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34 Regulation 26 (2011-2012)
The Private and Social Costs of Patent Trolls

handle is hein.journals/rcatorbg34 and id is 206 raw text is: The Private and Social Costs of Patent Trolls Do non practicing entities benefit society by facilitating markets for technology? Boston University School ofLaw In 2010, firms operating in the United States found them- selves in lawsuits initiated by nonpracticing entities (NPEs) more than 2,600 times. That is a five-fold increase over 2004. Is this trend worrisome? NPEs are firms that do not produce goods. Rather, they acquire patents in order to license them to others. In principle, NPEs can perform the socially valuable function of facilitating markets for technology. Some inventors lack the resources and expertise needed to successfully license their technologies or, if necessary, enforce their patents. NPEs provide a way for these inventors to earn rents that they might not realize otherwise, thus providing them with greater incentives to innovate. For example, economic historians find evidence ofa robust market for technol- ogy during the 19th century that allowed individual inventors to earn returns on their inventions in the era before the rise of the large research and development laboratories. Optimists argue that the current crop of NPEs perform a similar function and should not be discouraged. Critics, including many technology firms, compare these NPEs to the mythical trolls who hide under bridges built by JAMEs BESSEN is lecturer in law at Boston University School of Law and director and founder of the nonprofit research group Research on In- novation. JENNIFER FORD earned herJ.D. from Boston University School of Law in 2011. MICHAEL J. MEURER is the Abraham and Lillian Benton Scholar and professor of law at Boston University School of Law. The authors thank Colleen Chien, Dennis Crouch and Michael Risch for comments. They also express their appreciation to Tim Layton for research assistance, the patent information firm PatentFreedom for data, and the Coalition for Patent Fairness and the Kauffman Foundation for support. other people, unexpectedly popping up to demand payment of tolls. The critics call NPEs patent trolls, claiming that they buy up vaguely worded patents that can be construed to cover estab- lished technologies and use them opportunistically to extract licensing fees from the real innovators. Indeed, there has been a general and dramatic rise in patent litigation that some analysts attribute to rapid growth in the number of patents with unclear or unpredictable boundaries. To the extent that the recent NPEs opportunistically assert fuzzy patents against real technology firms, they can decrease the incentives for these firms to innovate. Innovators deciding to invest in new technology have to consider the risk of inadver- tent infringement as a cost of doing business. This risk reduces the rents they can expect to earn on their investment and hence decreases their willingness to invest. This article makes several findings about this litigation. First, by observing what happens to a defendant's stock price around the filing of a patent lawsuit, we are able to assess the effect of the law- suit on the firm's wealth, after taking into account general market trends and random factors affecting the individual stock. We find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010. During the last four years, the lost wealth has averaged over $80 billion per year. These defendants are mostly technology companies that invest heavily in R&D. To the extent that this litigation represents an unavoidable business cost to technology developers, it reduces the profits that these firms make on their technology investments. That is, these lawsuits substantially reduce their incentives to innovate. REGULATION | Winter 2011-2012