Antitrust Alert: U.S. Federal Trade Commission Issues Report on the Evolving Intellectual Property Marketplace

This week the Federal Trade Commission issued its long-anticipated report, "The Evolving IP Marketplace: Aligning Patent Notice and Remedies With Competition."  The report is seen by the FTC as continuing the "policy engagement with the patent system" that it launched in its controversial October 2003 report, "To Promote Innovation:  The Proper Balance of Competition and Patent Law and Policy."  Based on eight days of hearings, public comments and independent research, the FTC's new report focuses on issues of notice to the public of the scope of patent claims coverage and remedies for patent infringement.  The report has eight chapters:  chapters 1 and 2 describe the FTC's view of the evolving IP marketplace; chapter 3 focuses on patent notice; and chapters 4-8 deal with remedies.  Some chapters contain multiple specific recommendations, summarized in the Executive Summary in the form of 35 recommendations directed to Congress, the Patent and Trademark Office and the courts.  Many of the FTC's recommendations go to fundamental issues of patent law at the core of both patent prosecution and litigation.


The report's first two chapters set forth the FTC's understanding of the evolving nature of the intellectual property "marketplace."  In the first chapter, the FTC describes its view of "open innovation," in which a company does not rely solely on its own internal research and development for innovation, but rather seeks the inventions it needs from outside sources as well.  The FTC refers to acquisitions of technology in this manner as "ex ante" transactions, in which the purchaser or licensee first obtains the technology by means of a technology transfer from the patent owner.  The FTC emphasizes that open innovation benefits companies as well as consumers, and points out that many aspects of patent law and the patent system help to promote open innovation. 

In the second chapter, the FTC draws a sharp distinction between "ex ante" transactions and what it refers to as "ex post" transactions.  It defines "ex post" transactions as situations in which the licensee has already invested in creating, developing or commercializing the technology in question.  The report notes that the licensee needs a license from the patent holder to avoid liability for patent infringement, but the license is not accompanied by any transfer of technology.  According to the FTC, ex post transactions have the potential for both beneficial and detrimental effects.  The FTC attributes ex post transactions in part to problems with patent notice and quality and with remedies for patent infringement, concluding that concerns regarding ex post transactions have increased in recent years because of an increase in patent litigation and the evolution of patent assertion business models.  The FTC identifies the primary driver of this development to be "patent assertion entities," defined as non-practicing entities with a business strategy based on patent enforcement.  The FTC describes the respective roles of patent enforcement and licensing companies, litigation finance firms, patent aggregators, defensive buying funds and intermediaries.  The FTC intends its report to address "the conditions of patent law and policy that have created conditions where a patent market based on ex post transactions has flourished and…that lead to or create incentives for patentees to pursue ex post patent transactions rather than technology transfer."

Issues relating to patent notice

Chapter 3 deals with issues relating to patent notice to third parties as well as patent quality.  The FTC sets forth various recommendations (separated into 16 separate specific recommendations in the Executive Summary) intended to promote greater clarity in the scope of patent claims coverage, improve predictability of evolving or future patent claims, and facilitate more effective patent searches.  Four of the recommendations would require legislation, two recommendations are addressed to the courts, and the remainder are intended for the Patent and Trademark Office.  Among the most far-reaching is a proposal to protect from infringement actions any party that infringes patent claims "only because of claim amendments (or new claims) following a continuation" if that party "developed, used, or made substantial preparation for using, the relevant product or process before the amended (or newly added) claims were published."

Remedies for patent infringement

Chapters 4 through 8 focus on remedies.  Chapter 4 identifies problems with potential under-compensation and over-compensation for infringement and their impacts on innovation and competition.  In Chapters 5-8, the FTC presents what it refers to as an "economically grounded" remedies analysis.  These chapters contain 19 specific recommendations, 18 of which are addressed to the courts and one to the International Trade Commission.  Certain themes permeate the FTC's recommendations, including the importance of identifying the "but-for" world, the likely effect of alternatives when measuring damages, the desirability of avoiding double-counting and mixed remedies when possible, and the role of the hypothetical "willing licensor" in determining the amount of an award of royalties.  The report also identifies the time of measurement of royalties as a significant issue, and stresses its view that royalties should be measured before the infringer makes any sunk costs in implementing the technology so as to remove any element of hold-up from the calculation of the royalty amount.  With respect to injunctive relief in particular, the FTC urges courts and the ITC to take steps to avoid patent "hold-up."  (Indeed, four of the FTC's six recommendations relating to injunctive relief specifically refer to hold-up.)  In two recommendations relating to injunctive relief, the FTC also distinguishes between patent holders that primarily engage in technology transfer and patent assertion entities, and recommends standards that could make it comparatively more difficult for patent assertion entities to obtain injunctive relief.

Implications of the FTC's report

The FTC's report comes at a time when these and other issues are being debated in Congress, the courts and the Patent and Trademark Office.  The report does not carry any specific implications for the FTC's future antitrust enforcement.  However, it remains to be seen what, if any, impact the FTC's report may have on future patent prosecution and litigation.  As we have seen with recent efforts to reform U.S. patent law, different industries (and even companies within an industry), as well as non-practicing entities, may have divergent views on the wisdom of the FTC's specific recommendations.  Much is likely to depend on the extent to which individual parties seek to use the report to support their own individual arguments in these fora, and whether the report and recommendations are given any weight.

Lawyer Contacts

For more information, please contact your principal Jones Day representative or either of the lawyers listed below.

Geoffrey D. Oliver

David M. Maiorana

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