07/01/2013 04:11 pm ET Updated Aug 31, 2013

Harnessing Privateers to Block Their Attacks on US Competitiveness

As the 21st century patent wars rage on, the combating companies have resorted to a decidedly 16th-century tactic: privateering. Long ago, this term referred to pirates-for-hire, naval contractors hired by one government to attack the commercial interests of another. Today, patent warriors are doing the same, but instead of pillaging ships at gunpoint, today's privateers launch patent attacks, thus putting the competition at a tactical disadvantage in the marketplace.

Typically, privateers are "patent assertion entities" (commonly called trolls) -- entities that make nothing, whose only product is litigation -- and, like pirates of the past, these attacks are deniable. Though different businesses sponsor privateers in different ways, there are two common trends: 1) the business and its allies retain a license to the patents they're transferring, giving themselves immunity to the privateer's lawsuits; and 2) the business gets a cut of the privateer's (often substantial) licensing, much like monarchs of ages past required a share of the bounty plundered from other nations' merchants.

Laundering lawsuits in this manner not only brings a measure of "plausible deniability," but also insulates the sponsoring business from retaliation, or reputational damage (since a patent troll's reputation is already at rock-bottom). And because trolls offer no real products or services of their own, they are immune to countersuits from the businesses they target.

As privateering expert Tom Ewing explains, outsourcing patent assets in this way enables operating companies to quietly monetize IP and disadvantage competitors.

Certainly, a troll (and any business sponsoring it) may be enticed by the possibility of jackpot judgments, but the goal of the privateer's sponsor is hamstringing competitors.

Nokia, for example - once the world's largest vendors of mobile phones - has suffered a reversal of fortune and finds itself in a less desirable position in the mobile operating system market. With revenues from its businesses declining, Nokia has fallen under pressure to monetize the patent portfolio it has developed over years as a leader in R&D. Thus, it wasn't altogether surprising when a recent press report indicated that the Finnish company had sold patents "covering a wide range of foundational memory technologies for electronic devices" to Pendrell Corporation, a publicly traded troll. Pendrell's press release announced a new subsidiary, HMT, which would "continue the innovation efforts begun by Nokia and to enable broader use of these [patents] via a global licensing program. Nokia will receive a license to all of the patents acquired by HMT as well as to new IP developed by HMT." More here on the waste of resources in the smartphone wars.

This, however, is not Nokia's first time out to sea: Over the last two years, the company has also done privateering deals with other well-known trolls like MOSAID, Sisvel, and Vringo, which have rightly sparked considerable controversy.

The Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice have taken note of the anticompetitive nature of patent privateering, and recently hosted a one-day workshop that focused on the topic. In his introductory remarks, former FTC Chairman Jon Leibowitz characterized the practice of transferring patents to trolls as an "unsavory" and "asymmetric" way of raising rivals' costs. The FTC has also asked for public comments on the topic, and we are hopeful that the regulatory agencies will continue to scrutinize privateering and PAEs more generally once they have an opportunity to analyze the dozens of submissions from concerned businesses, advocacy groups, and members of the public.

Fortunately, in the meantime tech companies large and small have found common ground in supporting judicial, legislative and other efforts that could make the patent system less vulnerable to patent troll abuses. Many companies are even putting forward their own ideas on how to address the troll problem, with the aim of fostering "patent peace" and reducing litigation. Twitter, for example, has promised to only use its engineers' inventions for defensive purposes. Google, too, has announced it's working with other companies on defensive patent licenses, and recently pledged not to sue open-source users of some of its patented technologies.

Additionally, momentum is building around other ways to curb patent abuse. One is to require that disclosing patent ownership be made mandatory rather than voluntary, an idea recently endorsed by Senate Judiciary Committee Chairman Patrick Leahy. The U.S. Patent Office hosted a roundtable on this topic in January and has indicated that it wants to do more to help on this front. Another is to give companies targeted by patent trolls an affordable alternative to taking on a patent troll in years of litigation. This could be accomplished by expanding the Covered Business Method Program -- a part of the 2011 America Invents Act -- to apply to all business method patents and not just those within the financial services space. Chairman of the House Judiciary Committee Bob Goodlatte has cited this concept as a way to reduce abusive litigation practices.

Of course, one way to curb patent abuse by trolls is to refrain from arming them with patents in the first place. But the broader problem with privateering -- in any century -- is that while it eventually cripples everyone, sponsoring privateers seems attractive in the short run when one's rivals are experiencing success. What's worse, there is little value once everyone is doing it. At that point, however, it is too late to prevent this market parasitism. It took Europe several centuries to prohibit privateers. The U.S. economy can't wait that long.