The business magazine Fortune has spent many decades chronicling developments affecting economies throughout the world. On October 6th, the publication ran an article discussing the recent patent assertion entity (PAE) study released by the Federal Trade Commission (FTC). The title of the Fortune article reads, “The FTC Patent Report Has Some Harsh Words for Patent Trolls.” That would be great if it were true, but once again we see the popular press getting a patent story woefully incorrect.
Simply stated, Fortune is wrong. The FTC report did not have harsh words for patent trolls. In fact, the FTC had harsh words for those who use the term “patent troll” to vilify patent owners! Indeed, anyone who has thoroughly read the FTC’s PAE study, however, would know that Fortune’s coverage of the study was already severely off the rails before the headline was even finished.
At the risk of upsetting the predetermined narrative obviously favored by Fortune, allow us to interject some facts into this discussion.
The actual FTC report itself only mentions the word “troll” a total of five times through the text of the main study, not counting the appendices. This is remarkable given the report itself (i.e., not counting the appendices) is some 146 pages in length. The word “troll” shows up far more often in the study’s footnotes, often just in the title of the source being cited. In other words, a simple word search would have demonstrated to Fortune that the FTC was not taking a position on, let alone sending a harsh message to, patent trolls.
If anything, the FTC reserved its harsh words for those using the “patent troll” moniker rather than the so-called patent trolls themselves. Early on in Chapter One of the report, it reads: “In the Commission’s view, a label like ‘patent troll’ is unhelpful because it invites pre-judgment about the societal impact of patent assertion activity without an understand of the underlying business model that fuels such activity.” It’s right there in the first sentence of the first full paragraph on page 17 of the report. Curious how Fortune could have missed the FTC chastising those who use the term “patent troll.” Perhaps Fortune confined their coverage of the FTC report to the press release accompanying the report, which conspicuously leaves out any mention of patent trolls, or that they view the term “patent troll” as being unhelpful and prejudicial.
Seriously, if you are going to cover a report shouldn’t you at least read all of Chapter One?
The FTC goes on to cite language in the U.S. Supreme Court’s decision in Halo Electronics, Inc. v. Pulse Electronics, Inc. regarding the “outsized licensing fees” supposedly exacted by such trolls. “This definition incorporates a normative judgment that licensing fees are ‘outsized,’ which cannot be made without some understanding of the business model and its economics. The Commission’s study and this report seek to bridge that knowledge gap,” the report reads.
If anything, the FTC’s work addresses issues posed by “nuisance litigation,” or litigation that leads to licenses less than $300,000, seen by the FTC as the lower bound for early-stage litigation costs; essentially, cases where the royalty is less than the costs of trying the case. That has very little to do with trolling, if anything. In fact, the very act of taking allegations of patent infringement past the demand letter phase and into an actual lawsuit filed with a district court is a sign that the entity isn’t a troll at all.
Had Fortune been at all interested in being objective the magazine would have pointed out that the $300,000 figure arrived at by the FTC is completely arbitrary and does not in any way, shape or form do anything to inform anyone about whether a patent license is only being offered to extract nuisance value.
“The $300,000 line in the sand gets back to a point I’ve spoken on before,” explained Jaime Siegel, CEO of Cerebral Assets and Global Director of Licensing for the Open Invention Network (OIN). “Built into the system is a mismatch in valuation. Not every patent license is worth $1 million. I’m aware of patents that were valued at a $25,000 license, which was set not to be a nuisance, but rather because the alternative was a $50,000 work around, so the appropriate price was less than that amount. A patent license should be based on how much value is in the license, and it isn’t always $1 million.”
“$300,000 is a completely arbitrary number that attempts to put patent licenses into buckets and suggests that if it is $300,000 and below it must be a sham claim, and that generalization is absolutely untrue,” Siegel explained. “What makes a nuisance claim a nuisance claim is when a patent is not infringed or is almost certainly invalid; that is what makes a case a nuisance settlement. When a patent owner says we know we have a lousy patent, be we know the defendant will pay us X dollars because it costs so much to litigate, that is what makes a nuisance case.”
Of course, Fortune did not explore the merits of the FTC report, which is odd given it has long been regarded as one of the preeminent business publications. Instead, rather than focusing on the business issues and analyzing whether an arbitrary figure ipso facto means that all patent licenses below that figure are somehow per se problematic. Instead, Fortune chose to begin with and attempt to support what is clearly a factually inaccurate narrative — a fairy tale.
Over and over through the course of its article, Fortune continues to force a patent troll narrative on false pretenses. Where it discusses the FTC’s discussion of litigation PAE behavior, the article adds a parenthetical: “Terms like PAE are more polite terms for ‘patent troll.’” Of course, that too is wrong. Even the FTC press release explained that the Commission found two distinct PAE business models. One it referred to as “Portfolio PAEs,” which are strongly capitalized, purchase patents outright, seek to negotiate broad licenses that cover large patent portfolios, and resemble the licensing arms of manufacturing firms. The second it referred to as “Litigation PAEs,” which frequently rely on revenue sharing agreements to acquire patents and generally file patent infringement lawsuits before securing licenses.
Interestingly, Fortune does mention “Litigation PAEs,” but makes no mention whatsoever about “Portfolio PAEs.” Perhaps that is because the FTC report takes a neutral, if not positive, tone with respect to Portfolio PAEs, and that would make it impossible to erroneously conflate the general term PAE, which is hardly used by the FTC, with non-practicing entities (NPEs) or patent trolls.
Of course, as you probably expected in an article that obviously leaves out important facts and then seems to intentionally get other facts wrong, the Fortune article does seem to wrongly conflate PAE with non-practicing entities (NPEs), while the FTC study clearly delineates between the two. Whereas a PAE is an entity that obtains patents to license or enforce them on other parties already practicing the technology, the FTC report defines NPEs separately as “patent owners that primarily seek to develop and transfer technology.” Technology transfer is a different business model than patent assertion, and something Fortune should be well aware of given its position as a preeminent business publication. However, Fortune’s coverage of the FTC report states that the FTC’s judicial and legislative recommendations applied to NPEs, which is simply not true. Taken in a light most favorable to Fortune this is improperly reporting what the report actually said, but given the egregious and rather obvious errors in their article it seems likely more than that.
The FTC’s PAE report has clearly differentiated the terms PAE, NPE and patent troll. It would have been nice if Fortune had noticed that before unleashing a poorly reasoned piece that will only serve to confuse its readers and be inappropriately used to gin up support for more unnecessary patent reform.