Hate innovation? Have we got the industry for you.
If you're looking for a swell way to make a few bucks, here's an idea: buy up software patents, don't actually try and develop any products or sell anything, and then just sue people left and right for patent infringement. Congratulations. You're a parasite.
That's basically the only conclusion you can draw from a new study by James Bessen and Michael J. Meurer of Boston University which looks at the costs of patent litigation instigated by "non-practicing entities" (NPEs), the polite term for patent trolls. NPEs own patents, but don't actually use them to make goods or services that people would, you know, want. Rather, they use the patents to prevent other companies from creating goods or services that people might want. Lovely, really. The cost of this vital industry? $29 billion in 2011 alone, and that's just the direct legal costs, not even counting "various indirect costs ... such as diversion of resources, delays in new products, and loss of market share." The loss for the economy overall -- in terms of immeasurable opportunities -- is surely far greater.
In the past, Bessen and Meurer write, NPEs provided a service to small inventors who could not on their own defend their patents. But for the most part, that is no longer the case. NPE litigation has been a booming industry in recent years -- particularly in the software industry -- reaching 2,150 unique companies facing litigation in nearly 6,000 cases instigated by NPEs in 2011. A chart from the paper shows the growth of such cases in recent years:
The growth of such litigation comes not from the useful role of protecting small inventors but from a more predatory practice of trolling (beautifully and compellingly reported on by This American Life last year). "We find little evidence that NPEs promote invention overall," the authors write. Basically, the say, there is no way that the inventors are possibly benefiting at a scale that anywhere close to reaches the $29 billion price tag. Moreover, the price is substantial relative to total business spending on R&D, which totaled $247 billion in 2009, "implying," they say, "that NPE patent assertions effectively impose a significant tax on investment in innovation." They write:
"Previous research has shown that the defendants in these lawsuits are largely tech companies that invest heavily in R&D. This estimate suggests that their losses are much larger than the possible flows to small inventors, especially if one adds indirect costs of NPE litigation to the direct costs ... Effectively, what defendants pay in costs as a result of NPE litigation reduces their own R&D budgets. This is because companies become targets for litigation mainly when they introduce innovative products. Hence R&D managers must anticipate NPE costs as part of the cost of innovating."
The problem is particularly acute for small- and medium-sized companies, which account for 37 percent of the direct costs, and, for them, the costs are relatively larger, "making it" they argued, "even less likely that innovative startups are net beneficiaries of NPE activity." They called the costs "a social loss" [emphasis mine]. The effects of the loss may not be evenly distributed across potential innovation but may fall in such a way as to "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."
The authors say that one promising opportunity for reform lies in "fee-shifting" so that the cost burdens from lawsuits would fall more on trolls than on defendants, which makes particular sense in light of the fact that an earlier study found that "troll patents fare poorly in court." Raise the costs of litigating, the thinking goes, and the trolls may be a bit less eager to pursue their claims.