Is the FTC Already Capable of Regulating Patent Demand Letters?

The answer is no, except under special circumstances. The question itself arises from comments by Julie P. Samuels of the Electronic Frontier Foundation at last week’s panel held by the Senate Committee on Commerce, Science and Transportation over demand letters from patent assertion entities (PAEs), commonly known as patent trolls. Samuels proposed new legislation to expand the Federal Trade Commission’s (FTC) Section 5 authority, which allows the FTC to regulate “unfair or deceptive acts” by businesses.

PAEs are companies which buy patent rights from other companies and then sell licensing rights for those patents to other third party companies to produce products using said patents. Patent demand letters are letters sent by PAEs to companies which are accused of violating the patents held by a PAE in question.

Section 5 is codified in 15 U.S.C. § 45(a). It gives the FTC has the authority to regulate “unfair or deceptive acts or practices” by businesses. The FTC enforces Section 5 either by reporting such acts to relevant agencies, or bringing violators to court. The FTC issued a deception policy statement in 1983 in which it clarified its understanding of unfair and deceptive acts. Deceptive acts were defined as acts in which “representation, omission or practice” by a business would mislead consumers about the product they intended to buy. Furthermore, such deceptive acts don’t have to be intentionally deceptive. There merely has to be a consumer who is being deceived in order for the FTC to act as a regulator.

So the real question is, is there a consumer involved with patent demand letters? The problem here is that the FTC Act never gives a legal definition for what a consumer is, so a new law or policy statement would have to provide one. I argue that because there is no product being exchanged between a PAE and the letter recipient, demand letters are therefore not within the FTCs jurisdiction.

There is more to the story, though. As FTC Commissioner Joshua D. Wright has described in this speech, the PAE’s do have a consumer base that could enable regulation by the PAE: the companies which license the patent rights to create material products. The FTC could intervene, via anti-trust, if the PAE does not describe the details of patents accurately to licensees. That is, if patent licenses are sold with details omitted or lied about, then the FTC would have authority to intervene. Or, in Wright’s words:

To fulfill their notice function, patent claims must delineate the scope of patent rights with sufficient clarity that a person skilled in the relevant art can reliably determine whether planned activities would infringe. Many panelists declared that patents often provide little guidance as to their coverage because they lack “clarity,” i.e., they are “vague,” “ambiguous,” or otherwise difficult to interpret. Some of this testimony addressed patents across the board. [See here.]

Thus, the deception would not focus so much on demand letters, except as those letters are tied into protecting the patents that have been licensed to other companies from the PAEs.