The FTC has released its long-awaited Patent Assertion Entity (PAE) Activity Report. It is detailed, comprehensive and quite long – almost 270 pages! I apologize for the length of this blog posting, but a report five years in the making deserves more than passing attention.
By far the most important finding of the Report – what the FTC describes as its first “Key Finding” – is that not all PAEs are created equal. Instead, the FTC found that there are dramatic and significant differences between “Portfolio PAEs” such as IV, which emphasize licensing and high-value patents, and other types of litigation-oriented PAEs, which often draw criticism and negative marketplace scrutiny.
The Report is disappointing in many respects – for example, it offers legislative recommendations not supported by the evidence in the report, and it misses a key opportunity to analyze the fundamental issue of how to value the mission and impact of PAEs. But overall the in-depth analysis of the different models of PAE should provide useful insights in the ongoing discussions of patent policy.
Crucially, the Report highlights a significant flaw in virtually all prior academic studies in this field. It observes, accurately, that most prior studies of PAE activity “have focused on publicly observable litigation behavior and relied on publicly available litigation data.” And it notes that relying on only public data conceals key information that is required for a “deeper understanding of PAE business models,” such as “their confidential... licensing terms and data.”  As is noted in the study, for PAEs such as IV, which reach negotiated licensing agreements far more often than they litigate, this information is critical to any well-founded analysis of the market impacts of its business model. This Report attempts to gather that essential information and as a result is able to make a valuable contribution to the ongoing policy debate in this area.
As noted, the Report draws an important distinction, supported by extensive analysis and evidence, between two very different modes of PAEs. On the one hand, the Report recognizes what it calls “Portfolio PAEs” – firms like IV, which focus their efforts on investment, IP innovation and development, and wide-scale licensing of high-value patents to further develop significant technologies. (Indeed, the Report at various points notes the similarities between the strategies and business methods of Portfolio PAEs and those of other Non-Practicing Entities (NPEs) and of manufacturing firms). In contrast, while the Report goes out of its way to eschew the term “patent troll,” it also draws a clear distinction between the methods and approach of high-value Portfolio PAEs with the strategies and approach of what the Report calls “Litigation PAEs” – PAEs that, according the findings of the Report, focus their efforts on low-value patent settlements that are generally consistent with nuisance settlements and appear driven by the interest of defendants in avoiding litigation costs. The collection of hard data and statistical evidence and the FTC analysis of the clear differences between these two very different business models is an important and compelling aspect of the Report, and it alone makes the Report worth reading.
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