Anyone in the information technology industry will remember the saga of the SCO Group, the small company that produced some software, but spent most of its time attempting to lay claim to the Linux operating system kernel, claiming it was a derivative of its Unix intellectual property. SCO Group sued large software vendors and even threatened to sue the users of Linux-based applications. (They lost their case, by the way.)
Well, it appears there are a lot of SCO Groups out there. In fact, companies put up at least $29 billion in legal fees last year fighting off suits from “non-practicing entities” (NPEs) laying claim to their intellectual property -- popularly known as “patent trolls."
That's the estimate from James Bessen and Michael J. Meurer of the Boston University School of Law, who set out to measure the toll the trolls are taking on the productive economy. And it isn't big companies being forced to shell out legal fees -- small and medium-size businesses are just as vulnerable.
It's not that patent trolls have always been malicious. Patent trolls started out as beneficial -- helping small inventors profit from their inventions. However, Bessen and Meurer state, they now "find little evidence that NPEs promote invention overall. Publicly-traded [patent trolls] cost small and medium-sized firms more money than these [patent trolls] could possibly transfer to inventors. This reduces the net amount that firms of any size have available to invest in innovation."
Bessen and Meurer used a survey of 250 defendants and a database of litigation to estimate the direct costs to defendants arising from patent cases.
The level of patent trolling has been soaring in recent years, they find. In 2011, 2,150 companies fended off 5,842 legal actions by patent trolls -- up from 1,401 claims in 2005, with $6.6 billion in direct costs.
"Much of the litigation appears to consist of nuisance suits that settle for a few hundred thousand dollars," the researchers found. "But some [patent trolls] are 'big game hunters' who seek and get settlements in the tens or hundreds of million dollars."
Legal costs are about a third as large as settlement costs, or about one quarter of total litigation costs (slightly larger for small/medium companies), the researchers state. "This implies that a substantial part of direct costs of NPE litigation is a deadweight loss to society." Also, many NPE patent assertions are settled without a lawsuit being filed -- a number difficult to calculate.
A majority, 62% of the patent suits involve software patents, "which are notoriously difficult to interpret," the researchers state.
Much of the burden falls on small and medium-sized companies, the researchers found. "The median company sued had $10.8 million in annual revenues. 82% of the defendants had less than $100 million in revenue and these accounted for 50% of the defenses. Small and medium-sized companies account for 37% of the accrued direct costs. Moreover, compared to revenues, the direct costs of NPE patent assertions are relatively larger for small companies."
The researchers urge reform in the patent system to reduce these nuisance lawsuits, including introducing more transparency to the process. "Rapid growth and high cost of NPE litigation documented here should set off an alarm warning policy makers that the patent system still needs significant reform to make it a truly effective system for promoting innovation," they write. However, don;t punish the NPEs just because they are NPEs, they add. "Policy reform should address troll-like behavior rather than merely status as an NPE." The best approach to reform the patent system is to improve notice; "this kind of reform will make the patent system perform more like an idealized property system." The authors also favor rigorous implementation of "recent Supreme Court decisions restricting the patentability of business methods and other abstract processes that are difficult to propertize," along with courts more rigorously supervising patent damages awards to make sure that damages are proportionate to the value of the patented technology."
(Photo: US District Court for Western District of Michigan.)