[Updated] The Patent Troll Tragedy

I hope we are approaching the end point in the patent troll game. Recall, patent trolls -- non-practising entities that obtain patents and sue operating companies (especially in software) -- have been playing an increasing role in innovation economies. They often threaten young companies with lawsuits as soon as they obtain funding; or hamstring older companies, forcing them to divert cash into costly licenses for absurd patents rather than pay for costly defenses in uncertain, patent-friendly jurisdictions. 

New data from Colleen Chien of Santa Clara University shows the situation. According to her research, 61% of patent lawsuits in the U.S. in 2012 have been brought by patent trolls. 61%. This is  a record, both in relative and absolute terms, as the following graph (from a recent presentation of Ms Chien's) shows. 

There must be changes in patent laws to prevent this sort of abuse. One approach, the SHIELD Act, would force patent trolls to pay for unsuccessful litigation in a "loser pays" system. While it's far from perfect, and fundamental reforms are needed to U.S. patent law, it is noteworthy that there, at least, some attempts being made to deal with a patent system that is increasingly consuming itself, while the rest of us pay for the litigation and misplaced resources.

[Update] A law colleague of mine points out tonight that some of the 2011 and 2012 increase in lawsuit activity is a function of the America Invents Act changes in September 2011 that prohibited having multiple defendants in one suit. As a result of this unbundling, there are more NPE suits, making them a much larger percentage of overall patent lawsuit activity. At the same there has been a reduction in the number of operating companies being sued, as the following figure shows.

What does this mean? It means that some of what we're seeing in the first graph is partly a result of rule changes, which is worth noting. At the same, there is a reduction in the number of companies being sued, which, given more suits, means more patent litigation, in general, at any given firm. 

[Update 2] Colleen Shien at Santa Clara University points out to me in separate correspondence that even these numbers are subject to confusing factors. For example, in a recent case Cisco received more than 300 NPE letters before that turned into an eventual patent-related action. Even if that number is considerably lower, say 25-50:1, it is exceedingly burdensome, especially for smaller companies subject to NPE nonsense.

Add to this the costs involved, which according Prof Shien's work is roughly as follows: 

• Fighting troll in court costs startups $857K (N=7)
• Settle $340K (n=12)
• Fight out of court $168K (N=18)

It is,  indeed, a species of tax on innovation, one whose proceeds goes to economic vandals.

Comments

[Mike Taylor]

Unfortunately, it's not a tax on innovation. Taxes go to governments, which spend the revenue on citizens (with greater or lesser efficiency, sure). In the end, tax money funds things like health and education.

This money, though, simply accumulates in the pockets of bandits. A protection racket would be a much better analogy than a tax. It's a shakedown.

[Klein Trial Lawyers]

Your post includes some graphics that certainly illustrate how large of a problem “patent trolls” have become. As Chien noted, these lawsuits are increasingly hitting startups, and separate studies have found the average defense for these lawsuits costs $2 million and can take 18 months to win. We certainly agree that some type of reform is necessary, and we would suggest that patent holders be required to develop a patent before being able to sue for its infringement.