Written by James Bessen, Boston University School of Law, and Research on Innovation, and Michael J. Meurer, Boston University School of Law.
The America Invents Act requires the GAO to “conduct a study of the consequences of litigation by non-practicing entities… and assess [t]he economic impact of such litigation on the economy of the United States ….” Although we found it hard to get very excited about the smorgasbord of patent reforms bundled together in the AIA, this provision made us smile, and feel a little bit hopeful. Perhaps this signals a growing taste on the part of Congress for evidence over anecdote as the basis for patent policy-making. We’ve recently conducted two empirical studies of NPE patent litigation which we hope will prove useful to the GAO and other policy-makers.
One study, The Direct Costs from NPE Disputes, estimates the costs of NPE assertions based on a survey of defendant firms. We find that the aggregate accrued payments for outside counsel, licenses, and other direct payments to resolve patent disputes are large and growing rapidly; they totaled $29 billion in 2011, up from $6.5 billion in 2005.
The other study, The Private and Social Costs of Patent Trolls, estimates the cost of NPE litigation based on stock market reaction to the filing of lawsuits. We find that the filing of NPE patent lawsuits is associated with an $80 billion average annual loss of share value for defendant firms over the years 2006-2010. The higher costs in the second study are not surprising because rational investors take account of the direct costs enumerated above and also indirect costs such as business disruptions arising because researchers’ and managers’ attention is diverted from productive activity to litigation related issues, delays in product development and new product introductions caused by litigation concerns, and costs arising from litigation worries that spill over to suppliers and customers.
NPEs are active only in certain technologies and industries, and thus these costs are not distributed evenly across various fields of innovation. About three-quarters of the patents asserted by NPEs are software patents. The defendants are almost always in high-tech industries, finance, or retailing. There is a striking absence of NPE activity in the patent-intensive chemical and pharmaceutical industries.
How should policy-makers react to the high costs of NPE litigation? In theory, these costs could arise because NPEs act as intermediaries between inventors and defendants. Some commentators contend that NPEs efficiently extract the rewards owed to the inventors of the patents that they assert. If true, then NPE litigation should be encouraged or at least tolerated.
We are not aware of any solid evidence supporting such a positive view of NPE litigation. Most NPEs are privately held and shrouded in secrecy, thus it is hard to tell whether they deliver much benefit to inventors. However, about 14% of NPE litigation is conducted by public NPEs, and their financial reports indicate they do not transfer a significant share of defendants’ litigation costs to inventors. Furthermore, certain characteristics of NPE litigation are hard to square with the view that NPEs help Davids in their struggles with Goliaths. Small and medium-sized companies account for 90% of the defendant companies, 59% of the lawsuit defenses and 37% of the accrued direct costs. Moreover, 86% of NPEs sue multiple defendants in a particular case – sometimes there are dozens of defendants. These data are more consistent with a business plan based on opportunistic and often frivolous litigation.