Patent Trolling: Good or Bad for Innovation Funders? (Views: 6360)
Wed, 13 Nov 2013
On October 3, 2013, the United States took a giant step forward in the pursuit of real patent reform with the introduction of the Innovation Act of 2013. While over the past few years, billion-dollar patent infringement lawsuits involving tech giants like Apple, Samsung, Microsoft, and Google have grabbed the headlines, representatives of the tech sector have been more worried about how patent trolls have been targeting small app developers.
Representatives of the technology sector have applauded the Act, if passed, as an important instrument that will severely limit trolls in their “parasitical” activities. The Electronic Frontier Foundation, for example, has expressed concern over the growing problem of patent trolling because it is “stymieing innovation, hurting individual inventors, small businesses, and the economy at large.” A recent study (June 25, 2012/revised July 2013) by Boston University’s James E. Bessen and Michael J. Meurer calculates that the overall direct cost of patent lawsuits in the U.S. in 2011 was 29 billion dollars.
What are patent trolls and how do they affect innovation funders? Also known as “non-practicing entities”(NPEs), and patent-licensing and patent-litigation agencies, they are companies that own, buy, or license patents from others for the purpose of obtaining licensing fees or filing infringement lawsuits but do not practice the technology covered by their patents. In the past, NPEs have helped small inventors profit from their inventions, but given the unprecedented levels of NPE litigation, the study concludes that NPEs are reducing innovation incentives.
The study also found that most of the defendants were small or medium-sized firms, and “that NPE litigation imposes substantial direct costs on high-tech innovators with little apparent offsetting benefit to inventors or innovators from assertion of NPE patents.” Likewise, “rather than transferring technology and aiding R&D, it appears that NPEs usually arrive on the scene after the targeted innovator has already commercialized some new technology.”
Due to their central role in starting or funding innovative companies, venture capitalists often invest in companies that own patents. Not unexpectedly then, two other studies by Robin C. Feldman at the University of California’s Hastings College of the Law and Colleen V. Chien at Santa Clara University found that the majority of the venture capitalists interviewed were so concerned about the negative effects of outside patent trolls that they said they would avoid using them even if companies they were funding were to fail. Startups and other new businesses along with their financial backers are especially vulnerable to NPEs since patent litigation is extremely complicated and expensive.
Patent litigation agencies use the threat of litigation to demand quick settlements and to ask for the right amount of money at the right time. The right time may be when a company is about to release a new product or secure a new round of funding. Receiving demands based on vague claims that often include no details about the patents that are allegedly being infringed, defendants often feel that settlement is the least costly option, even if it may cost them several hundred thousands of dollars.
For venture capitalists, the importance of this new law lies in the fact that if NPEs are not reined in soon, the cost of rapidly increasing patent infringement litigation will discourage them from investing in new technology startups, especially in the area of software, due to the corresponding risk of litigation. The direct and indirect costs to the defendants’ businesses will also reduce available capital for investment and delay innovation.
In light of the above, the answer to the question posed in the title might appear to be obvious. There are, however, others who extol the benefits of the current U.S. patent system including NPEs. A recent article in Forbes (9/17/2013) entitled “Thank the Founding Fathers for the Open Market in Patents”, by Jon Dudas, undersecretary of commerce and director of the U.S. Patent and Trademark Office from 2004 to 2009, and David Kline, author of Rembrandts in the Attic, affirm that “even though most start-up companies, universities, and technology licensing firms don’t manufacture products themselves, they still produce enormous value for the U.S. economy.” Their point is that professional intellectual property licensing firms act as intermediaries that facilitate “the transfer of new technologies to businesses that are best equipped to develop them into new products, services, and medical treatments that benefit society.”
They also provide facts and figures to demonstrate that early American patent regulation that permitted a wide array of intermediaries including lawyers, venture capitalists, and patent licensing firms “gave rise to the most technologically fertile period in American history.” Illustrating this, Dudas and Kline make reference to more than 5000 new products and 7000 new companies having been launched over the past 30 years from university NPE patents alone.
There are always two sides to every question, so you our readers will have to decide whether patent trolling is good or bad for innovators and innovation funders.
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