One Cheer for Patent Trolls

by on October 11, 2010 · 11 comments

“On the whole, the results certainly seem to suggest that patent trolls with software patents do very much view the system as a lottery ticket, and they’re willing to use really weak patents to try to win that prize. That is not at all what the patent system is designed to do, but it’s how the incentives have been structured — and that seems like a pretty big problem that isn’t solved just by showing how many of these lawsuits fail. The amount of time and resources wasted on those lawsuits, as well as the number of companies who pay up without completing a lawsuit, suggest that there is still a major problem to be dealt with.”

So writes the always-thoughtful Mike Masnick at Techdirt.  He is referring here to a newly-published article by John R. Allison, Joshua Walker and Mark Lemley, released as a Stanford Law and Economics Olin Working Paper.  Mike has written frequently about patent trolls—companies that buy up patents from inventors and then make money by litigating or threatening to litigate against potential infringers—and never with much sympathy.

The Stanford Study

I have a less extreme view of patent trolls, about which more in a moment.  First, a few words about the study.

The Allison/Walker/Lemley paper, working with a couple of different databases of patents and litigation involving them, did a number of interesting regressions that revealed some counter-intuitive findings about the current state of patent lawsuits.

The study found that patents litigated most frequently—that is, whose holders bring lawsuits against multiple alleged infringers—are often the least likely to stand up in court.  “Once-litigated patents win in court almost 50% of the time,” the authors found, “while the most-litigated – and putatively most valuable – patents win in court only 10.7% of the time.”

Which is to say that when a patent lawsuit actually goes to trial (few do), the most frequently-asserted patents were nearly always found to be invalid in the first place.  Such patents should never have been granted by the Patent Office, either because they are obvious, non-novel, or otherwise fail to meet the criteria for a patent.  (Invalidity of the patent is a complete defense to a claim of infringement.)

The worst offenders in the study are software patents (see “Bilski:  Justice Stevens’ Last Tilt at the IP Windmills”), which accounted for almost 94% of the most often asserted patents in the study and yet were upheld as valid less than 10% of the time they actually went to trial.

Yet in most cases these patents are asserted against multiple defendants, most of whom pay settlements to avoid the time, expense, and uncertainty of a trial.  That decision, the study suggests, is a mistake.  Defendants who take these cases all the way through trial usually win; that is, they pay nothing.

Well not exactly nothing.  Even a successful litigant must pay the costs of defending her case, and that cost can run into the millions.   (In some situations, the loser must pay the winner’s costs, but under the Patent Act, fee shifting only occurs in “exceptional” cases.)

As the authors note, “It appears that as a society, we are spending a disproportionate amount of time and money litigating a class of weak patents. Our results may also have implications for our models of patent value and of rational behavior in litigation, since it appears we know quite a bit less than we thought about what makes patents valuable.”

Toward a Modest Defense of Trolling

Masnick and others take this study as further evidence—if any was needed—that patent trolls are a drain on society offering absolutely nothing but headaches, interference with innovation, and enormous wastes of money, both from litigants and the taxpayers, who underwrite the court system.  Patent trolls or “Non-Practicing Entities” (NPEs) as the authors call them, win only 9.2% of their lawsuits that go to trial.  (Only about 10%, however, go to trial, and the terms of settlements are kept confidential by both sides.)  Clearly their patents, especially the ones they assert the most frequently, are junk.

(Why would the most frequently-asserted patents be the most likely to fail a validity challenge at trial?  The broader the patent, the easier to assert it against a wide range of potential infringers, and the more likely they will be, given the breadth, to settle.  But at trial the value of a broad claim shifts—what looks scary to a defendant for the same reasons looks most dubious to the trier-of-fact.  Claims that are too broad are rejected, precisely because they represent the grant of a monopoly over too much otherwise productive economic activity.)

As I wrote in “The Laws of Disruption,” I don’t have much sympathy for patent trolls, but I don’t go quite as far as their harshest critics.  Put another way, I’m not sure I share Masnick’s conclusion that the findings of the study lead to the conclusion that “there is a still a major problem to be dealt with,” or in any case that it ought to be dealt with by reforming trolls out of the system altogether.

(For a spirited defense of trolls, see this multi-part posting.  Unfortunately the author never gives his name!)

Why the hesitation?  Even if every patent troll is a low-life individual or entity, and even if nearly all of the patents they assert are ones the patent office should never have granted in the first place, there’s still a positive benefit to society from the existence of patent trolls.

To understand why, consider how a troll becomes a troll.

Patents are granted to inventors, and the intent in giving them a 20-year monopoly on the use of their invention is to provide a market biased in their favor.  They can either commercialize the invention themselves without fear of competition, or sell or license the invention to others to do the same.

Keeping competitors away, albeit for a limited time, gives the inventor the chance to recover their up-front investment in making the invention.  In some cases, inventors toil at their own expense for years before coming up with anything new (if ever), and even then the potential market for their invention may be small or non-existent.

Granting a patent goes against the otherwise free market orientation of capitalist economies, but is thought to be a necessary evil.  If inventors don’t believe they’ll have protected markets, they may not undertake the risk and cost of inventing.  And if they don’t, important inventions may be delayed or lost.  If that happens, everyone loses.  That, in any case, is the theory behind patents.

But a patent troll, by definition, has done no inventing and has no intention of commercializing the inventions they buy.  They simply sue or threaten to sue companies they believe are using the invention (intentionally or, more likely, unintentionally), extracting tribute in the form of forced licenses or other damages.

So what positive role do they play in the system?

Consider how a troll gets a patent in the first place.  In the simplest case, an inventor finds they cannot afford to commercialize their invention, or doesn’t have the risk or managerial profile necessary to try.  Perhaps they try to sell the invention to a company in the industry who can make use of it, or offer to license the invention to several such companies.  The inventor may be rebuffed or ignored or offered a price too low to keep her in the business of inventing.  Maybe the invention isn’t worth the investment already made, or maybe the company fails to evaluate its potential accurately or even at all.

Or maybe the company, knowing that the inventor lacks the resources not only to commercialize but also to protect her invention, takes the chance of ignoring the patent and continues to operate as before, even if that means infringing the patent.

Well, why not?  The inventor’s claim may be no good, or may not cover the company’s behavior.  But even if there is infringement, the road to proving it is long, expensive, and requires a skill set in litigation, negotiation and the substantive law of patents the inventor almost surely doesn’t have and, perhaps, can’t afford to engage.

So as a last resort, the inventor sells the patent to an NPE.  The NPE may buy up many patents, perhaps for related inventions, in the hopes that the combined pool includes at least some that are both valid and cover some unlicensed behavior in industry—or at least that a threat that they do will be credible.  They assert these patents against whatever defendants will most likely be induced to settle, balancing the potential settlements against the probability of incurring the costs of litigation, perhaps all the way to a trial.

As the Stanford paper suggests, in the vast majority of cases the authors studied the asserted patents were in fact junk, at least as determined at trial (judge and jury may have their own biases, of course).  The inventors shouldn’t have gotten anything for them, either from the defendants or from the patent troll, because the patent never should have been granted in the first place.  Again, the trolls may know better than the study suggests the real value of their holdings, and may be betting that the transaction costs of litigation will encourage defendants to settle anyway.

That bet is a game of chicken, for if the defendant chooses to litigate then both sides must absorb heavy litigation costs no matter who wins—the troll bets that the defendant will simply pay them to go away.

Patent trolls may make most of their money, in other words, from arbitraging the inefficiencies and failings of the current patent system.

But even if this is so, there is still value to the system and to society from the existence (if not the individual behaviors) of patent trolls.  For without them, potential defendants have no incentive to deal with inventors who want to sell or license their inventions, even valid ones.  Absent patent trolls, the companies would conclude the inventor can’t litigate regardless of the validity of the claim, a reality the inventor always would know.

Without the existence of patent trolls as a buyer of last resort, there’s no credible threat the inventor can make, and a rational defendant will simply carry on knowing the patent can’t be successfully enforced.  Knowing this set of facts, inventors at the margins may not undertake their research in the first place.

So even if every non-practicing entity is a troll, and even if every troll-asserted patent is garbage, the role in the system played by the existence of trolls is an important one.

Whether it justifies its cost today is another matter, one tied hopelessly to the other weaknesses and dysfunctions of the overall patent system.  Speaking generally, the authors conclude that “it is important to recognize that software patents and patents asserted by NPEs are both taking disproportionate resources in patent litigation, and that the social benefit from those cases appears to be slight.”  But they stop well short of calling for reforms that would eliminate the incentives that keep NPEs in the game.

That caution, for now, seems sensible.

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