The True Cost of the Patent Trolls: Half a Trillion Dollars

I've written a number of pieces about the inherent flaws of patents, especially in the field of software. Those are mostly to do with how the good intentions of patents are not realised. But alongside those who try to use patents as they were supposedly intended are another group who are essentially parasites – those who seek to game the system, and extract money from its weaknesses: the patent trolls.

Aside from the patent trolls themselves, few have a good word for them, since it's pretty obvious to everyone that they suck money out of companies that make stuff, and thus act as a brake on real innovation. But those feelings have been largely unquantified. Now, thanks to recent work of the authors of the seminal book "Patent Failure", James Bessen and Michael Meurer, along with a third author, Jennifer Laurissa Ford, we have perhaps the first rigorous estimate of the damage they cause. It's even worse than we thought:

Firms that license patents without producing goods—" non-practicing entities" (NPEs)— have historically facilitated technology markets and increased the profits that small inventors earn from their inventions.

But a self-described new crop of NPEs has emerged that asserts patents and litigates them on an unprecedented scale, involving thousands of defendants every year in hundreds of lawsuits. Do these litigating NPEs improve markets for technology and increase incentives for small inventors? Or are they "patent trolls" who exploit weaknesses in the patent system?

This paper makes several findings about this litigation. First, by observing what happens
to a defendant's stock price around the filing of a patent lawsuit, we are able to assess the effect of the lawsuit on the firm's wealth, after taking into account general market trends and random factors affecting the individual stock. We find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010. During the last four years the lost wealth has averaged over $80 billion per year. These defendants are mostly technology companies who invest heavily in R&D. To the extent that this litigation represents an unavoidable business cost to technology developers, it reduces the profits that these firms make on their technology investments. That is, these lawsuits substantially reduce their incentives to innovate.

"Half a trillion dollars of lost wealth to defendants from 1990 through 2010": bad enough for you? Interestingly, the new paper finds that the software industry is affected more than most:

the characteristics of this litigation are distinctive: it is focused on software and related technologies, it targets firms that have already developed technology, and most of these lawsuits involve multiple large companies as defendants. These characteristics suggest that this litigation exploits weaknesses in the patent system. In our book Patent Failure, we argue that patents on software and business methods are litigated much more frequently because they have "fuzzy boundaries." The scope of these patents is not clear, they are often written in vague language, and technology companies cannot easily find them and understand what they claim. It appears that much of the NPE litigation takes advantages of these weaknesses.

The paper also examines the argument that patent trolls are good for smaller inventors, who can allegedly use them to obtain a reward for their work that might not otherwise be recognised. But the effect turns out to be minuscule against the backdrop of the losses inflicted:

we can state that less than 2% of the defendants' losses could represent a transfer to independent inventors and quite possibly the true figure is much smaller than 2%.


the incentives provided to patent holders by the current crop of NPEs may be the wrong kind of incentives. The extensive litigation may encourage incentives to obtain patents, especially overly broad and vague patents, rather than incentives to actually innovate.

The authors conclude:

To summarize, there are a lot of big losers from NPE litigation, while hardly anyone benefits much. The defendant firms and their customers lose while patent holders gain very little by comparison. Even the investors in NPE firms have gained little—these firms barely break even based on their cumulative net income in Table 4. Apparently, the only real beneficiaries are the lawyers and perhaps the principals of the NPE firms.

That's important, because it means whatever gains patents may bring to the business economy – and that's assuming they do bring any, which seems not to be the case for the software world, judging by the figures discussed in "Patent Failure" - most be weighed against the half-trillion-dollar loss in terms of money that could otherwise have been spent on real innovation, rather than on supporting the luxuriant lifestyle of trolls and their lawyers.

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Copyright © 2011 IDG Communications, Inc.

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