The FTC signals future focus on the impact of patents on commerce

July 8, 2013

Evan Vucci/Associated Press

Evan Vucci/Associated Press

We have previously discussed the growing concern that aggressive patent enforcement, particularly by the patent holding enterprises known as “Patent Assertion Entities” (PAEs), may be adversely affecting commercial competition and innovation.  In a recent speech, the Chair of the Federal Trade Commission (FTC), Edith Ramirez, strongly suggested that the FTC is ready to engage actively in the policy debate over the appropriate role for PAEs and the broader issue of the relationship between patent rights, innovation, and competition.  That engagement is a very positive step in the overall effort to structure and enforce intellectual property rights in ways which most effectively foster long-term economic growth.

PAEs are commercial enterprises in the business of extracting maximum economic value from patents.  They acquire patent rights then attempt to transform those rights into commercial gain through patent litigation and licensing.

The FTC and other observers recognize that PAEs can have positive economic impact.  By assisting individual inventors and small businesses to enforce their patents, PAEs help to transform patented innovations into commercial value.  The economic gains that PAEs help patent owners to realize can, in turn, be used to invest in research and development activities that support future inventions and innovations.

PAEs can also, however, provide disincentives for innovation.  By initiating patent infringement litigation, they can increase the costs of conducting business and thus reduce the funds available for future research and development efforts.

Ms. Ramirez expressed particular concern as to three aspects of the increasing PAE activity.  She noted that a rapidly growing number of PAE lawsuits are being directed against the users of technologies which allegedly infringe on patents, not against the manufacturers or providers of those technologies.

Ms. Ramirez noted that the number of lawsuits filed by PAEs tripled in the period between 2007 and 2012.  She noted with concern that more than 50% of the lawsuits initiated by PAEs are now directed against the users of allegedly infringing technologies and that most of those targets are non-technology companies (e.g., restaurants, hotels, and retailers).

Ms. Ramirez also expressed concern about the problem of “privateering.”  She pointed out that, in the past, PAEs would take action against any user of an allegedly infringing technology who the PAEs believed would be most likely to pay an appropriate licensing fee.  Now, a growing number of PAEs have greater economic incentives to take action against customers of the companies that manufacture products that compete with the products made by the companies that license the patent in question.

Take the hypothetical example of privateering involving Company A, which owns a patent and transfers it to the PAE.  If the terms of that transfer include an agreement that Company A will provide additional compensation to the PAE when the patent is enforced against customers of Company B, a competitor of Company A, then the PAE has greater incentive to act against Company B’s customers than against any other parties.

The third PAE topic of concern to the FTC is deceptive trade practices by PAEs.  Ms. Ramirez indicated that, by targeting small businesses for patent enforcement actions, PAEs may be engaging in unfair and deceptive conduct.

Ms. Ramirez noted that the FTC is ready to participate in the policy debate associated with PAEs and the appropriate commercial use of patents in two ways.  The FTC is prepared to conduct an “industry study” on the commercial and competitive impact of PAEs under the authority granted to the Commission Section 6(b) of the FTC Act.

She also noted that the FTC will apply its authority to take enforcement actions against specific parties.  Those enforcement actions will be directed against parties the Commission believes are engaged in either anti-competitive conduct or deceptive trade practices against consumers.

The concerns expressed by Ms. Ramirez are important and timely.  The FTC has a vital role to play in the overall effort to balance the often competing interests of intellectual property owners and users.  However, as Ms. Ramirez also recognized in her remarks, the FTC can not implement appropriate policies in this field acting alone.  The FTC efforts must be part of a more comprehensive effort, involving several different federal agencies and the Congress.