How Patent Trolls Stifle Innovation

The latest figures on lawsuits filed by patent assertion entities (PAEs) reveal a frightening trend that suggests this activity will remain a threat to American high-tech innovation and competition in 2013.

In the first 11 months of 2012, PAEs initiated 61 percent of US patent lawsuits, after initiating 45 percent of them in 2011 and 19 percent in 2006, according to a recent study conducted by Colleen Chien, a law professor at Santa Clara University.

PAEs, a.k.a. patent trolls, acquire patents for the sole purpose of filing litigation to make money, rather than using the patents to develop goods and services. This activity costs businesses time and money, and research shows that small businesses are more likely than others to be targeted by this unscrupulous practice.

Chien presented her research at the Patent Assertion Entity Activities Workshop hosted last month in Washington, D.C., by the Federal Trade Commission and the Justice Department. She said that large companies such as Google and Apple see their fair share of PAE lawsuits, but approximately 40 percent of startups that have raised $50 million to $500 million have been sued by PAEs, and around 20 percent of companies that have raised $20 million to $50 million have suffered a similar fate.

In an email to me, Chien expressed her concern for small high-tech firms, which would have a harder time than others absorbing the impact of a lawsuit.

In my survey, 40 percent of small companies/startups reported a significant impact -- like changing the product, delay in hiring, impact on fundraising -- as a result of a patent lawsuit. The majority (55 percent) of unique PAE targets make less than $10 million in revenue.

By threatening to crimp good old-fashioned American innovation, the growth of PAE activity is turning the patent system on its head and exacting a hefty financial toll. This occurs when companies that don't produce anything turn their acquired patents into a weapon by initiating lawsuits that force companies to fork out money to defend their intellectual property or settle out of court.

In fact, a study published in July by Professor Mike Meurer and Law Lecturer James Bessen at Boston University School of Law reveals that the costs of PAE disputes more than quadrupled from 2005 to $29 billion in 2011. During that time, the number of unique companies that defended their patents against PAE-initiated lawsuits rose more than 50 percent to 2,150.

What is contributing to the increase in patent troll activity? For one thing, this activity is legal. Furthermore, PAEs can bring a lawsuit against several entities that hold or use a patent. In fact, according to Chien's study, 76 percent of PAE defendants are sued by a PAE that has named 15 or more defendants over two or more suits. This raises the chances for PAEs to win settlements and capture economies of scale.

Another factor advancing this business model is that companies hit with a PAE suit often find it best to settle out of court instead of paying the legal fees to defend themselves. PAEs are also assisted by lawyers who work on a contingency basis, which helps delay costs until a settlement.

For the high-tech industry's sake, and to help clear the way for innovators to create unique products and services without the threat of pesky lawsuits filed by entities that don't produce goods and services, 2013 will hopefully be the year PAE activity is stopped in its tracks.

Certainly, our high-tech inventors, the products they develop, the businesses they build, and the economy in which they operate deserve a better system than one that lets PAEs run roughshod over talented innovators. One way to fight back is to encourage large companies to work with startups to help them fight PAE-initiated litigation. Something has to be done soon, and I'm sure we can all agree that this matter needs the high-tech industry's undivided attention in the year ahead.