FTC Report Recommends Patent Litigation Reforms

    Oct 11, 2016

    Addressing the imbalances between the cost of litigation discovery for patent assertion entity (PAE) plaintiffs and defendants was one of several goals outlined in a report released by the Federal Trade Commission (FTC) on October 6. The report – which describes PAEs as “firms that acquire patents from third parties and then try to make money by licensing or suing accused infringers” – seeks to spotlight PAEs’ business practices in an effort to address nuisance infringement litigation which, the report notes, can tax judicial resources and divert attention away from productive business behavior.

    In addition to addressing litigation discovery imbalances, the report recommends reforms that provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits. It also recommends streamlining multiple cases brought against defendants on the same infringement theories and providing sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.

    “The Federal Judicial Center notes that discovery in patent litigation ‘can be exhaustive and exhausting for a variety of reasons,’ including broad claims and defenses which require inquiry into product development and financial records, special issues that arise with willfulness and inequitable conduct claims, and ‘potentially consequential but unpredictable outcome[s]’ that can lead to extensive discovery requests and lack of compromise,” the report notes in justifying new rules and case management practices to address discovery burdens and costs for defendants. “Because PAEs do not invent, develop, or manufacture products incorporating their patented technology, they generally have less discoverable information than the party accused of infringement.”

    The study highlights two types of PAEs that use distinctly different business models. One model, known as “Portfolio PAEs,” is highly capitalized and owns and licenses many patents, but rarely litigates. The other model, known as Litigation PAEs,” frequently relies on revenue sharing agreements to acquire patents, and accounts for 96% of all patent infringement lawsuits, although they only generated about 20% of the revenues of all PAEs.

    “Litigation PAEs tended to be thinly capitalized,” the report notes. “Many had between one and three individual owners, often with no other employees and no offices outside of their owners’ homes. In fact, several Litigation PAEs were simply individual entrepreneurs who relied entirely on outside attorneys and professionals to maintain records regarding their assertion activity. Many firms did not have sophisticated recordkeeping.”

    The FTC’s recommendations track similar reforms in legislation that was reported by House and Senate Committees in 2015, but failed to advance in either chamber. The bills, S. 1137 and H.R. 9, seek to alter the economic imbalances of patent infringement litigation and direct the Judicial Conference to implement case management changes impacting the discovery process, including defining and creating rules for when additional document discovery should be made available and who should pay for it. 

    The FTC report does not address other litigation reforms that have held up Congressional action. Those include requiring the loser to pay the winner's attorneys’ fees and allowing the government to file lawsuits against senders of pre-litigation “demand letters” targeting small retailers for using patented technology.

    The Washington Policy Brief is an online advisory that contains brief summaries of recent legislative and regulatory issues that may affect the records and information management profession. Further information about the issue is accessed by clicking on the link provided at the end of each summary.


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