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Hey Patent Trolls, The FTC Has A Few Questions For You

By now we’ve all heard about the enormous damage that patent trolls inflict on U.S. companies, large and small.  Business owners are telling their stories, sharing information about the demand letters they receive and the vexatious lawsuits they are forced to defend. Still, most of the shake downs and payoffs are done in private, cloaked in secrecy and protected by so called “confidentiality agreements.” Now the Federal Trade Commission (FTC) wants to get a better understanding of patent trolls by going directly to the source – the trolls themselves, and they are going to use their statutory power to get it.

A recent press release announced that the FTC voted unanimously (4 to 0) “to seek public comments on a proposal to gather information from approximately 25 companies that are in the business of buying and asserting patents, known as Patent Assertion Entities (“PAEs”). The FTC intends to use this information to examine how PAEs do business and develop a better understanding of how they impact innovation and competition.”

The investigation starts with a call for public comments, and Rackspace encourages everyone to submit their comments as to why the FTC should gather information from these 25 PAEs. Specifically, here is what the FTC is looking for from the public:

  1. Whether the proposed collection of information is necessary for the proper performance of the functions of the FTC, including whether the information will have practical utility.
  2. The accuracy of the FTC’s estimate of the burden of the proposed collection of information.
  3. Ways to enhance the quality, utility, and clarity of the information to be collected.
  4. Ways to minimize the burden of collecting information.

The questions the FTC has for patent trolls include:

  • How do PAEs organize their corporate legal structure, including parent and subsidiary entities?
  • What types of patents do PAEs hold, and how do they organize their holdings?
  • How do PAEs acquire patents, and how do they compensate prior patent owners?
  • How do PAEs engage in assertion activity (i.e. demand, litigation, and licensing behavior)?
  • What does assertion activity cost PAEs?
  • What do PAEs earn through assertion activity?

The FTC also proposed sending requests to roughly 15 other entities asserting patents in the wireless communications sector, such as manufacturing firms and other non-practicing entities and organizations engaged in licensing.

“Patents are key to innovation and competition, so it’s important for us to get a better understanding of how PAEs operate,” said FTC Chairwoman Edith Ramirez in a statement. “We want to use our 6(b) authority to expand the empirical picture on the costs and benefits of PAE activity. What we learn will support informed policy decisions.”

This is a bold and necessary move by the FTC and will have a major impact on how we think about patent litigation. The information can be used to fuel sorely needed patent law reform and protect businesses from the financial and emotional drain that patent lawsuits create. It will be interesting to see how patent trolls respond to this latest probe – if they’ll be honest in their responses and reveal the truth about their businesses.

About the Author

This is a post written and contributed by Alan Schoenbaum.

Alan Schoenbaum is Special Counsel for Rackspace.

Prior to joining Rackspace in 2005, he was a partner at Akin Gump Strauss Hauer & Feld LLP in San Antonio, Texas. Alan has more than 25 years of experience in corporate and securities law and mergers and acquisitions. Throughout his legal career he has represented public and private growth companies, venture capital funds and their portfolio companies. Alan received his B.A. in English and his law degree from the University of Texas at Austin.


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