Patent trolls kill innovation – lawsuits are specifically filed in innovative industries

Over the last two years, much has been written about patent trolls, firms that make their money asserting patents against other companies, but do not make a useful product of their own. Both the White House and Congressional leaders have called for patent reform to fix the underlying problems that give rise to patent troll lawsuits. Not so fast, say Stephen Haber and Ross Levine in a Wall Street Journal Op-Ed (“The Myth of the Wicked Patent Troll”). We shouldn’t reform the patent system, they say, because there is no evidence that trolls are hindering innovation; these calls are being driven just by a few large companies who don’t want to pay inventors. But there is evidence of significant harm. The White House and the Congressional Research Service both cited many research studies suggesting that patent litigation harms innovation. And three new empirical studies provide strong confirmation that patent litigation is reducing venture capital investment in startups and is reducing R&D spending, especially in small firms. Haber and Levine admit that patent litigation is surging. There were six times as many patent lawsuits last year than in the 1980s. The number of firms sued by patent trolls grew nine-fold over the last decade; now a majority of patent lawsuits are filed by trolls. Haber and Levine argue that this is not a problem: “it might instead reflect a healthy, dynamic economy.” They cite papers finding that patent trolls tend to file suits in innovative industries and that during the nineteenth century, new technologies such as the telegraph were sometimes followed by lawsuits. But this does not mean that the explosion in patent litigation is somehow “normal.” It’s true that plaintiffs, including patent trolls, tend to file lawsuits in dynamic, innovative industries. But that’s just because they “follow the money.” Patent trolls tend to sue cash rich companies, and innovative new technologies generate cash. The economic burden of today’s patent lawsuits is, in fact, historically unprecedented. shows that patent trolls cost defendant firms $29 billion per year in direct out-of-pocket costs; in aggregate, patent litigation over $60 billion in firm wealth each year. While mean damages in a patent lawsuit ran around $50,000 (in today’s dollars) at the time the telegraph, mean damages today about $21 million. Even taking into account the much larger size of the economy today, the economic impact of patent litigation today is an order of magnitude larger than it was in the age of the telegraph. Moreover, these costs fall disproportionately on innovative firms: the more R&D a firm performs, the it is to be sued for patent infringement, all else equal. And, although this fact alone does not prove that this litigation reduces firms’ innovation, other evidence suggests that this is exactly what happens. found, for example, that medical imaging businesses sued by a patent troll reduced revenues and innovations relative to comparable companies that were not sued. But the biggest impact is on small startup firms — contrary to Haber and Levine, most patent trolls target firms selling less than $100 million a year. of software startups found that 41% reported “significant operational impacts” from patent troll lawsuits, causing them to exit business lines or change strategy. of venture capitalists found that 74% had companies that experienced “significant impacts” from patent demands.