FTC to shine a light on patent troll practices

So when Congress established the FTC it gave it the unique power under Section 6(b) of the Act to conduct studies and issue reports to advise Congress and businesses.  Last Friday the FTC announced that it would use that power to conduct a study on patent trolls. There are probably few areas that need a strong dose of transparency as much as does the conduct of patent trolls – often involving numerous shell companies, hidden interests, and dubious business practices.

Patent trolls play on the lack of information, asymmetries in the litigation system, and the significant cost of litigation.
 
But what exactly is a 6(b) study?
 

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In 1914 the Congress established the FTC and gave it far broader powers than the Justice Department to police, educate, and regulate.  Unlike the Justice Department, which could only conduct investigations leading to enforcement actions, Congress gave the FTC much broader powers not only to bring enforcement actions, but also to engage in regulatory reform, serve as an investigatory arm to Congress and provide advisory opinions, and continuously educate the legislature, the public, and the market about the impact of anticompetitive practices.
 
Perhaps the most important authority of the FTC is the Commission’s unique power to use subpoenas to secure information and documents to conduct broad studies of the market. Congress’ goal in granting this power, established in Section 6(b) of the FTC Act, was to allow the Commission to conduct in-depth industry studies and provide reports to the public and Congress.
 
The FTC’s 6(b) power has had substantial impact and enduring value.  It led to major regulatory reforms such as the Packers and Stockyards Act (1921), the Securities Act of 1933, the Stock Exchange Act of 1934 and the Public Utility Holding Act of 1935, as well a variety of more recent studies and enforcement actions including the 2002 study of generic drug competition that led to the reform of the Hatch-Waxman Act.
 
Some people might suggest a study is unnecessary since there is considerable scholarship documenting the significant costs of patent trolls.  For example, one study found that patent trolls cost the economy $29 billion in legal fees in 2011, and another study by the White House found that patent trolls made up 62 percent of all patent litigation in 2012.

But these studies provide only a limited view since they are based solely on public information. The empirical data currently available is limited to public information and surveys of defendants to patent troll suits. Such surveys are often incomplete because many defendants and licensees of patent trolls are hesitant to participate for fear of retaliation. The FTC has the advantage of subpoenaing private information to more clearly identify both the problems and potential benefits of patent troll activities. This information will be vital to crafting carefully targeted reforms.
 
Others may suggest that Congress should delay any action until the FTC study is completed.   They could not be more wrong.  The problems of patent trolls extract a tremendous cost on the economy, employment and innovation.  There are numerous actions Congress can take to reform the troll problem that should not be delayed by the FTC study.
 
Time is of the essence.  The FTC has not always used its 6(b) powers promptly – indeed a recent FTC study of authorized generic drugs took over 5 years.   Congress and the public cannot wait for a lengthy report. In light of this, the FTC should design the study to be an iterative process where information can be consistently disseminated to the public as it becomes available through briefings with Congressional staff, testimony and speeches. The FTC should consider short interim reports.

The FTC should not hesitate to use all of the tools at its disposal in crafting an effective 6(b) study to shine a light on the patent troll industry, and put a stop to the billion-dollar toll it levies on our economy each year.

Balto is an antitrust attorney and former policy director at the Federal Trade Commission.