The U.S. Federal Trade Commission will launch an investigation of the business practices of so-called patent trolls in an effort to understand whether those companies are harming competition and consumers, the agency's chairwoman said.
As part of a growing focus of the U.S. government on patent abuses, the FTC will study patent assertion entities (PAEs), companies with the primary business model of buying and licensing patents, in an effort to understand the costs and benefits of PAE activity, FTC Chairwoman Edith Ramirez said Thursday.
The agency will also watch PAEs closely for possible anticompetitive lawsuits and will take antitrust enforcement action against PAEs if warranted, Ramirez said. One PAE business model that's emerging is patent privateering, in which an operating company transfers its patents to a PAE, and the PAE files a patent infringement lawsuit against a competitor of the first company, she said.
PAE patent demands can raise antitrust issues "especially if the PAE is effectively acting as a clandestine surrogate for competitors," Ramirez said at a patent debate hosted by the American Antitrust Institute and the Computer and Communications Industry Association (CCIA). Critics say "this emerging strategy allows operating companies to exploit the lack of transparency in patent ownership to win a tactical advantage in the marketplace that could not be gained with a direct attack," she added.
PAEs are bringing a growing number of patent infringement lawsuits with the targets expanding from IT vendors to retailers and small businesses, Ramirez said.
Many businesses "now find themselves victims of nuisance suits that are far cheaper to settle than litigate," she said. "Some PAEs send thousands of demand letters to target businesses. The sender may claim the recipient is infringing one or more patents by using ordinary office electronics purchased at the local superstore."
While PAEs may have some upsides, including encouraging investment in research and development, "empirical evidence on the magnitude of the return to investors and startups was largely absent" when the FTC issued a report on PAEs two years ago, Ramirez said.
In its study, the FTC will examine the benefits and costs of PAEs. Researchers are beginning to look at the issue, but U.S. policymakers need more information on PAE activity, Ramirez said. The FTC will use its section 69(b) authority, which gives the agency power to conduct wide-ranging economic studies of business practices.
The FTC can subpoena companies when conducting a 6(b) study, and the studies can spur legislative or regulatory action.
U.S. lawmakers have introduced two bills this year targeted at PAEs, and earlier this month, President Barack Obama called on Congress to allow new challenges to patents on processes that are enabled by computers and to make it more difficult for patent-holding firms to gain import injunctions at the U.S. International Trade Commission.
CCIA President and CEO Ed Black praised the FTC for the new study, saying it was a "welcome step."
Antitrust lawyer David Balto also praised the study, saying 6(b) studies can play "a vital role in guiding Congress and regulators how to put a stop to harmful and deceptive conduct."
The study will help "spotlight the extortion tactics of this modern-day litigation Mafia," Balto said. "[PAEs] use uncertainty and deception to exploit vulnerable small businesses, raising costs for consumers, stifling innovation and ultimately dampening economic growth."
Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is firstname.lastname@example.org.