In the past, non-practicing entities (NPEs) — firms that license patents without producing goods — have facilitated technology markets and increased rents for small inventors. Is this also true for today’s NPEs? Or are they “patent trolls” who opportunistically litigate over software patents with unpredictable boundaries?
The authors also take the time to thank the Coalition for Patent Fairness for “support.”* The statement is likely intentionally ambiguous, but I’m guessing they’re not thanking the likes of Cisco and Google for calling up on the phone with an enthusiastic “attaboy!” for their conclusion that patent litigation by one specific class of patent owners is somehow responsible for “the loss of billions of dollars of wealth” and therefore “harms society.”
Regardless of whether this study was specifically commissioned by some of the world’s most well-known patent infringers, even a brief review shows several reasons to question the conclusions reached. First, and perhaps even more importantly, the basis for the conclusion rests on the laughable assertion that “reaction of the [accused infringer] firm’s share price during the days following the filing of [a patent infringement] lawsuit” is by any means a valid proxy for estimating the “private losses” of companies so accused. Second, the authors imply that monies paid by infringers but not reaching “small inventors” has somehow been entirely wasted, without benefit. Finally, the researcher’s objectivity is compromised–not only by the apparent close relationship with companies routinely accused of appropriating inventions belonging to others–but by the way they present their findings to the reader. In particular, the authors disparage an entire class of patent owners based on reasons entirely beyond the patent owner’s control.
Of course a company’s stock price decreases in the days following the filing of a lawsuit. Investors routinely watch public events like litigation, and information spreads like wildfire throughout the market. However, while I understand the logic that “investors respond to the news of a lawsuit filing by reducing their expectations of future earnings,” the author’s apparent (and unsupported) conclusion that the expectation reduction “should reflect all the costs the firm faces from the suit.” For what reason? Are investors that react to individual events by selling their ownership really behaving rationally and reducing “expectations of future earnings”?
The far simpler explanation for any correlation between patent lawsuits and stock price is that the news creates uncertainty about the future of the company. Uncertainty translates to increased risk, and risk-averse investors react to increased risk by dumping the stock. You don’t need graduate courses in economics to follow that logic. Using stock price as a proxy might equally lead people to blame the weather, the President’s speeches, or the New York Yankees for loss of wealth.
As to whether patent litigation activity benefits “small inventors”, the authors explain that if these claimed corporate “losses were offset by massive transfers to independent inventors, we think we would have heard or read reports documenting this bonanza and a corresponding surge in research activities by small inventors.” First of all, selling a patent to a “non-pracitcing entity” is, more often than not, a last resort of the inventor. Inventors, particularly independent inventors, treat their creations as though they were their own children (and many have referred to them as such in personal conversations). In my experience, inventors decide to sell only after exhausting all other efforts, and in some cases live to regret the decision later.
More importantly, the implication that a patent owner’s earnings are wasted if not significantly transferred to the inventor is simply ludicrous. Most inventors receive nothing more than the loyalty provided by at-will employment (and if they’re lucky, a nominal bonus check). Inventors who deal with NPEs receive a fair bargain for their invention (or else they wouldn’t sell). Meanwhile, NPEs receive compensation (when they make the right buys) for recognizing value in the patent rights acquired. Both phenomenon are as they should be, since they allow each party to continue their respective pursuits, with the net result continuing to encourage inventors to disclose their inventions. (See my post Patent Licensing Is The Answer, But What Is The Question? for more on this argument).
As the biggest insult, however, this so-called “academic” paper uses unjustified, biased terminology to describe a class of patent owners, immediately raising suspicion about the objectivity of any conclusions reached. My personal reaction to this would be on par with reaction to a study of some racial or ethnic group that described the group with a well-known racial slur. In all seriousness, would anyone care to imagine the reaction to a study about Native American casinos with a title like Why Do Redskins Deal Poker?
Moreover, the authors repeat throughout that patents asserted in litigation may have “fuzzy boundaries” and that infringement is often “inadvertent” or “independent” of the patent’s existence. First, while “fuzzy boundaries” represents a legitimate concern, any resultant problem rests with the patent office, not with patent owners. Patent owners spend thousands to secure patent rights as broadly as possible, entrusting the patent office to conduct an appropriate examination. Further, the patent office applies a broader interpretation to patents, so patent owners correctly rely on possession of a duly issued patent. If “fuzzy boundaries” poses a significant problem, the solution lies with the patent office, not with patent owners. (And the solution is simple: give the patent office the funding it needs).
Second, liability even in the face of “independent” or “inadvertent” is not only unavoidable, it is justified. The justification cuts to the heart of the patent system in the first instance. The bargain struck by forming the system asks inventors to come forward and disclose. In exchange, they receive a patent. The risk of remaining ignorant of patents should be borne by the ignorant party, not the patent owner. Further, if lack of pre-infringement knowledge were a defense, companies (to an even greater extent) could easily avoid liability by remaining ignorant of patents. This frustrates goals of the patent system centered around dissemination of knowledge and advancement of the technological arts, and acts as a material disincentive to disclose new inventions.
(The natural counter-argument at this point would be for someone to suggest that patents are unhelpful when it comes to teaching new technologies. Having read hundreds, if not thousands, of patents, I respectfully disagree. Moreover, if legitimate concerns about enablement and written description exist, this too is a matter than can be resolved by dealing with the patent office, rather than disparaging patent owners.)
I do thank the academics at Boston University for publishing their research. Doing so gives me the opportunity to remind myself (and my readers) why I started this blog in the first place. Prior to Gametime IP, the strongest defense of NPE-based patent litigation generally revolved around the fact that it is every patent owner’s right to take accused infringers to court, whether we like it or not. This tepid “defense” produces a bad aftertaste, sort of like saying “I hate the cable company, but it’s their product and I suppose they can do what they want.” Our public discourse largely lacked any affirmative argument for the value created by NPEs, giving infringing companies free rein to pollute the literature with only anti-patent owner content. Thankfully, those days are over.