Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Wright Advocates Applying Standard Antitrust Framework to Patent Assertion Entity Conduct, (Apr 22, 2013)

By Tobias J. Gillett, J.D., LL.M.

FTC Commissioner Joshua D. Wright has delivered a speech before the Dechert Client Annual Antitrust Spring Seminar in April 17 in Philadelphia opposing the application of a higher standard of antitrust scrutiny to the activities of patent assertion entities (PAEs).

Wright began his speech by reviewing some of the recent history regarding PAEs, which he defined as "firms whose business model primarily focuses on purchasing and asserting patents." He referred to the FTC’s 2011 report in which it identified problems with the patent system, and observed that PAEs "likely were having a deleterious effect on innovation and competition." He noted that Congress and the Department of Justice had also taken an interest in PAEs’ activities.

He moved on to discuss some of the patent litigation economics behind the present concern with PAEs. He observed that critics of PAEs argued that, since PAEs do not manufacture or sell products, they do not risk countersuits for patent infringement or disruptions to other businesses or customer relations, and may actually benefit from a reputation as aggressive litigants. They can also reduce legal fees through contingency arrangements, "capture economies of scale through repeat assertion of the same or similar patents," and lower discovery costs through generating less documents in the course of doing business. He noted that some evidence suggested these facts facilitated PAEs’ ability to engage in patent litigation, leading to rapid growth in the number of lawsuits filed by PAEs.

Wright then proceeded to examine two competing theories regarding PAEs: (1) that they "are efficiency-generating specialist patent owners who facilitate licensing and innovation, and (2) that they "are rent-seeking ‘patent trolls’ taxing innovation by imposing costs on manufacturers and other firms." Under the "efficiency" theory, PAEs generate liquidity for patent owners from disposing of patents they could not maintain, permitting them to focus on invention and manufacture, and allow manufacturers to more easily determine the rights they must procure."

Under the "patent troll" theory, Wright continued, the costs of defending against PAE lawsuits diverts resources from the targets’ R & D efforts, frequently under conditions in which the targets face asymmetric costs, such those from IP counterclaims, business disruptions, and reputational harms. Moreover, PAEs can increase their bargaining power through acquiring more patents to assert against targets, "potentially resulting in royalty rates above the underlying value of the patents." Further, potential targets may be forced to acquire otherwise unnecessary IP assets to prevent them from falling into the hands of PAEs.

However, Wright observed that business conduct that lowers costs in one part of the economic system does not necessarily give rise to antitrust concerns merely because it increases costs to other firms. He noted that antitrust laws protect competition and not competitors, and requires evidence of harm to consumers, providing "protection against misusing the antitrust laws to thwart innovation or to tilt the playing field in favor of certain firms or business models. "

Therefore, Wright contended that there was no need to deviate from the standard antitrust framework when addressing the activities of PAEs. He noted that there was "widespread agreement" that a PAE’s acquisition of patents from a practicing entity with the intent to more aggressively monetize them would not violate the antitrust laws, and that a well-functioning market could generate firms specializing in the efficient enforcement of patent rights.

Wright contended that limited knowledge of business practices sometimes leads to overly aggressive enforcement against practices that do not pose real risks of competitive harms, and that antitrust’s advantage lies in "analyzing the competitive implications of specific practices rather than picking winners and losers in the competitive process."

Wright also expressed his skepticism regarding the application of antitrust laws to patent holdup, the practice of "refusing to adhere to commitments made by a prior IP owner to a standards setting organization" by threatening injunctions or exclusion orders. He argued that contract law permitted greater flexibility, noting that several courts had found that failure to adhere to a commitment may constitute a breach of contract.

Moreover, Wright noted that PAE holdup "does not necessarily have the same competitive implications as holdups by practicing entities because PAEs arguably do not compete with practicing entities that do not have substitutable patents." He considered contract law’s single remedies to be sufficient, due to the certainty of detection of patent holdup. Moreover, he suggested that the application of antitrust law risked "false positives."

Further, Wright contended that the principles inherent in the Supreme Court’s conclusion that the evasion of pricing constraints, without more, does not violate the antitrust laws also weighed against enforcement of RAND commitments through the antitrust laws. He observed that a PAE’s refusal to follow a commitment evaded a pricing constraint but did not affect the IP holder’s degree of market power. He suggested that construing a failure to abide by a RAND commitment as a violation of the antitrust laws would raise concerns about other business practices, and "place antitrust firmly into the business of contract regulation and micro-managing the competitive process."

Wright also argued against an application of the antitrust laws to "the transfer of IP from a practicing entity to a newly-formed PAE." He observed that such a transfer would result in lower assertion costs, creating an incentive to engage in more demands, litigation, and holdup. However, he noted that the transaction did not fall within the scope of the Clayton Act because it would not affect competition or market concentration.

However, he emphasized that he was not suggesting that PAEs’ activities were immune from antitrust scrutiny. Rather, he argued that the standard antitrust frameworks should apply. "Rigorous empirical research and economic analysis" should be employed, according to Wright, to discern the competitive consequences on various PAE business activities. He expressed his opposition to the imposition of heightened scrutiny or review under Section 5 to PAE conduct prior to such analysis, noting that this "commit[ed] the cardinal antitrust sin: conforming the law (and economics) to condemn a disapproved-of practice, rather than condemning a practice because it fails to conform to the law."

Wright closed by noting the "robust and consistent supporting evidence that PAEs account for a large and growing portion of patent litigation activity," but the comparative lack of evidence about the "extent to which PAE activity contributes to innovation." He contended that enforcers need much more empirical evidence.

"[A]ntitrust law should stay focused on competition problems such as cartels, acquisitions that create or enhance market power, or exclusionary conduct by monopolists," Wright concluded. "When enforcers engage in "mission creep" and attempt to expand the application of the antitrust laws (including Section 5 of the FTC Act) to new business models or conduct before they are sufficiently well understood, or to alleged inefficiencies not arising from the acquisition or creation of monopoly power, they risk unhinging antitrust law from sound economic foundations, introduce greater unpredictability into antitrust enforcement, and raise uncertainty and risks for the business community at large as well as for consumers."

News: Antitrust FederalTradeCommissionNews