How “Patent Trolling” Taxes Innovation

Applying for a patent is expensive. Fees can exceed $25,000, and most applications require at least a couple years of effort. We might expect that anyone considering applying for a patent would be fairly certain of the merits of their case for one. And yet, of the patents granted by the U.S. Patent and Trademark Office (PTO) that are subsequently litigated, 40% are declared invalid in court.

A court’s declaration that a patent is “invalid” means it should never have been granted in the first place, usually because the invention has been done before, or because it’s obvious to anyone familiar with the patent’s particular scientific or technical field. So why do so many people spend so much time and money filing for patents that are ultimately declared invalid?

Uncertainty is one reason. Applicants can’t always predict whether the patent will later be struck down in court. New evidence may come to light that the “invention” isn’t really new; or that the basic idea underlying it is widely understood by those in the relevant field. So misperception, aided by the well-known phenomenon of “optimism bias,” may explain a portion of this puzzle.

Another answer is that seeking even dubious patents is a gamble worth taking. The PTO receives over 520,000 patent applications a year. That’s about 1,425 applications a day. The agency’s approximately 6,500 patent examiners are overburdened; on average each patent gets only about 16 hours of review. Virtually all experts agree that this is nowhere near enough time to properly assess a patent. More fundamentally, patent examiners are rewarded for processing applications – and the easiest way to clear a file is to approve a patent. The PTO’s examiners don’t get paid to say no. They’re incentivized to approve.

But there’s a third, more interesting reason so many people seek patents that have a high probability of being found invalid. As it turns out, invalid patents may be worthless as innovations, but they can be very nice bargaining chips.

Any patent the PTO grants enjoys a legal presumption of validity. To overturn this presumption, defendants in a patent infringement case must prove the patent’s invalidity by a high standard of “clear and convincing evidence.” It takes a lot of lawyer fees to do that. And the result is that defendants often pay rather than fight, even when they think they could ultimately have the patent invalidated. More than 97% of patent infringement suits are settled before trial.

(Hemera)

In this environment, brandishing invalid patents can be a good business strategy. This behavior, called “patent trolling,” gets a lot of attention today, but it’s been going on for more than a century. In 1895, George Selden obtained a U.S. patent for putting a gasoline engine on a chassis to make a car. The patent clearly should never have been granted: the idea was so obvious that many people worldwide thought of it independently as soon as the first workable gasoline engines became available. Nevertheless, Selden brandished his patent, threatened nascent carmakers with suit, and collected hundreds of thousands of dollars in royalties.  Selden didn’t contribute anything meaningful to the development of the automobile, but his patent abuse made cars more expensive for years, until Henry Ford, who refused to license from Selden, finally busted the patent in court in 1911.

The patent system exists to encourage people to invent – to add, in Abraham Lincoln’s words, “the fuel of interest to the fire of genius.” But as this post suggests, there’s a dark side to the patent system. Just as good patents advance innovation, bad patents retard it. And even bad patents can be valuable to a patent troll. Every penny that goes to license an invalid patent, or settle a meritless lawsuit, is a tax on innovators.

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 27

View All Comments »
  1. Eric M. Jones. says:

    The real reason was that in 1981, President Reagan forced the Patent Office to change their direction and grant patents for virtually everything. This was a real sea change. He said, “Let the courts decide”.

    Ostensibly, there was a giant backlog and this seemed to clear it up. But suddenly so many dubious patents got passed that I had the task of deciding what patents the company I worked for could just “walk over” –that is– ignore because they were utterly indefensible.

    Well-loved. Like or Dislike: Thumb up 23 Thumb down 2
    • Lucian Armasu says:

      The more I hear about Ronald Reagan, the more I realize how much damage he has done to USA. Was he just a puppet for others?

      Well-loved. Like or Dislike: Thumb up 31 Thumb down 18
  2. RogerP says:

    I found a patent in which all the claims had been in the public domain for years. All but one were in college text books and the other was in a technical paper pre-dating the patent by 10 years.

    The patent was filed by a respectable attorney who should have known better.

    Most people just ignored the patent and even used the inventor’s trade name for the product. I know of one case where the inventor threatened the infringer. The latter ignored the threat and the matter never got to court.

    Thumb up 5 Thumb down 2
    • Ray says:

      If the patent is so obviously invalid there is no risk for you to reveal what it was specifically. Since you haven’t, your story reads like an urban legend and I assign it as much credibility.

      Well-loved. Like or Dislike: Thumb up 15 Thumb down 1
  3. Mike B says:

    An east fix is that if a patent is found to be invalid, the holder of the patent will be liable to return any infringement awards to those who paid them initially.

    Well-loved. Like or Dislike: Thumb up 11 Thumb down 3
    • Michael Peters says:

      That’s not really a fix. That’s like saying a robber is only liable for what he stole and faces no other penalties. Of course they need to give back what they took, but they need stiffer penalties on top of that. Maybe interest on that money?

      Well-loved. Like or Dislike: Thumb up 10 Thumb down 2
  4. David Leppik says:

    While I agree with the gist of this article, the introductory paragraph contains a little statistical nonsense. The fact that 40% of litigated patent cases declare the patent invalid has nothing to do with how many patents overall are invalid– only the those that make it to litigation. Apples and oranges.

    Well-loved. Like or Dislike: Thumb up 20 Thumb down 0
    • Ray says:

      Selection bias — invalid or questionable patents are much more likely to attract lawsuits in the first place and avoid pre-judgment settlements later in the process.

      (In case it is not clear, I agree with you.)

      Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
      • Joe says:

        No, a patent owner is less likely to assert an invalid patent than a valid one. An alleged infringer has no standing to challenge the validity of a patent unless (a) it has been asserted against him/her or (b) there is some actual controversy between the patent owner and alleged infringer in which the patent is likely to be asserted.

        Consequently, if there is a selection bias, it would be against invalid patents.

        Thumb up 2 Thumb down 1
    • Ryan says:

      This is absolutely right. However, the real driver here is that for lawsuits that are filed, strong enforceable patents are more likely to drive settlement. The settlements aren’t factored into the provided 40% stat. Thus, the suits that go through a full trial have a higher percentage of invalid patents than the overall population. What percent are the adjudicated invalid patents of the overall number on which lawsuits are initiated? That’s closer to a real number, but even that wouldn’t encompass licenses taken without filing suit, or valid patents that are never monetized.

      Thumb up 1 Thumb down 0
  5. Todd Sullivan says:

    The premise of this article seems to be, 40% of patent infringement cases end with the patent being invalidated, so 40% of all US patents should not have been issued. Isn’t it just as likely that the cases settled because a strong argument for invalidity did not exist? many patent validity determinations are made on motion before trial and, thus, settlement was achieved after the defendants determined their invalidity arguments would not be successful. If 97% of cases settle, then only 1.2% of initiated infringement cases end with the patent being invalidated. Isn’t 98.2% of patents being validated by an inter partes system (litigation) indicative of an effective patent office?

    It should also be noted that the US Patent Office is allowing less than 50% of applications to issue, at the very least an indication that Patent Examiners are not incentivized to rubber stamp approval for every patent application that hits their desk.

    Too many of these Freakonomic blog posts are nothing more than an author’s opinion mixed with a couple convenient statistics to rationalize the opinion, rather than the thoughtful analysis developed in the Freakonomics books. These blog posts tarnish the brand.

    Well-loved. Like or Dislike: Thumb up 11 Thumb down 0
  6. Mike says:

    First, there is a selection bias in the finding that 40% of patents that are litigated are found invalid. Defendants are going to be more willing to litigate to completion over patents they suspect have a reasonable chance of being invalidated (or that they believe will not be found to be infringed). This is especially true where the damages are steep.

    A more interesting statistic might be to look at the results of patent reexamination process. Few patents come out of that process unscathed.

    Second, patents are not special in this sense. Asserting dubious claims of any type (discrimination, breach of contract, etc.) when available can also be a lucrative strategy to obtain a settlement of the claim just South of the nuisance value.

    Thumb up 3 Thumb down 0
  7. EJM says:

    Could you provide a citation for the 40% declared invalid and the 97% settlement rate, please?

    Well-loved. Like or Dislike: Thumb up 6 Thumb down 0
  8. Faye R. says:

    Although I generally agree with the overall argument in this article, the definition of patent trolling provided here is off-base from the standard use of the term. A patent troll is traditionally an entity that enforces patents it does not itself practice — an entity that does not invent, make, manufacture, or create but rather just buys patents from others so it can sue alleged infringers and extort settlement and licensing fees. Many argue that this pejorative definition itself is too overarching as there can be legitimate activities by such entities, but the definition provided here is off base. The entity here described is related to a patent troll — often patent trolls buy patents of questionable validity to enforce them against unsuspecting companies that independently developed their product — but it is not the same. There are certainly legitimate businesses that practice their own patents but still obtain invalid patents in an effort to force costs on competitors. These are not patent trolls by the normal definition.

    Thumb up 4 Thumb down 0