Profs. Cohen, Gurun, and Kominers first published a paper collecting evidence of the impacts of NPEs on innovation in 2014. Recently, they updated the paper, incorporating additional evidence and research from the past four years. The key takeaways?
“NPE litigation has a real negative impact on innovation at targeted firms: firms substantially reduce their innovative activity after settling with NPEs (or losing to them in court)”
“we neither find any markers of significant NPE pass-through to end innovators, nor of a positive impact of NPEs on innovation in the industries in which they are most prevalent.”
In other words, patent trolling activities harm innovative activity conducted by the companies they target, while failing to promote innovation elsewhere in their industries.
NPEs Are Opportunistic Litigants
One finding in the paper is that, controlling for other characteristics, NPEs target defendants opportunistically—they look for defendants who either have a relatively high amount of cash or who have recently received positive cash shocks (e.g., a VC investment).
This seems reasonable—after all, why sue someone who can’t pay you anything? Except that it pairs with two other key findings in the paper. First, NPEs target cash-rich companies with smaller legal teams. And second, both large operating companies and smaller inventors who file patent infringement lawsuits don’t exhibit the same behavior with respect to targeting firms with high cash reserves and small legal teams. In fact, this behavior is not observed in any other type of litigation—only in NPE patent litigation.
In other words, NPEs and operating companies behave in fundamentally different ways as plaintiffs, ways that suggest that NPEs litigation strategies are not aimed at policing infringement but rather at targeting for financial return, regardless of the strength of the infringement case.1
When paired with the finding that NPE litigation has a negative impact on innovation at the targeted firm, this means that NPEs are more likely to target small innovators and particularly to target the small innovators who are most likely to succeed absent NPE intervention, behavior not seen as part of operating company litigation.
NPEs Don’t Contribute To Innovation
All of that might be acceptable if there was evidence that NPEs provide innovators who can’t afford to pursue and monetize their inventions with a reward. But the evidence shows that there’s no positive impact on innovation from NPEs, and it shows that there’s no reason to believe NPEs provide significant reward to innovators. In fact, the paper estimates that firms who are successfully targeted by NPEs (resulting in either a lawsuit loss, or a settlement) reduce their innovation investment by an average of 20%.2
The paper also describes the lack of any evidence for pass-through of financial returns to the actual innovator. The best available estimate cited in the paper is that only 5% of NPE winnings is returned to innovators. And, comparing areas of technology where NPE litigation is frequent to areas of technology where NPE litigation is not frequent, there is no evidence for the proposition that NPEs promote innovation—no enhanced innovation is seen in those areas of technology.
Keeping The Problem From Getting Worse
The evidence continues to make clear that NPEs are a tax on ingenuity and economic activity. Reforms like IPR and the Alice case have been effective in helping to reduce NPE activity.
So why are there efforts—including from U.S. Patent and Trademark Office Director Iancu—to minimize the effectiveness of these reforms?