{"id":3070,"date":"2016-04-25T07:42:21","date_gmt":"2016-04-25T11:42:21","guid":{"rendered":"http:\/\/cpip.gmu.edu\/?p=3070"},"modified":"2026-02-03T21:11:53","modified_gmt":"2026-02-03T21:11:53","slug":"acknowledging-the-limitations-of-the-ftcs-pae-study","status":"publish","type":"post","link":"https:\/\/blogs.uakron.edu\/ualawip\/2016\/04\/25\/acknowledging-the-limitations-of-the-ftcs-pae-study\/","title":{"rendered":"[Archived Post] Acknowledging the Limitations of the FTC’s PAE Study"},"content":{"rendered":"

\"dictionaryThe FTC\u2019s long-awaited case study<\/a> of patent assertion entities (PAEs) is expected to be released this spring. Using its subpoena power under Section 6(b)<\/a> to gather information from a handful of firms, the study promises us a glimpse at their inner workings. But while the results may be interesting, they\u2019ll also be too narrow to support any informed policy changes. And you don\u2019t have to take my word for it\u2014the FTC admits as much. In one submission<\/a> to the Office of Management and Budget (OMB), which ultimately decided whether the study should move forward, the FTC acknowledges that its findings \u201cwill not be generalizable to the universe of all PAE activity.\u201d In another submission<\/a> to the OMB, the FTC recognizes that \u201cthe case study should be viewed as descriptive and probative for future studies seeking to explore the relationships between organizational form and assertion behavior.\u201d<\/p>\n

However, this doesn\u2019t mean that no one will use the study to advocate for drastic changes to the patent system. Even before the study\u2019s release, many people\u2014including some FTC Commissioners themselves\u2014have already jumped to conclusions when it comes to PAEs, arguing that they are a drag on innovation and competition. Yet these same people say that we need this study because there\u2019s no good empirical data analyzing the systemic costs and benefits of PAEs. They can\u2019t have it both ways. The uproar about PAEs is emblematic of the broader movement that advocates for the next big change to the patent system before we\u2019ve even seen how the last one panned out. In this environment, it\u2019s unlikely that the FTC and other critics will responsibly acknowledge that the study simply cannot give us an accurate assessment of the bigger picture.<\/p>\n

Limitations of the FTC Study <\/strong><\/p>\n

Many scholars have written about the study\u2019s fundamental limitations. As statistician Fritz Scheuren points out<\/a>, there are two kinds of studies: exploratory and confirmatory. An exploratory study is a starting point that asks general questions in order to generate testable hypotheses, while a confirmatory study is then used to test the validity of those hypotheses. The FTC study, with its open-ended questions to a handful of firms, is a classic exploratory study. At best, the study will generate answers that could help researchers begin to form theories and design another round of questions for further research. Scheuren notes that while the \u201cFTC study may well be useful at generating exploratory data with respect to PAE activity,\u201d it \u201cis not designed to confirm supportable subject matter conclusions.\u201d<\/p>\n

One significant constraint with the FTC study is that the sample size is small\u2014only twenty-five PAEs\u2014and the control group is even smaller\u2014a mixture of fifteen manufacturers and non-practicing entities (NPEs) in the wireless chipset industry. Scheuren reasons that there \u201cis also the risk of non-representative sampling and potential selection bias due to the fact that the universe of PAEs is largely unknown and likely quite diverse.\u201d And the fact that the control group comes from one narrow industry further prevents any generalization of the results. Scheuren concludes that the FTC study \u201cmay result in potentially valuable information worthy of further study,\u201d but that it is \u201cnot designed in a way as to support public policy decisions.\u201d<\/p>\n

Professor Michael Risch questions<\/a> the FTC\u2019s entire approach: \u201cIf the FTC is going to the trouble of doing a study, why not get it done right the first time and a) sample a larger number of manufacturers, in b) a more diverse area of manufacturing, and c) get identical information?\u201d He points out that the FTC won\u2019t be well-positioned to draw conclusions because the control group is not even being asked the same questions as the PAEs. Risch concludes that \u201cany report risks looking like so many others: a static look at an industry with no benchmark to compare it to.\u201d Professor Kristen Osenga echoes<\/a> these same sentiments and notes that \u201cthe study has been shaped in a way that will simply add fuel to the anti\u2013\u2018patent troll\u2019 fire without providing any data that would explain the best way to fix the real problems in the patent field today.\u201d<\/p>\n

Osenga further argues that the study is flawed since the FTC\u2019s definition of PAEs perpetuates the myth that patent licensing firms are all the same. The reality is that many different types of businesses fall under the \u201cPAE\u201d umbrella, and it makes no sense to impute the actions of a small subset to the entire group when making policy recommendations. Moreover, Osenga questions the FTC\u2019s \u201cshortsighted viewpoint\u201d of the potential benefits of PAEs, and she doubts how the \u201cimpact on innovation and competition\u201d will be ascertainable given the questions being asked. Anne Layne-Farrar expresses<\/a> similar doubts about the conclusions that can be drawn from the FTC study since only licensors are being surveyed. She posits that it \u201ccannot generate a full dataset for understanding the conduct of the parties in patent license negotiation or the reasons for the failure of negotiations.\u201d<\/p>\n

Layne-Farrar concludes that the FTC study \u201ccan point us in fruitful directions for further inquiry and may offer context for interpreting quantitative studies of PAE litigation, but should not be used to justify any policy changes.\u201d Consistent with the FTC\u2019s own admissions of the study\u2019s limitations, this is the real bottom line of what we should expect. The study will have no predictive power because it only looks at how a small sample of firms affect a few other players within the patent ecosystem. It does not quantify how that activity ultimately affects innovation and competition\u2014the very information needed to support policy recommendations. The FTC study is not intended to produce the sort of compelling statistical data that can be extrapolated to the larger universe of firms.<\/p>\n

FTC Commissioners Put Cart Before Horse<\/strong><\/p>\n

The FTC has a history of bias against PAEs, as demonstrated in its 2011 report<\/a> that skeptically questioned the \u201cuncertain benefits\u201d of PAEs while assuming their \u201cdetrimental effects\u201d in undermining innovation. That report recommended special remedy rules for PAEs, even as the FTC acknowledged the lack of objective evidence of systemic failure and the difficulty of distinguishing \u201cpatent transactions that harm innovation from those that promote it.\u201d With its new study, the FTC concedes to the OMB that much is still not known about PAEs and that the findings will be preliminary and non-generalizable. However, this hasn\u2019t prevented some Commissioners from putting the cart before the horse with PAEs.<\/p>\n

In fact, the very call for the FTC to institute the PAE study started with its conclusion. In her 2013 speech<\/a> suggesting the study, FTC Chairwoman Edith Ramirez recognized that \u201cwe still have only snapshots of the costs and benefits of PAE activity\u201d and that \u201cwe will need to learn a lot more\u201d in order \u201cto see the full competitive picture.\u201d While acknowledging the vast potential benefits of PAEs in rewarding invention, benefiting competition and consumers, reducing enforcement hurdles, increasing liquidity, encouraging venture capital investment, and funding R&D, she nevertheless concluded that \u201cPAEs exploit underlying problems in the patent system to the detriment of innovation and consumers.\u201d And despite the admitted lack of data, Ramirez stressed \u201cthe critical importance of continuing the effort on patent reform to limit the costs associated with some types of PAE activity.\u201d<\/p>\n

This position is duplicitous: If the costs and benefits of PAEs are still unknown, what justifies Ramirez\u2019s rushed call for immediate action? While benefits have to be weighed against costs, it\u2019s clear that she\u2019s already jumped to the conclusion that the costs outweigh the benefits. In another speech<\/a> a few months later, Ramirez noted that the \u201ctroubling stories\u201d about PAEs \u201cdon\u2019t tell us much about the competitive costs and benefits of PAE activity.\u201d Despite this admission, Ramirez called for \u201ca much broader response to flaws in the patent system that fuel inefficient behavior by PAEs.\u201d And while Ramirez said that understanding \u201cthe PAE business model will inform the policy dialogue,\u201d she stated that \u201cit will not change the pressing need for additional progress on patent reform.\u201d<\/p>\n

Likewise, in an early 2014 speech<\/a>, Commissioner Julie Brill ignored the study\u2019s inherent limitations and exploratory nature. She predicted that the study \u201cwill provide a fuller and more accurate picture of PAE activity\u201d that \u201cwill be put to good use by Congress and others who examine closely the activities of PAEs.\u201d Remarkably, Brill stated that \u201cthe FTC and other law enforcement agencies\u201d should not<\/u> \u201cwait on the results of the 6(b) study before undertaking enforcement actions against PAE activity that crosses the line.\u201d Even without the study\u2019s results, she thought that \u201creforms to the patent system are clearly warranted.\u201d In Brill\u2019s view, the study would only be useful for determining whether \u201cadditional reforms are warranted\u201d to curb the activities of PAEs.<\/p>\n

It appears that these Commissioners have already decided\u2014in the absence of any reliable data on the systemic effects of PAE activity\u2014that drastic changes to the patent system are necessary. Given their clear bias in this area, there is little hope that they will acknowledge the deep limitations of the study once it is released.<\/p>\n

Commentators Jump the Gun<\/strong><\/p>\n

Unsurprisingly, many supporters of the study have filed comments with the FTC arguing that the study is needed to fill the huge void in empirical data on the costs and benefits associated with PAEs. Some even simultaneously argue that the costs of PAEs far outweigh the benefits, suggesting that they have already jumped to their conclusion and just want the data to back it up. Despite the study’s serious limitations, these commentators appear primed to use it to justify their foregone policy recommendations.<\/p>\n

For example, the Consumer Electronics Association<\/a> applauded \u201cthe FTC\u2019s efforts to assess the anticompetitive harms that PAEs cause on our economy as a whole,\u201d and it argued that the study \u201cwill illuminate the many dimensions of PAEs\u2019 conduct in a way that no other entity is capable.\u201d At the same time, it stated that \u201ccompletion of this FTC study should not stay or halt other actions by the administrative, legislative or judicial branches to address this serious issue.\u201d The Internet Commerce Coalition<\/a> stressed the importance of the study of \u201cPAE activity in order to shed light on its effects on competition and innovation,\u201d and it admitted that without the information, \u201cthe debate in this area cannot be empirically based.\u201d Nonetheless, it presupposed that the study will uncover \u201chidden conduct of and abuses by PAEs\u201d and that \u201cit will still be important to reform the law in this area.\u201d<\/p>\n

Engine Advocacy<\/a> admitted that \u201cthere is very little broad empirical data about the structure and conduct of patent assertion entities, and their effect on the economy.\u201d It then argued that PAE activity \u201charms innovators, consumers, startups and the broader economy.\u201d The Coalition for Patent Fairness<\/a> called on the study \u201cto contribute to the understanding of policymakers and the public\u201d concerning PAEs, which it claimed \u201cimpose enormous costs on U.S. innovators, manufacturers, service providers, and, increasingly, consumers and end-users.\u201d And to those suggesting \u201cthe potentially beneficial role of PAEs in the patent market,\u201d it stressed that \u201creform be guided by the principle that the patent system is intended to incentivize and reward innovation,\u201d not “rent-seeking” PAEs that are \u201cexploiting problems.”<\/p>\n

The joint comments of Public Knowledge, Electronic Frontier Foundation, & Engine Advocacy<\/a> emphasized the fact that information about PAEs \u201ccurrently remains limited\u201d and that what is \u201cpublicly known largely consists of lawsuits filed in court and anecdotal information.\u201d Despite admitting that \u201cbroad empirical data often remains lacking,\u201d the groups also suggested that the study \u201cdoes not mean that legislative efforts should be stalled\u201d since \u201cthe harms of PAE activity are well known and already amenable to legislative reform.\u201d In fact, they contended not only that \u201ca problem exists,\u201d but that there\u2019s even \u201creason to believe the scope is even larger than what has already been reported.\u201d<\/p>\n

Given this pervasive and unfounded bias against PAEs, there\u2019s little hope that these and other critics will acknowledge the study\u2019s serious limitations. Instead, it\u2019s far more likely that they will point to the study as concrete evidence that even more sweeping changes to the patent system are in order.<\/p>\n

Conclusion<\/strong><\/p>\n

While the FTC study may generate interesting information about a handful of firms, it won\u2019t tell us much about how PAEs affect competition and innovation in general. The study is simply not designed to do this. It instead is a fact-finding mission, the results of which could guide future missions. Such empirical research can be valuable, but it’s very important to recognize the limited utility of the information being collected. And it’s crucial not to draw policy conclusions from it. Unfortunately, if the comments of some of the Commissioners and supporters of the study are any indication, many critics have already made up their minds about the net effects of PAEs, and they will likely use the study to perpetuate the biased anti-patent fervor that has captured so much attention in recent years.<\/p>\n","protected":false},"excerpt":{"rendered":"

The FTC\u2019s long-awaited case study of patent assertion entities (PAEs) is expected to be released this spring. Using its subpoena power under Section 6(b) to gather information from a handful of firms, the study promises us a glimpse at their inner workings. But while the results may be interesting, they\u2019ll also be too narrow to […]<\/p>\n","protected":false},"author":3627,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[2,16,18,26,30,33,34,1],"tags":[136,233,311,485,553,576,577,702,814,855,954,1035,1040,1057,1069,1332],"class_list":["post-3070","post","type-post","status-publish","format-standard","hentry","category-administrative-agency","category-economic-study","category-ftc","category-innovation-2","category-inventors","category-law-and-economics","category-legislation","category-uncategorized","tag-anne-layne-farrar","tag-broken-patent-system","tag-competition","tag-edith-ramirez","tag-federal-trade-commissiion","tag-fritz-scheruen","tag-ftc","tag-innovation","tag-julie-brill","tag-kristen-osenga","tag-michael-risch","tag-office-of-management-and-budget","tag-omb","tag-pae-study","tag-patent-assertion-entity","tag-section-6b"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/posts\/3070","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/users\/3627"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/comments?post=3070"}],"version-history":[{"count":1,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/posts\/3070\/revisions"}],"predecessor-version":[{"id":15872,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/posts\/3070\/revisions\/15872"}],"wp:attachment":[{"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/media?parent=3070"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/categories?post=3070"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/tags?post=3070"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}