More on the Effect of Infringing Troll Patents

Tuesday, I posted about the lack of harm to the economy when a PAE’s patent is infringed. University of Pennsylvania Law School Professor Polk Wagner (@PolkWagner) engaged with the post on Twitter:

The limits of Twitter made it difficult to respond to what I think is an important argument that Prof. Wagner is making. As I understand what he’s saying, if patents cannot be enforced, that harms the secondary market in patents (i.e., the market for reselling patents), because of course an unenforceable patent is worth nothing.

I’ve enlisted Dan O’Connor to write a post on secondary markets that should be up later this week, but I’d like to respond here as well.

My post wasn’t arguing that patents should not be enforced. Intellectual Ventures was arguing that it, and by extension the economy as a whole, is damaged by companies infringing its patents.

To which I said, essentially, “Bunk!” Typical PAEs, like the lilies of the field, toil not, neither do they spin. They contribute nothing to the economy — they produce no goods or services, they invent nothing of value, and yet they expect to be compensated.

There is certainly an argument to be made, as I think Prof. Wagner does, that PAEs are simply the cost of doing business. If we want a highly liquid secondary market in patents, the argument goes, all patents must be potentially enforceable (assuming the patents are valid and there was no inequitable conduct during prosecution). Drawing a line between a rent-seeking company and a company with a more socially desirable goal is too difficult to do properly, so on balance society is better off with trolls and an unregulated secondary market for patents.

That’s actually an empirical question. Do we gain more from the secondary market in patents than we lose in litigation costs and settlements to patent trolls? I’m not aware of any studies on the subject. But I’m not persuaded that Prof. Wagner is right.

Not all markets function well without regulation. Consider what happened in unregulated markets for commoditized mortgages. Why shouldn’t we regulate the market for patents as well? A patent in the wrong hands can wreak havoc on an industry and on small businesses without providing any gain to society.

I’ll leave the economics to Dan, who’s better equipped than I to get into them.

But Prof. Wagner has raised a question that we should be discussing. Is an unregulated “used patent” market worth the damage businesses are suffering from patent trolls? And, moreover, does a secondary market for patents promote the useful arts?

You can guess our answer. We’d love to hear your thoughts in the comments and on Twitter.