10.10.16

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Towards the End of Patent Trolls in the United States

Posted in America, Patents at 7:03 am by Dr. Roy Schestowitz

Federal Trade Commission study

Summary: The Federal Trade Commission’s report about patent assertion entities (euphemism for a particular type of patent trolls) is bad news for patent trolls and potentially the catalyst of upcoming patent reform

Having published "Towards the End of Patent Trolls-Friendly Courts in the United States" and "Towards the End of Software Patents in the United States", we finally turn our attention to the FTC’s new study, which comes at a good time because of those former two installments (about courts in Texas and software patents, not to mention Apple’s stupid software patents that it uses to demand hundreds of millions of dollars — a subject of plenty of media coverage at the end of last week).

The USPTO is partly to blame here, for reasons that the Government Accountability Office (GAO) explained a few months back. Patent trolls use software patents quite a lot; without these patents, patent trolls would almost cease to exist. We wrote about evidence of that in the distant past.

“Patent trolls use software patents quite a lot; without these patents, patent trolls would almost cease to exist.”So, what has the FTC just shown us? In the words of CCIA, which took money from Microsoft after it had gone after it: “Ed Black said trolls are exploiting #patent system for a quick buck so we appreciate the #FTC ‘s patent troll study pic.twitter.com/AKdQFRBo19″ (there’s a photo in there).

“The FTC study on PAEs is finally out. A long report with a lot of useful data. It will take a while to parse it all,” wrote Professor Risch, who at times sounded like he defended software patents (several times in the past).

“FTC patent assertion entity study recommends fixing discovery asymmetries,” wrote another person, “mandating more disclosure by PAEs; streamlining litigation…”

“Long awaited @FTC study on patent assertion calls for strong patent reform,” wrote one character upon a quick glance.

More press coverage regarding the FTC’s study (that would likely transform the whole of the US patent system through upcoming reform) was soon generated, starting with blogs like this one:

FTC Releases Big Report On Patent Trolls, Says The Patent System Needs To Change

[...]

For quite some time now the FTC has been making lots of noises about the problems of the patent system and patent trolls in particular. While the US Patent Office itself has done little to address the problem, the FTC has recognized the harm patent trolling is doing to innovation and consumers. More than five years ago, the FTC released a big report on patent trolling and the problems it causes — suggesting that the Patent Office should start getting rid of vague patents with “indefinite” claims. That has happened a little bit, but much more because of the Supreme Court forcing the issue, rather than the USPTO listening to the FTC.

However, since then, it’s appeared that the FTC has only grown more concerned. Basically every year we report that the FTC is investigating patent trolls in some form or another. In 2012 (a year after that first report), the FTC began exploring patent trolling more thoroughly. In 2013, it announced an official investigation that would make use of subpoenas to find out how patent trolls were actually operating. Later that year it was revealed that it would subpoena 25 patent trolling operations. Since then, though, it’s been mostly crickets. There was one famous troll, MPHJ, who sued the FTC in a case that was dismissed.

And now, finally, after all these years, the FTC has released its big report. It appears that 22 patent trolling operations responded to the subpoenas, though many had “affiliates and other related entities” allowing the FTC to study many more patent trolling operations overall. The study lumps patent trolls (they prefer the euphemistic “Patent Assertion Entities” or PAEs) into two categories: litigation trolls and portfolio trolls. In short, litigation trolls are the smaller guys with just a small number of patents, who would threaten and sue companies (and quickly reach settlements) over those few patents. It’s more of a “mom & pop” shakedown kind of business. Portfolio trolls are the bigger, well funded operations, that have a massive portfolio of patents and play a more comprehensive shakedown game, going to lots of big companies and basically saying “you infringe on some of our patents, so give us a bunch of money to not figure out which ones.” Think: Intellectual Ventures or Acacia.

The differences here matter, because the businesses are quite different. Lots of the actual lawsuits come from the litigation trolls as a sort of negotiation tactic. The portfolio trolls don’t actually have to go to court that often — they have “sales people” who are a bit more effective. But the amount of dead-weight loss to the economy from the portfolio trolls is much larger. When big companies agree to a portfolio troll shakedown it’s often for a tremendous amount of money. The FTC study found 80% of the revenue went to portfolios, and only 20% to litigation trolls — even though litigation trolls filed 96% of the lawsuits and 91% of the reported licenses.

One interesting — and potentially surprising — finding of the study was that the FTC did not see evidence of much pure demand letter shakedown. That is, it’s been said that many of the smaller trolls just send letters, but never expect to go to court, since many may just settle based on the demand letter. But the FTC didn’t find much evidence to support that — saying that most of the revenue for litigation trolls came from actually going to court (and then rapidly settling). In short, it appears that the leverage of a federal lawsuit (in eastern Texas, probably) is much stronger than just a threat of a lawsuit. But a key takeaway from this is that attempts to reform demand letters (which has been regularly proposed — such as requiring them to outline what the infringement is) won’t actually help much.

Almost everyone (except trolls) would agree that the patent system in the US needs fixing. See this new article (“Patent reforms must also include our trade courts”) and a National Retail Federation press release (“FTC Study Should Provide Momentum to Pass Patent Reform Legislation”), not to mention a growing bulk of media coverage, such as [1, 2, 3, 4, 5]. More media coverage of this kind will continue this week, with patent trolls getting negative publicity after people actually read those hundreds of pages and summarise what’s in them. See “Public Knowledge Applauds FTC’s Call for Strong Patent Litigation Reform” and the excellent early coverage from Jeff Roberts, who said that the “FTC has harsh words for patent trolls – what tech folks have been saying for years http://fortune.com/2016/10/06/ftc-patent-report/ …”

“IAM is nowadays doing to journalism what the US presidential candidates already do to journalism. So-called ‘news’ sites pick a side and hardly pretend to be unbiased observers.”“Both Mayer and the FTC,” I told him, “say what we’ve been saying for years, e.g. code is like prose and protected by copyright” (Roberts liked that). The patent mess in the United States is being tackled little by little; almost exactly 5 years ago Obama signed one patent reform bill and soon there will be another.

IAM’s Mr. Lloyd, quite proudly a proponent of software patents and all sorts of other nuisance, decided to go against the flow because IAM is not really a news site. The voice of the patent trolls, IAM ‘magazine’ (partly funded by trolls), attacks the FTC for saying the truth about them. It’s quite laughable that all they could say (in the headline) about the news is that it “is probably already out of date” (got to be seen to be believed).

IAM is nowadays doing to journalism what the US presidential candidates already do to journalism. So-called ‘news’ sites pick a side and hardly pretend to be unbiased observers. Here is Watchtroll; watch how his site spins the study against troll as pro-trolls — because hey! — it’s not journalism anyway, just lobbying. Talk about lying to or misleading readers.

What did MIP do? Well, it resorted to shooting the messenger or its intelligence, as usual. To quote a portion from this article:

The Federal Trade Commission’s long-awaited patent assertion entity report differentiates between portfolio PAEs and litigation PAEs. The Innovation Alliance has called it an “unscientific case study”

The Innovation Alliance is a think tank, much like the Scientific Alliance and Copyright Alliance. It calls the FTC’s study an “unscientific case study” because its paymasters are unhappy with the findings.

Here is the original page about this study:

A new Federal Trade Commission report spotlights the business practices of patent assertion entities (PAEs), firms that acquire patents from third parties and then try to make money by licensing or suing accused infringers. The report includes several recommendations for patent litigation reforms.

“This report is a big step forward in enhancing our understanding of PAEs and provides an empirical foundation for ongoing policy discussions,” said FTC Chairwoman Edith Ramirez. “The recommendations we are proposing are designed to balance the needs of patent holders with the goal of reducing nuisance litigation.”

Patently-O did a fairly decent job covering it (it’s the first such coverage we found):

The report offers important insight into PAE business models – primarily identifying two categories: Litigation PAEs and Portfolio PAEs. The FTC found that Litigation PAE licensies are “typically … less than the lower bounds of early stage litigation costs” and thus seen by the FTC as consistent with “nuisance litigation.” The report suggests a variety of litigation reforms to help alleviate potential abusive litigation tactics by patent owners.

The 269 page report will be a catalyst for patent reform measures and thus should be considered carefully.

I have not personally read this report, but rest assured the patent microcosm and its front groups will attack both the messenger and the message by all means possible. They’ll do anything to derail patent reform that puts an end to (or significantly curbs) patent trolls.

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