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.

  • Thanks for the thoughtful response, Matt. I think we actually agree on a lot of these issues: clearly nobody is in favor of social losses as a result of undesirable behavior with respect to patents. And as you note, this entire issue is fraught with definitional problems and very little reliable empirical analysis. That said, I think the burden of persuasion that a secondary market in patents is NOT economically desirable is VERY VERY high. A robust secondary market for patents will add dynamism to innovation, allowing firms to specialize in inventing rather than commercializing (and vice-versa!), not to mention more market entry and startups. That said, with every market comes important downsides, and what might be called “strategic” or “abusive” litigation is definitely one of them. I won’t deny that this is a real problem with the patent system, though I think we don’t really know the magnitude of the problem (see the definitional and data problems noted above). Because of this, I think we should be cautious about labeling middlemen/market makers/invention brokers/ or frankly any new patent-related business model as “evil” per se. We just don’t know the real effects. BUT, what we do know is that abusive litigation thrives where the costs of litigation are high and the outcomes are very uncertain. That pretty much describes the current state of the patent law; but this has nothing to do with whether the parties are or are not “PAEs” or startups or manufacturing firms. It has everything to do with the patent law itself. Thought experiment: let’s say we had a real doctrine of claim construction, whereby the scope of a patent could be readily ascertained with good reliability. (Yes, a fantasy!) Would there be nearly as much abusive patent litigation? Very unlikely: to the extent they were brought at all, meritless cases would end much more quickly and cheaply. This is just one example of how we could work together to solve the many problems in the patent system by creating a system that works better for all parties. In my view, the labels just get in the way.

    • Polk, thanks for your thoughtful reply. I think you’re right; we do agree on quite a bit. I do agree with you that we should be careful before abolishing any market, including a secondary market for patents. But query how well that market functions — there is definitely a need for data.

      And I also agree that if patent claims could be easily construed, a huge amount of abusive patent litigation would be curtailed. As a former patent prosecutor, I’m not sure what that might look like, but it’s absolutely a project worth pursuing. As Dennis Crouch pointed out in his testimony to the House Small Business Committee hearing on Patent Reform yesterday, lack of clarity is likely the biggest problem with the patent system.

  • Good conversation. It seems to me relatively uncontroversial to say that revoking the transferability of patent rights would significantly devalue patents in general. Ignoring predatory NPE behavior for a minute: creative, insightful innovators are often not the same as the people and organizations best positioned to efficiently commercialize inventions. If an inventor does not have the ability to commercialize an invention, a patent system in which patent rights are nontransferable would offer little incentive in its own right to innovate. So one might envision and debate a patent system with no secondary market, but in my opinion such a change would just be the first huge step toward scrapping the patent system altogether.

    So in theory, the secondary patent market is an integral part of a patent system that COULD logically serve its fundamental purpose “to promote the progress of science and useful arts.” But does it, in practice? That’s the core of the current raging debate about the patentability of software. Recently I see a rapid shift to the mainstream of the opinion–long-held by many developers–that, at least in software-dominated industries, the patent system (1) is not a motivating factor to innovators, and (2) in fact, imposes dramatic and unnecessary direct costs to innovators, as well as indirect market costs such as entry barriers to startups.

    Of course, that conclusion will almost certainly be different for other industries. See, e.g. pharma and chem.

  • Russ Merbeth

    I’m Russ Merbeth, Chief Policy Counsel for Intellectual Ventures, and I raised the question about costs of infringement at the Institute for Policy Innovation panel entitled “Software Patents: A Bridge for Trolls?” I appreciate the debate between Mr. Levy and Mr. Wagner and I’d like to share my point of view.

    First, I agree with Mr. Levy that the question of whether we gain more from the secondary market in patents than we lose in litigation costs and settlements is ultimately an empirical question, and we need more data — reliable data (http://www.intellectualventures.com/index.php/insights/archives/is-29b-the-point)
    — in a debate that, up to this point, relies heavily on rhetoric and finger pointing. When calculating the economic cost of patent disputes, shouldn’t the cost of litigation be placed at the feet of infringers? When a patent is upheld by a court, and the patent owner receives payment, shouldn’t the infringer be held accountable for forcing a patent owner to go through the trouble and expense of a court battle?

    Putting accounting arguments aside, though, it’s Intellectual Ventures’ position that patent infringement — whether that patent is in the hands of an operating company, an inventor, a market intermediary or any else – does real harm to the US economy.

    A patent is not like a lottery ticket and Mr. Levy’s analogy (http://www.patentprogress.org/2013/05/14/the-economy-doesnt-suffer-if-a-troll-patent-is-infringed-but-an-angel-does-get-its-wings/) fails to capture the long term negative economic impacts of infringement. In reality, inventors ‘win the lottery’ when they get paid for their idea. Unfortunately, today many inventions get used without an inventor being compensated. In lottery terms, this would be akin to having your winning numbers drawn only to see that the giant check has someone else’s name on it. Such an outcome certainly would discourage me from buying more lottery tickets…and, seeing one’s invention used without receiving payment must certainly discourage some invention and innovation.

    When an idea is brought to market and the inventor doesn’t get paid, the negative effect on the economy as a whole may or may not be immediately felt, but in the long-run this infringement – the failure to recognize and pay for the work of inventors – has a chilling effect on invention. When companies are emboldened to infringe, inventors face the prospect of an extensive legal battle if they hope to make a return on their investment. As infringement pulls money away from inventors, their incentive to invent is diminished. It means that invention is increasingly only done within the walls of corporations or government research labs. In the long run, this means fewer inventors and fewer inventions. This impact is hard to measure, but we can all agree that invention sparks progress.

    And, this is where the secondary market comes in. Intellectual Ventures was founded on the belief that if this market develops and applied research becomes a profitable activity — attracting significantly more private investment than it does today — the number of inventions generated will soar. Despite Mr. Levy’s argument that ”[Patent market intermediaries] contribute nothing to the economy — they produce no goods or services, they invent nothing of value, and yet they expect to be compensated,” many complex markets include firms whose function is to act as intermediaries. Intermediaries, whether — to use Mr. Wagner’s car analogy — buying and reselling cars, or buying and licensing patents, facilitate exchange, which in turn creates liquidity, connects buyers and sellers, and brings specialized knowledge to the market. In short, intermediaries make the market work. Perhaps it is just that, a working market for invention rights, that Mr. Levy opposes, not because patent intermediaries syphon value, but because they help foster it. And, the more well-functioning the market for invention rights, the more valuable – and, the more expensive – those invention rights become. Which is a threat to those who would just as soon not pay for them.

    But, the secondary market for inventions, like a secondary market for cars or any goods, can only exist if the intermediary in the transaction has its legally acquired rights respected. The market for cars would fall apart if it was acceptable to steal from a used car lot but not from the original car owner.

    While it isn’t perfect, the developing secondary market for invention rights gives inventors a way to make a return on their investment. In our history, Intellectual Ventures has paid more than $400 million to individual inventors. Without further data, the true cost of infringement is unknown. But to claim that it has zero cost is cynically dismissive of even the possibility that infringement takes its own toll on invention and innovation, and ultimately on the US economy.