Federal Trade Commission to Investigate Patent Trolls

Patent trolls, also called “non-practicing entities” or “patent assertion entities”, are responsible for a large upswing in patent litigation.

Patent trolls are being investigated by the FTC...and changes in patent law may be on the horizon.

Patent trolls make money by buying up patents and then aggressively suing possible infringers.

This method is effective: the high cost in time and money for defending an infringement case makes it cheaper to settle than to fight, even if the claim has no merit.

While patent trolls are legal, their actions and their impact on intellectual property law has caught the attention of the Federal Trade Commission and change in patent law may be on the horizon.

The Cost of Patent Trolls

Intellectual property industries, from Hollywood to software development to pharmaceuticals, constitute about 35% of the national GDP. Litigation in this area generally resolves important conflicts over who owns an idea and who has the right to make the product. These lawsuits promote economic growth and innovation by protecting the right of patent owners to create and sell their product. However, patent trolls rarely produce their patented items. Instead they sit on the patent, waiting for possible defendants to infringe. And patent troll cases are on the rise: since 2007 cases brought by patent trolls have tripled, resulting in over 60% of intellectual property cases being brought by patent trolls. Critics of patent assertion entities claim these cases are overloading the system and damaging the economy by rewarding sitting on patents and being overly litigious.

Patent trolls are subverting the patent system:  Instead of encouraging inventors to innovate by offering them a temporary monopoly patents are being used to penalize businesses, clogging the courts with frivolous claims brought by entities who are not actually using their patents.

The Federal Trade Commission Investigation

The Federal Trade Commission Study is a fact-finding mission but could lead to criminal sanctions in the future. Under section 6(b) of the FTC’s charter the FTC can investigate industry matters to determine the cost and benefits of the current makeup of the patent system. The FTC has fairly broad powers under 6(b) including the ability to issue subpoenas and make reports to both Congress and the public. Similar studies have yielded positive results in the past, such as the 2002 inquiry into generic drugs that resulted in the amendment of the Hatch-Waxman Act.

The investigation will target the transparency of patent ownership, an area that many critics of patent trolls contend is the heart of the problem. The investigation may well result in changed rules about providing basic information about who owns the patent.

The FTC is also prepared to use its power under the provision of the FTC Act, which prohibits unfair or deceptive acts. If this power is used against patent trolls it will prevent them from making false or illegal licensing demands, a common practice among non-practicing entities.

The FTC investigation comes on the heels of the President issuing five executive actions and seven legislative recommendations aimed at protecting innovators and improving patent quality.

Given the severity of the problem patent trolls present it seems likely that the investigation will result in significant changes in how patent litigation is handled.