The FTC should release an interim report to help patent reform

Patent reform is appropriately a critical priority for the 114th Congress.  Reps. Bob Goodlatte (R-Va.) and Darrell Issa’s (R-Calif.) proposed legislation provides an essential effort to rein in patent trolls that are an increasing tax on innovation and competition.  The Federal Trade Commission is using its unique investigatory powers to study patent troll business practices.  This study, called a “6(b) study,” will be the first to look at the underlying documents and practices of trolls and will greatly enhance the ongoing debate of how best to reform the system. 

{mosads}Unfortunately FTC studies can take years (the average time for an FTC study is over 3 years) and opponents of reform might suggest the debate be put on hold until the report is issued.  They could not be more wrong about delay.  Rather, the FTC should act now and issue an interim report based on the data gathered to date. The FTC has designed its study so that some of its data can be analyzed and reported immediately. Below is a list of examples of data that should be part of an Interim FTC report.

Number of entities:  Patent trolls thrive through obscurity.  They often use a large number of shell corporations to make their demands.  This practice makes it difficult to know who actually owns the patents and prevent alleged infringers from getting helpful information about who is threatening to sue them.  Obscurity hampers defending patents.  The FTC should release information regarding the average number of entities each patent troll controls to determine whether this practice is actually occurring and the extent of its practice.  If it is, then accused infringers need to be informed that the helpful information they are looking for could be under a different company’s name.

Assertion and Litigation data:  Some suggest that patent trolls are all bark and no bite.  Some patent trolls have been reported as sending out thousands of demand letters and yet never pursuing an alleged infringer in court.  The FTC should release data on how many demands are sent out by patent trolls versus how many complaints are actually filed.  This data would be helpful to determine how much risk someone receiving a demand letter actually incurs.  The data would also give hints as to how strong patent trolls internally believe their infringement claims to be.  If the patent trolls refuse to risk litigating their claims, then they must not believe their patents are strong.

Number of patents reviewed:  Trolls claim the problem is minimal because defendants can use post-grant review by the Patent and Trademark Office.  It would be helpful if the FTC released data on how many patents owned by patent trolls are actually reviewed in this process and whether the patents survive review.  This data would be a clue as to how useful the patent review process currently is in combating the patent troll problem.

Asserted patents by sector:  It’s useful for businesses to know how many patents are “active” in an industry in order to assess their risks.  The FTC has asked patent trolls to list their patents by sector.  It should be easy to generate basic data on how many patents are asserted using these sectors as a guide.  This information would put sector practitioners on notice as to how likely they are to be sued by an active patent.

Source of patents:  The FTC is also collecting data on where patent trolls obtain their patents: from an inventor, employer of an inventor, another troll, and whether it was obtained in bankruptcy proceedings.  Trolls claim they serve a useful purpose by helping innovators monetize their invention.  The FTC can release data on whether patents come from inventors.  Whether or not the patents come from bankruptcy proceedings is also useful as a clue as to whether these patents were able to be successfully commercialized or whether their only use is in holding up practicing companies.

Cost vs. earnings data:  Another important clue as to the usefulness of patent trolls is their acquisition costs versus the income they generate on patents.  If acquisition costs as compared to income generated are reasonably in line with the amount of risk a patent troll is incurring then it is evidence that the patent troll’s business practice is reasonable and that money is flowing to inventors and supporting innovation.  If the acquisition costs are dwarfed by the income generated than it is evidence that these patents are only valuable to trolls – not practitioners – and that money is not flowing to inventors and supporting innovation.

Research and Development Investments:  Trolls claim that their conduct increases spending on R&D.  If patent trolls are serious about commercializing inventions then we would expect to see some investment in R&D.  This is especially true since the inventors likely could not commercialize the patents themselves and thus needed to sell them to a patent troll.  If patent trolls are not investing in R&D, then that provides evidence that their intentions are to lie in wait for someone else to commercialize a product that might implicate one of their owned patents.  This practice is unhelpful for innovation and the economy as a whole.

Ask Main Street American businesses and they will tell you loud and clear the need for reform is critical.  The FTC should weigh in as soon as possible with data to help that debate progress.

Balto is a former policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and antitrust lawyer at the U.S. Department of Justice. He has been a senior fellow at the Center for American Progress and has worked with the International Center on Law and Economics, both of which receive funding from many organizations including Google. Balto has also published research and authored scholarship for Google on technology policy topics.

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