Saturday, November 1, 2014

New study shows exactly how patent trolls destroy innovation

Andrew Scott

Everyone agrees that there's been an explosion of patent litigation in recent years, and that lawsuits from non-practicing entities (NPEs) — known to critics as patent trolls — are a major factor. But there's a big debate about whether trolls are creating a drag on innovation — and if so, how big the problem is.

new study by researchers at Harvard and the University of Texas provides some insight on this question. Drawing from data on litigation, R&D spending, and patent citations, the researchers find that firms that are forced to pay NPEs (either because they lost a lawsuit or settled out of court) dramatically reduce R&D spending: losing firms spent $211 million less on R&D, on average, than firms that won a lawsuit against a troll.

"After losing to NPEs, firms significantly reduce R&D spending — both projects inside the firm and acquiring innovative R&D outside the firm," the authors write. "Our evidence suggests that it really is the NPE litigation event that causes this decrease in innovation.

The study also finds evidence that trolls discourage innovation even before they file lawsuits. One sign of this: trolls are less likely to sue firms with a lot of lawyers on staff, presumably because they fear prolonged litigation. That encourages firms to bulk up on legal representation, leaving less money left over for developing new technology.

The study also found that patent trolls are highly opportunistic. Unsurprisingly, trolls are more likely to sue companies with more cash in the bank. But the more alarming finding was that trolls weren't picky about where the cash came from.

"NPEs target conglomerate firms that earn all of their cash from segments having nothing to do with the allegedly infringing patents," the authors write. "For example, an NPE is likely to sue a firm regarding a technology patent even if the firm is earning all its revenue from a lumber division entirely unrelated to the allegedly infringing technology patent — even if the division holding the patent is unprofitable."

That's a problem because it creates a disincentive for larger companies to make risky investments in cutting-edge technologies. Trolls may target a company for patent infringement long before a product begins turning a profit. Since there's no guarantee that new technology products ever will turn a profit, firms may be deterred from investing in high-tech products in the first place.

The whole point of the patent system is to encourage companies to innovate by rewarding those that do so. But thanks to the rising number of low-quality patents and the opportunistic use of these patents by trolls, the patent system often has the opposite effect: making innovation less, rather than more, profitable.

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