Something to Talk About: The Federal Trade Commission Report on Patent Assertion Entities

The 2016 Federal Trade Commission Report remains the most objective and comprehensive study on the structure, as well as economic and litigation activities, of United States companies designated as Patent Assertion Entities [hereinafter PAEs]. [1]  PAEs affirmatively enforce patents they own, and if necessary, they commence patent infringement lawsuits.[2] Many of these patents were previously owned by small or medium sized businesses and individual inventors who receive a revenue stream from PAEs in exchange for transfer of their patent ownership.[3]

The Report contradicts numerous assertions in the media about PAEs which enforce patent rights indirectly on behalf of these same independent inventors and small businesses. For example, the Report documented two distinct business models within the group generically referred to  as PAEs: Portfolio PAEs and Litigation PAEs.[4]  Typically Portfolio PAEs negotiated licenses covering large portfolios containing hundreds or even thousands of patents, and frequently without initially suing the alleged infringer.[5] According to  popular opinion all PAEs commence wrongful patent infringement actions without consequence to themselves, because they do not own property with significant financial value.  In these situations, according to popular opinion if a court or agency orders a PAE to pay damages it cannot do so and therefore the opposing person receives no compensation for a wrongful law suit.

Unfortunately, this misconception results in a woefully inaccurate characterization of Portfolio PAEs. Instead, according to the Report Portfolio PAEs typically fund their initial patent acquisitions through capital raised from investors, including existing institutions or manufacturing firms.[6] These investments, in addition to ownership of hundreds or thousands of patents, place a great many assets at risk for Portfolio PAEs if they commence frivolous litigation.  

Furthermore, popular and legal media maintain that PAEs inevitably injure innovation whenever PAEs seek to enforce their patents. This popular view is tragically erroneous for at least three reasons. First, there are sound economic reasons why businesses do not necessarily practice their patents. Secondly, many individual inventors, as well as small and medium sized businesses, simply do not possess the economic muscle to defend their inventions against larger competitors.[7] Thirdly, United States patent law specifically recognizes the right to exclude all parties from infringing any patent, and not merely those which patent owners actually practice.

The original analogy in this series was to a homeowner who departs on vacation and leaves his house vacant. He returns home to find an intruder residing there (and eating his groceries). In court the intruder’s defense is that the owner was not using the house and so he (the intruder) had the right to stay there indefinitely. Of course, this is an absurd reply and premise, but no one to date has responded as to why patent ownership is different from house ownership in this respect.

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[1]Patent Assertion Entity Activity, Federal Trade Commission October 2016 [hereinafter ‘the Report’].

[2] Id.

[3] See id. at 26-27 nos. 95 and 96.

[4] Id. at 3-5.

[5] Id. at 3.

[6] Id.

[7] Id. at note 3 supra.


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