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Edward J. Black

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Patent Trolls and the Growing Toll On Innovation

Posted: 07/12/2012 3:26 pm

For those who follow the so-called "patent wars" involving a parade of lawsuits, last month's dismissal by a federal judge of Apple's fight against patent-rich Motorola Mobility (just recently acquired by Google) was the apparent end to the latest round in a series of bruising and distracting battles. I say distracting because when patents are secured and used primarily as legal weapons -- as in this case when Apple tried to claim some of Motorola's smartphone patents were invalid and infringed on Apple's own innovations -- the role of patents as a driver of innovation is overridden.

A new study shows just how much damage is being done. The study by James Bessen and Michael Meurer for the Boston University School of Law shows that patent infringement claims from so-called non-practicing entities, or patent trolls, cost companies $29 billion in direct costs last year. That's up from $6.6 billion in 2005.

Big companies are on the front lines. Companies like Google have continued to build their patent arsenal in what appears to be a defensive move in response to competitors buying a big patent arsenal to potentially crush Android.

But this new study shows that smaller innovators face even greater risks from patent trolls. It turns out that 82 percent of the defendants of patent suits are companies with $100 million or less in annual revenue. In fact the median annual revenue of those attacked by patent trolls was $10.8 million. Larger companies still pay more in settlements and legal costs, but for smaller companies, patent trolls steal a larger share of their revenue.

It used to be companies might threaten patent lawsuits to collect licensing fees -- especially in the tech space where interoperability makes companies more dependent on each other. But now companies seem increasingly interested in licensing to third parties (patents trolls) to go after those who are competing against them. For the tech industry, the possibility of tens of thousands of patents in a single product such as a smartphone is a huge burden, risk, and ultimately tax on innovators.

At a patent office oversight hearing last month, the head of the patent office reported on progress implementing the patent reform law, including hiring more patent officers to deal with a backlog of over 600,000 patent applications. But the real answer to over-patenting that Congress has yet to address is to tighten standards for inventiveness and make it harder to keep patents in perpetuity by "evergreening" patent thickets. The volume of patents issued has jumped substantially in the last couple of years. The major portion of these patents, some 80,000 annually, are now in the ICT/Internet/software sectors. The sheer glut of patents leads to what the study's authors call a patent "pollution problem." They advocate boosting the cost of keeping and obtaining patents as a way to cut down on "too many patents."

But even as calls for systematic reform by CCIA and some members of Congress continue, the courtrooms will remain busy. This is not all bad news, since some cases serve as teachable moments for what is wrong with the patent system, and a wise ruling from the bench can help clarify policy goals and challenges. The recent Apple/Motorola ruling by federal circuit court Judge Richard Posner in Chicago is a prime example.

By demanding that Apple and Motorola make a solid case for the damages that might be incurred by the alleged infringement of a handful of possibly valid patents, Posner focused the case on economic reality rather than the rhetoric and posturing characteristic of patent disputes. And Posner went even further, delivering some welcome and pointed criticism of the overall problem in an interview with Reuters.

"It's not clear that we really need patents in most industries," he said. "You just have this proliferation of patents... It's a problem."

The fact that a smartphone includes tens or hundreds of thousands of possibly patentable functions is partly inherent to the technology, but it is also due to a patent system that allows for legions of patents that have virtually no value in themselves except as lottery tickets or land mines for disabling opponents.

We hope Congress will address this sooner rather than later because the costs are climbing -- and the toll patent wars are taking on our overall economy and innovation is ultimately incalculable.

 

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