The Patent Troll Plague

Patents are supposed to encourage innovation and we’re starting to be in a world where they might start to stifle innovation. Governments may need to look at the patent system and see if those laws need to be modified because I don’t think some of these battles are healthy for society.

- Jeff Bevos, President and CEO, Amazon

When Jeff Bevos, who asserted a dubious patent himself on Amazon’s “one-click” web purchasing tool starts to worry that the patent system is broken, you know the problem has to be serious. It is.

“Patent assertion entities” (PAEs), or sometimes “non-practicing entities” (NPEs) are the politically correct term for patent trolls.. The PAE business model focuses not on developing or commercializing patented inventions but on buying and asserting patents, often against firms that have already begun using the claimed technology after developing it independently, unaware of the PAE patent.

Patent trolls generated at least $29 billion in revenues from defendants and licensees in 2011, a 400 percent increase over $7 billion in 2005. The costs to those defendants and licensees are deadweight, with less than 25 percent flowing to support innovation and at least that much going towards legal fees. Critics assert that they undermine the purposes of patent law – promoting innovation by providing incentives to invest in development and commercialization of inventions – and unnecessarily injure companies that play a vital role in the American economy.

The patent troll business model looks a lot like the classic shakedown:

According to one empirical study, [patent trolls] lose 92 percent of merits judgments, but few cases make it that far. The vast majority end in settlements because litigation is risky, costly, and disruptive for defendants, and PAEs often offer to settle for amounts well below litigation costs to make the business decision to settle an obvious one.

Patent troll claims are dramatically increasing. In contrast, patent claims by operating companies, companies that actually use the patents involved, are in decline.

Patent troll cases rarely got to trial; overwhelmingly, they settle early. And that’s because they set the settlement price below the cost of litigation. They are classic nuisance suits, except that if you are trying yo develop a business plan to attract venture capital, these lawsuits are an absolute nightmare.

And, in fact, when you scratch down into the data, that’s pretty much the case. In a study by Lex Machina, Inc., published in the Social Science Research Network, it found:

A random sample of 500 cases from 2007-­‐2011 suggests that the impact of patent monetization entities on patent litigation is both dramatic and growing across time. We note in particular that lawsuits filed by patent monetizers have increased from 22 percent of the cases filed to almost 40 percent of the cases filed, and that the increase has occurred in only five years.

We also note that of the five litigants who filed the most patent infringement claims in the period covered by the data, four were monetizers and only one was an operating company. On the opposite end of the spectrum, universities barely registered on the scale, filing only 0.2 percent of the lawsuits in our sample.

Finally, the data also show that cases filed by patent monetization entities were unlikely to advance very far in the trial process and generally settled early in the litigation. The numbers of cases of any type proceeding to final disposition are small, however, making reliable conclusions impossible to draw.

Granted the Congress is dysfunctional to the point of absurdity, but this should be an issue where both liberals and neocons can both be enthusiastic and accomplish a bit of good. Reform is badly needed before the patent trolls bring American innovation to its knees. It needs to be done sometime. Why not now?

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