Overview of US FTC: The Evolving IP Marketplace

US Federal Trade Commission, "The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition,” (March 2011)

I have finally had time to read the most recent IP-related report from the US Federal Trade Commission, on "The Evolving IP Marketplace." In contrast to the 2007 Report on “Antitrust Enforcement and Intellectual Property Rights” which considered the intersection of IP law and competition law, this Report, like the 2003 Report “To Promote Innovation” focuses directly on patent law, on the view that a properly functioning patent system promotes competition, but a defective patent system will do the opposite. This is a trite observation from a patent perspective, and the implicit justification for FTC Reports on patent law is that it has a unique expertise in the economics of competition policy. In my view, that premise is borne out by the latest Report, which very interesting and balanced look at two main areas of patent law: the “notice” function of patents, and patent remedies. (The 2003 Report focused on patent quality, especially obviousness.) The Report is based on hearings and a workshop, as well as written submissions and independent research.

The Report begins with a descriptive survey of "the evolving patent marketplace" (ch 2). This focuses on how ex post licencing can impede innovation. If a firm is able to negotiate for patent rights before it has invested in creating or commercializing the technology, then the licence fee will reflect the value of the patented technology as compared with the non-infringing options available to the firm. However, if the firm licenses only after it has invested substantially in product development, the cost of the licence reflects not just the value of the patented technology, but also the sunk costs that would have to be abandoned if the activity were enjoined. This can impede innovation as a firm that cannot determine at the outset whether its activities will infringe must discount its anticipated profits to allow for the possibility of an ex post infringement action. Ex post licensing is not categorically undesirable, as the possibility of such an action is the major inducement to conduct patent clearance in the first place. However, when the patentee’s strategy is to avoid ex ante licensing in order to extract licence fees that are greater than the value of the technology, the effect is to impede both competition and innovation. I like to refer to “opportunistic ex post licensing” to refer to the latter strategy.

The take-home message is that the ability to conduct effective patent clearance is crucial to a sound patent system. This depends on the efficacy of the notice function of patents; the ability of a firm to predict what activities will infringe by discovering and interpreting relevant patents. The Report finds that patent clearance is generally effective (which is not to say ideal) in industries such as chemicals, pharmaceuticals, and biotechnology, but in other industries such as IT and telecommunications, it is essentially impossible to conduct effective patent clearance [77-78].

The discussion of the importance of patent notice is followed by a very useful description of the role of "patent assertion entities." This is the Report’s preferred term for what are more commonly known as “non-practising entities” or, pejoratively, patent trolls. The Report points out that many entities which do not practice their invention themselves, nonetheless exploit their patent rights in a very traditional manner, as when a start-up that has done the basic break-through research seeks to licence to a larger firm to take the product to commercialization. Patent assertion entities, in contrast, acquire patents to generate revenue through licencing. The Report notes that this may allow small patentee with insufficient resources to sustain an infringement action a way of enforcing their patent rights, but when the patents are asserted opportunistically ex post against an infringer which developed the technology independently, the effect on competition and innovation is likely to be negative.

Most of this discussion is found in Chapter 2 of the Report (pp.50 - 72), which is well worth reading. (About half of the space is taken up with footnotes, so it is not as long as it looks.) Chapter 3 of the Report focuses on specific recommendations as to how to improve patent notice, while chapters 4-8 look at patent remedies. In upcoming posts I will blog on specific points that are of interest from a Canadian perspective.