FTC is said to plan inquiry of frivolous patent lawsuits

The chairwoman of the Federal Trade Commission is expected on Thursday to recommend a sweeping investigation of "patent trolls," companies that buy large portfolios of technology patents and use them to sue software designers and makers of products like smartphones and tablet computers, people briefed on the inquiry said.

The chairwoman, Edith Ramirez, is planning to ask the full commission to approve an inquiry that will include the issuance of subpoenas to companies that are known as patent-assertion entities, or, unflatteringly, as patent trolls. The move comes after the issuance of several executive orders by President Barack Obama directing executive agencies to take steps to "protect innovators from frivolous litigation."

If approved, which is likely, the FTC investigation will require patent-assertion companies to answer questions about how they conduct their operations, including whether they coordinate their lawsuits with other patent holders and whether they funnel proceeds from lawsuits and patent licenses back to the original patent owner.

Patent-assertion entities, also known as PAEs, typically have no operations other than collecting royalties on patents. They accounted for more than 60 percent of the roughly 4,000 patent lawsuits filed last year, up from 29 percent two years earlier.

"There are companies that are engaged in spurious lawsuits, seeking settlements that are less than the cost of litigation, but not us," said Scott Burt, chief intellectual property officer at Mosaid Technologies, a Canadian company that is nonetheless considered one of the largest patent trolls. "We are a patent-licensing company."

The types of lawsuits that have been filed or threatened sometimes exceed comprehension. One such suit recently threatened thousands of companies with liability for damages on charges that they had violated a patent by hooking up a document scanner to a computer network and sending a scanned file by email to an employee.

Ramirez is expected to discuss her recommendation Thursday at a patent law workshop sponsored by the American Antitrust Institute and the Computer & Communications Industry Association, a trade group. A spokesman for the FTC declined to comment on the topic of her speech.

She previously has hinted at the idea of a broader study of patent trolls, telling an antitrust group in January: "A central empirical question, which we will continue to examine, is whether PAEs encourage invention or instead hamper innovation and competition."

The FTC is not expected to single out any individual company in the investigation. People briefed on the plans said that the inquiry would focus on companies at both ends of the patent-troll spectrum. At one end are the small companies, essentially legal shells, which gather patents and cite them when sending demand letters to thousands of businesses, claiming infringement on a patent for some activity. In 2011, a company targeted coffee shops for setting up Wi-Fi networks for customers.

At the other end are large companies like Mosaid, which has its U.S. headquarters in Plano, Texas, and Intellectual Ventures, a Bellevue, Wash., firm that was co-founded by Nathan Myhrvold, a former chief technology officer at Microsoft. Those entities buy portfolios of intellectual property rights from technology innovators like Microsoft and Nokia and use them to generate millions of dollars in licensing payments.

The patent-troll business has grown rapidly in recent years as the Patent and Trademark Office has issued a growing number of technology patents and as ever-more-complex devices like smartphones have become big consumer items. Ramirez said recently that the components and software in a single smartphone could be subject to tens of thousands of patents.

Ramirez is expected to recommend what is known as a 6(b) study, after the authorizing section of the Federal Trade Commission Act. This type of inquiry does not always have a specific law enforcement purpose but can gather information for use by Congress, the courts or executive agencies in dealing with an issue.

Those studies can also produce information that results in an antitrust lawsuit, however. The breadth of the inquiries that companies have to answer usually produce more information than would otherwise be available if investigators had only subpoenaed certain documents.

Patent trolls have captured the attention of the Obama administration, which last week under executive orders of the president directed the Patent and Trademark Office and other executive branch agencies to heighten disclosure of who owns a patent and take steps to eliminate frivolous patent lawsuits.

As an independent agency, the FTC is not subject to the executive orders, but it has been studying the issue for months, along with the Justice Department. The agencies conducted a joint workshop in December on the effect of patent-assertion entities on innovation and competition.

At that session, some people defended the rights of patent-assertion entities, saying they played an important role by compensating inventors who might not have the resources to enforce their patents. Likewise, startup companies that know there is a secondary market for their patents might be willing to take more risks on new innovations.

People who have been briefed on Ramirez's plans said it was highly likely that the full commission would vote to begin the investigation. Currently there are four instead of the usual five members, divided 2-2 between Democrats and Republicans.

The boom in patent lawsuits in the past two years has drawn calls for action by members of both parties, and the heads of independent agencies like the FTC rarely bring an issue to a vote without already having secured assurances of majority support.

Congress, too, has taken an interest in the issue, with lawmakers from both parties supporting legislation to rein in patent trolls. Rep. Judy Chu, D-Calif., and Rep. Blake Farenthold, R-Texas, wrote a letter this month urging Ramirez to use the FTC's power to police deceptive and unfair practices against patent trolls.

"Patent trolls are using a business model that seeks to extract money from end users," they wrote, "who must make the difficult choice to settle in order to continue investing in their businesses, rather than pursue potentially frivolous litigation."

© 2013, The New York Times News Service