Are the Regulators Coming after the Patent Trolls?

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FTC and DOJ discuss antitrust implications of patent acquisition entities

The Federal Trade Commission and the Department of Justice recently held a workshop to discuss the effects of patent assertion entities (PAEs) on innovation and competition. A PAE, more commonly, and more colorfully, known as a patent troll, is an entity that buys patent rights not to practice the patented invention, but to extract licensing agreements by threatening or bringing costly infringement litigation. PAE activity has steadily increased over the recent years to the point where, this year, PAEs accounted for approximately 60% of all infringement actions filed. Moreover, data suggests that infringement suits brought by PAEs tend to be disproportionately meritless: PAEs lost 92% of the time when cases were decided on the merits.

Although the workshop included both supporters and detractors of PAEs, it is clear the DOJ and FTC are concerned that PAEs may limit competition and innovation in the marketplace. The workshop included a panel discussion on whether the antitrust laws offered any relief from the potentially anticompetitive effects of PAE activity.

The panel discussed several hypothetical scenarios, but the most likely areas for antitrust scrutiny seemed to be 1) when PAEs acquire a patent portfolio sufficient to exercise some market power, and 2) when a PAE coordinates its enforcement activity with the original patent owner or owners.

First, if a PAE obtains some market power by acquiring a large patent portfolio, the PAE could run afoul of Section 7 of the Clayton Act or Section 2 of the Sherman Act. The panel noted PAEs with large patent portfolios can coerce settlements that protect weak patents, misuse standard essential patents, or circumvent licensing obligations of the original patent owner, all of which could abuse the PAE’s market power.  Panel participants agreed, however, that asserting a Section7 or a Section 2 action against a PAE raises problems in defining the relevant market because PAEs do not themselves participate in any traditional product market.

Second, a PAE could violate Section 1 of the Sherman Act if it coordinated activities with one or more of the original patent owners. Companies sometimes hesitate to file infringement actions against their competitors because the competitors may file counterclaims for infringement of their own patents. But PAEs, which do not have any operations that could infringe any patents, could target the original owners’ competitors in the market, thereby raising their costs and impeding their ability to compete with the original owners. The participants discussed some real-life examples where coordinated activity attracted regulatory attention in other countries. But the panelists agreed that a Section 1 claim would be subject to market definition problems, and the PAE’s act of filing suit may be protected under the Noerr Pennington doctrine as if it had been brought by the original patent owners.

The recent discussion showed the DOJ and FTC have concerns about the effect of PAEs on competition and innovation in the market, but are frustrated that PAE activities do not fit neatly under the traditional antitrust enforcement mechanisms. The agencies are continuing to monitor PAE activity, and are accepting public comments on issues raised by PAEs until March 10, 2013.