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Originally published July 6, 2013 at 4:08 PM | Page modified July 8, 2013 at 10:53 AM

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Guest: FTC should avoid ‘Caddyshack’ approach with patent trolls

In investigating patent trolls, the Federal Trade Commission should tread carefully around the benefits of the secondary market for patents, writes guest columnist John “Jay” Jurata Jr.

Special to The Times

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AFTER repeated attempts to rid the Bushwood Country Club of a destructive gopher in the movie “Caddyshack,” Bill Murray’s character rigs the golf course with explosives.

With the gopher seemingly in his cross hairs, the commando-style groundskeeper slowly pushes down on the detonator. A flurry of explosions rip through the entire golf course to the background score of Tchaikovsky’s “1812 Overture.” When the smoke clears, the course is left in scorched ruin.

The gopher sneaks away unscathed.

Last week, the Federal Trade Commission (FTC) announced that it likely would open a market study into “patent-assertion entities,” or PAEs. These entities buy patents but do not use them to offer products or services. Rather, they generate revenue through licensing the patents or suing alleged infringers. Therein lies the controversy.

The FTC’s investigation is an important step to combat the abusive use of patents. Some companies, known as “patent trolls,” exploit imperfections in the patent system to inflict harm, similar to the gopher in “Caddyshack.”

But trolls are just one of several participants in a valuable secondary market for patents. It is important for the FTC to resist a “Caddyshack” solution that inadvertently eliminates the secondary market’s benefits in attempting to stop the trolls.

The litigation and licensing abuses of patent trolls are well known. Some send demand letters to end customers, offering “nuisance-value” settlements that cost less than defending against the weak patents being asserted. Other trolls use elaborate corporate structures to hide the patents’ real owners, which sometimes are the lawyers themselves.

Certain trolls lie in wait, while unsuspecting companies invest substantially in allegedly infringing products, and then demand licensing fees based on product-redesign costs as opposed to the value of the patents.

The harm inflicted by patent trolls extends to the Seattle area. At any given time, Microsoft is on the receiving end of approximately 60 patent-infringement cases filed by trolls, which cost tens of millions of dollars to defend. Almost all local technology companies have been targeted.

In recent years, patent trolls have also filed lawsuits against Alaska Airlines, Boeing, Costco and Nordstrom. Even Starbucks — like dozens of other coffee shops, grocery stores, restaurants and hotel chains — has been sued by patent trolls for the audacity of providing Wi-Fi hot spots to customers.

As bad as these abuses are, not all companies that buy patents engage in such tactics. Trolls are just part of a wide range of nonpracticing entities that participate in the secondary market for patents.

Prestigious universities, such as MIT and Stanford, patent their academic research and license or sell that patented technology to others. Sophisticated patent aggregators, such as RPX Corporation, Tessera Intellectual Property Corp. and Open Invention Network, evaluate and buy patents from various sources, bundle them into larger portfolios, and license or sell those portfolios to manufacturing companies in whole or in part.

Even individual inventors create, patent and license technology to large companies that develop products incorporating the technology. The most famous such inventor was Thomas Edison, who changed the world by inventing the phonograph, the motion-picture camera, an advanced telegraph and long-lasting light bulbs.

Collectively, this group of nonpracticing entities serves as a technology exchange. Few manufacturing companies can develop all the technologies for their products, and companies often create inventions they are unable to bring to market.

The technology exchange for patents solves this problem by allowing manufacturing companies to obtain licenses to patents that their products use and generate a return by disposing of patents they no longer want or need.

This vibrant secondary market allows manufacturing companies to focus on what they do best: create and produce innovative products and services. For example, the secondary market for patents allows struggling companies exiting a business area to recoup part of their investments in patent-protected technology.

Kodak did just that in 2012 — selling its digital-photography patents to RPX Corporation, Bellevue’s Intellectual Ventures and others, and using the capital to pay creditors and create a path out of bankruptcy.

Patent liquidity also can be harnessed to invest in new business opportunities. Nokia did this in 2011 when it transferred patents to a nonpracticing entity, and used the resulting capital to help fund its transition from outdated feature phones to innovative smartphones. In both scenarios, consumers benefit from a more efficient utilization of resources.

For these reasons, the solution to the patent-troll problem should be carefully tailored. It must curtail abusive litigation and licensing practices, but not inhibit the secondary patent market by excessive restrictions on other nontroll participants.

Examples of appropriately tailored remedies include transparency in patent ownership, procedures to improve patent quality and a requirement that vexatious litigants reimburse the other party’s legal fees.

The FTC’s research into patent-assertion entities is much needed. The “Caddyshack” approach is not the way to do it.

Instead of blowing up the whole playing field in an attempt to eliminate a destructive gopher, the solutions should address the specific imperfections in our patent system that trolls exploit. If not, our technology companies, and American industry more generally, may lose an important field of play.

John “Jay” Jurata Jr. is a Washington, D.C.-based partner at Orrick, Herrington & Sutcliffe, specializing in the intersection of antitrust and intellectual property. His technology clients include Microsoft.

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