FTC begins investigation into dark, depraved world of patent trolls

At last! The Federal Trade Commission is taking action against patent trolls.

Or at least it voted to seek public comments on a proposal to gather information about patent trolls. It is the government after all, and likes to take things one bureaucratic baby step at a time.

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The FTC announced this morning that it is gathering information as part of an investigation into Patent Assertion Entities (PAEs) “to develop a better understanding of how they impact innovation and competition.”

After considering these comments, the FTC will submit a request to the Office of Management and Budgets (OMB) to issue the PAEs with compulsory orders for information.

“The FTC is conducting the study in order to further one of the agency’s key missions—to examine cutting-edge competition and consumer protection topics that may have a significant effect on the U.S. economy,” the statement said. 

PAEs, often referred to as patent trolls, are “non-producing” companies that hoard patents with the intention of suing companies that infringe upon them.

Patents are, in theory, meant to protect people from having their ideas and/or work wrongfully used. To get a patent, in theory, the requirements include “novelty” and “non-obviousness.” Alas, this is not the reality. The U.S. patent system has been referred to as “broken,” “garbage,” and “evil,” and there are some pretty ridiculous patents out there, such as those for human genes, online press releases, and hyperlinking.

Patent trolls take advantage of the system to extort money from legitimate businesses by suing them for infringement. Legal fees are so expensive that the defendants often choose to settle, even when the claim has no validity, in order to stay out of court. The Georgetown Law Journal said that in an estimated 90 percent of cases, the defendants settle before going to trial.

“Outright trolling is a big threat and a terrible problem — they are basically collecting fees for everyone who is trying to do legitimate business, like a wolf at the edge of a fox hole,” said Gil Silberman, an attorney and managing partner with Equity LLP. “It’s the cost of doing business, but almost no startup company, even a well-financed one, has enough money to fight a patent lawsuit all the way to the end, whether or not it is going to be victorious.”

Patent trolling is estimated to be a $29 billion industry. Silberman said it is almost like a “rite-of-passage,” but one that is extremely frustrating and unfair, particularly for small startups that are tight on resources. It also has a stifling effect on innovation and businesses’ abilities to grow and create jobs.

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President Barack Obama has been vocal about the important role technology companies large and small play in getting the U.S. economy back on track, and the government has started to take some action.

A federal appeals court began looking at the topic of software patenting in February 2013. Then in June, the Obama administration proposed five executive actions and seven legislative recommendations to help fix the problem, and two members of the House of Representatives introduced the SHIELD Act to thwart patent trolls.

Proposals included requiring patent trolls that lose in court to pay the attorney’s fees of the defendants, or require them to put up a bond prior to commencing legislation.

Around the same time, the New York Times reported rumors that FTC chairwoman Edith Ramirez would ask the commission to approve an inquiry that included the issuance of subpoenas to PAEs.

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Now that is finally happening.

The FTC is calling for a 6(b) study to “expand the empirical picture of the costs and benefits of PAE activity.” This will help the FTC get permission to order approximately 25 patent trolls to answer questions about how they organize their corporate legal structure, what types of patents they hold, how they acquire patents and compensate prior owners, how they engage in assertion activity, and how they earn money.

In the meantime, tech companies are taking action themselves.

E-commerce startup FindTheBest sued a patent troll earlier this month under the anti-mafia Racketeer Influenced and Corrupt Organizations (RICO) Act, and influential tech companies like Twitter and Google have pledged not to use their patents offensively.

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It seems like the needle is starting to move on this particular issue, but the patent lobby is strong. Until then try not to breathe, you may be breaking a patent.