The patent reform act didn't go far enough

Patent trolls have wasted $500 billion that could have supported innovation and jobs -- real reform is needed

How much better off would Silicon Valley be with an additional $500 billion to invest in innovation, great products, and good-paying new jobs? I ask that question because a new study of patent litigation has finally put a number on the damage caused by patent trolls -- those firms that collect patents, produce no products, and hunt for tech firms to sue over alleged patent infringements. It's huge: $500 billion since 1990. The problem has become most severe in recent years. Between 2007 and 2010, the cost has averaged $83 billion per year.

To put the damage in perspective, $83 billion is more than a quarter of annual R&D spending by all industries in the United States, the authors note. Moreover, because this total is only for publicly listed firms, it likely understates the true loss of wealth resulting from patent trolls' lawsuits.

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If you think the patent reform act signed last week by President Barack Obama will end the madness, an author of the study says you're wrong: "It does not get to the root of the problem," says James Bessen, an economist at the Boston University School of Law.

Bessen and co-authors Jennifer Ford and Michael J. Meurer, all of Boston University, used a database of 1,630 lawsuits by nonpracticing entities (NPEs) -- the polite term for patent trolls -- and looked at how much the stock price of the companies that were sued dipped after the lawsuit was filed. The average loss in market capitalization of a company being sued was about $122 million.

But don't companies then regain value after the suits are settled? On average, they do not, says Bessen. The market typically prices in the cost of a settlement when a suit is filed. If the settlement is more or less in line with those expectations, the stock doesn't move very much on the settlement news.

In theory, patent lawsuits are supposed to protect inventors from having their ideas stolen. But that's not the case. The researchers looked at 14 litigants that had caused companies to lose about $87.6 billion in value. Very little of that lost wealth -- only about $7.6 billion -- actually accrued to the true inventors of the patented technology.

The database was assembled by Patent Freedom, an organization devoted to researching and providing information on NPE behavior and activities. It defines NPEs as companies that "do not practice their inventions in products or service, or otherwise derive a substantial portion of their revenues from the sale of products and services in the marketplace. Instead, NPEs seek to derive the majority of their income from the enforcement of patent rights."

Software is the target
The study found that about 62 percent of the troll suits targeted software patents.

A software patent, says Bessen, is four times more likely to be targeted than a patent on a chemical. "The definition of something like [the drug] Lipitor is clear, but in software we see a lot of abstractions," he said in an interview.

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