A few weeks ago, I had the opportunity to sit down with Boston University School of Law Professor Michael Meurer (pronounced MOY-er). Mike wrote a paper with fellow BU Law Professor Jim Bessen that estimated that NPEs cost U.S. businesses at least $29 billion dollars in 2011. That paper has taken a lot of fire, and I was curious to hear Mike’s response.
Matt Levy: Mike, thanks for giving me your time. I know it’s a busy day today.
You and Jim Bessen have ended up at the center of a controversy in a patent reform debate. You and Jim found that in 2011, NPEs cost U.S. businesses at least $29 billion dollars. Why do you think that’s become such a hot issue for reform opponents?
Michael Meurer: It’s a hot issue for reform opponents because they have no data of their own to offer that would indicate that there’s not really a serious problem with patent litigation. Several people have done studies recently of the impact of patent litigation on incentives to innovate and they find that there is a problem. So, if you have no positive argument to make, the best thing that you could do would be to nit-pick at the research that has been done.
Levy: Yeah, I wrote a blog post along those lines not that long ago. Does it surprise you that there hasn’t been any research showing a different result, I mean, other than the people who are critiquing the paper?
Meurer: Well, most of the critics are not economists and not people that have the right skill set to do the empirical research that needs to be done. It can be done as Cotropia, Kesan, and Schwartz show us. It’s not so difficult to find the relevant set of patent lawsuits. So we have had the benefit of access to confidential data in one study that came from Patent Freedom and in another study that came through RPX. But the confidential nature of that data is not especially problematic because the underlying data is publicly available. The underlying data on who files a patent lawsuit is available through PACER and other sources. Any scholar who wanted to could find that data and come close to replicating our work.
Levy: The three of them, Cotropia, Kesan, and Schwartz, did go through all of the lawsuits for two years. What you said is completely true; they could if they wanted to.
Meurer: You know, and when I looked at that study by Cotropia, Kesan, and Schwartz it further convinces me that there’s a problem with NPE litigation.
Levy: That’s the funny thing: the numbers really don’t look all that good: if you’re opposing reform, if you think there’s no problem, I don’t think I’d be signing that letter. (Ed. note: The letter I’m referring to is the letter sent by a group of law professors opposing patent litigation reform. I wrote about the letter in this post.)
Meurer: I agree.
Levy: The big criticisms that Schwartz and Kesan had were that the survey you did was somehow a biased sample. Can you explain how the companies were selected and what your responses are to that criticism?
Meurer: The companies were selected by RPX, and their companies either had an existing relationship with RPX or some sort of connection. In an ideal world, we would have gotten general access to all firms that had seen a patent assertion by an NPE. We had no way of doing that. In response to the criticism from Kesan and Schwartz, we talk about the likelihood that quite a large portion of the universe of relevant firms was reached by RPX. And that the firms that RPX couldn’t reach are likely to have the same or lower litigation cost. So, it’s right to ask us, “Is there some sort of biased created by the sampling?” that was conducted for us by RPX, but I think they’re wrong to conclude that the direction of possible sampling bias is to cause us to overstate our numbers. We think that if anything the numbers are understated, but we’re pretty satisfied that the potential bias is not serious.
Levy: I know that one of the responses that you had was that they proposed some possible biases but there’s really no evidence to back up their concerns. Again, I think it was two years ago that this started, and in two years nobody’s actually come out with anything that’s in any way inconsistent.
Meurer: Right. You’d think that people motivated to argue against reform would find contrary evidence if it were there. One particular argument that Kesan and Schwartz make is that respondents may exaggerate the extent of the cost attributable to NPE lawsuits. I don’t think there’s any reason for a particular respondent, who’s probably a lawyer, probably used to truthfully responding to queries like this, to do anything other than copy some data over from one spreadsheet and put it into another. I don’t think it makes much sense to think that there is systematic dishonesty on the part of the respondents. Another concern that Schwartz and Kesan raised is that RPX clients had higher than average litigation cost because they were large firms, but we adjust for that. When we extrapolate from the survey responses to our estimated total costs, we recognize that smaller firms may have smaller costs and we weight appropriately the survey responses by the size of the firms. So we recognize that possibility, but I think we properly adjust for that.
Levy: One of the things that Schwartz and Kesan focused on was your use of the term, “deadweight loss.” I was little surprised that they took issue with that. Maybe you can explain what it was you were talking about. I thought it was about the legal fees that are a deadweight loss, because if there’s a transfer that just seems to be extra money spent that in an ideal world you wouldn’t have to spend. It doesn’t feel productive in any way.
Meurer: What you’re saying is right, Matt, but there’s a second level of response and I guess it’s more important. So, as you just said resources that are burned up in litigation are lost to society and are properly considered to be deadweight loss. But the real question is, what costs are attributable to innovation? The defendant firms here are innovators; that’s what exposes them to patent litigation. And when they decide to innovate and they see that they might have to defend against a patent lawsuit, they may be discouraged from innovating as much or investing in innovation as much, not only because they may engage in litigation and burn up resources, but because they might alternatively settle before a lawsuit is filed or settle early in the lifetime of a lawsuit and make transfer payments. The transfer payments here are not neutral. The transfer payments are like a tax payment. If I have to pay a tax to the government when I decide to innovate, there is no deadweight loss directly from the transfer but the transfer has a negative effect on the incentive to innovate. So, Schwartz and Kesan are misguided when they think that only deadweight loss matters. The costs of litigation matter because costs, whether they represent burned up resources or not, do represent a disincentive or a tax on innovation.
Levy: So let me see if I understand. It sounds like the transfer payments that are made with licensing or settlements are not the only big cost. You’re talking about what happens to that company that just paid out because now they have a disincentive to innovate either because their employees were busy dealing with the litigation instead of innovating or they’re now concerned about doing something, because there’s a chilling effect. And we’ve heard stories about this. I know that J.C. Penney testified at a Judiciary Committee hearing, and they said very clearly that they used to invest in all kinds of small projects with small inventors. They just will not do that anymore because they’re just too concerned about patent trolls.
Meurer: I agree with everything you’ve said, and I want to be clear that you could think about two levels to this problem. The threat of litigation and actually dealing with litigation means that productive people like managers and scientists and engineers are tied up in patent litigation; that slows innovation. But probably, the more important and the more fundamental problem is that going forward, knowing that there are payments that may have to be made to opportunistic patent asserters is simply a tax that discourages investment and innovation.
Levy: Another criticism that Kesan and Schwartz make is that there are inventors who have a valuable innovation that they can’t commercialize for lack of access to funding. The only way for them to be compensated is to wait until someone else does it and then sue them. That’s not quite how Kesan and Schwartz phrased it, but that’s the idea.
Meurer: The criticism is not really an economic argument. What they’re arguing here is that there’s some unfairness in the world that some innovators or some inventors are small and small inventors, like small business people generally, find that it’s tough in a business world where there are also big companies. That unfairness in their minds dictates some payment be made to small inventors who got patents; I’d prefer to see a world in which people that succeed in contributing to technological advancements get paid. So, what I need to underline here is that many of these individual inventors who obtain patents are really not connected to underlying innovation. They don’t transfer technology, they don’t directly facilitate the advance of innovation. And so I think it’s wrong to contend that they still deserve a share of the profit.
Levy: There does seem to be an underlying assumption that these people are entitled to be paid for the fact that they have a patent that arguably covers something that someone is making money on.
Meurer: What we really want to see is that small inventors operate in a system that encourages them continue to invent and continue to try to commercialize their technology. And our system, apart from the patent system, seems to work really well. Small inventors like Gates, and Jobs and Wozniak, and the founders of Facebook or Google were able in our economic system to flourish despite being the Davids facing the Goliaths like IBM or Microsoft.
Levy: One of those small inventors you just mentioned founded Microsoft.
Meurer: That’s right, that’s right. Microsoft had to fight off IBM and they did so successfully benefitting from copyright and trade secret law among other things. There’s no evidence that Google or Microsoft or Facebook or eBay relied in any significant way on patents that they acquired in the early days. There were other factors that rewarded them as innovators. Economists know very well that outside of chemicals, pharmaceuticals and medical instruments, most innovation is rewarded by some means other than the patent system.
Levy: Are you and Jim Bessen economists?
Meurer: (Laughs) Yeah, I have a PhD in Economics. I taught Economics at Duke for several years, I’m active and published both in economics journals and in law journals. I have throughout my career. Jim is more of an economist than a legal scholar, as he has no formal training in the law.
Levy: It always amuses me that there are certain critics who have degrees in things that are completely unrelated to empirical research, unrelated to economics, and yet they feel quite comfortable sitting back and criticizing other people’s work.
Meurer: Oh, I don’t mind generally as long as the criticisms are sensible—
Levy: Right, I don’t mean to say there has to be some sort of litmus test just to be able to offer a criticism. But it always amuses me to see people label research “junk science” when they don’t have any idea what actual science looks like.
Anyway, thank you so much for your time today.
Meurer: You’re welcome. I enjoyed it.
The interview was edited for length and clarity.