry advantages possessed by PAEs.

A sixth factor could be presented by disaggregation of a portfolio. The issue of “royalty
” occurs when multiple claims for royalties are “stacked together,” which can lead to higher costs that increase the price charged to consumers or that drive rivals out of the market.

This list is not exclusive, and other plus factors could be identified. The point is that the unique factors presented by PAEs should raise the antenna of the agencies in considering acquisitions under Section 7. The existence of plus factors could push the case over the threshold of antitrust challenge.

5. Monitor collusive activity

Although Clayton Act Section 7 will be the most natural setting to analyze the antitrust effects
of PAE activity, Sherman Act Section 1 also might be applicable in certain settings involving collusion. One example discussed in the literature involves alleged monthly calls between RPX and Acacia in which “Acacia describes the producers they are in the process of targeting and the patents they will assert against the producers.” In return, Acacia “names a price for the patents in question” and “RPX purchases the patents if it wishes.” Such conduct implicates collusive activity that should be explored under Section 1.

Another type of interaction that could conceivably implicate Section 1 involves collusive relationships
between operating companies and PAEs discussed above. For example, if Nokia and Microsoft pooled their patents and enlisted Mosaid to use the patents to sue competitors, that could present a concern of raising rivals’ costs or removing a rival from the market. In any of these cases, conduct could be analogized to that considered in United States v. Singer Manufacturing Co., in which the Supreme Court struck down an arrangement in which three companies pursued a “common purpose” to
suppress competition “through the use of [a] patent.”

6. Consider the use of FTC Section 5

PAE behavior also could potentially constitute an unfair method of competition prohibited by FTC Section 5. Section 5 reaches beyond antitrust but needs a justifiable framework based
on well-defined limiting principles. One potential setting involves incipient or “frontier” conduct that has recently developed and that does not fit into well-established antitrust categories. Some commentators underscore the propriety of Section 5 in this setting on account of its
prospective application and the lack of a private damages recovery.

Although the FTC has not yet offered a precise framework for Section 5, one conceivable framework could require the factors of (1) market power, (2) a lack of a non-trivial efficiency (i.e., behavior not
justified by purposes of patent system), (3) causation, and (4) consumer harm. In the PAE setting, (1) market power is possible in technology markets, (2) PAEs’ revenue-driven licensing will often not be connected to product creation, and the behavior (3) seems likely to cause competitive harm and could result in (4) higher prices or reduced innovation for consumers. The “plus” factors discussed above
in the context of heightened ability and incentive to exercise market power are relevant here in exploring the existence of justifications and consumer harm.

PAEs confronting Section 5 prosecution should be given the opportunity to show that the proceeds they collect benefit inventors in non-trivial proportions. But absent such a showing, and given the articulation of limiting principles, the application of Section 5 could be appropriate given the potential unjustified consumer harm in a setting that lacks antitrust precedent.


PAEs present a challenge to antitrust law. But even if the empirical evidence on PAEs across society is not yet fully collected, and even if certain PAEs can justify some of their conduct, that does not
mean that all PAE activity is immune from antitrust scrutiny. For if it was so protected, then the most aggressive and unjustified behavior, undertaken by PAEs with the greatest market power and
largest portfolios, and inflicting the greatest harm on rivals and consumers, would fall through the antitrust cracks. Antitrust enforcement cannot automatically be shunned in a context that presents new and powerful opportunities to inflict anticompetitive harm.

April 9, 2013 | Permalink | Comments (0) | TrackBack (0)

A Developmental Approach to the Patent-Antitrust Interface

Posted by D. Daniel Sokol

Thomas Cheng (University of Hong Kong) provides A Developmental Approach to the Patent-Antitrust Interface.

ABSTRACT: This Article proposes a set of guiding principles for approaching the patent-antitrust interface in developing countries. Based on the notion that antitrust doctrines need to be adjusted to reflect the local economic circumstances, this Article argues that any credible approach to the patent-antitrust interface in developing countries must incorporate development considerations. It proposes a set of guiding principles that takes into account a wide range of factors, including the need to provide innovation incentives, the need to facilitate domestic imitation, the need to protect domestic consumer welfare, and the need to safeguard access to basic necessities. With the support of a considerable body of theoretical and empirical economic literature, this Article challenges the widely held belief that patent protection is necessary for securing innovations. Rather, this Article argues that developing countries need to be skeptical about innovation-based justifications for restrictive patent exploitation practices, as many of them do not possess the capacity to take advantage of innovation incentives and can ill-afford to sacrifice consumer welfare. It concludes by highlighting the implicit challenge this Article poses to the drive for convergence that has dominated international antitrust in the last decade.

April 9, 2013 | Permalink | Comments (0) | TrackBack (0)

Monday, April 8, 2013

Colleen Chien on Patent Assertion Entities

Posted by Colleen V. Chien*

Holding Out or Holding Up?”

To some, patent assertion entities (PAEs) satisfy the unmet needs of innovators to realize the value of their patents. Enforcing patents is risky and costly, and the refusal of big companies to give patentees their due makes it impossible to realize the core promise of patents – the right to exclude. Only when the demand comes from a PAE does it get any attention from infringing corporations, who themselves are increasingly supporting PAE activity.

PAEs are a solution to the problem of patent hold-out.

To others, PAEs hold the assets of failed businesses that got lucky with a broad patent. They clog the courts to extort value from companies that actually make things, serve customers, and create jobs. They spend and risk nothing while taxing and sometimes even endangering the survival of small companies –55% of unique defendants make $10M or less in revenue – of whom they demand nuisance value settlements – or else.

PAEs are in the business of patent hold-up.

Which account is right? And what should, what can we do about it? These important questions are exceedingly hard to answer because like their fairy-tale counterparts, patent “trolls” hide – not behind bridges, but behind unusual corporate structures and non-disclosure agreements. Yet it is only with a good understanding of the various PAE models that we can know how they function, and what interventions will best preserve the benefits and curb the abuses.

That’s why I join others in welcoming examination of the PAE business model by antitrust authorities. But I may depart from them by advocating a different type of inquiry. In addition to focusing on antitrust concerns, I think the FTC should position itself as the eyes and ears of others directly affected by PAEs:

Companies, that are footing the estimated $29B yearly bill associated with NPE suits, who want to know who is behind these suits, and how to avoid paying money for invalid patents;

Courts, 62% of whose patent docket is now comprised of PAE suits  who want to fairly and efficiently resolve disputes while discouraging frivolous litigation;

Patent agencies across the system, who want to know whether or not the interventions they are contemplating would work and leave the rest of the system intact.

Companies, courts, and the patent agencies are repeat players in the thick of the patent ecosystem. They have the most to lose if the harms and benefits of PAEs are not appropriately balanced, and therefore the most incentive to use the levers at their disposal to get it right. But they need guidance on how to do so. The FTC can provide this guidance, if it keeps in mind a few basic principles.  

Don’t Miss the Forest for the Trees

Much of the recent activity around PAEs has centered on litigation abuses. But most disputes are resolved before a lawsuit is filed. And small companies are more likely to get spooked by a letter.  We can count lawsuits, but, because the lack of a demand letter registry, we don’t really know the scope and of the extent of PAE activity that occurs in the shadow of litigation. The glimpses we have of that shadow – for example the 13,000 letters Innovatio sent as compared to the 26 cases it has brought – suggest that it is large. Some small companies will go to great lengths to avoid ruinous litigation.  Companies like Intellectual Ventures have brought very few suits. Because of NDAs, it’s also hard to know how suits that are filed actually resolve. The ability to get data on activities that are below the radar is a unique comparative advantage of the FTC’s investigative authority.  It should be exploited.

Money Chases Spread

Despite the moral overtones of PAE critics, at the end of the day, the PAE business is just that: a business. Thus, to understand where the PAE phenomenon has been and is going, and whether interventions like fee-shifting will work, we need to understand the business model and profits that are associated with different PAE activities. What are the economics of campaigns against end-users vs. those against manufacturers? How do the margins compare when the patent is “privateered” or vs. sourced from a defunct or non-practicing company source, or when the patents are asserted but not litigated vs. those that are litigated, or when different types of defendants are targeted.

Perhaps more importantly, how do these economics change when certain interventions are applied? For example, in international jurisdictions where fee-shifting is the norm or where it is harder to get software patents? Or when a case is filed in a particular venue, vs. another or, at the case- or patent- level, when cases are transferred, or stayed, or patents are the subject of post-grant challenges, or invalidated? From a societal perspective, are greater returns going to better patents?

Some of this information may encompass trade secrets that the FTC cannot disclose publicly. However, understanding how PAEs make money and how profitably they are doing so are a key to influencing them.


Follow the Money

One reason PAE targets are asking the government for help is that the use of conventional self-help tools has been stymied by the difficulty of figuring out who is really behind a campaign. The FTC should ask PAEs: who stands to benefit from your successful assertions of particular patents? One possible way to get at this is to ask: when a damages award is given to a PAE, where does the money go? In addition, how are the costs of revenues accounted for, in terms of outlays to the inventor, investors, lawyers, and others? How much did you pay for the patent, if you bought it outright, and how was the deal structured? How do you select targets to go after? Another important bit of information pertains to what a PAE's patent and other assets are, as well as the assets (patent or otherwise) of parties that benefit from successful assertions.  

Comparing the information that a FTC 6(B) investigation yields versus the information publicly available can inform the process of drafting rules supportive of meaningful, not burdensome disclosure (real-party-in-interest) requirements. Within these disclosures, pathways to correcting the asymmetries that PAEs exploit may reveal themselves.

One final point. If the FTC does conduct an investigation, it should direct its attention towards not only the large and notorious PAEs but the small and anonymous ones. Campaigns based on a small number of patents can have a big impact.  By prioritizing its inquiries based on consumer and competitive impact – both observed and suspected – the FTC can make sure its activities also have this same, outsized impact.


*Professor Chien teaches at Santa Clara University Law School and spoke at the FTC/DOJ conference in December. (slides) She has published several studies of PAEs including with respect to the patent marketplace (in which the “PAE” term was first used), patent litigation, the ITC, and startups.  She has also written on historical episodes of trolling and efforts to regulate them.


April 8, 2013 | Permalink | Comments (0) | TrackBack (0)

Buyer Groups, Antitrust and Outsiders

Posted by D. Daniel Sokol

Stephen P. King, Monash University - Department of Economics describes Buyer Groups, Antitrust and Outsiders.

ABSTRACT: A buyer group is a subset of downstream firms that pool their demand for an upstream input to negotiate a better deal with suppliers. This study develops a simple model that shows how a buyer group changes market behaviour, focusing on the impact on downstream firms outside the buyer group. This impact critically depends on whether or not the buyer group and the supplier can write a contract contingent on the market price paid by outsiders. With contingent contracts, the price paid by firms outside the buyer group rises and their profits fall. If such contracts are infeasible, possibly due to legal concerns, the market price is lower after the buyer group forms. These results raise issues for antitrust authorities in Australia, Europe, the USA and elsewhere who evaluate buyer‐group agreements. We extend the model to consider the situation where a supplier can commit in advance to the market price. In this situation, the bargaining power of the buyer group becomes relevant with the market price inversely related to this bargaining power. We illustrate our results with a simple example.

April 8, 2013 | Permalink | Comments (0) | TrackBack (0)

Mergers When Prices are Negotiated: Evidence from the Hospital Industry

Posted by D. Daniel Sokol

Gautam Gowrisankaran (Arizona), Aviv Nevo (Northwestern), and Robert Town (Wharton) analyze Mergers When Prices are Negotiated: Evidence from the Hospital Industry.

ABSTRACT: In healthcare and other bilateral oligopoly markets, prices are often negotiated by the contracting parties. Many hospitals have merged in recent years in part to gain bargaining leverage with managed care organizations (MCOs), leading to several antitrust trials. We specify and estimate a bargaining model of competition between hospitals and MCOs using claims and discharge data from Northern Virginia. We find that MCO bargaining restrains hospital prices significantly relative to standard insurance. Increasing patient coinsurance tenfold would reduce prices by 16%. A proposed hospital acquisition that was challenged by the Federal Trade Commission would have significantly raised hospital prices.

April 8, 2013 | Permalink | Comments (0) | TrackBack (0)

Jim Besson and Mike Meuer on Patent Assertion Entities

Posted by Jim Besson and Mike Meuer

Patent Assertion Entities: Costs and Benefits

As Congress considers the SHIELD Act, it is helpful to review some of the empirical evidence on the economics Patent Assertion Entities (PAEs). In particular, we can summarize recent research on the magnitude of both the negative and positive effects of these actors.

How much do PAEs cost the firms they attack?

We performed three different estimates using different samples, different methods and different definitions of PAEs:

1. Publicly listed PAEs

The first sample comes from data on the 10 publicly listed firms that were predominantly in the patent assertion business during the period from 2005 to 2010 (Acacia, Asure, Interdigital, Mosaid, Network-1, OPTi, Rambus, Tessera, Virnetx, and Wi-Lan). These companies accounted for about one sixth of all PAE lawsuits filed during this period. Although these companies might not represent
the entire universe of PAEs, the greater amount of available financial information helps paint a rich picture of their business. We matched these patent trolls to the lawsuits filed listed in Patent Freedom’s database of patent trolls. Patent Freedom is an independent company that collects data on
PAEs and provides advice and risk assessment (see our paper The Private and Social Costs of Patent Trolls for details on this database and the matching). During the period from 2005 through 2010, licensing revenues totaled nearly $6 billion. The mean licensing revenue per lawsuit defense comes to $3.8 million in 2010 dollars. This figure includes licensing revenues from non-litigated patent assertions. But it understates the magnitude of licensing revenues per suit because it does not account for accruals — much of the revenue from lawsuits filed in 2010 was not collected in 2010 (and there were many more lawsuits in 2010 than in earlier years). Extrapolating from this sample to Patent Freedom’s database, we multiply $3.8 million times the 5,307 defendants counted in 2011, coming to aggregate estimated payments to PAEs of $20 billion.

2. Survey of defendant firms

We also surveyed 82 defendant firms to obtain information about their settlement costs and legal costs both from litigated and unlitigated patent assertion from PAEs (see The Direct Costs of NPE Disputes). The confidential survey was conducted by RPX, but it also included defendants who were not clients of RPX. RPX is another firm that collects data on PAEs, including their own database, and provides risk management services. These defendant firms conducted 1,184 defenses in lawsuits with PAEs from 2005 through 2011. This sample is not representative of the entire universe of PAE litigations listed in the RPX database — these firms tend to be larger than average and they are sued more often. We created a model to correct for these biases and extrapolated our estimates to the 5,842 defenses that RPX counts for 2011. The resulting estimate was that the costs to all the firms defending PAE assertions in 2011, including accrued costs and legal expenses comes to $29 billion. This aggregate cost is a bit larger but it includes more, namely defendant legal costs and accrued settlement costs.

3. Lost wealth of publicly listed defendants

We also estimated the wealth that investors in publicly traded firms lost when the firms were sued by PAEs (see The Private and Social Costs of Patent Trolls). We used standard event study methods that filter out the effects of overall market movements and also of other events affecting each individual firm’s stock price. Theoretically, this loss of wealth should be much larger than the other estimates because it includes more: it includes lost profits, including discounted value of future profits that might be affected by the lawsuit. Defendant lose profits aside from direct payments to PAEs and legal costs; management and engineering resources might be distracted from business needs because of the suit, customers may cancel or delay purchases, firms might postpone innovative improvements. Case studies show that all of these things do happen and that they sometimes have a quite substantial impact (e.g., 30% revenues lost in one careful case study). Our event studies provide an estimate of annual lost wealth of about $80 billion.


Thus we use three different methods and three different samples to estimate the cost of PAE patent assertions to defendant firms. Considering the different concepts measured in each study, the results are quite consistent. Some people have criticized the survey study for having an unrepresentative sample. While none of the three samples of defendants we have studied are fully representative of
all PAE defendants, the similarities in the results suggest that sampling issues do not introduce substantial biases. Although our numbers might seem large, it pays to bear in mind that the distribution of these costs is highly skewed. A small number of very big payouts account for most of the aggregate cost. For example, the mean cost to defendants in the second study is about $5 million per defense, but the median cost is only around $100,000. Thus the “typical” cost of a PAE defense might be around $100,000 yet the aggregate cost can still be $29 billion.

How much do PAEs benefit inventors?

Many people argue that PAEs provide an important benefit by helping inventors enforce their patents. Inventors, especially small inventors, might not have the resources or ability to conduct patent litigation. The PAEs license their technology or purchase their patents thus monetizing inventors’ patents. This serves to provide important incentives that otherwise might not be provided. In
this way, it is claimed, PAEs make markets more efficient.

Some critics of this argument point out that these incentives might not be the right incentives. They argue that these are incentives to patent, not incentives to innovate — that too many PAE patents are vaguely worded, overly broad exercises in patent draftsmanship rather than real innovations. Also, typical PAE patents are quite old — the mean age is eight years from issue — often covering old
technologies but being asserted broadly to cover subsequently developed technologies.

Setting that argument aside, we can ask how much of the license fees incurred by defendant firms actually flows to inventors, especially to small inventors? We studied the 10-K reports of publicly listed PAE firms over the period from 2002-2011 to answer this question. First, it is important to note that not all PAEs are in the business of helping third party inventors enforce their patent rights. Some do not license or acquire patents, but instead conduct R&D to file their own patents. Others were once operating companies that obtained patents as part of their ongoing businesses; having now ceased production, they became patent assertion entities with these patents. Using the 10-K reports of publicly listed PAE firms, we estimated the flows of funds to third party inventors as royalties and as patent acquisitions, as well as the flows to PAE’s own R&D departments including capitalized development costs when the PAE exited an operating business. We find that royalty payments and patent acquisition costs paid to independent inventors averaged $59 million (in 2010 dollars) per year for these firms. Many of these third party inventors, however, were large firms — researchers have found that 45% of PAE patents come from large firms. These figures pale in comparison to the costs that patent suits by these firms imposed on defendants—$1.2 billion in out-of-pocket costs per year and annual business costs to defendants were much larger based on our event study estimates. Even internal R&D expenditures by PAE firms, averaging $169 million per year, do not change the picture.

Costs and benefits

Certain commentators praise PAEs because they transfer rents from large technology firms to small inventors. In the case of publicly traded PAEs, they do this very badly. It seems that a tiny fraction of the costs imposed on defendants is transferred to small inventors by PAEs. If advocates of PAE activity have information showing that non-public PAEs are more efficient we hope they will bring it forward. We are skeptical such a claim could be true. We hasten to add that PAE lawsuits burden high-tech start-ups and not just large incumbent firms. The RPX database reveals that 82% of the firms defending against PAE patents have less than $100 million in revenue. The median firm has only $10.3 million in revenue. While large firms deal with more suits per firm and while they pay more per suit on average, the cost of litigation to small firms is larger relative to firm revenues on average. Thus small firms bear a proportionately higher “tax” on innovation yet, despite the rhetoric, PAEs do
precious little to monetize innovation by small inventors.


April 8, 2013 | Permalink | Comments (0) | TrackBack (0)


Posted by D. Daniel Sokol

Anca Daniela Chirita, Durham University - Department of Law offers A LEGAL HISTORICAL REVIEW OF THE EU COMPETITION RULES.

ABSTRACT: The article reviews the history of the European Union competition rules: Article 101 TFEU, in particular the historical and comparative context of the 'object' and 'effect' distinction; the possibility of a gap under Article 102 TFEU; the relationship between unfair competition and the prohibition of discrimination, and the broader meaning of distortions of competition. It reveals new insights based on the consideration of several historical documents starting with the Schuman Plan, the Founding Treaty establishing the EC Community of Steel and Coal (ECSC) and the negotiations of the Treaty of Rome.

April 8, 2013 | Permalink | Comments (0) | TrackBack (0)

Robin Cooper Feldman on Patent Assertion Entities

Posted by Robin Cooper Feldman [1]

This comment begins from the perspective that at least some behavior in modern intellectual property monetization is problematic. There may be differing opinions on which of the behavior is
problematic or how much of the behavior is problematic. (The piece from which this comment is adapted describes a variety of modern monetization behaviors that I find troubling.) To the extent one agrees with the perspective that at least some of the behavior has the potential to create dysfunction in markets or damage innovation, can antitrust law respond effectively? I believe those doctrines can be effective vehicles to address some behaviors, if they are adapted to take into account the shape of emerging intellectual property markets.

One might imagine that the answer to many of the modern intellectual property shenanigans would lie in the notion of preventing parties from abusing the court system. After all, the heart of some of these schemes involves threatening or bringing less than meritorious lawsuits to damage or harass competitors. Antitrust actions based on abusive use of the legal system, however, are unlikely to provide a fruitful path unless the Supreme Court is willing to significantly adjust the
legal precedents in this arena.[2]

The problem begins with the Noerr-Pennington doctrine, which protects the rights of citizens to petition the government without fear of antitrust liability.[3] The doctrine originally developed to protect attempts to persuade the legislative branch to adopt a law, or the executive branch to enforce a law, in a way that would have an anticompetitive effect.[4] Over time, the doctrine has expanded to protect the right to petition the courts.[5]

There is an exception to the Noerr-Pennington doctrine for sham litigations. The sham litigation doctrine attempts to prevent parties from using the governmental process itself as an anticompetitive weapon.[6]  The problem for intellectual property cases involves the elements that must be established to demonstrate sham litigation. Specifically, in the 1993 Professional Real Estate case, the Supreme Court held that in order to show that legal actions constitute sham litigation, those actions must be both 1) objectively baseless, in the sense that no reasonable litigant could realistically expect success on the merits, and 2) subjectively baseless such that the lawsuit conceals an attempt to use administrative or judicial processes to interfere with a competitor.[7]

A court is allowed to examine the subjective portion of the evidence only if the court first concludes that no reasonable litigant could have expected to succeed.[8] Given the uncertainties in intellectual property law, litigants can almost always establish some possibility that one might succeed—at least enough to avoid a finding that the filing was entirely baseless.

Even without the sham litigation doctrine, however, antitrust may provide other avenues. Private or public antitrust authorities may be able to bring actions based on anticompetitive actions other than filing lawsuits. Effective antitrust enforcement in this area will require a shift in the way that we define relevant markets.[9] For example, antitrust authorities examine three different kinds of
markets—markets for goods, technology markets, and innovation markets.[10] In examining markets for goods, authorities will consider the particular goods and their substitutes. Technology markets relate to circumstances in which intellectual property is marketed separate from any underlying products in which it is used. To analyze technology markets, courts will look at particular intellectual property and its close substitutes. Finally, innovation markets consist of the research and development directed at particular new or improved goods. Here, authorities are watching to ensure that existing producers do not strangle potentially competitive technologies in their infancy.

Understanding the full extent of some of the modern intellectual property schemes, however, requires an analysis of a different type of market. One must look at the market for monetization of
patents or for monetization of copyrights as their own markets, in order to properly analyze the impact of certain modern behaviors.[11] One cannot possibly understand the impact of behavior by mass aggregators, for example, without thinking of the market for patent monetization as a

In particular, in looking for potential anticompetitive effects of patent monetization, one must look on three different levels. First, one must consider ways in which a patent monetization entity with market power in a particular intellectual property market may be using, obtaining or maintaining that power in an anticompetitive manner. Second, as described above, one must worry about ways in which patent monetization activities could have anticompetitive effects in the market for patent monetization itself.

Finally, one has to worry about behavior in the market for patent monetization that could affect the underlying individual Intellectual Property markets, even in the absence of actual power in any of those individual markets.[12] In other words, in the modern world of patent monetization, one may not need to have power in a particular IP market to affect prices in that market. It is an odd circumstance, but entirely possible in this new market.            

Consider the following: one no longer needs to have a basket of automobile patents big enough to constitute market power in the auto market in order to affect the auto market. Perhaps all one would need is a small number of patents in that market and a reputation for tough tactics. If one happens to have a large grab bag of assorted patents, so much the better.  (After 50 patents, most licensing targets will cease to examine the patents on their individual merits.)

For example, suppose I have a patent related to the banking industry. My claim that this banking patent actually applies to your automobile production may be pretty farfetched. If I have
enough farfetched claims to cause trouble for you, however, and I am threatening to throw them at you one after another, and I have a reputation for playing hardball, that may be enough for you to pay what I ask. It may also be enough for every other automobile manufacturer to pay what I ask, as well.
Under those circumstances, it is possible that I could affect the market for automobiles without having much to speak of in the way of automobile patents.

Most important, none of these levels of antitrust analysis is possible unless public or private antitrust actors have the information necessary to identify and trace anticompetitive behavior.  Under current circumstances, intellectual property rights holders are able to use the magnified power from their rights to bargain for invisibility and silence. This problem highlights the final limitation in depending on antitrust action to cabin the inappropriate use of intellectual property. Antitrust analysis is concerned with market prices. It is not designed to address concerns over actions in which intellectual property rights are being used for purposes such as hiding embarrassing or illegal conduct, avoiding obligations, or pressuring others into surrendering rights. These are not necessarily market power concerns, and yet the behaviors still may be damaging to society.

[1] Professor of Law & Director of the Institute for Innovation Law, UC Hastings Law. This comment is
adapted from Intellectual Property Wrongs, forthcoming 2013 Stanford Journal of Law, Business & Finance.

[2]See Feldman, supra note 19, at 166-169 (providing a detailed description of problems with the doctrines in sham litigation and antitrust as they intersect with patent law).

[3] Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961).

[4]See id.; see also United Mine Workers v. Pennington, 381 U.S. 657 (1965).

[5]See Cal. Motor Transp. Co. v. Trucking Unlimited, 404 U.S. 510 (1972).

[6]See City of Columbia v. Omni Outdoor Advertising, 499 U.S. 380 (1991).

[7]See i Prof’l Real Estate Investors v. Columbia Pictures Indus., 508 U.S. 49, 60-61; see (1993); also id. at 58 (characterizing the Cal. Motor Transport Court’s discussion of the difficulty in evaluating whether a claim is baseless as endorsing an objective standard); Cal. Motor Transport v. Trucking Unlimited, 404 U.S. at 513.

[8] See Prof’l Real Estate v. Columbia, 508 U.S. at 60 (“First, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits.”).

[9]See Feldman, Giants Among Us, supra note 39, at 35-37 (discussing at length the changes necessary for effective antitrust analysis under these circumstances).

[10] U.S. Dept. of Justice and Fed. Trade Comm’n, Antitrust Guidelines for the Licensing of
Intellectual Property, 8-11 (1995), available at [hereinafter 'Antitrust Licensing'].

[11]See Feldman, Giants Among Us, supra note 39, at 35-37 (describing at length the necessity for analyzing monetization markets.)

[12] This discussion in this paragraph and the hypothetical in the following paragraph were first presented in Robin Feldman, Comments on Notice of Roundtable on Proposed Requirements for
Recordation of Real-Party-in-Interest Information Throughout Application Pendency and Patent Term, U.S. Patent & Trademark Office, Jan. 24, 2012, available at

April 8, 2013 | Permalink | Comments (0) | TrackBack (0)

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.

April 8, 2013 | Permalink | Comments (0) | TrackBack (0)

Private Antitrust Litigation in the European Union and Japan – A Comparative Perspective

Posted by D. Daniel Sokol

Simon Vande Walle, University of Tokyo - Graduate Schools for Law and Politics has a new book on Private Antitrust Litigation in the European Union and Japan – A Comparative Perspective.

BOOK ABSTRACT: Companies in Europe and Japan are increasingly the target of private antitrust litigation. These lawsuits are being facilitated by favorable case law, legislative changes, and a growing awareness of antitrust remedies in all layers of society. This book analyzes and compares this burgeoning area of litigation in the European Union and Japan. It examines the legal framework for these actions and takes stock of the hundreds of actions for damages and injunctive relief that have been brought in Japan and the EU. It also looks at the novel contexts in which private litigants are invoking antitrust violations, such as in derivative suits and in actions to challenge arbitral awards. Finally, the book assesses the impact of private litigation on the enforcement of antitrust law and shows how Japan's experience can be useful for Europe and vice versa in shaping future reforms.

You can read the table of contents here.

April 8, 2013 | Permalink | Comments (0) | TrackBack (0)

Sunday, April 7, 2013

Blog Symposium on Patent Assertion Entities

Posted by D. Daniel Sokol

Patent Assertion Entities (PAEs) are a very hot topic for antitrust purposes. First, the FTC held a December 2012 workshop on PAEs in December. Then, the Department of Justice and the FTC opened a comments period on PAE activities in which they requested written submissions from the public until April 5, 2013. As a result, with the comment period now closed, it makes sense to take stock regarding PAEs. Providing commentary on PAE issues are:

David Balto (Law Office of David Balto)
Jim Bessen and Mike Meuer (Boston University Law)
Mike Carrier (Rutgers University - Camden Law)
Colleen Chien (University of Santa Clara Law)
Robin Cooper Feldman (University of California Hastings Law)
Thomas Ewing (Avancept LLC)
Bert Foer (American Antitrust Institute)
Mark Lemley (Stanford) and Carl Shapiro (Berkeley)



This symposium was sponsored by Google. When initially posted, the symposium inadvertently did not include sponsorship information.

April 7, 2013 | Permalink | Comments (0)