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.

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