The Meteoric Ascent of the Patent Troll and the Devastating Consequences for Innovation

Today it is perfectly legal for companies to buy and sell the rights to unlimited numbers of ideas, a company is not required to have any interest in making these ideas a reality. It is perfectly legal for companies to sit on patents and wait for others to create before either suing the creator or charging licensing fees.? The following pair of quotes is pulled directly from the promotional material on the website of just one prolific patent troll:

?$2 Billion+ cumulative licensing revenue?

?70,000 IP assets acquired and nearly 40,000 in active monetisation programmes?

In fact it is not just legal, patent trolling is an industry on a colossal scale. According to research recently published by Boston University School of Law, last year patent trolls won a cool $29 Billion. One of the most worrying findings of research in to patent trolls is that the mere threat of a suit is enough to put the frighteners on and make creators pay up:

?The average legal cost to defend a patent case is $420,000 for small and medium sized companies and $1.52 million for large companies. The average settlement costs are $1.33 million for small and medium companies and $7.27 million for large companies.?

It appears that a vast majority of the money acquired by ?non practicing entities? is creamed off, according to the research by the Boston researchers:

?no more than a quarter (of the direct spending by defendants ) could possibly represent a flow to fund innovative activity?

Despite this, the Boston University School of Law researchers demonstrate that money flowing in to the coffers of patent trolls is rising at a colossal rate. The following figures do not include indirect costs such as loss or delay of revenue or abandonment of new inventions:

Patent trolls however are by no means the only people in the bulk patent buying business; last August Google spent $12,500,000 on 17,000 patents. Perhaps most worrying of all is the catastrophic state of affairs with regard to the utterly overwhelming volume of software patents that continue to be filed year on year. According to a study published by Yale Law School last year:

?We?ll estimate the number of firms that create software at 600,000. The number of software patents issued, is around 40,000 in a typical year (and growing). That means that there are around 24 billion new patent-firm pairs each year that could produce accidental infringement. Even if a patent lawyer only needed to look at a patent for 10 minutes, on average, to determine whether any part of a particular firm?s software infringed it, it would require roughly 2 million patent attorneys, working full-time, to compare every firm?s products with every patent issued in a given year. At a rate of $100 per hour, that would cost $400 billion. For comparison, the software industry was valued at $225.5 billion in 2010.?

In essence, it would cost more money than the entire US software industry earns each year just for each software firm?s lawyers to skim read the 40,000 software patents published in the US each year. Obviously this is a ridiculous statement, there are only 40,000 registered patent attorneys in the US so this cannot happen, leaving the gate wide open to frivolous legal suits from competitors and patent trolls. In reality it seems, many patents don?t even get read. It?s almost as if we have taken our collective creativity and placed it in to a locked box where the main benefactors are lawyers and profiteers. In fact, there is no almost about it.

For further reading on the patent problem check out Wired Magazine?s excellent current series on patent issues and Village Voice?s excellent feature last week on ?the new cold war?. Also read at the Big Think about a recently uncovered rare and worrying case of patents encroaching into the realm of Psychology.

References:

Bessen, James E. and Meurer, Michael J., (2012) The Direct Costs from NPE Disputes. Boston Univ. School of Law, Law and Economics Research Paper No. 12-34. Available at SSRN: http://ssrn.com/abstract=2091210 or http://dx.doi.org/10.2139/ssrn.2091210

Mulligan, Christina and Lee, Timothy B., (2012) Scaling the Patent System. NYU Annual Survey of American Law, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2016968

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