FTC announces NPE investigation, possible antitrust action

After receiving a round of comments, the Federal Trade Commission (FTC) Chairwoman Edith Ramirez recently announced that she will ask the commission to conduct a Section 6(b) investigation into the business practices of non-practicing entities (NPEs), and promised to use its antitrust enforcement powers if those findings show that enforcement is warranted.

Section 6(b) would allow the FTC to issue subpoenas to NPEs to investigate their activities. The New York Times reported last week that the FTC’s inquiry will require NPEs to answer questions about how they conduct their operations, including specifically questions into ownership and coordination of enforcement with other patent holders. For example, the inquiry seeks to find out if and how NPEs funnel settlement and licensing proceeds back to the original patent owner. Ramirez’s comments suggest that the low hanging fruit the commission is aiming for in its initial foray into patent litigation is a call for more transparency. For example, are some NPEs fighting a proxy war with its beneficiary’s competitor?
The FTC appears to be setting its sights on “bad actors”–and not looking to curtail NPEs in general. Ramirez acknowledged that there are “plausible upsides” to NPEs. For example, they can provide value to startup companies that tried, but failed, to successfully bring their inventions to market. If those inventions were protected by patents, the investors have an opportunity to still make a return on their money. Bringing this cycle full circle, the risk protection afforded by patents may encourage investors to fund new companies’ efforts to commercialize their inventions. Ramirez noted that these benefits are not present in certain kinds of conduct by some NPEs.

Ramirez said that the issue the commission faces at this point is a dearth of analysis of the cost and benefits of NPEs. A goal of this inquiry, she said, would be “to collect more comprehensive information on a variety of PAE business models and the scope of their activities.” Thus, the FTC’s investigation will focus on trying to answer the question of whether NPEs serve the purposes of patent protection: do they “encourage invention or instead hamper innovation and competition.” Ramirez did not call for targeted efforts at specific NPEs at this stage.

Ramirez also noted that over half of lawsuits that NPEs have filed recently were against non-techology companies–such as financial services companies or brick-and-mortar retailers with an Internet presence–that are merely users of the accused technology.

The FTC statement comes on the heels of a workshop in December of last year jointly hosted by the FTC and the Department of Justice Antitrust Division. It also follows on a series of government announcements that have put a spotlight on the conduct of NPEs and their varying effects on patent litigation and innovation in the industry. And earlier this month, President Obama issued a series of executive orders, and several proposed bills have been circulating in Washington.