The Federal Trade Commission (FTC) is finally going to take on patent trolls (it calls them Patent Assertion Entities), using its subpoena powers to force them to disclose information on how their companies are organized, how they acquire patents, and what they gain from patent assertion, reports Dennis Crouch for Patently O.


How do patent trolls work?

Patent trolls make money by accusing companies of violating their patents and suing for exorbitant amounts, and then settling for a much smaller amount. The idea is that as long as the settlement is less than the expected cost of going to trial, most companies will pay the smaller amount, even if the allegations are absurd. There have been many examples where patent trolls sued regarding patents they did not actually own, or when the merits of the case have gotten it thrown out of court without a trial.

Unfortunately, judges often don’t have the necessary expertise to determine whether a patent assertion is legitimate or whether the suit is abusive. Even large companies, including pretty much every smartphone manufacturer, uses intellectual property as a legal club to strike its rivals, so the dividing line between patent trolls, hard corporate tactics, and legitimate IP claims can be hard to define.

It’s also difficult because weak IP laws don’t give people a good reason to innovate (companies should be able to profit from their ideas), but abusive tactics sap money from small companies that promise new innovation in the future.

FTC finding facts

While not everyone agrees on what should be done, it’s clear that the issue is sufficiently complex and important enough that the FTC should be directly involved. For now, it seems they are going on a fact-finding mission to determine the extent and nature of patent assertion, but hopefully this is the first step towards meaningful patent reform. The FTC announced that it will aim to answer the following questions:

  • 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?