Prosecute the patent trolls!

By Felix Salmon
June 4, 2013

Here’s an idea: take the resources that the SEC is currently using to prosecute insider trading, and give them instead to the FTC, so that they can be used to aggressively prosecute patent trolls instead. The cost would be the same (by definition), and the benefit would surely be much greater, as today’s wonderful report from the White House underscores.

Patent trolls are known by various names — one is “non-practicing entities”, or NPEs. Another term is “Patent Assertion Entities”, or PAEs. But whatever they’re called, the most important research into the costs of trolls is this paper from researchers at Boston University:

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.

And we’re not talking about a steady loss of $80 billion per year, either. If the PAEs were costing $80 billion per year from 2007-2010, they’re probably making three or four times as much today, given how quickly their business is growing. Here’s a chart showing PAE activity, in red, versus all other patent cases, in blue:

trolls.tiff

The patent trolls are harming the nation in all manner of unquantifiable ways as well. This American Life just aired a fantastic episode on the subject of patent trolls, which features a man called Nick Desaulniers who wanted to build a low-cost heart monitor. But he was quickly dissuaded: after doing a patent search, he came away “horrified at how generic some of the patents were”,  and persuaded that there was no way he could possibly build a business. “However many jobs I could have created or however many lives I could have saved,” he concluded, “that’s it.”

Patent trolls are surely contributing to the decline in new-company formation:

Fewer Americans are choosing that path. In 1982, new companies—those in business less than five years—made up roughly half of all U.S. businesses, according to census data. By 2011, they accounted for just over a third. Over the same period, the share of the labor force working at new companies fell to 11% from more than 20%.

Both trends predate the recession and have continued in the recovery…

For the first time since such records have been kept, the Census found in 2008 that more Americans worked for big businesses—those with at least 500 workers—than small ones. The trend has continued since.

Go to any technology conference these days, and you’re likely to find VCs who say that there are entire sectors they refuse to invest in, just because the waters are so troll-infested. Google and Apple might be able to do interesting things in wearable computing, for instance, but a single lawsuit could easily wipe out a startup in the same space — even if it was entirely frivolous. Even the 3D printing industry seems to have boiled down to a handful of companies, despite the fact that most of the patents in the space have expired, because it seems to be all to easy to get patents on tiny improvements to established technology. Technological innovation is increasingly a game that only the largest technology players can indulge in; every VC has a story of a portfolio company which gets sued for patent infringement and then gets a lowball acquisition offer from the plaintiff. Either sell out to us, is the message, or we’ll destroy you with legal fees.

Clearly, something must be done. But I’m not convinced that the White House’s wish list is really adequate to the task at hand. None of it would prevent the kind of trollery detailed in the This American Life episode; at best it might just force Intellectual Ventures, the biggest and worst of the trolls, to be marginally more transparent about what it was doing. Instead, the government should start going after patent trolls in much the same way as Preet Bharara is going after inside traders. Tim Wu explains that the ammunition already exists:

There are good laws in place that could fight trolls, but they sit largely unused. First are the consumer-protection laws, which bar “unfair or deceptive acts and practices.” Some patent trolls, to better coerce settlement, purposely misrepresent matters such as the strength of their patents, the extent of other settlements, and their actual willingness to litigate. Second, there are plenty of remedies available under the unfair-competition laws. Some trolls work by aggregating an enormous number of patents, and then present the threat that one of their thousands of patents might actually be valid. The creation of these portfolios for trolling may be “agreements in restraint of trade” under Section 1 of the Sherman Antitrust Act, or they may “substantially lessen competition” under the Clayton Antitrust Act. More generally, the methods of the trolls are hardly what you would call ordinary methods of competition; they should be considered, rather, what the Federal Trade Commission calls “unfair methods of competition” under Section 5 of the F.T.C. Act. The Commission has the power to define and punish methods of business that are inherently harmful with few or no redeeming benefits, and that’s what trolling is. Finally, it is possible that the criminal laws barring larceny and schemes to defraud may cover the conduct of some trolls.

I would love to see some zealous prosecutors, armed with subpoena power, taking on Intellectual Ventures as aggressively as possible — as well as any other trolls they could find. Nathan Myhrvold is just as rich as Stevie Cohen, and causes much more harm to the economy. Rather than announcing the creation of “an accessible, plain-English web site offering answers to common questions by those facing demands from a possible troll”, let’s see the full weight of the government brought to bear in the form of civil and criminal cases against all patent trolls, up to and including including the biggest. That would surely be much more effective, and requires no legislative action at all.

Update: In the NYT, some highly respected jurists — Randall Rader, Colleen Chien, and David Hricik — have much the same idea. Don’t worry, I won’t sue them for infringing my intellectual property.

11 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Can you go after patent trolls for unfair competition if they’re not actually competing?

Honestly, it seems like patent trolls are simply taking bad laws and utilizing them to produce bad outcomes.

At the very least, a simple change requiring an actual commercial implementation before a patent is granted would get rid of many of the “I thought of something we might someday do, let’s patent it in case somebody does it” type patents.

Will it hurt some real inventors? Of course. But like any trade-off, we will lose some little good to prevent some major bad.

Posted by TomWest | Report as abusive

This is a call for improving the patent system, as much as it is a call for prosecuting companies that choose to make the most of the system.

I haven’t watched the show mentioned, but it seems the guy’s complaint is with the patent office not patent trolls. If I come up with a great idea and patent it, why shouldn’t I be allowed to sell that patent to some other company? They pay me now and in return collect royalties over time from anyone that wants to use that patented technology. The problem is that patent office has given out a lot of “not good” patents.

There are lots of patents that are clearly bogus, but someone has to pay to invalidate them. And we’re not yet at a point where the law has caught up with the technology, a lot of smart people just don’t understand how ridiculous a lot of these patents are because they don’t understand the technology space.

Posted by Harpstein1 | Report as abusive

Let’s save that money and eliminate all software patents. Software patents don’t protect innovation, they are an economic weapon that prevents innovation. Not only would we save on prosecution, but also the court system would get a lot less crowded.

Next up: patents on your genes. That’s right, some companies don’t believe you own the genetic design of your cells. They think because they have mapped out some genes, they own the rights to them. Hopefully that will be rejected by the Supreme Court soon.

The patent system was designed to reward investment in invention. It has been gamed to reward investment in legal assaults and tricks. It doesn’t require that anyone actually invent something, only that they think something will be invented, or worse, designed. A design is not necessarily an invention, but often an application or implementation. Not that the patent system or courts can tell the difference.

All technology gets obsoleted, and so do many government creations. The patent system has served its purpose and should be retired.

Posted by KenG_CA | Report as abusive

The chart you posted is from RPX, which is essentially a protection racket.

Posted by briankae | Report as abusive

I propose that a patent expire after a short time, unless (1) the patent owner is the actual creator of the invention or (2) the assignee is actively developing and commercializing the invention.

Inventor-owned OR active use == long patent

else
Short patent.

Thoughts?

Posted by WolfmanJack | Report as abusive

+1 KenG.

Posted by crocodilechuck | Report as abusive

Great topic Felix. I think as bad as patent lawsuits are, I would bet that shareholder lawsuits are even worse as measured by total cost to society. 95% of all merger deals are challenged. Any time a stock drops by more than 10% the robo-lawyers descend like locusts. The only winners are the bloodsucking lawyers and professional plaints.

Posted by y2kurtus | Report as abusive

Great post Felix.

Patent Trolls are like the criminal gangs that used to gain from running protection rackets – each skims off the top of other peoples’ hard work and enterprise.

It’s clear that if Big Business continues to ‘own’ congress and some policies of the GOP are so heavily influenced by the rich lobbyists then the interests of small businesses and starting out entrepreneurs will be compromised because political will will move more and more away from the little guy’s interests. And the little guy’s interests are clearly served by the removal of trolls; big business just deals with them from their huge resources – and in some ways becomes like them by taking out speculative patents as a form of anti-patent troll protection. Nobody cares about the little guy any more.

Posted by FifthDecade | Report as abusive

As you point out, albeit shortly, it is easy to get a patent for tiny improvements. Well, it is the case that the patent office has a hard time when recruiting new talents, because the people with the knowledge required to assess whether an improvement is patent-worthy or not earn a lot more working in the private sector. And if they start working for the patent office, they get new attractive offers very quickly, because of their of regulations. It is kind of the same case as in the financial sector, where people working in the investment banks earn a lot better than people working for the SEC, therefore attracting the most talented people to the private sector. In the courts, patent trolls aren’t that successful, but they can inflict a lot of pain because of deficient regulation. There is also a difficulty with identifying which company is a patent troll and which one is a technology company who has a large patent portfolio. For example, when Apple sues Samsung (or the other way around), aren’t they behaving like a patent troll, using its patent portfolio to block its competitors? Or it is a fair use of patents? Once again, in order to get an answer to this question, normally you have to pay a lot to your lawyers.

Posted by gonzaloalberto | Report as abusive

This is not serious journalism, but a call to mob justice for the monopolists like self-appointed czar Bloomberg. Power to Keep the Money eliminates the cure of reflection on human kind.

Posted by HiOnow | Report as abusive

This is surreal – an open season on american inventors, almost like Ayn Rand novel

Large multinational corps pay huge $$$ to crooked DC politicians to kill invention in this country once and for all

Obama reading from the script written in Silicon Valley’s boardrooms… Nothing can be more disgusting

Well, OK guys, enough is enough

As a holder of one valid tecnnical patent I am going on strike – no more public patent disclosures of new tech from me

Who is Johnn Galt ?

This country is quickly winding down

The Founding Fathers are rolling over in their graves

Shame

Posted by angrydude | Report as abusive