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FTC plans to examine patent troll businesses

  • Article by: EDWARD WYATT
  • New York Times
  • September 27, 2013 - 8:12 PM

– Stepping into a volatile debate in the technology sector, the Federal Trade Commission said Friday that it would use its subpoena power to begin an investigation of so-called patent trolls, businesses whose primary purpose is to stockpile patents and use them to sue other companies.

The action, which the commission’s chairwoman recommended in June, is the first step in what is likely to be a lengthy and broad investigation. It could eventually result in antitrust enforcement against some of the companies and could provide momentum for efforts underway in Congress to tighten restrictions on such lawsuits.

The effort is intended to document the costs and benefits of a rising tide of patent litigation, said Edith Ramirez, the commission’s chairwoman. In announcing the investigation, the FTC said it would seek information from about 25 companies that buy and sell patents, and 15 other companies that manufacture devices and write software and applications.

“Patents are key to innovation and competition, so it’s important for us to get a better understanding” of how the companies, also known as patent assertion entities, operate, Ramirez said Friday.

The subpoenas will solicit information about the financial operations of the firms, and they will seek to uncover how much the companies earn from patent lawsuits and licensing, and how the profits are distributed to investors.

“This will give regulators the ability to penetrate the shroud of secrecy that patent trolls operate behind,” said Daniel Nazer, a lawyer at the Electronic Frontier Foundation, a nonprofit organization that focuses on free speech and technology. “Patent trolls have complex structures, with thousands of shell companies. It’s impossible to know who is pulling the strings and getting the dollars.”

But other patent experts say they fear that the effort could be little more than a fishing expedition, looking for problems that the investigators have already decided exist.

“At the end of the day, these are licensing companies that are practicing their property rights, much as a landlord is practicing his property rights by leasing a house,” said Adam Mossoff, a law professor at George Mason University.

Even the term “patent assertion” implies that the purpose of the company is to file lawsuits, Mossoff said, adding that he preferred to call them what they are: patent licensing companies.

Andrew Gavil, director of the office for policy planning at the FTC, said the agency had not predetermined anything about companies that license patents.

“This is a statistical study,” he said. “We are not trying to lay a foundation for an enforcement action.”

He said the commission hoped to begin requesting information from companies in the late winter or early spring.

The decision to move forward with the investigation was unanimously approved, 4-0, by the commission.

If the commission finds evidence of companies’ filing frivolous lawsuits accompanied by demands for payments to license questionable patents, it can begin enforcement proceedings using its anti-competition and antitrust authority.

The types of companies targeted by the FTC accounted for more than 60 percent of the 4,000 patent lawsuits filed in 2012, up from 29 percent two years earlier.

This year, President Obama has called for the federal government to ascertain how such companies are operating. He directed executive agencies to take steps to “protect innovators from frivolous litigation.”

U.S. technology companies also have been worried that their patent problems will spread to Europe with the implementation of a new unified patent court system there.

The companies that are generally pointed to as the largest of the litigators say that while there is abuse of patents in some sectors, they themselves are not involved in frivolous litigation.

Patent assertion entities span a spectrum. On one end are companies that are essentially legal shells that send letters to businesses claiming infringement and demanding payments; in 2011, for example, such a company targeted coffee shops for setting up Wi-Fi networks for customers.

At the other end are companies like Mosaid Technologies and Intellectual Ventures, which buy patents from technology companies, assembling large portfolios that they use to generate licensing payments that run to the millions of dollars.

Intellectual Ventures, frequently cited as one of the largest patent assertion entities, said it welcomed the inquiry.

“By gathering data from 25 patent assertion entities and 15 operating companies, we believe the FTC analysis would help policymakers make decisions on patent reform based on business behaviors not business models,” said Russ Merbeth, its chief policy counsel.

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