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6/26/2012
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Patent Trolls Decimate Innovation

Study finds the cost of patent litigation brought by non-practicing entities comes to about a tenth of R&D spending by U.S. businesses.

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Patent trolls cost the U.S. economy $29 billion in 2011, according to a study released on Tuesday by two Boston University legal scholars.

As a tax on innovation, that's more than 10% of the $247 billion businesses spent on research and development in 2009, based on National Science Foundation data. That qualifies as "decimation," which refers to a reduction by a tenth.

Patent trolls, also known as non-practicing entities, or NPEs, exist to litigate patent claims. They do not produce goods or offer services, which immunizes them from potential patent infringement counterclaims. Typically, large companies with patent portfolios are cautious about bringing patent lawsuits because such cases are costly and defendants may have patents of their own.

Patent trolls don't have to worry about counterclaims that could result in an injunction against a profitable product. Because they can litigate without risk of losing their business--litigation is their business--they tend to do so aggressively.

One of the more widely reported examples of patent troll litigation last year involved Lodsys, an NPE that sued several iOS developers over their use of Apple's in-app payment technology.

[ Read Apple Gets Patent For Polluting Electronic Profiles. ]

Those defending themselves against patent trolls pay a high cost. According to the study, "The Direct Costs from NPE Disputes," the mean legal cost of defense is $420,000 for small and midsize businesses and $1.52 million for large companies.

And the chance of bearing that cost is rising. The study found that NPE litigation is becoming more frequent, affecting 5,842 defendants in 2011.

Study authors James E. Bessen and Michael J. Meurer find that the patent system, used thus, is not promoting innovation. "About one quarter of the cost of NPE litigation consists of legal fees," they state in their paper. "Of the total direct cost, no more than a quarter could possibly represent a flow to fund innovative activity."

The study concludes the patent system needs reform, and a recent ruling in a patent dispute between Apple and Motorola suggests the need for reform goes beyond the issue of NPEs. Judge Richard Posner dismissed that case last week and criticized the lawyers for both sides because neither side could adequately establish a right to damages. He has described the patent system as "chaos."

The Electronic Frontier Foundation agrees. In a blog post, EFF attorney Julie Samuels says that the Bessen and Meurer paper and Judge Posner's ruling underscore the need to revise the patent system. "Software patents--and the cottage industry of litigation and licensing surrounding them--have created an environment that threatens businesses, consumers, and, worst of all, innovation."

Legislators should revisit the issue of patent reform in a few months. The U.S. Government Accountability Office (GAO) is preparing to submit a report to Congress, due in September, that explores the impact of patent litigation by NPEs.

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