WASHINGTON (Legal Newsline) - A new Federal Trade Commission report that looks at patent assertion entities -- some of which are referred to as patent “trolls” because of their penchant for filing lawsuits -- and their business practices is “totally flawed,” says a Virginia law professor who has been studying patent licensing firms for years.

Kristen Osenga, a professor at the University of Richmond School of Law, teaches and writes in the areas of intellectual property, patent law, law and language, and legislation and regulations. She is a frequent speaker at symposiums on patent law and intellectual property.

Before joining academia, she practiced patent law and clerked for Judge Richard Linn of the U.S. Court of Appeals for the Federal Circuit, which is charged with handling all U.S. patent appeals.

Osenga said the FTC report, launched in 2013 and released last month, is most troubling because of its design.

“It’s totally flawed,” she recently told Legal Newsline. “The design is bad, particularly the way [the FTC] identified who it would send questions to. It’s basically directed towards one type of patent licensing firm.”

The report, “Patent Assertion Entity Activity: An FTC Study,” examines non-public information and data covering the period 2009 to 2014 from 22 PAEs, 327 PAE affiliates and more than 2,100 holding entities -- or those entities that did not assert patents -- obtained through compulsory process orders, or subpoenas, using the commission’s authority under Section 6(b) of the FTC Act.

The FTC defines PAEs as businesses that acquire patents from third parties and seek to generate revenue by asserting them against alleged infringers.

“This report is a big step forward in enhancing our understanding of PAEs and provides an empirical foundation for ongoing policy discussions,” FTC Chairwoman Edith Ramirez said in a statement.

“The recommendations we are proposing are designed to balance the needs of patent holders with the goal of reducing nuisance litigation.”

The report found two types of PAEs that use “distinctly” different business models, the commission said.

One type, referred to in the report as Portfolio PAEs, were strongly capitalized and purchased patents outright. According to the FTC, they negotiated broad licenses, covering large patent portfolios, frequently worth more than $1 million.

The second, more common type, referred to in the report as Litigation PAEs, frequently relied on revenue sharing agreements to acquire patents. According to the commission, they overwhelmingly filed infringement lawsuits before securing licenses, which covered a small number of patents and were generally less valuable.

The report found that among the PAEs in the study, Litigation PAEs accounted for 96 percent of all patent infringement lawsuits, but generated only about 20 percent of all reported PAE revenues. The report also found that 93 percent of the patent licensing agreements held by Litigation PAEs resulted from litigation, while for Portfolio PAEs that figure was 29 percent.

The FTC report also found that the royalties typically yielded by Litigation PAE licenses were less than the lower bounds of early stage litigation costs.

“This data is consistent with nuisance litigation, in which defendant companies decide to settle based on the cost of litigation rather than the likelihood of their infringement,” the commission explained.

Osenga said she’s concerned the companies or firms the commission targeted were not varied enough and didn’t, themselves, provide complete answers.

She’s also concerned that lumping companies or firms into just two groups -- portfolio versus litigation -- is insufficient.

“It’s either you’re really big and good, or really tiny and bad,” Osenga said of the report. “But I can imagine a big, good portfolio company doing really bad things, too. It’s just not the right dichotomy.

“If what the FTC was trying to do was create a picture of the patent licensing landscape, then saying we have two buckets and you have to fit in one or the other is just not adequate.”

As part of its report, the commission did a study on the wireless chipset sector. In doing so, it said it hoped to gain a better understanding of how PAE behavior compares with the behavior of other firms that assert patents.

For this study, the FTC said it obtained non-public data from eight manufacturers and five non-practicing entities, for the same timeframe, using its 6(b) authority.

The wireless case study found that Litigation PAEs and manufacturers behaved differently.

“Within the study, Litigation PAEs brought far more infringement lawsuits involving wireless patents -- nearly two-and-a-half times as many as manufacturers, NPEs and Portfolio PAEs combined,” the commission said. “Litigation PAE licenses involved simple lump-sum payments with few restrictions, if any, whereas the reported manufacturer licenses frequently included field-of-use restrictions, cross-licenses, and complicated payment terms.”

Osenga took issue with the wireless case study’s sample size, and that of the entire report.

“Bottom line: we don’t know who any of these firms are,” she said. “Of course, I certainly understand that if you’re going to divulge financial information and such, you want an assurance of anonymity. But without knowing who they are and how they were selected, it’s really hard to say it’s representative of anything.

“The FTC needs to explain to us how it picked these 22 PAEs and the 13 other manufacturers and NPEs. What was the criteria? Otherwise, it all looks cherry-picked.”

And now, the problem is the FTC report will be used in a renewed push for patent legislation, even though the commission’s policy recommendations are not supported by the report itself, Osenga said.

“The FTC recognizes that infringement litigation plays an important role in protecting patent rights, and that a robust judicial system promotes respect for the patent laws. Nuisance infringement litigation, however, can tax judicial resources and divert attention away from productive business behavior,” the report states.

In particular, the commission proposes reforms to:

- Address the imbalances between the cost of litigation discovery for PAE plaintiffs and defendants;

- Provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits;

- Streamline multiple cases brought against defendants on the same theories of infringement; and

- Provide sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.

“This study is a big deal,” Osenga admitted, “because [the FTC] has the power, under the 6(b) rule, to ask questions that other people can’t. It’s truly significant -- almost like a subpoena power.

“But the recommendations the FTC put in its report are not good recommendations. They’re not based on or tied to the data it got. And what’s worse is, now you’re going to have lawmakers who are going to hold up this report and say, see, this is the evidence we’ve been waiting for; see, the FTC says they are; let’s push through on these things.”

And, in fact, some of the recommendations already have been implemented, Osenga said.

As of Dec. 1, 2015, patent plaintiffs are subject to the same heightened pleading standards required of plaintiffs in other types of civil litigation due to changes made to the Federal Rules of Civil Procedure.

Under the prior edition of the Federal Rules of Civil Procedure, Rule 84 provided attorneys with model forms, including Form 18, a model patent complaint, which attorneys could rely on in filing suit.

Form 18 required plaintiffs to include only minimal details, such as the patent number, the name of the patent and an allegation of infringement.

It did not require a plaintiff to identify any asserted patent claim or any accused product by name.

“I think if this [report] was done right, it could’ve been really great, because there’s still a lot we don’t know about patent licensing,” Osenga said. “In that sense, it’s sort of a shame that after all these years, this is what came out of it.”

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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