Patent Assertion Entity Activity: An FTC Study

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1 Patent Assertion Entity Activity: An FTC Study Suzanne Munck Deputy Director, OPP Chief Counsel for IP U.S. Federal Trade Commission Daniel Hosken Deputy Assistant Director Bureau of Economics U.S. Federal Trade Commission ABA Teleconference October 18, 2016 The views expressed in this presentation are those of the presenters and are not necessarily those of the Federal Trade Commission or any of its individual Commissioners.

2 Introduction and Background Patent assertion entities (PAEs) Acquire patents from third parties Do not practice their patents Attempt to generate revenue by asserting the patents against accused infringers Prior PAE research focused on litigation data Significant government interest in PAE activity

3 Introduction and Background FTC used 6(b) authority to obtain confidential data describing PAE behavior Firms required to submit documents and data describing firms organization, patent holdings, and patent assertion Study Categories 22 Responding PAEs reporting on behalf of themselves, 327 affiliates engaged in active assertion behavior, and more than 2000 entities that held, but did not assert, patents Wireless Case Study compares PAEs active in the wireless chipset sector with 8 manufacturers and 5 NPEs who asserted patents in this sector

4 Two Complementary Case Studies Detailed examination of 22 PAEs Business Model Patent Assertion Demands, Litigation, Licensing Patent Holdings Industry Study: Comparison of PAE patent assertion to that of manufacturers and NPEs Limit to a single industry to focus on how patent assertion varies by business model Wireless Chipset Industry Sample contains manufacturers accounting for approximately 90% of worldwide chipset sales

5 Sample Selection FTC sample designed to oversample the most economically important firms, but also include small and medium size firms Proxy for PAE revenue using information estimating number of defendants sued by PAEs and PAEs patent holdings Because PAE universe is unknown, the FTC s findings cannot be extrapolated to all PAEs operating in the U.S. FTC Sample Contains An estimated 75% of U.S. PAE patent holdings Between 14% and 46% of PAE patent infringement litigation initiated during study period (January 2009-September 2014)

6 Two Business Models Litigation PAEs Thinly capitalized, patents typically purchased via revenue sharing Set up separate affiliates for each patent portfolio acquired 18 Litigation PAEs associated with 327 Affiliates that asserted patents Almost always sue and generate patent licenses as part of the settlement of litigation Litigations settle quickly, 66% settle within a year Patent licenses contain few patents and generate relatively low revenues 77% of licenses generate royalties of less than $300,000

7 Two Business Models Portfolio PAEs Portfolio PAEs highly capitalized Typically negotiated patent licenses without first filing a patent infringement suit Licenses often include more than 1000 patents License agreements typically generated royalties of millions of dollars 4 Portfolio PAEs accounted for about 80% of study revenues (approximately 3.2 billion dollars)

8 PAE patent holdings Patent Holdings and Targets of Assertion 75%+ software patents 88% Computer and Communications or Other Electrical and Electronic patents PAEs asserted against both manufacturers and likely end-users of potentially infringing products 10% of defendants and 13% of licensees operated in the Retail Trade industry

9 Wireless Case Study Litigation PAEs asserted their patents very differently than manufacturers in the wireless chipset sector Manufacturers almost never sued to generate a patent license (1%), while Litigation PAEs almost always sued (90%) to generate a patent license Manufacturer patent licenses are more complicated than Litigation PAE licenses Frequently contain field-of-use restrictions and running royalties

10 Recommendations Patent infringement suits played a key role in the Litigation PAE model 93% of reported Litigation PAE licenses followed a lawsuit 77% valued at less than the lower bound of the estimated cost of defending a patent lawsuit through end of discovery When licenses followed litigation, they tended to settle early Infringement litigation plays an important role in protecting patent rights Nuisance litigation, however, can tax judicial resources and divert attention away from productive business behavior

11 Recommendations Propose reforms directed towards: Addressing discovery cost imbalances between PAE plaintiffs and defendants Providing courts and defendants with more information about the plaintiffs that have filed infringement lawsuits Streamlining multiple cases brought against defendants on the same theories of infringement Providing sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.