Both the White House and congressional leaders have been vocal in their support for reforming the US patent system to rein in “patent trolls.” Trolls are firms with no interest in innovation or technology transfer; they hold patents to assert them against innocent businesses to extract some of the profit from genuine innovators.
A number of individual states have passed measures to curtail patent trolling, and though Massachusetts is not currently one of them, the state is reportedly examining workable remedies that could leverage existing consumer protection statutes. However, Congress has failed to agree on federal legislation despite the widespread belief that the existing system needs to be fixed. Now, with costs on the rise due to increased foreign government involvement in patent trolling, the need for a workable remedy from Washington has never been higher.
Academic research has yielded clear evidence that patent trolls thwart innovation and hamper venture capital investment in startups. Troll activity discourages research and development, particularly among smaller innovative companies that operate with tighter margins. In 2013, American courts saw six times as many patent lawsuits as in the 1980s. Over the past decade, there has been a 900 percent increase in the number of businesses facing patent litigation.
The economic costs associated with abusive patent litigation are staggering. Recent research estimated that defendants spent at least $29 billion per year in out-of-pocket costs to defend or settle claims brought forth by patent trolls in 2011. Patent lawsuits by these entities drain an estimated $60 billion every year from the economy.
In recent years, some of the United States’ closest trading partners have established enterprises for the purpose of asserting patents. France with its troll called France Brevets, which translates literally to “France Patents”, Japan with its troll named the Innovation Network Corporation of Japan, and the Taiwanese Industrial Technology and Research Institute are all examples of governments which sponsor patent trolls that are frequently active in US courts. The latest entrant into this space is the government of China which established its own troll called Ruichuan IPR Funds earlier in this year. Government-sponsored patent trolls amass patents and assert them against companies from other countries, including American firms. A particularly notable example is Taiwan’s ITRI which has used an arsenal of over 18,000 patents to sue non-Taiwanese firms in American courts. These actions have the potential to discourage international technology transfer, and dampen innovation within targeted firms and economies.
Government controlled trolls present special concerns. Government-sponsored patent trolls could implement patent assertion policies designed to advantage domestic firms by harassing foreign competitors. Former Department of Justice Antitrust official David Balto worries there will be a “race to the bottom” as more and more countries feel the pressure to set up GSPTs to protect domestic industry.
Whether owned by a foreign government or operated by a private interest in the United States, there is no question that patent trolls cause immense harm. A recent survey of software startups found that nearly half reported “significant operational impacts” from patent troll lawsuits. These included a wholesale change of strategy or a shutdown of certain lines of business. Another survey found that roughly three of every four venture capitalists were adversely impacted by patent litigation.
That’s why Congress must move swiftly to respond to the plague of patent trolls. Adequate and appropriate reform should ensure transparency in the patent system. The targets of patent assertions have the right to know which patents might be asserted against them, by whom, and what the scope of those patents is. The deceptive and unfair assertion tactics used by trolls must be curtailed.
When trading partners play by the rules and fairness is ensured by Congress, innovation will prosper. Further delay benefits nobody except the profiteers.
Michael J. Meurer is a professor of law and James Bessen is a lecturer at the Boston University School of Law. They are coauthors of “Patent Failure.”