Patent Liquidity Is a Solid Mess

Yesterday, I attended a panel sponsored by the American Constitution Society, “Patent Assertion Entities: Helping or Hurting Innovation?” It was a great panel discussion, but, of course, there wasn’t time to respond to some points that needed responding to.

The big news from the panel was that FTC Commissioner Julie Brill expressed her support for the Section 6(b) study (subscription required). It will take a while, but it looks like the study is going to happen.

But here I want to focus on something that came up in the panel discussion. One of the panelists, Jay Jurata, made a strong argument in favor of patent assertion entities. (Don’t worry, I’m not switching sides, I’m just acknowledging that he made the best case he could.) He argued that patent assertion entities provide needed liquidity in the secondary market for patents. This liquidity allows failed companies to recover some of their costs, which encourages venture capitalists to take more risks.

Let’s assume that Jay’s assertions about venture capitalists are right. There’s still a big problem with Jay’s argument.

I thought a video might be helpful to explain the problem I see:

The basic point is that we’re letting investors recoup some losses by selling patents to trolls who will then victimize various existing businesses.

That makes no sense. Businesses fail. It’s often terrible for the people involved. But there’s no good reason to reward failed ventures or bail out investors who make bad decisions by penalizing businesses that are succeeding.

It’s easy to use slogans like “liquidity is good” and “investors should be able to recoup their losses.” But we need to remember the cost on the other side of those slogans: letting patent trolls extract money from thousands of businesses.

Patents are not like office furniture or buildings. Allowing them to be liquidated without restriction has real negative consequences, as we’re seeing.