Study calculates economic harm from patent trolls

By studying the movements of the stock market, three researchers from Boston University School of Law have found that over the past twenty years patent trolls have cost publicly listed US product developers 500 billion US$, and the rate is rising year by year. They’ve also shown that very little of this is transfered to the small inventors which trolls sometimes use to justify their existence. That last part won’t surprise readers of this website, but it’s important to have a credible document to prove these things.

[Because trolls are just one of many problems caused by software patents, and aren’t the biggest problem either, this figure represents only a fraction of the total harm caused by software patents]

Read on for some excerpts, or read the full paper: The Private and Social Costs of Patent Trolls (source).

Two of the researchers, Bessen and Meurer are already known for their individual writings on software patents, plus and their book Patent Failure. They’re joined in this paper by Jennifer Ford.

Below is a slighly long set of excerpts which summarise the paper. For anyone interested in the discussion of statistical methods, the resulting tables, and complete numbers, read the paper linked above.

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.

Second, by exploring publicly listed NPEs, we find that very little of this loss of wealth represents a transfer to inventors. This suggests that the loss of incentives to the defendant firms is not matched by an increase in incentives to other inventors.

Third, 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.

We conclude that the loss of billions of dollars of wealth associated with these lawsuits harms society. While the lawsuits increase incentives to acquire vague, over-reaching patents, they decrease incentives for real innovation overall.

To the extent that the recent NPEs opportunistically assert “fuzzy patents” against real technology firms, they can decrease the incentives for these firms to innovate. Innovators deciding to invest in new technology have to consider the risk of inadvertent infringement as a cost of doing business. This risk reduces the rents they can expect to earn on their investment and hence decreases their willingness to invest.

Using the financial statements of publicly listed NPE firms, we obtain upper bound estimates on these transfers. We find that relatively little of the wealth lost by defendant firms shows up as a transfer to NPEs and relatively little of the funds flowing to NPEs is transferred to outside inventors.

Chien finds that 90% of the high tech NPE lawsuits involve software or finance patents. Allison et al. (2010) study patents litigated multiple times and find that software patents account for 94% of the lawsuits.

Risch (2012) finds that the mean NPE lawsuit occurs 8 years after the
patent was issued. […] The long delays suggest that in many cases these patents are not asserted until other firms actually develop the technology.

Some characteristics of defendant firms […] Almost two thirds of the firms are technology firms, including software and communications firms, and these firms, on average, spend a lot on R&D and have very substantial intangible assets. A significant number of financial, retail and wholesale firms are also represented. And these firms are typically subject to multiple NPE lawsuits.

most of the NPE disputes involve multiple defendants, either in the
same suits or from multiple suits filed by the NPE on the same day. […] median of 5 […] Only 17% of the defendants were the sole defendant listed. This contrasts sharply with other patent litigation where 85% of defendants are solo

about 62% of the patents are software patents, using the technology class categorization used in Bessen (2011). Using the NBER categorization (Hall et al. 2001), 75% of the patents are in computer and communications technology. Thus this sample shows the same concentration of NPE litigation in software and related technologies as in earlier studies. Both this technological concentration and the prevalence of multiple defendants are important for interpreting the nature of the current crop of NPEs.

How much of the transfer to NPEs is subsequently transferred to inventors outside of the NPEs? The investment that NPEs make in acquiring patents is included in the accounting category “net cash flow to investing activities.” […] Although this figure includes other investments in addition to payments to outside inventors, it is small compared to the defendants’ losses: $1.7 billion, or about 2% of the defendants’ losses. […] In any case, 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%.
Some of the NPEs also conduct their own R&D. Indeed, capitalized R&D investments are included in the intangible assets of the firm. The R&D expense flows are also not large, around 2% of the loss.

Studies show that the more a firm spends on R&D, the more likely it is to be sued for patent infringement (Bessen and Meurer 2005). Moreover, very rarely are the defendants in these lawsuits found to have actually copied the patented technology (Bessen and Meurer 2008, p. 126, Cotropia and Lemley 2009). Instead, they are inadvertent infringers, if infringers at all. This means that they have to anticipate the risk of future lawsuit-related losses as part of their cost of developing new technology and products. This risk is a disincentive to invest in innovation, and our results find that it is a very large disincentive, much larger than any possible incentives provided by transfers to independent inventors via NPEs. Even if incentives to small inventors were much more fertile than incentives provided to large technology firms—producing two, three or even ten times as many innovations —the incentives flowing to small inventors would not offset the very much larger disincentives imposed on the technology firms.

NPE activity may skew the research agenda of small firms away from disruptive technologies and toward mainstream technology and associated patents that can be asserted against big incumbents. Even worse, small firms are encouraged to divert investment from genuine invention toward simply obtaining broad and vague patents that might one day lead to a credible, if weak, lawsuit.

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.

We have shown that defendants have lost over half a trillion dollars in wealth—over $83 billion per year during recent years—and this has not improved incentives to innovate. While the lawsuits might increase incentives to acquire vague, over-reaching patents, they do not increase incentives for real innovation. The defendants in these lawsuits are firms that already invest a lot in innovation. Their losses make it more expensive for them to continue to do so and it also makes them less willing to license new technologies from small inventors. Meanwhile, independent inventors benefit very little from what the large companies lose.