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How Patent Trolls Are Undermining The Economy

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"How Patent Trolls Are Undermining The Economy"

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The point of patents is to make innovation profitable: They secure the exclusive rights to a particular novel discovery or innovation to the inventor for a limited period of time with the idea that inventors can commercialize the object of the patent themselves or license the patent to a third party who wants to do so. But a White House report released Tuesday warns that the explosion of companies who buy up rights to patents in order to pursue aggressive litigation against alleged infringers has had a dramatically negative impact on innovation.

These Patent Assertion Entities (PAE), commonly called patent trolls, often mask themselves in a series of shell companies and typically do not have a hand in researching or translating patents to markets. Instead, they acquire the rights to broad patents and wait until entrepreneurs have made “irreversible investments” in uses that may infringe, then (usually with little specific evidence of infringement and sometimes attempting to apply patents to technology never imagined at the time of the original patent’s issuance) they ask many companies at once to pay a relatively moderate licensing fee or settlement under the assumption that most companies will cough up the money rather than risk a lengthy and uncertain trial. One company claiming to own the right to scan things to email, which has been targeting thousands of small businesses with a $1,000 per-worker settlement offer, is facing a lawsuit from the Vermont Attorney General, who believes the company is violating Vermont consumer-protection laws.

While there is a legitimate role for intermediary firms that help innovators find a market for licensing patents, the proliferation of these aggressive litigation tactics can scare inventors away from pursuing ideas because they worry it might attract the attention of patent trolls, thus limiting innovation that fuels growth throughout the economy. Estimations on the direct and indirect costs put the patent troll toll paid by the economy as a whole in the tens of billions range per year.

Studies also suggest patent trolls tend to do more damage to the value of companies they pursue litigation against than they reap in profits. One study shows fourteen PAE’s had total revenues of $7.6 billion from 2000 to 2012, but the patent suits they initiated were associated with a $87.6 billion decrease in the share value of defendant companies. While the drop in share prices could be influenced by other economic factors, this suggests that these groups do more than ten times as much damage to other companies than the money they collect for patent rights holders.

But despite these less than positive societal impacts, patent trolling is a growing market. According to the White House, suits from PAEs have jumped by nearly 250 percent in the last two years, going from 29 to 62 percent of all infringement suits, as shown in this chart:

(Credit: White House)

The growth of software-related patents and publications recommending the patent troll model for the purpose of commercialization or to reduce competition has contributed to the increase in litigation and the sheer volume of patents being processed. But to make matters worse, there’s some evidence to suggest that the increase in patents in need of processing resulted in the patent office giving less scrutiny to applications as the agencies attempted to cope with the backlog.

The White House report sees three main areas for improvement in the patent process to reduce the negative impacts of trolls: Requiring clearer patents with “high standard of novelty”, reducing the disparity between costs of litigation between patent owners and users, and “greater adaptability of the innovation system to challenges posed by new technologies and new business models.” Of course, there’s also the alternative of revamping the whole patent system.

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