The Social Costs of Patent Trolls

President Obama heralded the patent reform bill’s prospects for stimulating innovation when he signed the bill last week. SIIA concurs. The new law, which represents the first major reform the patent laws in 60 years, makes critical, necessary patent improvements that will drive our country’s continued leadership in the software and information industries. SIIA has continually called for patent reform, and we are pleased to see U.S. patent law move in the right direction. Enactment of the America Invents Act will enhance patent quality and encourage growth in sectors that are poised to create jobs and renew our economy.

While there is no question that the new law is a substantial improvement over the status quo, many fear it might not bring an end to abusive patent litigation that stifles innovation and hinders job growth.

A new study by James Bessen and Mike Meurer on the social costs of patent trolls in the years 2000-2010 sheds some light on the magnitude of the patent troll problem.

They conclude that patent lawsuits from entities that hold patents but do not produce goods or services “are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives.”

The idea that patent litigation is creating disincentives for innovation is not new. Bessen and Meurer’s 2008 book, Patent Failure, summarized here, came to a similar conclusion that during the 1990s the net benefits of patents were negative for public companies outside the pharmaceutical and chemical industries. The news is that things did not improve in the first decade of the 21st century.

Abusive patent litigation has been a staple of recent press coverage. An August report by NPR highlighted the problem of unproductive litigation by non-practicing entities. A piece by Timothy B. Lee in the current National Review underscored the same problem. Tech entrepreneur Mark Cuban pointed out in his August blog post that patent litigation risk from non-practicing entities is “unlimited,” which forces companies to set aside resources for patent litigation that would otherwise be used for further investment and job creation. Companies within SIIA report that infringement suits are on the rise, significantly, within the last year. This problem is especially severe for mobile app developers and platforms, leading some offshore app developers to shun the U.S. market for fear of patent infringement suits. Major companies such as Apple, Google and Microsoft are amassing large portfolios of patents to improve their strategic position in the coming patent litigation wars.

The new law will make some improvements. It will allow the U.S. Patent and Trademark Office to keep more of revenue it collects, thereby reducing the problem of bad patents, and it will make it easier to challenge bad patents after they have been granted.

But the new law applies only to new patents, and it does nothing to limit the risk of patent litigation by limiting damages from non-practicing entities. So the problem of abusive patent litigation will likely be with us for some time – along with the social costs outlined in the new Bessen and Meurer study.

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