WASHINGTON — Retailers said a study released by the Federal Trade Commission should spur Congress to act on patent reform legislation.
Abusive patent lawsuits have been on the rise and Main Street companies such as J.C. Penney Co. Inc. have testified before Congress outlining the scope of the problem and pressing lawmakers to consider legislation to curb rampant litigation costing companies millions of dollars.
Retailers have been significantly impacted by abusive lawsuits filed by companies known as “patent trolls,” which by some accounts have cost the U.S. economy billions of dollars.
The “trolls” are also referred to as NPEs, or non-practicing entities, and are defined by the National Retail Federation as firms that do not make products but buy obscure patents and then threaten to sue or actually sue companies that use the technology unless they pay a licensing fee.
The FTC’s “Patent Assertion Entity Activity” study found that 17 percent of companies that receive demands from “patent trolls” are retailers. In addition, retailers make up 10 percent of all defendants in patent litigation and 13 percent of companies paying royalties to patent trolls.
Edith Ramirez, chairwoman of the FTC, said the report “spotlights” the business practices of what the agency has dubbed “patent assertion entities,” firms that acquire patents from third parties and try to make money by licensing or suing accused infringers.
“This report is a big step forward in enhancing our understanding of PAEs and provides an empirical foundation for ongoing policy discussions,” Ramirez said. “The recommendations we are proposing are designed to balance the needs of patent holders with the goal of reducing nuisance litigation.”
The FTC’s study, the culmination of an investigation that began in 2013, could provide valuable ammunition for the NRF and other groups lobbying Congress for patent reform legislation.
“This report reveals data supporting the facts we have been presenting to members of Congress for many years — that retailers are being victimized by patent trolls’ abusive practices, and that this abuse is diverting vital resources that retailers could otherwise use to invest and grow their businesses, further innovation and create jobs,” said Beth Provenzano, vice president for government relations and political affairs at the NRF. “Congress should use the momentum from this study to pass legislation to reform patent laws as soon as they return from the October recess.”
She added that the “common-sense suggestions” outlined by the FTC would “level the playing field for retailers who are currently battling patent trolls, and bring balance to the patent litigation system that is vital for the retail industry.”
The FTC’s study, covering a period from 2009 to 2014, found that two types of “patent assertion entities” use different business models. One type is strongly capitalized and purchases patents outright. Those companies negotiated broad licenses, covering large patent portfolios, often worth more than $1 million.
A second group of companies, which were more common, relied on revenue-sharing agreements to acquire patents and often field infringement lawsuits before securing licenses, which generally covered a small number of less valuable patents, the FTC said.
The study found that the royalties typically yielded by licenses were less than the lower bounds of early stage litigation costs.
“This data is consistent with nuisance litigation, in which defendant companies decide to settle based on the cost of litigation rather than the likelihood of their infringement,” the FTC said. “The FTC recognizes that infringement litigation plays an important role in protecting patent rights, and that a robust judicial system promotes respect for the patent laws. Nuisance infringement litigation, however, can tax judicial resources and divert attention away from productive business behavior.”
The FTC’s proposed reforms in the system, including addressing “imbalances” between the cost of litigation discovery for plaintiffs and defendants, provide the courts and defendants with more information about the patent company plaintiffs filing infringement suits, streamlining multiple cases brought against defendants and providing sufficient notices of “infringement theories” as courts develop more heightened pleading requirements for patent cases.